The Option Investor Newsletter Tuesday 9-7-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com Published three times weekly, Sunday, Tuesday, Thursday evenings. ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 9-07-99 High Low Volume Advances Decline DOW 11034.13 - 44.32 11104.10 11011.96 712,432k 1,325 1,646 Nasdaq 2837.26 - 5.85 2860.16 2833.02 906,817k 1,892 1,982 S&P-100 711.37 - 2.52 716.80 710.37 Totals 3,217 3,628 S&P-500 1350.45 - 6.79 1361.39 1349.59 47.0% 53.0% $RUT 438.24 + 2.27 438.25 435.75 $TRAN 3109.49 - 47.41 3153.82 3100.09 VIX 23.33 + 1.94 23.59 21.82 Put/Call Ratio .60 ************************************************************* One more day of Summer... Stocks paused for a breather today after Friday's frenetic rally. Investors had a long weekend to assess exactly what Friday's powerful gains mean and what to expect going forward. Today's activity does not look too much like profit taking, although there are definitely profits from Friday. A more descriptive word for today's market is blasť. Volume was lackluster for most of the day and it appears that some traders chose to extend the Labor Day weekend an extra day. But then, who wouldn't want one more day of Summer? Many investors were reluctant to put new money in the market today due to renewed interest rate fears. Although many analysts felt that last month's rate hike would be the last Fed action of the year, there is growing sentiment that another hike is coming in October. With four members of the Fed Board speaking this week, including Mr. Greenspan himself tomorrow, and PPI numbers on Friday, there is enough uncertainty to keep many on the sidelines. Inflation fears are also growing. While most recent economic reports have shown that inflation is benign at a pace of about 2%, these reports are trailing indicators and not necessarily projections for the future. Strong commodity prices, particularly oil prices are becoming more of a burden and the soaring stock market have many economists worried about high percentage gains in consumer spending, which some see rising five or six percent from current levels of about three percent. Since the Fed seems determined to err on the side of caution in regards to inflation, another rate raise is very possible, but that alone will not extinguish the stock market uptrend. There is also some concern that the market is following the same pattern of 1997 and 98 in which the market struggled through September and October before rallying. Over the past 49 years, September has been the worst month of the year, with the S&P 500 declining an average of .3% during the month. While inflation, Fed worries, historical trends or some other indicator always seem to fuel a lingering worry over this market, there is still a lot of optimism among traders. Third quarter earnings are expected to be very strong and most major indices are within one or two good days of all-time highs. Tech stocks in particular have performed admirably and since last month's correction, showing some real strength. The Internet sector has been buoyed by expectations for a very good holiday season as many shoppers begin to become more comfortable with making purchases online to avoid the frenzied malls. Tech bellwethers like Intel, Microsoft, Dell, and more recently Oracle have led the techs higher and are all at or within striking distance of 52-week highs. The Nasdaq has recently outperformed the other indices lately, advancing more on good days and declining less on negative days. With techs leading the market and the rally being a broad-based advance, it is hard for average traders not to be bullish. Today makes this point well. The tech-heavy Nasdaq finished the day down 5.85, or .21% (please read as two/tenths of 1%) and is held up better than both the DJIA and the S&P 500, which were down 44.32, or .40%, and 6.79, or .50% respectively. Looking at the advance/ decline line, decliners defeated advancers 16 to 13 on 712 million shares while on the Nasdaq losers beat winners 1982 to 1892 on 907.2 million shares. On the NYSE, 73 issues had set new 52-week lows while 74 had touched new highs. On the Nasdaq, 59 issues had set new 52-week lows while new highs totaled 144. Overall the Nasdaq looks stronger, even on down days. Tuesday was a big day for mergers. Viacom and CBS announced a merger worth about $34.4 billion in stock , the biggest media merger ever. The combined company will be a formidable opponent for competitors such as Fox and Disney. The market reaction was positive as both stocks finished up for the day. CBS, the Big Board volume leader, hit a 52-week high and was up 1 3/4, or 4%, to 50 11/16. Viacom Class B shares, which are the more relevant for the merger were up 1 7/8, or 4.16%, to 46 15/16. In the wake of the deal, PaineWebber raised Viacom to buy from attractive. In other merger news Hilton Hotels announced a 4 billion-dollar merger with Promus Hotel. This move was not a major surprise as the WSJ carried a story about a possible deal last week. Wall Street was not as enthusiastic about this deal. PaineWebber cut Hilton to neutral from attractive, while S&P and Moody's threatened analyst cuts, sighting the enormous debt involved. Hilton was off 11/16, or 6%, to 11 1/8. Promus jumped 3 7/16, or 11%, to 34 13/16. Among the losers today was the airline and transportation sector. With fuel prices up 25%, more empty seats and very competitive Internet ticket pricing, airline stocks took a beating. Merrill Lynch lowered earnings estimates on US Airways, Delta Air Lines (which hit a 52-week low), Southwest Airlines, and Northwest Airlines. The bad news weighed heavily on the Dow Jones Transportation Average, which stumbled 1.5%. The American Stock Exchange Airline Index was off 6.13 to 147.41. Lower bond prices weighed on the market as well, taking many interest rate sensitive stocks down with them. The 30-Year Treasury bond dropped about .75 of a point, raising rates to about 6.07%. Banks slipped today after surging on Friday. The Philadelphia Stock Exchange/KBW Bank Index fell 3%. Lehman Brothers issued a positive report on the wireless services sector which gave a major boost to some stocks in that sector. Lehman upgraded its ratings and boosted its price targets on Nextel Communications, Aerial Communications and VoiceStream Wireless. They also raised their price target on Sprint PCS and Motorola. The report propelled Nextel, Aerial, VoiceStream and Motorola to new 52-week highs. Other winning sectors were oil services, up as crude oil futures jumped - the Philadelphia Stock Exchange Oil Service Index soared 4.8%, and the computer and Internet sectors, which continued to be very strong. The Philadelphia Stock Exchange Box Maker Index was up 4.47 to 334.21, while the Philadelphia Stock Exchange Semiconductor Index was up 2.83 to 563.73. TheStreet.com Internet Sector was up 5.79 to 601.61 What can we expect going forward? While today's action was about as interesting as reruns of Mr. Rogers Neighborhood, we can glean a few insights. First, interest rate fears and unexpectedly poor earnings are the two main fears that could drive the market lower the next month or so. Fed Chairman Alan Greenspan and Treasury Secretary Lawrence Summers are both scheduled to make speeches tomorrow, which will be watched closely, but will probably not contain any major policy announcement. Their words will be micro- analyzed but hints they may give will be very short-term drivers for the market. The next important economic report is scheduled for Friday, when the producer-price index is to be released. It would not be surprising if the rest of the week was more of the same, at least until Friday. A positive PPI report could provide the catalyst we need to push stocks into record territory and attract new cash once again. If volume does not pick up it could be an indication of a range-bound market, with resistance on at old highs and support at last months lows. As usual, investors need to stick religiously to proven trading systems and not allow their decisions to be dictated by emotion. It's always a stock-pickers market you don't need to be a genius or an original thinker to do well in the market. Just stick to proven winners and be quick to admit an error, moving on to the next opportunity, of which there are many. Plus, let's hope for an influx of volume tomorrow showing us that everyone is back in town. Not only that, pray that an over abundance of Fedspeak doesn't scare the bulls away. Chad Research Analyst