The Option Investor Newsletter Sunday 9-12-99 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 9-10 WE 9-3 WE 8-27 WE 8-20 DOW 11028.43 - 50.02 11078.45 - 11.72 11090.17 - 10.44 +126.96 Nasdaq 2886.96 + 43.85 2843.11 + 84.21 2758.90 +110.57 + 10.52 S&P-100 712.79 - 1.10 713.89 + 5.92 707.97 + 11.38 + 7.77 S&P-500 1351.65 - 5.59 1357.24 + 8.97 1348.27 + 11.66 + 8.93 RUT 441.19 + 5.22 435.97 + 3.52 432.45 - 1.93 + 0.33 TRAN 3090.83 - 66.07 3156.90 - 14.45 3171.35 + 20.62 - 28.34 VIX 22.35 - .96 21.39 - 1.82 23.21 - 0.85 + 1.68 Put/Call .52 .57 .73 .69 ******************************************************************* Fed Governors, CPI reports, Housing Starts, Oh my! While the post-Labor Day rally failed to materialize for the entire market as many had hoped, big name tech stocks still managed to land on the yellow brick road. Investors could take their pick of reasons not to buy last week with a host of Fed governors speaking and a frightfully decisive PPI report expected last Friday. Thus, the stampede to Emerald city that we expected last Friday was suddenly lost in a cloud of dust. Earnings warnings, higher oil prices, and plenty of Fedspeak were enough to keep the Dow 30, OEX, and the S&P 500 all stuck in a week long trading range. Even the yield on the 30 year bond couldn't do much more than trade sideways. Alas, next week does not appear to look much better. However, with our normally optimistic outlook, there are opportunities aplenty for stock pickers extraordinaire. Before we can look to the future, let's glance back to Friday and see how the shortened trading week ended. After the weathering a handful of speeches from the Fed governors, the market was poised to move on the data presented in Friday's PPI report. What we got was a +0.5% gain in August. This was higher than the expected 0.3% economists were predicting. However, excluding the more volatile energy and food prices, the "core" rate actually fell -0.1%. To most of us this is a mixed bag and amateur hour on Friday showed it. The NASDAQ gapped up about 30 points to 2880 and the Dow quickly shot up as well before both of them fell back to more mundane levels as traders stopped to decipher the data. Here is how the week looked: Dow NASDAQ SPX The PPI's core rate that came in unchanged, or down from the expected 0.1% gain, is what the market was looking at the most. This was the 4th decline for 1999 and really helped ease concerns among bond traders that the Fed would raise rates again in October. Bond yields gapped lower and actually fell to a low of 6.01% (with a little help from the Bank of Japan, but more on that later), before climbing back to end the day at 6.03%. Economists and the Fed both realize that inflation is currently non-existent. However, our economy is so strong and retail spending has been so robust, that both are looking for any pressures from the wage market to signal any growth in inflation. The wage market is not the only culprit. The rising price of oil is putting pressure on certain industries and inflation may be building in the pipeline. Additionally, economists are noting that the two year decline in commodity prices may have stopped. Any rise in raw materials will eventually raise the prices of finished products. Some expect that rising oil/energy and commodity prices may begin to show inflation over the next three to six months. But short term, the coast appears clear. A survey by CBSMarketWatch of economist showed that sentiment is 9:1 against a rate hike on October 5th. News of a 0.9% growth for Japan's 2Q GDP numbers sent the dollar to three year lows against a rising yen. While the yen's recent trend is probably still intact, U.S. bond traders were happy to see the Japan government step in to buy dollars and slow it down. This added a little extra emphasis to the U.S. 30 year bond's drop on Friday before its late day recovery. Japan is the second largest economy in the world. A stronger yen only makes its exports more expensive forcing you and I to pay more for that new Sega Dreamcast or Honda Accord. Not exactly what Japan is looking for while its struggling economy finally appears to be pulling out of a 10 year recession. Of course a weaker dollar doesn't help our inflation concerns either. A weaker dollar could add to inflation pressures by forcing the