Market Posture *************** As of Market Close Tuesday, September 7, 1999 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,500 11,320 11,034 Neutral 7.20 SPX S&P 500 1,320 1,420 1,350 Neutral 8.17 OEX S&P 100 675 735 711 Neutral 8.13 RUT Russell 2000 440 465 438 BEARISH 8.6 NDX NASD 100 2,320 2,400 2,492 BULLISH 9.3 MSH High Tech 1,120 1,200 1,251 BULLISH 9.3 XCI Hardware 1,035 1,050 1,126 BULLISH 8.24 CWX Software 750 800 856 BULLISH 9.3 SOX Semiconductor 515 520 564 BULLISH 8.24 NWX Networking 555 625 591 Neutral 8.13 INX Internet 500 580 454 BEARISH 7.20 BIX Banking 690 710 618 BEARISH 7.23 XBD Brokerage 410 440 397 BEARISH 7.23 IUX Insurance 645 660 609 BEARISH 7.23 RLX Retail 915 960 823 BEARISH 7.23 DRG Drug 360 390 371 Neutral 8.24 HCX Healthcare 740 785 759 Neutral 8.24 XAL Airline 180 190 147 BEARISH 5.21 OIX Oil & Gas 285 310 309 Neutral 8.10 Posture Alert After Friday's (9/3) explosive rally, today's follow through was disappointing and although technology issues led the way, several key industry sectors are actually turning down below its decline moving average. A detailed description of our Market Posture and its applications can be found at: /members/marketposture Market Sentiment **************** Tuesday, September 7, 1999 Whoops! After Friday's (9/3) impressive rally, many thought the market would follow through and rock and roll this week once all of the traders returned from their summer break and fund managers began to put money back to work - Where did all the buyers go? Many market watchers blamed today's action to profit taking after the big day on Friday. But Pinnacle is not too sure. Typically we like to see confirmation of a move following a big trading day. Not only was the market soft today, it traded with little volume, just over 700 millions shares. What's more, the 30-year bond yield actually drifted higher (6.067%) despite favorable market sentiment. Next, check out the divergence between the S&P 500 and the transportation Index. Today, Merrill Lynch downgraded the airline sector because of increases in fuel prices (+25%) and air traffic delays (+20%). How long do you think that increasing commodity prices will eventually surface in CNBC discussions and impact the inflation picture? Finally, at Pinnacle Capital Advisors, we talk a lot about key benchmarks. These benchmarks represent potential key turning points or moments in the market. We use a variety of technical and sentiment indicators to develop these benchmarks but one of the most popular benchmarks technicians like to use is the short-term 50 day moving average. We have summarized many of the broad market and industry indices and where the market closed today in relation to this key benchmark including the percent above or below (+/-) and our alert flag. As shown by the schematic, apart from the hot technology sectors, notice how many of the industry sectors are still trading below their key benchmarks or decision point. What's more, some sectors such as the airline, banking and retail sectors are beginning to drift even lower - not encouraging for those expecting the market to break out. Does anyone expect the broader market to reach record levels WITHOUT participation form these key sectors? The Technology sectors is clearly leading the way, but some might argue that these are over extended as measured by the percent above its 50-day moving average. Broad Market Indices ******************** Key Today's Index Benchmark Close +/- Alert NDX NASD 100 2,325 2,492 +7.2% Over Extended? MSH High Tech 1,170 1,251 +6.9% Over Extended? OEX S&P 100 700 711 +1.6% Key Moment DOW Industrials 10,970 11,034 +.6% Key Moment SPX S&P 500 1,350 1,350 .0% Key Moment RUT Russell 2000 440 438 -1.6% Key Moment Industry Sectors Key Today's Index Benchmark Close +/- Alert SOX Semiconductor 500 564 +12.8% Over Extended? CWX Software 775 856 +10.5% Over Extended? XCI Hardware 1,030 1,126 +9.3% Over Extended$ XBD Brokerage 400 397 -.7% Key Moment INX Internet 460 454 -1.3% Key Moment IUX Insurance 625 609 -2.6% Key Moment RLX Retail 880 823 -6.5% BIX Banking 670 618 -7.8% XAL Airline 160 147 -8.1% Street Signs We not saying that the market cannot reach new levels, but saavy option traders should not ignore these subtle currents in the market particularly since we are at a key moment. Follow what happens happens to the following sectors over the next couple of days and you will likely get a jump on other investors. Internet (INX) and Networking (NWX) Sectors: Most investors know that the technology sector is hot with many industry segments breaking out to new record territory. But did you know that the Internet sector is actually trading BELOW its 50/100 -dma. What's more, the networking sector, believe by many to be an important component of the technology group is trading just above its key benchmark (575). Keep an eye on these two sector. If the networking sector violates and closes below 575, watch out. Transportation (TXN) and Airline (XAL) sectors: Drifting further below its declining moving average and challenging 1999 lows. Airline sector broke key breakout and support level at 150 and closed at 147. S&P 500 (SPX): Trading right at its 50/100-day moving averages (1,350). The next move by the S&P 100 will likely presage the tone and direction of the broad market. Finally, Pinnacle has been tracking the level of OTM call and put buying for September and October and believes that we are likely to continue trading in a narrowing range. Technical analysts call this a classic pennant formation. And how appropriate as Major League Baseball (MLB) moves into its September pennant races. Street Signs ************* 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. Industry Sectors: 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 100 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) 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 2 87,833 +149.3% Friday, July 9 99,855 +183.5% August Expiration Cycle OEX OTM Call Analysis (Open Interest August 700-800) Friday, July 16 32,285 - Friday, July 23 62,455 +93.4% Friday, July 30 74,895 +131.9% Friday, August 6 113,258 +250.8% Friday, August 13 117,620 +264.3% September Expiration Cycle OEX OTM Call Analysis (Open Interest September 690-780) 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 Indicator (9/3) (9/7) Pinnacle Index (OEX): (735-780) 179.0 179.0 Overhead Resistance (710-730) 2.4 2.4 Underlying Support (630-690) 4.0 4.0 Put/Call Ratios: CBOE Total P/C Ratio .7 .7 CBOE Equity P/C Ratio .5 .5 OEX P/C Ratio 1.1 1.1 Peak Open Interest (OEX): Puts 660 660 Calls 720 720 P/C Ratio 1.33 1.35 Market Volatility Index (VIX): CBOE VIX 21.39 23.31 Investors Intelligence: Bullish 42.9% 42.9% * Bearish 31.9% 31.9% * The Power of Sentiment Analysis It has often been said that the crowd is right during the market trends but wrong at both ends. Measuring and evaluating the sentiment of the crowd, therefore, can give savvy option traders a decided edge. OEX Pinnacle Index Friday Tues Thurs Benchmark (9/3) (9/7) (9/9) (735-780) 179.0 121.9 Overhead Resistance (710-730) 2.4 2.4 OEX Close 713.89 713.89 Underlying Support (630-690) 4.5 4.5 Average ratings: Resistance levels 2.0 / Support Levels .5 What the Pinnacle Index is telling us: Overhead sentiment resistance is reaching extreme levels at the OEX 735/780 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 .69 CBOE Equity P/C Ratio .54 .54 OEX P/C Ratio 1.12 1.12 OEX Peak Open Interest Friday Tues Thurs Strike/Contracts (9/3) (9/7) (9/9) Puts 660 / 13,325 660 / 13,536 Calls 720 / 10,042 720 / 9,992 Put/Call Ratio 1.33 1.35 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 September 3, 1999 21.39 September 7, 1999 23.31 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 May 14, 1999 Top 60.9 28.7 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 7, 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 5, 1999 58.1 27.6 May 12, 1999 56.9 31.0 May 19, 1999 60.9 28.7 May 26, 1999 60.9 28.7 June 2, 1999 61.6 27.7 June 9, 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 * Please view this in COURIER 10 font for alignment ************************************************* CHANGES THIS WEEK Index Last Tue Week Dow 11034.13-44.32 -44.32 Nasdaq 2837.26 -5.85 -5.85 $OEX 711.37 -2.52 -2.52 $SPX 1350.45 -6.79 -6.79 $RUT 438.24 2.27 2.27 $TRAN 3109.49-47.41 -47.41 $VIX 23.33 1.94 1.94 Calls Tue Week HGSI 89.50 12.50 12.50 Gene therapy show lots of promise VRSN 113.72 4.47 4.47 Volatile and risky Internet play TXN 