price of imports higher and increasing exports here at home. At the moment, domestic policy is to let it the currency rates run its course as long as it remains slow and steady. In the mean time, intervention on the side of Japan has sparked renewed interest in its recovering stock market which is expected to keep the momentum alive though next week. While we are on the subject of foreign markets, most of Europe appeared to rally on the U.S. economic data and the continuing rise in oil prices. Germany, France, and Italy were all higher on the day while England fell to some late day selling. Our neighbors, Canada and Latin America also gained on the day. To bring the focus back home, most of us were watching the tech stocks. And how could we not! The NASDAQ turned the heat on slightly after 10 o'clock on Friday and came within less than 2.5 points of hitting 2900 before succumbing to a little late day profit taking ahead of the weekend. Our old intraday high was 2874 set back in mid-July. Several sectors helped spur the rally as hardware, semiconductors, networking, Internet, and even software stocks all helped push the index higher. It is not hard to understand why. With the perception that the Fed "should" have a harder time rationalizing a rate hike in October, investors fly back to the interest sensitive, high P/E growth sectors. Sector rotation might be making it too simple, but there are arguments to support such a move. Just recently, the passing of Thursday, September 9th or 9-9-99 gave the software sector it first dress rehearsal for Y2K. It was previously thought that this string of 9's could cause problems with older programs. Without any major failures this week, investors may be feeling more confident that Y2K will pass without incident. We also have a new belief that corporate spending is not falling behind like we previously thought. Again, previous assumptions expected corporations to with hold any new spending in light of Y2K fears. This may prove untrue. Last but not least is the growing expectation for holiday sales on the Internet. Last year, holiday sales figures were a mystery. This year, expectations are rising. While this allows us a great chance to play the "rumor" it is setting us up for a "sell on the news" later in the year. Let's take a quick look at some of the major events we need to be aware of this week: Tuesday, 14th. 8:30 am ET, Retail Sales estimate +0.7% Wednesday, 15th. 8:30 am ET, CPI Report estimate +0.3% Fed Gov. Ed Gramlich speaking on financial services Thursday, 16th. 8:30 am ET, Jobless Claims Fed Gov. Ed Kelley presides over a two day Y2K summit. Friday, 17th. 8:30 am ET, Housing Starts Y2K summit continues with appearances from Alan Greenspan and other Fed Gov's. As you can see, it is not the most benign schedule the market has to work with. However, last week didn't look too hot either. What is going to move the markets will be investors' (both small and large) fear's of a rate hike in October versus not wanting to miss out on possibly the best 3Q earnings in a long time. At this point I'd like to remind you that there is something called the greed factor. Unless we get some drastic economic numbers or some extremely negative comments from the Fed heads this week then we are likely to see an uptrending market. That does not mean bet the farm on Monday. This is the week we need to be making our earnings season game plan. Take the time to pinpoint those stocks we want to play and identify their earnings dates. Do they have a previous earnings run trend? When does it normally start? If you are a believer in contrarian viewpoints, look at the current disposition of call options versus put options on your favorite stocks. Do you see any overhead resistance or support there? Where is the best entry point for you to target shoot your way in? Where and how am I going to allocate my capital for the next 6 weeks? For most of us, we have four weeks before Intel kicks off the 3Q earnings season on Tuesday, Oct. 12th. For the braver traders, we have three weeks before Yahoo! kicks off the Internet earnings game on Thursday, Oct. 7th. Everyone remembers how we played YHOO last time, right? You won't see it as a current play this weekend, because of its one week $30 run up. However, if we get any kind of entry point this