91.56 3.69 3.69 New contracts for TXN overseas ADI 56.50 2.94 2.94 Announcements made with 3 Com DISH 88.81 2.94 2.94 New split adjusted high at $91 BVSN 112.38 2.88 2.88 There committed to innovation SFE 70.50 2.63 2.63 New, this one has lots to offer SUNW 86.31 1.81 1.81 Zeroing in on a quality stock SFA 55.00 1.56 1.56 This stock is a real workhorse CNXT 77.88 1.50 1.50 Another high for the record book LGTO 46.25 1.13 1.13 Helped by a shot of adrenaline JDSU 113.44 0.19 0.19 Looking for a breakout point DELL 49.38 -0.06 -0.06 Price cuts on certain computers FLEX 62.88 -0.25 -0.25 This one's attracting buyers CMGI 85.88 -0.38 -0.38 Earnings run for three weeks!! MU 79.63 -0.50 -0.50 Killing two birds with one stone CSCO 70.38 -0.56 -0.56 Shows little buying conviction CHKP 84.13 -1.44 -1.44 Profit-takers get the upper hand MSFT 94.44 -1.44 -1.44 Will the tech rally continue? INTC 87.63 -1.69 -1.69 Look for buying opportunities ERTS 73.00 -1.75 -1.75 Sellers move in while buyers sit Puts KO 54.63 -2.75 -2.75 Problems continue to hurt Coke DOW 114.75 -0.63 -0.63 Use some caution with this play ONE 39.00 -0.47 -0.47 Even more interest rate fears? HRB 46.38 -0.38 -0.38 Purchase still haunting investors JCP 36.06 -0.25 -0.25 New wounds for a crippled stock WLP 74.00 0.19 0.19 There may be good entry points PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** There are no dropped calls today. PUTS: ***** There are no dropped puts today. ** Play updates continued in section two ** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. The newsletter staff makes every effort to provide timely information to its subscribers but cannot guarantee specific delivery times due to factors beyond our control.
The Option Investor Newsletter Tuesday 9-7-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ******************* TRADERS CORNER ******************* A good plan violently executed now is better than the perfect plan later Or as my instructors at Officer Candidate School would say, lead, follow or get out of the way. My plan for the week is a frag order -- a fragmentary order adjusting my previous plan, which is on track. My plan, based on Jim's guidance about entering last week for a post labor day rally, has 5 distinct phases -- 75% of my options portfolio in sept calls entered last week & exited by thus or fri this week; 33% of my options portfolio in sept or oct calls entered in a normal cyclical dip about 10 - 14 Sept; 33% of my portfolio in Oct OEX puts at a top in mid to late Sept; 10 - 20% of my portfolio in Oct or Nov calls in an intraday massive capitulation & rebound. In this context, it looks like the market is moving just as I expect. So, my frag plan for Tuesday looks like this -- GTW Sept 90. Limit sells at 10, 10.5, 11, 12. If I get hit on those, great. By the end of amateur hour, I will evaluate whether the stock is moving up, and based on that, adjust my limits back down if necessary. I will be completely out of the play by the end of the day (stock splits after the close). [I am sitting here in my office, ie: the diner by the bay. Foggy day today, on Tuesday afternoon. All my additions will be in square brackets. I woke up at 8:30, and most of these orders had already filled, so I moved my remaining limit sell down to get the last order off. Could have waited for a few points, as GTW streamed past on CNBC at 113, but I had already forgotten about the play. 10-20% is a good return.] MSFT Sept 95. Limit buy at 2.5 (max 2.75). I am already in this position (along with 5 other call positions -- GTW, CSCO, SUNW, JDSU, OEX). If I can, I reinforce this contract. I think we are looking at a general liquidity rally driven by money coming off of the sidelines, and index future action. This NASDAQ General will lead the move up. But, I don't want to shape a battle that is hard to manage, so I buy more of a position that I already own. By end of day Tuesday, this will be one of five positions I am monitoring to limit sells on Thrs or Fri. [This order filled while I was in a weights/ boxing workout in the Marina district. I had dropped of my better half for a pedicure, and I was warming up while watching CNBC. MSFT streamed past at 95, and I figured I had a fill. I went out to the Jeep, fired up the Thinkpad, confirmed the fill, and added 3 more orders for good measure. I want to load up on the NASDAQ generals, as the index is leading the others higher. When Greenspeach is done tomorrow. I expect a move up lead by these stocks.] CSCO Sept 70. Limit buy at 1 7/8 (max 2 1/8). As with the MSFT Sept 95, I am reinforcing success. Another NASDAQ General, with lots of good news (Cerent, IBM deal) for traders/ managers coming back to digest. This is one you have to own, and there is even more reason now. Liquidity will drive this one up. I have limit sells on all my positions but I don't expect them to fill on Tuesday; in fact, I'll probably move some up before the open on Tuesday. I will start exiting Wed and plan to be done by Friday. [I do my best trading on these intra-week, intra-plan plays. The QCOM decision last week, ie to buy more when it was down, was a bad one. But my decision to add more CSCO calls when the market was down, but CSCO was strong was good. Today, I target shot and reinforced MSFT. I was patient and followed my plan. Tonight, I need to read the newsletter to gain full situational awareness for the week, but it looks on track. Today's market activity I read as digestion of the Friday move, and anxiety ahead of Chainsaw Al. I am betting tomorrow is more like Humphrey Hawkins Part II than Part I, ie, no new news.] Last week, I quoted Sun Tzu, who said, if you know yourself and your enemy in a thousand battles you will never be in jeopardy. The key here is that everyone has their own trading style which fits them. It is critical to your long term success as an option trader that you recognize your own best trading style and strive to develop it. Here are a few of the personality types in our local option club: Trader A. She started trading options in 98, had some ups and downs, and started doing very well in 99, making $1,000,000 at one point. In our last meeting, she outlined some of her techniques: 1. Big Gains. Go for the big pay offs. This means -- - heavily traded options - big positions, eg, QCOM 100 calls, AOL, 200 calls 2. Right Market. Trade when the market favors you. Only really good periods this year have been January, April, June/ July of 99. 3. Buy 3 weeks before expiration for best price. 4. Rest. [my addition: work out] 5. Gotta watch the market while you are in. No substitute [eg, stops] 6. Read bulletin boards ;Cross check with OIN newsletter; When the picks are confirmed in several places, that is better. 7. Manage emotions. Easy to say, hard to do. 8. Don't worry about little amounts [commissions, spreads... Trader A uses market orders, but others disagreed] 9. When a option doubles, sell -- wait -- decide 10. 50% loss -- sell 11. Only play 50% of portfolio. Big mkt drop won't kill you. 12. Don't play same stock twice. 13. Play 2-3 stocks, max of 4, at a time 14. Keep it Simple 15. Get Needed Support -- husband -- friend -- can't be afraid 16. Don't buy Sept Calls 1 week before or 1 week after aug expiration (apply to other months)... price too high Trader B. He brought a chart with a 5/30 day moving average to the meeting. On a 5 minute chart, when the 5 crosses the 30, that indicates a time to buy the option on the stock or index. When it crosses back under, that signals a sell. Use a 15 minute or 30 minute chart for longer term trades. He and another trader have discussed this technique at some length on our Email list, and their trades are mostly 1-2 day plays, whereas Trader A is in a play longer. Trader C. He's been trading options for 10, maybe 20 years. He's been to several workshops, and he used the advanced techniques taught at the Optionetics workshops, and available in George Fontanills' The Options Course. He went to Europe a few weeks ago with a Bear Put Spread open. He'd rather minimize his risk, but also accept lower returns. My style is to accept maximum risk, which I try to minimize by knowing as much as I can and developing my instincts and knowledge. I know my plays are not as safe as Trader C's, but I am closer to Trader A in my aspirations. I'm a 30 year old grad student, and if I make a large sum of money now, I can invest it in a portfolio of growth stocks which can compound for 10, 20, and 30 years. If I lose it, in the words of the friend