week, you'll probably see it on the letter soon (I'm hoping for a retracement to at least $160, maybe more). Technically, Friday's strong close on the NASDAQ with volume of 1.14 billion bodes well for the tech sector. Temporary support should be 2800. If the Dow still needs more consolidation, look for 10,950 to be our first line of defense. Many believe that if we are to have any kind of sustainable rally we need to see a broad market advance. Without the small caps confirming the move, then it is prone to be short lived. Fortunately, we had such a move in the Russell 2000 just last week. Whether this new trend holds up or not remains to be seen. Tips for next week: be patient, don't chase stocks you shouldn't and don't place all your bets before we see the CPI on Wednesday. After that, we'll probably all go cross eyed keeping one eye on the approaching 3Q earnings and the other on the October 5th Fed meeting. Sell too soon. Kimo Editor P.S. Yes, Jim is still the editor but we've grown enough to need two. Secondly, we dropped quite a few plays this weekend and some of them are still good plays. Make a careful decision before bailing out of something that may still work for you. *********** JIM'S PLAYS *********** Week ending 9/10/99 I only watched the market three days this week. I was planning to be out of town on business the end of the week so I really wanted only solid plays or none at all. With five Fed speeches this week and the PPI on Friday I did not expect a blowout week. I think we will continue to move up but the next milestone is the CPI next week. Don't get greedy and raise the targets too fast. If you make a habit of buying high then selling low will happen more often than not. The SFA target at $52 never came to pass. SFA traded between $53 and $55 for three days and was trending down from Tuesday's high. I am still positive on this stock and I may raise my target for next week if Fridays trading goes well. I had a target on AMZN of $60 and I was hoping for some post split depression. Amazon did nothing and range traded between $61-64 tue/thr. Thursday PM it did close near the high of the day and it may be up Friday. If we can get some momentum on AMZN then next week might require a higher target. EXDS - Target of $80 and hold. As of Thursday night we have not seen $80 yet. $78 looks to be a short term top. Good bounce off the $72 low on Thursday so again, next week may be the week for EXDS. SUNW - SunMicro had a target of $82 and it charged off on Tue/Wed to a high of $88. I was cussing myself for missing yet another good run when it rolled over Wednesday afternoon. It did hit the $82 target on an end of day dip Thursday but after the roll over from $88 you are thinking, profit taking or selloff? Since I am going to be on the road on Friday I elected to hold on SUNW until next week as well. QCOM - Target $160, never hit and it is showing no strength at all. Looks like a top at $170. I am dropping QCOM as a possible at this time. What a boring week. I am sorry there were not any exciting trades to write about. BUT, sometimes the best trade is no trade at all. It takes patience to wait for a stock to come to you and sometimes by the time it does you are not sure you still want it. When things do not go as planned I always console myself with the fact that by not forcing trades just for the sake of trading, I did not lose any money. When you get to the bottom line I think that is what is important. Trade only when profitable and when ever possible DON'T trade without a compelling reason. I will not be back in the office until Thursday and I am not a fan of trading on the road. Therefore there are no targets for this week. Good luck, sell too soon. Jim ************** Fall Seminar Series ************** NORTH, SOUTH, EAST, WEST... No matter what part of the country you live in, Optionetics and OptionInvestor.com have a Fall seminar close to you. Maybe you missed our Summer schedule but the kids are back school and the markets are ready to rumble. Take the time to re-focus your option trading strategies. Here is what some of our own OptionInvestor.com readers said about the Optionetics seminars: *** "I've worked for years to build my portfolio. 