who got me into option trading, what's the big deal? Having pressed my luck and lost in the post earnings peak turbulance in February and April/ May, I have developed a strategy of playing most of my options portfolio in 5-8 positions in a earnings run up (as we may be entering now), but minimizing my risk in other periods by playing only 25 - 33% of my options portfolio in one or two stocks (eg, Feb/March, May/June [A last note on why I draw all these military analogies. Jim Cramer wrote today, "Remember, a battleground is where people have such strong feelings that you can get the stuffing knocked out of you or you can knock the stuffing out of somebody else." They always taught us in the Marines that war is a contest of human wills, and, as such was broadly applicable to other things in life. If my ruminations help you to think through your trades and style, all the better. Good luck.] Janar Wasito janar@OptionInvestor.com ***************** PICK NEWS - CALLS ***************** INTC $87.63 -1.69 (-1.69) After gaining $7.13 over the last 3 trading sessions, INTC saw some profit-taking today on slightly below average volume. Meanwhile, rival AMD added $2.25 on very strong volume. The semiconductor sector is still showing a lot of strength and analysts remain very positive on INTC. With the whole market down a bit today, this may represent a chance to buy into options on INTC but first confirm market direction. Over the weekend, Intel lowered prices on its current notebook chips by over 40% in anticipation of the release of faster Celerons and the new Pentium III. Also in the news: INTC and Microsoft are working together to develop technology that could be used in video game consoles like the ones made by Nintendo, Sony and Sega. The latest game systems can access the Internet and are very sophisticated. Growth in these game systems is strong and getting stronger. DELL $49.38 -0.06 (-0.06) Dell held up well today on average volume as the markets moved back and forth near the unchanged level. The volume in the markets wasn't what most traders would have guessed after the Labor Day holiday when activity tends to pick up. We did have fresh news on Dell though as they announced they have cut prices on certain business computers purchased over the web by 18%. They cited cost efficiencies in distribution and declines in component prices. This latest development should be considered positive for both Dell and their customers. Otherwise we are watching the NASDAQ for direction before opening new plays on Dell. CHKP $84.13 -1.44 (-1.44) Check Point dropped today after its huge run-up on Friday. No new news was announced today and today's drop should be seen simply as some profit-taking. The volume was moderate and there is still a lot of bullish sentiment for tech stocks in general. We might see a few days of consolidation before CHKP pushes to new highs. So with only one day of market activity under our belt, we will need to watch for further developments on our play. TXN $91.56 +3.69 (+3.69) The long weekend was enough to confuse investors and markets today causing stocks to oscillate between positive and negative territory. However, for TXN the long weekend only prevented its investor's from one day of adding value to their positions. Despite the long weekend TXN picked up were it left off on Friday, continuing its run to newer highs. Today's new high can be attributed to the recent news released on TXN. In a press release today, Samsung Electronics and Hyundai Electronics have chosen digital signal processor technology from TXN for use in asymmetrical digital subscriber line products targeted for the Korean market. This announcement is a significant win in Asia for TXN, as the market for ADSL services in Korea is expected to reach several hundred thousand lines by the end of the year 2000. With this news helping our momentum play, look for the stock to continue to higher highs. However, because market conditions remain volatile and may turn at any time, use the recommended stops. SFA $55.00 +1.56 (+1.56) This stock is a workhorse and continues to trudge forward despite a set back in the broader markets. Ending the day with yet another high, SFA has worked wonderful as a momentum play. Despite the fact there is little news on the stock, investors are buying SFA hoping to get a piece of the momentum pie. Technically speaking, the charts on SFA look good, the stock is trading above all its moving averages. Since we are at new highs, there is no technical resistance overhead. Like any stock that is reaching new highs, entry points can be tough to come by so look for weakness intraday or wait until the stock drops back to 10-dma at $52 before opening new plays. ADI $56.50 +2.94 (+2.94) It was a big day for ADI on Tuesday. The volume was strong with over 1.57 mln shares changing hands. ADI is also still technically very sound and continues to show no indications of weakness. The stock once again closed well above it 10-dma of $52 and further demonstrated it has the ability to out perform the markets. Since Friday there has been a few news developments regarding ADI but only one worth mentioning. ADI and 3COM announced on Tuesday an alliance to develop a two-chip controllerless V.90 modems that operates at 56K per second. Beginning in September, 3Com said it plans to leverage the two-chip technology, engineered by both ADI & COMS, in a marketing campaign targeting computer manufacturers. More alliances with the right people can only improve investor sentiment. SUNW $86.31 +1.81 (+1.81) And the beat goes on. Again investors didn't let the mixed tone in the broader markets confuse them when it came to zeroing in on a quality stock. Shares of Sun Microsystems gained another $1.81 today as investors made their way back to the markets after the long holiday weekend. Volume for the day was better than average with over 9.5 mln shares exchanging hands. After making a new high at $87.63, SUNW did soften a bit towards the close. In the news today, IBM announced it is making it's first move to challenge SUNW, in the release of a powerful server computer for ISPs. The machine will be available this month and will be priced between $3000 to $4000. Also SUNW was reiterated as a Buy from analyst Jay P. Stevens at the Buckingham Research Group. If you are currently in a play on SUNW move your stops up and let the market dictate your next move. If you a looking to establish a new play on SUNW, we would consider an intraday dip as a chance to jump in but only after reconfirming direction. DISH $89.00 +3.13 (+3.13) Investors came back to the markets today with their sights set on buying DISH. By the end of the first hour of trading, DISH had made a new split-adjusted high at $91. Volume was strong right out of the gate but dwindled as shares of the satellite broadcaster traded sideways for the balance of the session. The fact that there was not a lot of follow through after the first hour does make us somewhat suspect but we do believe the stock will continue higher. However, after making a new high, some traders may chose to take their profits. Should we get a pullback, we would view that as an opportunity to buy calls. The mood in the broader markets seemed to be somewhat cautious as investors await the release of PPI figures on Friday. Don't forget that Mr. Greenspan "speaks" again tomorrow as well as Fed Governor Meyer, who may have first contributed to the slow down in momentum of DISH and the markets so use caution. FLEX $62.88 -0.25 (-0.25) Today's trading in FLEX was decided after the first few minutes today as an initial sell off from $63.63 to $62.13 left us range bound the rest of the day. The post Labor Day event was not attended however, as volume was weak at 238K. But days like today should provide entry opportunities, as you target shoot on dips to support around the $60 level. Remember that FLEX is a play due to the strong upward trend and it's ability to use support as it's guide. It has also been very resilient to negative market conditions due to its fundamentals. This is not to say that it is immune and resting periods like today are helpful. Expect possible consolidation to support and use it to your advantage. A bit of good news today in an article listing FLEX as one of the Tech stocks that is attracting buying interest. Let's look for increased volume however to confirm it. Because the appears to still be worried about interest and inflation, let the stock approach support and wait for the market to turn positive before starting your plays. HGSI $89.50 +12.50 (+12.50) Deja vu? Today's dramatic rise in price looks very similar to that of July 8th this year. There's a lot of speculation as to why HGSI made this move today. Rumors from institutional interest, increased patent filings and buyout ideas have all hit the airways. The only item that can be substantiated is a news article Bloomberg published stating that gene therapy has a lot of promise for heart disease. It mentions HGSI as a leader in this technology and points out their active testing of vascular regeneration that is taking place. We said that HGSI would move on news but we can't imagine a move of this magnitude on an article of this nature so stay tuned as something may be brewing. We mentioned above the similar move to July 8th. It would be prudent to note the correction the following day. Keep your stops tight! The fact that we closed significantly higher than our top Bollinger band creates concern. Many short sellers look for top breaks for a potential gap down the following day. Use caution and protect your profits. HGSI has gained $29 since our pick so don't let this testy market take your success. BVSN $112.38 +2.88 (+2.88) The tech rally seemed to have a false start today, hampered by rising bonds and interest rate fears. BVSN got a good start out of the gate this morning with it's solid range gain from $107 to $116. It ran out of steam however as the session wore on and realized that this race wasn't for real today. For the more aggressive investors, this range provides good intraday plays. So when will the real race start? Some indications are more volume, better breadth and more runners (stocks) participating. Until we get these confirmations, use caution. There is a lot of worry right now, and with Sept. being a historical sell off month, protect your profits. In the news, BVSN was awarded the Crossroads 2000 honor, a highly regarded recognition in the e-commerce applications industry. Broadvision attributes the award to their commitment to innovation and customer satisfaction. MSFT $94.44 -1.44 (-1.44) The last few weeks in the market have been like a scary movie featuring interest and inflation fears. The kind where you want to go home and sleep with the lights on. You jump at the most common of noises (economic reports and comments). This being the case, we can't be too hard on MSFT and it's performance today. It's just stepping quietly and cautiously until morning comes (a confirmed tech rally and reduced rate fears). The good news is we got a confirmation on our support at $94, where MSFT bounced today. We are still hopeful of a tech rally as the week matures and MSFT is still poised for participation. The main news today was MSFT's announcement that Carpoint and Expedia could be for sale. This because the businesses do not match Microsoft's core infrastructure. As mentioned above, morning is not here yet so use caution. Leave the light on as more Fed comments and economic reports could scare us this week. Since we are close to support, a positive confirmation in the market could provide us with an entry point. MU $79.63 -0.50 (-0.50) Our new momentum play hit two birds with one stone today. MU broke the 52-week record of $80.56 (set last February) and pushed through this overhead resistance when it played tag at $81 right after the open this morning. The sector sell-off later in the day pressured MU down to $78.31 at one point. This downdraft provided excellent entry points though on this high-flying semiconductor. Analyst Arnie Berman is keeping his eye on this stock too. Today he added it to the "focus list" at Soundview Technologies. In other news, Micron and Infineon Technologies AG of Germany are entering the Japanese semiconductor market. Together the companies plan to create a strong supply of DRAM components and thus undercut competitor's prices. It's expected they will sign long-term agreements with NEC and Fujitsu and supply the contracts as early as next month. Analysts estimate Micron and Infineon could take as much as 50% of Japan's DRAM market by 2001 and both companies are shooting for combined annual sales of about $456 mln. LGTO $46.25 +1.13 (+1.13) The shot of adrenaline from Friday's explosive broad market trading carried over to today. LGTO spiked early on to propel itself to a new 52-week high at $47.88, breaking it through the near-term resistance. The past two days of trading have confirmed the momentum is getting back into gear. LGTO first perked up back on August 26th after the announcement of its Celestra Consortium which promotes an open and integrated architecture that optimizes data movement and management within Storage Area Networks (SAN). Still its best to confirm market sentiment and verify stock direction before opening any new call positions. Also keep in mind that $42 (proven support) and the 10-dma technical indicator are excellent gauges for LGTO. If it reverses and heads toward this level, tighten those stops for protection. VRSN $113.72 +4.47 (+4.47) Volume was moderate as VRSN picked up a couple more dollars today. The stock is edging towards its near-term opposition at $114 and could push through this mark with a stronger market. Consider target shooting for an entry if you want to open a position on this VOLATILE AND HIGH RISK INTERNET play. Overall this Internet momentum play has really tacked on the gains. And consider this...even though VRSN just split 2:1 on May 28th it still has plenty of shares for another stock split with 200 mln shares authorized and only about 50 mln issued. If VRSN reaches levels around $130 it would certainly be considered a split candidate again. Now that would be a nice touch going into earnings season! CMGI $85.88 -0.38 (-0.38) Well its official, CMGI will report 3Q earnings on September 27th, after the close. That gives us almost 3 weeks to rev up for a strong earnings run. We added CMGI to our call list this weekend as a potential earnings' run candidate because of its historical performance around earnings season and its great bounce on Friday ($6.13 or 7.7%). Plus we especially wanted to alert our readers who may desire an early entry point. Please take a look at 6 or 12 month charts for visual confirmation of the stock's patterns and to help you in choosing your entry point. So far $80 is a firm support level and overhead resistance is just a stone's throw away at $93. Stronger daily volume with advances would of course give us better evidence of a strong run. ERTS $73.00 -1.75 (-1.75) Looks like ERTS buyers decided to take another week off. Not sellers though, as some stepped up to take a profit following last Friday's spectacular gains. In Sunday's letter, we noted that possibility following 5 days of gains, so today's give back of $1.75 wasn't completely unexpected. More disconcerting however, is that the selling action dominated trading in over 1 mln shares (715K is average) and that ERTS closed at its low of the day. If you were determined to enter this play no matter what and took our suggestion to buy at the dip following amateur hour, then you are probably down only slightly. For those in the play keep your stops set, since support is way back at $67. For those wanting in, look for the reversal, coupled with high volume in a rising market. We'll have to wait to see what the market gives us for the remainder of the week. We're still expecting volume to pick up market wide and for the NASDAQ to test old highs. CSCO $70.38 -0.56 (-0.56) Not much change in today's action following the Labor Day weekend. But where the heck are all the buyers? Though still technically positive, CSCO gave back a slight bit of Friday's gains on (mercifully) less than average daily volume. Nonetheless, it closed near its low of the day, indicating lack of buying conviction, which is never a good sign. However, one day does not a trend make and we think the trend is still over the short-term. There's no news to move the price, just a bit of profit taking. Support is at $68, which we consider a buyable dip (barring a marketwide Greenspooking by any of the talking Fed-heads). Otherwise, look for the breakout with volume over $71. If anything is going to get the attention of money managers, CSCO has to be high on their list along with the other 4 generals, MSFT, INTC, DELL and WCOM. These 5 make up 40% of the NASDAQ 100. As goes the index, so goes CSCO (pretty much). JDSU $113.44 +0.19 (+0.19) While reaching as high as $117 in today's trading, JDSU