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Krishna A., TX *** "This seminar is the best that I have ever taken on any subject. As a novice options trader it has provided me with tools to manage stress and risk." Joan L., TX *** "Optionetics is the most honest and realistic picture of making money in the markets. Anyone serious about learning option strategies greatly improves their chances in this endeavor." Ted E., CA *** Located in Chicago, New York, Miami, or San Francisco we have a seminar that is close to you. Hurry and check out the details at our site: http://www.OptionInvestor.com/seminar/ Seating is limited to the first 100 per city. ************* COMING EVENTS ************* Monday: Chicago Fed Index July Forecast: -- Previous: 131.9 Tuesday: Retail Sales August Forecast: 0.8% Previous: 0.7% Retail Ex. Autos August Forecast: 0.4% Previous: 0.3% Atlanta Fed Index August Forecast: -- Previous: 15.2% BTM Schroders 9/11 Forecast: -- Previous: -0.1% Current Account Q2 99 Forecast: -78.5B Previous: -$68.58B Richmond Fed. August Forecast: -- Previous: N/A LJR Redbook 9/11 Forecast: -- Previous: -0.1% API Oil Stocks 9/10 Forecast: -- Previous: -5.97M Wednesday: CPI August Forecast: 0.3% Previous: 0.3% CPI ex. food/energy August Forecast: 0.2% Previous: 0.2% Business Inventories 9/4 Forecast: 0.3% Previous: 0.3% Real Earnings August Forecast: -- Previous: 0.1% Thursday: Jobless Claims 9/11 Forecast: 283K Previous: 286K Industrial Prod. August Forecast: unch Previous: 0.7% Capacity Utilization August Forecast: 80.5% Previous: 80.7% Phil Fed Survey Sept. Forecast: -- Previous: 12.0 Money Supply (M2) 9/6 Forecast: -- Previous: -$4.8B Friday: Housing Starts August Forecast: 1.62M Previous: 1.661M Building Permits August Forecast: 1.59M Previous: 1.64M Univ. of Michigan Sent. Sept. Forecast: -- Previous: 104.5 Next week's economic releases (preliminary) September 21 International Trade - July September 23 Help Wanted Index - 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 ************** Market Posture As of Market Close - Friday, September 10, 1999 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,500 11,320 11,028 Neutral 7.20 SPX S&P 500 1,320 1,420 1,352 Neutral 8.17 OEX S&P 100 675 735 713 Neutral 8.13 RUT Russell 2000 440 465 441 Neutral 9.10 * NDX NASD 100 2,320 2,400 2,535 BULLISH 9.03 MSH High Tech 1,120 1,200 1,283 BULLISH 9.03 Key Benchmarks Technology Bearish/Bullish Last Posture/Since Alert **************************************************************** XCI Hardware 1,035 1,050 1,141 BULLISH 8.24 CWX Software 750 800 896 BULLISH 9.03 SOX Semiconductor 515 520 565 BULLISH 8.24 NWX Networking 555 625 613 Neutral 8.13 INX Internet 500 580 475 BEARISH 7.20 Key Benchmarks Financial Bearish/Bullish Last Posture/Since Alert **************************************************************** BIX Banking 690 710 610 BEARISH 7.23 XBD Brokerage 410 440 388 BEARISH 7.23 IUX Insurance 645 660 597 BEARISH 7.23 Key Benchmarks Other Bearish/Bullish Last Posture/Since Alert **************************************************************** RLX Retail 915 960 836 BEARISH 7.23 DRG Drug 360 390 366 Neutral 8.24 HCX Healthcare 740 785 748 Neutral 8.24 XAL Airline 180 190 144 BEARISH 5.21 OIX Oil & Gas 285 310 315 BULLISH 9.09 Posture Alert Friday's Producer Price Index helped technology stocks and the Nasdaq break into new highs. The Software Index was the leader, posting a +3.33% gain, followed by the Internet Index (+2.52%), and then Networking (+1.72%). With Friday's action, we have turned Neutral from Bearish on the Russell 2000. A detailed description of our Market Posture and its applications can be found at: /members/marketposture ****************** 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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The Option Investor Newsletter 9-12-99 Sunday 2 of 7 **************** MARKET SENTIMENT **************** Sunday, September 12, 1999 Keep'em Coming! Employment data, PPI, CPI, Fed-Heads, negative pre-announcements, Clinton's impeachment, Monica Lewinsky, currency devaluations, Russia, Brazil, inflation, Greenspan, and much much more. This bull market ceases to amaze everybody. It is like Michael Jordan, taking on all-comers, and not breaking a sweat; or Muhammad Ali, doing a little shake-n-bake and rhyme, before knocking out his opponent. Unfortunately, we probably have all sweat a little from time to time; but