sold off this afternoon with everything else but still managed a $0.06 gain. Volume was about 25% above average. Even so, we got a big head fake from JDSU, as it broke over $115 during the lunch hour, enticing a few of us into the play. While we make every effort to capitalize on a breakout, a breakout by itself doesn't necessarily mean "buy". The market and sector must also be moving in our favor, with advancers beating decliners, coupled with moderate to strong volume. We continue to caution, though we love this company's long-term prospects, picking an entry and exit is tricky and should only be attempted by those tolerant of HIGH RISK. We have heard that JDSU is holding an analysts' meeting this week but as of this writing, we haven't been able to confirm it. Perhaps the price will get a boost from any ensuing good news. In the meantime, support is in the $105-$106 range, with short- term support from Friday at $112. Resistance is at $120.88. Target shooting will yield a better result but don't chase it. There is always enough time not to force a trade. Wait for the pullback or buyable breakout. CNXT $77.88 +1.50 (+1.50) Another new high for the record book! Apparently, CNXT didn't need a rest today and escaped the slight NASDAQ profit-taking. Volume was average at 1.5 mln shares. Pushing the envelope, CNXT traded as high as $80.06 (which will now serve as resistance) and as low as $75.94, before settling midway between the two. There is no news to move CNXT, just good old-fashioned momentum. Though, we don't like to reach for an average this low for support, we can find it at its 7-dma of $75. We don't know how long that will last before it's violated but it's working for now. If there is a violation, support occurs again around $72, a definite target if you want to shoot for it. While you may get filled there if the market gets Greenspooked this week, consider it a gift. We don't think it will remain there for long in light of last week's new price target of $100. Be on the lookout for profit-taking if you're already in the play and confirm market direction before making a new entry. **************** PICK NEWS - PUTS **************** JCP $36.06 -0.25 (-0.25) JCP continues to disappoint those die-hard investors that refuse to give up the stock. Friday's weak performance of JCP (under strong market conditions) was enough to convince Prudential of the stock's troubles. They downgraded the stock from accumulate to hold after market close. If this news wasn't bad enough, this morning an article was released that Banc of America cut J.C. Penney's fiscal year 1999 earnings per share estimates to $2.39 from $2.65. This article completes the story that been ongoing since late May when the stock first started loosing steam. We continue to play JCP for its obvious problems and the overall weakness in the retail sector. Even though we remain very bearish, keep in mind that JCP does show historical support around $35 so place your stops accordingly. ********** Puts are continued in section three New Calls, Play of the Day, Combos, Straddles are in section three ********** SEE DISCLAIMER IN SECTION ONE **********
The Option Investor Newsletter Tuesday 9-7-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ****************** PUTS Continued ****************** HRB $46.38 -0.38 (-0.38) Seeing how today's markets could not sustain Friday's incredible rally works well for our current play on HRB. After a slight stall on Friday due to the broad market rally, HRB got back on track today, falling slightly and bringing us back to the familiar downtrend. We continue HRB as a momentum play and foresee little on the horizon to help JCP in the near future. Since last weeks announcement to buy Olde discount broker, both analysts and investors have worried about how the large integration would alter HRB. These worries continue to hurt the stock, that is down over $13 since its high back on Aug 24. The stock shows historical support at $45, so even though fundamentals indicate we could break through this level, technically it may be a little more difficult. Make use of the stop loss orders and for those entering new positions, wait until the stock drops below the $45 support level. WLP $74.00 +0.19 (+0.19) Today was a rather boring day for trading in WLP. The overall volume in WLP, and the market, was less than desirable which produced a fairly range-bound day. Yet we are at an interesting point in WLP's chart. WLP is right on the 10-dma resistance point which we have found great entry points in the past. So we do need to use caution in choosing our entry points in case it finally breaks back above this mark. The sector was weak today leading us to believe it is just a head fake but confirm the downward move first. KO $54.63 -2.75 (-2.75) Coke's downward march accelerated today as KO came within a fraction of a new 52-week low. Volume on the stock was huge, nearing 10 million shares, which is about three times average daily volume. Continued negative sentiment and fears that KO's purchase of Orangina from French drinks group Pernod-Ricard will not be approved by the French Ministry of Finance. Additionally, KO's recovery from its contamination episodes in Europe appears to be more expensive and drawn out than expected. Coke could break through support at its 52-week low at $53.63 this week which should create further selling pressure. ONE $39.00 -0.47 (-0.47) ONE showed further signs of decline on Tuesday with its $0.48 loss. The stock ended at $39.00 on relatively heavy volume of 5.4 mln shares. ONE has not been able to curb the recent slide so we will continue to ride the momentum wave for as long as it lasts. The stock is still technically weak but may find some support at the low from Thursday at $38.50. So far, it can not seem to recover for its plummet after the earnings warning announced on August 25th. Bonds on Tuesday also placed bearish pressure on ONE, as well as the entire financial sector. The 30-year bond yield fell to 6.07%. Alan Greenspan is giving a speech on Wednesday and this is leading to further interest rate fears. There is a good possibility this is only the beginning of interest rate uncertainty until the next FOMC meeting on Oct 5th. We'll just have to wait and see what Alan says so tighten your stops to protect profits and use caution entering new plays ahead of his comments. DOW $114.75 -0.63 (-0.63) The decline we have been looking for seemed to begin this morning and then kind of ran out of gas. The fundamentals for DOW and the industry haven't really changed however, the way DOW ran out of gas in the $114 area would suggest that you use extreme caution. We would have to view any basing or bounce from these levels as potentially as short- term bottom. We would only consider a new play on DOW with a solid move to the downside accompanied by strong volume and then keep your stops very close. On a positive note for our play, Andrew W. Cash of PaineWebber downgraded the chemical company today from Attractive to Neutral. ************** NEW CALL PLAYS ************** SFE - Safeguard Scientifics, $70.75 +2.88 (+2.88 this wk) SFE invests in and develop partnerships in young, primarily high-tech information companies. Safeguard Scientifics takes the next step in providing managerial assistance to help make the companies stock desirable to the public. Safeguard then sells all or part of its interest and SFE's own stockholders profit from rights offerings in the companies Safeguard invests in. In short Safeguard is an information technology "holding company" that develops and operates Internet-related companies. They have invested in such high-tech ventures as ComuCom and Nextron Communications. Their primary competitor is CMGI. Safeguard Scientifics is an attractive way to play the Internet game. The company has a successful track record in being able to locate and identify young startup high-tech companies and introducing them to the public. SFE's latest was announced today in Pac-West. Pac-West filed today to raise up to $125 mln in its IPO of common stock. It's a company that began offering long-distance services since 1982 and local services since 1996 in its main market of California, Pac-West's customers include Internet service providers. After blowing away analysts earnings estimates in July (by over 70%), shares of SFE went south, as was the trend for many stocks reporting good earnings this past season. Most of the gains in the second quarter were related to the company's holdings in Tellabs (TLAB) and CompuCom. SFE made a bottom after the first week in August and has begun to form a nice upward channel. Today SFE closed over its 100-dma for the first time since late July, on volume of 500K. Technically, there is resistance in the $75 area. Barring any bombshells from Greenspan tomorrow, we are expecting SFE to continue its upward move. Also we have the PPI numbers coming out Friday so it may be a good idea to have patience when considering a play in SFE. Should we see a strong upward move in the broader markets and the Internet index, SFE should jump on board as well. As always assess your risk profile when entering any new play. SFE was raised from an outperform to a by today by analyst Bennett Notman at first Union Capital Markets. The 12-month target price is now $86. ***less than 2 weeks remaining until September expiration*** BUY CALL SEP-65*SFE-IM OI=582 at $6.50 SL=$4.75 BUY CALL SEP-70 SFE-IN OI=699 at $3.00 SL=$1.50 BUY CALL SEP-75 SFE-IO OI=200 at $1.06 SL=$0.00 High Risk! BUY CALL OCT-65 SFE-JM OI=119 at $9.38 SL=$7.00 BUY CALL OCT-70 SFE-JN OI= 98 at $6.38 SL=$4.50 Picked on Sep 7th at $70.75 P/E = 17 Change since picked +0.00 52-week high=$120.00 Analysts Ratings 5-5-1-0-0 52-week low =$ 17.13 Last earnings 06/99 est= 0.19 actual= 0.33 Next earnings 10-19 est= 0.15 versus=-0.55 Average Daily Volume = 587 K Chart = http://quote.yahoo.com/q?s=SFE&d=3m ************* NEW PUT PLAYS ************* No new puts *************** PLAY OF THE DAY *************** DISH - EchoStar Communications $89.00 +3.13 (+3.13)(+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. Sunday's Write Up 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 as 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. Tuesday's Write Up Investors came back to the markets today with their sights set on buying DISH. By the end of the first hour of trading, DISH had made a new split-adjusted high at $91. Volume was strong right out of the gate but dwindled as shares of the satellite broadcaster traded sideways for the balance of the session. The fact that there was not a lot of follow through after the first hour does make us somewhat suspect but we do believe the stock will continue higher. However, after making a new high, some traders may chose to take their profits. Should we get a pullback, we would view that as an opportunity to buy calls. The mood in the broader markets seemed to be somewhat cautious as investors await the release of PPI figures on Friday. Don't forget that Mr. Greenspan "speaks" again tomorrow as well as Fed Governor Meyer, who may have first contributed to the slow down in momentum of DISH and the markets so use caution. ***less than 2 weeks remaining until September expiration*** BUY CALL SEP-80*UAB-IP OI=749 at $10.38 SL=$7.50 BUY CALL SEP85 UAB-IQ OI=252 at $ 6.75 SL=$5.25 BUY CALL OCT-85 UAB-JQ OI=256 at $10.50 SL=$8.75 BUY CALL OCT-90 UAB-JR OI=140 at $ 8.13 SL=$6.25 Picked on Sep 4th at $85.88 P/E = N/A Change since picked +3.12 52 week high=$89.00 Analysts Ratings 9-6-0-0-0 52 week low =$ 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 ********* STRADDLES ********* Straddle Recap for Tuesday, September 07, 1999 - I hope everyone had a great labor-day weekend. I use this weekend to reflect on what I did right, as well as what I did wrong in Straddle-World. I got the task of taking my 5-year-old son to the bus stop this morning for his ride to school. As he was waiting for the bus, I asked him like a concerned parent if he knew which stop to get off of on the way home. His answer shocked me, as he replied that he always gets off where the white truck, blue minivan, and white Honda accord were. It dawned on me that parents no longer let their kids sit out at the bus stop by themselves anymore, for security reasons I guess. What happened to walking to the bus stop with your childhood friends? I'm sure everyone is wondering where I am going with this. The biggest thing that I realized during the holiday is that as time passes, so does lifestyles, and so does the strategies that we know and trade. While sound-trading strategies will always hold up over time, adjustments must not be overlooked as premiums swell up and flatten out. As volatility spikes up and down dramatically, this will shorten my time in the markets with straddles. As the market flattens out, my time frame will change and my holding time on straddles will increase. So that's my view of the changing markets straight from a 5-year-old's perspective. Straddle Holds These are positions that have been highlighted in past Straddle Play Articles. They are currently on hold awaiting further announcements from the companies themselves. They include the Company as well as the calls and puts that were closest to the money upon inception. Symbol,Title,Bid,Ask,Last Honeywell HONJD,HON Oct 120 Call ,4.25,4.625,3.375 HONVD,HON Oct 120 Put ,4.75,5.125,6.25 Maytag Corp MYGJN,MYG Oct 70 Call ,0.5,0.75,0.8125 MYGVN,MYG Oct 70 Put ,6.125,6.625,4.125 Minnesota Min'G/Mfg MMMJS,MMM Oct 95 Call ,5.625,6.125,6.125 MMMVS,MMM Oct 95 Put ,1.4375,1.6875,1.625 Gannett Co GCIJN,GCI Oct 70 Call ,3.75,4.125,2.375 GCIVN,GCI Oct 70 Put ,1.5,1.75,3.25 Chevron Corp CHVLS,CHV Dec 95 Call ,4.875,5.25,5.625 CHVXS,CHV Dec 95 Put ,5.875,6.25,6.375 Mobil Corp MOBKA,MOB Nov 105 Call ,3.875,4.25,4 MOBWA,MOB Nov 105 Put ,4.5,4.875,5.125 Baxter International BAXJN,BAX Oct 70 Call ,1.5625,1.8125,2 BAXVN,BAX Oct 70 Put ,3.25,3.625, UAL Corp UALJM,UAL Oct 65 Call ,3.25,3.625,3.375 UALVM,UAL Oct 65 Put ,2.875,3.125,2.875 Siebel Systems SGQKO,SEBL Nov 75 Call ,8.25,8.625,8.125 SGQWO,SEBL Nov 75 Put ,6.875,7.25,6.375 AES Corp AESKL,AES Nov 60 Call ,7.125,7.5,7.375 AESWL,AES Nov 60 Put ,2.1875,2.4375,2.5 Ethan Allen Interiors ETHKF,ETH Nov 30 Call ,2,2.375,1.8125 ETHWF,ETH Nov 30 Put ,1.8125,2.0625,2.75 Unitrode Corp UTRKI,UTR Nov 45 Call ,3.25,3.625, UTRWI,UTR Nov 45 Put ,2.5625,2.9375, Straddle Drops The Straddles below have now changed direction or have made my exit target. These straddles have moved extremely well and we don't want to see them return from where they came. 2 of these picks are over 1 month old, yet they have held their value due to a move away from the strike price. Both CNTO and ZION were stocks that were involved in merger rumors. Great, that really caved in the options prices when I first highlighted these. They are both up from there original prices when comparing both the calls and puts together. Centocor Inc COQJK,CNTO Oct 55 Call ,6.125,6.25,6.25 COQVK,CNTO Oct 55 Put ,0.3125,0.5,0.4375 Zions Bancorp ZNQJK,ZION Oct 55 Call ,0.6875,0.9375,0.6875 ZNQVK,ZION Oct 55 Put ,4.625,5,6 How about these picks? Gosh, I'm sure someone is thinking that anybody could have picked these straddles... REALLY? If you picked these straddles each month over the last 8 months you would have been right about 20% of the time. That's why it is important to time your picks using the criteria I have highlighted over the past month. Each of these straddles are up over 20% from last week. Not bad for a week's work. Apple Computer Inc AAQJM,AAPL Oct 65 Call ,12.75,13.125,13.25 AAQVM,AAPL Oct 65 Put ,1.1875,1.375,1.375 Dell Computer Corp DLQJI,DELL Oct 45 Call ,5.75,5.875,5.875 DLQVI,DELL Oct 45 Put ,1.125,1.25,1.1875 Well folks, that's it for today. I do have a baby coming soon, and mama is calling. A whole new line of stress that versus some of that directional stress in today's markets, I'd take the baby stress any day of the week! Tom Gentile Chief Options Strategist ***************** COMBINATION PLAYS ***************** A Post-Holiday Slumber.. Tuesday, September 7 Most stocks were lower Tuesday as investors traded cautiously after last weeks pre-holiday rally. The Dow fell 44 points to close at 11,034 while the Nasdaq slipped 5 points to 2837. The S&P 500 index declined slightly to 1350. Declines led advances 1,646 to 1,325 on average volume of 707 million shares on the NYSE. The long Treasury bond fell 27/32, pushing the yield to 6.08%. Sunday's new plays (positions/opening prices/strategy): Nichols Res. NRES SEP17C/SEP22C $0.00 debit bull-call Case CSE OC45CC/OCT45P $43.50 cost CC/NP-combo IMS Health RX SEP35P/SEP30P $3.43 debit bear-put Liposome LIPO SEP30P/SEP27P $0.25 credit bear-call United Intl. UCOMA SEP85C/SEP80C $0.00 credit bear-call The holiday was unkind to some of our "new play" candidates and news announcements canceled two of our positions before the open on Tuesday Morning. Nichols announced Monday that it has delayed the planned initial