then again, we are not all Heavy-Weight- Champions of the World. Sentiment that seems to be changing in a quick way is the bearishness on corporate spending for software, due to Y2K. Wall Street always likes to look forward into the future, gaze at the crystal ball, and make bold predictions. Just recently, the sentiment was that software stocks should be AVOIDED at all costs, due to the fact that most companies resources will be used for Y2K, and not on software upgrades. Just yesterday, we heard that a major software analyst was quoted as saying that many of the software stocks will quadruple in the next year. Not double, but quadruple! Pretty bold statement, but look at some of the trodden down software stocks (NETA, PSFT, BAANF, too many to list). Then look at how brutally punished they got all year (negative sentiment), and combine that with the fact that Y2K will most likely be a non- event, and you have recipe for a big turnaround. Around the office, we ask ourselves, if the second and third-tier software companies are poised for a recovery after Y2K, then how big of an increase will first-tier software companies such as Microsoft fare when corporate spending picks up? Could be the great start to a new Millennium, especially if INFLATION stays put! 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. Market Posture: Several indexes have broken new highs, including the Nasdaq 100, Morgan Stanley High Tech, Software, Hardware, and Semiconductors. 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. Russell 2000: Even with the strong rally we've had, the RUT is still technically weak, but is showing signs of improvement. 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. 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 (9/10) (9/14) (9/16) Alert ****************************************************************** Pinnacle Index (OEX): Overhead Resistance (735-780) 108.9 Underlying Support (710-730) 2.5 Underlying Support (630-690) 4.2 Put/Call Ratios: CBOE Total P/C Ratio .5 CBOE Equity P/C Ratio .5 OEX P/C Ratio 1.3 Peak Open Interest (OEX): Puts 660 Calls 720 P/C Ratio 1.32 Market Volatility Index (VIX): CBOE VIX 22.35 Investors Intelligence: Bullish 44.10% * Bearish 30.50% * The Power of Sentiment Analysis It has often been said that the crowd is right during the market trends but wrong at both ends. Measuring and evaluating the sentiment of the crowd, therefore, can give savvy option traders a decided edge. Pinnacle Index ****************************************************************** OEX Friday Tues Thurs Benchmark (9/10) (9/14) (9/16) ****************************************************************** Overhead Resistance (735-780) 108.90 Overhead Resistance (710-730) 2.45 OEX Close 712.79 Underlying Support (630-690) 4.20 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 (9/10) (9/14) (9/16) ******************************************************************** CBOE Total P/C Ratio .52 CBOE Equity P/C Ratio .46 OEX P/C Ratio 1.32 Peak Open Interest (OEX) ******************************************************************** Friday Tues Thurs Strike/Contracts (9/10) (9/14) (9/16) ******************************************************************** Puts 660 / 14,393 Calls 720 / 13,506 Put/Call Ratio 1.06 Market Volatility Index (VIX) ******************************************************************** 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 10, 1999 22.35 Investors Intelligence Survey ******************************************************************** Major Percent Percent Date Turning Point Bullish Bearish ******************************************************************** October 97 Bottom 22.0 48.3 July 20, 1998 Top 52.0 24.0 October 8, 1998 Bottom 38.5 42.7 January 11, 1999 Top 58.3 30.0 March 4, 1999 Bottom 49.1 32.5 January 6, 1999 58.3 30.0 January 13, 1999 60.0 30.0 January 20, 1999 61.7 25.9 January 27, 1999 60.7 28.2 February 3, 1999 60.0 26.7 February 10, 1999 61.7 25.9 February 17, 1999 55.7 28.7 February 24, 1999 54.1 31.5 March 3, 1999 50.9 32.1 March 10, 1999 49.1 32.5 March 17, 1999 52.6 17.6 March 24, 1999 55.9 29.7 March 31, 1999 55.6 31.6 April 07, 1999 56.4 31.6 April 14, 1999 55.9 30.5 April 21, 1999 56.4 30.8 April 28, 1999 56.1 30.7 May 05, 1999 58.1 27.6 May 12, 1999 56.9 31.0 May 19, 1999 60.9 