public offering of TXEN Corporation, and that removed most of the high IV (and speculation) in the short-term call options. UCOMA was up almost $5 in pre-open trading and moved $12 higher in the first few minutes after Liberty Media announced it agreed to purchase 5 million shares of the parent company. They also announced the formation of a joint venture between Microsoft and Liberty with United Pan-Europe (UPCOA). There was a fairly small interest in the front-month call options prior to the news so it obviously came as a surprise to most traders. The Liposome spread was unavailable at our target entry as the market-makers adjusted the small pricing disparity before the options market opened. At 10:15 AM, the position was quoted briefly at $0.25 credit; a fractional premium but still above our minimum monthly ROI, and that's the entry that we recorded. Case was relatively unchanged for the first hour and the covered call/naked put "combination" was available near the recommended cost basis of $43.50. IMS health also traded sideways after the open and the bearish debit spread was observed within $0.06 of our suggested entry price. Portfolio plays: A day of mixed emotions followed the long holiday week-end and our spreads portfolio performed with a direction-less outlook. Many of the positions continued to power ahead while some less favorable issues fell by the wayside. Sun Micro (SUNW) was one of our few big-cap, hi-tech issues that continued higher and it appears Friday's roll-up to October options was favorable. Cisco Systems (CSCO) fell slightly, and that's a good thing as we did not make any adjustments to our diagonal spreads on last week's rally. Bullish mid-cap issues continue to perform well and two of our best plays are Microchip (MCHP), up $1.31 to $57 and Chiron (CHIR), up $2 to $35. Some smaller issues also moved higher; USWeb (USWB), a $2.38 climb to $25; and Cabletron (CS), with a closing rally to end just below our sold strike at $17. Mentor (MNTR) was one of our most unusual stocks of the day. It started climbing in the afternoon with no public news and ended $2.38 higher. The move through our STOP (at $1.00) on the sold option was surprising but the technical break above the recent top was supported by heavy volume. Our new position is a naked October-$25 call (at $1.81 debit), so the stock price will need to continue higher for the play to close with any significant profit. Most oil stocks performed well in today's listless market and many of our positions were higher. The spreads that benefitted include Diamond Offshore (DO), Halliburton (HAL), Noble (NE), and Exxon (XON). Baker Hughes (BHI) was also one of the leaders in that group; up $0.81 to $34, and the calendar position can be closed for a $1.00 profit. J.P. Morgan (JPM) fell back almost $5 to $129 and that's where we hope it will stay as our bearish debit spread expires next Friday. The current trend is centered around $130 and investor sentiment concerning inflation and interest rates will have a big effect on the final outcome. Don't let this one get away. Questions & comments on spreads/combos to ray@OptionInvestor.com ****************************************************************** Strategies and Techniques.. Covered Calls with LEAPS - There are two common approaches to this strategy. The neutral outlook, which involves selling the most time value possible; ATM, or slightly OTM, and buying it back when it becomes intrinsic as opposed to selling OTM for safety (rarely called out). The ATM strategy is really the easiest for most traders to master because option pricing theory is on your side and the OTM method requires bullish performance from the underlying stock while the ATM (neutral) method simply requires a stock to hold it's value (not go up). The best position (in my opinion) for "bullish" LEAPS with Covered-Calls would be OTM on the long and slightly OTM or ATM on the short, where the time value of the long increases with the upward movement of the underlying stock price. The problem with this strategy is the short-term "upside" risk and the fact that most new traders don't want to be in a margin/collateral position; where the sold option has a lower strike than the one that is owned. The important thing to remember when you open a calendar spread is, try to make sure there is excess time value in the sold call; a disparity in your favor. The passage of time will erode the value of the short term option at a faster rate than it will the long term option. That's why you generally wait until the end of the expiration period to close out the short position (if/when necessary) at a theoretically favorable price, without regard to stock price movement. Good Luck! ****************************************************************** - NEW PLAYS - This week, I had a few Emails with interest in Covered-calls with LEAPS. These new play candidates are large cap issues with favorable earnings; superior profit margin, strong revenue and growth over the most recent four quarters, and excellent return on equity. These stocks have exhibited an ability to maximize their profit margins which allows them to make capital work to its fullest potential; a necessity for long-term growth. These plays are based on the current price or trading range of the underlying issue and its options, the long-term fundamental outlook and the recent technical history or trend. 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. ****************************************************************** CA - Computer Associates $53.56 *** Diversity Is Good *** Computer Associates supplies an extensive array of systems management, information management, business management and consumer software products for use with a range of desktop, midrange and mainframe computers from many different hardware manufacturers including among others, IBM, Hewlett-Packard, Digital Equipment, Sun Microsystems, Data General, Tandem Computers and Compaq. PLAY (conservative - neutral/long term): BUY CALL JAN01-55 ZCA-AK OI=215 A=$12.25 SELL CALL SEP-55 CA-IK OI=2022 B=$1.25 INITIAL NET DEBIT TARGET=$10.75 TARGET ROI=100% (18 months) My favorite position, based on option pricing and the short-term technical outlook; but requires a margin or collateral. PLAY (conservative - bullish/long term): BUY CALL JAN01-60 ZCA-AL OI=299 A=$10.50 SELL CALL SEP-55 CA-IK OI=2022 B=$1.25 INITIAL NET DEBIT TARGET=$9.00 TARGET ROI=120% (18 months) Chart = http://quote.yahoo.com/q?s=CA&d=3m ****************************************************************** BGEN - Biogen $83.81 *** Drugs For The Next Century *** Biogen is a biopharmaceutical company principally engaged in the business of developing & manufacturing drugs for human healthcare through genetic engineering. The company focuses its research and development efforts on areas where it has particular scientific and competitive strengths: inflammatory diseases, respiratory diseases and certain cancers and viruses. PLAY (conservative - bullish/long term): BUY CALL JAN01-90 ZQB-AR OI=6 A=$16.88 SELL CALL SEP-90 BGV-IR OI=95 B=$0.43 INITIAL NET DEBIT TARGET =$16.25 TARGET ROI=100% (18 months) Chart = http://quote.yahoo.com/q?s=BGEN&d=3m ****************************************************************** MOT - Motorola $100.00 *** A Personal Favorite *** Motorola is one of the world's leading providers of electronic equipment, systems, components & services for worldwide markets. They are engaged in the design and manufacture of a diversified line of products. These include two-way land mobile communication systems, paging and wireless data systems, personal and mobile (cellular) systems, subscriber and infrastructure equipment for the telephone market, and a wide array of other products. PLAY (conservative - bullish/long-term): BUY CALL JAN01-105 ZMA-AA OI=161 A=$19.25 SELL CALL SEP-105 MOT-IA OI=366 B=$0.81 INITIAL NET DEBIT TARGET=$18.12 TARGET ROI=100% (18 months) Note: No pricing disparity in this play for September options but we couldn't resist the opportunity to sell the two-week position for $0.81. The options in October should hold their IV relatively well if MOT can avoid a significant sell-off at this new trading range, for the next few days. Chart = http://quote.yahoo.com/q?s=MOT&d=3m ****************************************************************** ****************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $10 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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