28.7 May 26, 1999 61.6 27.7 June 2, 1999 61.6 27.7 June 10, 1999 58.3 28.7 June 16, 1999 58.8 26.3 June 24, 1999 57.5 26.5 June 30, 1999 55.8 25.7 July 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 ** Sept 8, 1999 44.1 30.5 ****************** TRADERS CORNER ****************** The Learning Curve Charting programs, brokers, and how/ when to look at the market are common concerns for new traders. I use qcharts (www.qcharts.com). Jim described his trading configuration for qcharts in the 5/2/99 (newsletter /members/archive/marketwrap/050299_1.asp), and for interquote in the 5/9/99 newsletter (/members/archive/marketwrap/050999_1.asp). I subscribe to the real time service and use the latest version of the software. I have three quote sheets down the middle of my screen: the stocks; the options on the stocks; and market indexes. The index quote sheet includes: INDU*, COMPX*, SPX.X, OEX*, TRAN, TICK, TIKI, ADVDEC.NY*, YRHI.NY, YRLO.NY, ADVDEC.NQ*, YRHI.NQ, YRLO.NQ, SP99U*, ND99U, VIX.X*, TYX.X*, NDX.X, CWX.X, SOX.X, XCI.X, DOT.X, GIN.X, MSH.X, XBD.X, DRG.X, RUT.X, BIX.X, HCX.X, RLX.X, XAL.X, MSFT, GE, SLB, GPS. These are the symbols for stock indexes, tick indicators, advance/ decline lines, yearly highs & lows, futures, volatility indexes, bond quotes, sector indexes, and key stocks. On the left side of my qcharts, I have 8 charts with the indexes marked with asterisk (*). On the right side, I have charts for the stocks that I am playing. The latest version of qcharts allows me to put in position information (#shares, profit/ loss, basis, return, etc) on my option quote sheet. This makes it easy to see which positions are winning and losing. Also, by right clicking on an option symbol and choosing "trade," I can jump to my online broker. This makes the Observation - Orientation - Decision - Action loop faster. Jim wrote a online broker editorial in the 5/16/99 Market Wrap (/members/archive/marketwrap/051699_1.asp). I really don't want to recommend one broker over another, except to say that it really depends on your trading style. After changing brokers two times in 99, I ended up with the one that Jim discusses in his editorial. My first online broker had fast executions, but did not allow stops. My second online broker allowed stops, but the speed was very slow and threw me off my gameplan when I saw opportunties. I finally concluded that stops were too sensitive to volatility. My present broker works through software, and is very fast. At a minimum, I look at the market 3 times during a trading day. First, at 10:15 - 10:30 EST, after "amateur hour" has ended. During the first hour, the market tends to make sudden moves at the open only to reverse those moves later. This is sometimes a good time to sell because most often the first movement is upward. However, if you buy during amateur hour it may be at the emotional high of the day. Wait until after amateur hour to establish a market direction. Second, at 1:00-2:00, when thousands of traders eat lunch and the market tends to slow. This can be a good chance to buy if the market was up in the morning. Finally, between 2:55 and 3:05, when direction for the final hour is normally determined. I want to decide by 3:10 which way the market is going and make decisions accordingly. Of course, these windows are normally good times to get a true picture, but not always. Setting price alerts, either in qcharts, or through an online brokerage like E*Trade which will Email them to you, can be useful to monitor your plays between these periods. I load my plays into qcharts each weekend by putting the stocks and options in their respective quote sheets. I use the comments box to make notes, and set alerts at critical levels discussed in the write ups. For calls, I am looking for 1) rising charts on OEX, INDU, COMPX 2) positive ticks on the Dow and the NYSE 3) and more advances than declines on both exchanges. When the broad indexes line up, I can scroll down on my index quote sheet and look at the sector indexes, which are discussed in the market posture section of the newsletter. If I see a move in a stock I want to play, I can check the sector index to determine whether it is a sector move or simply a single stock move. If all these factors are positive, then I have minimized my risk. Particularly when playing a reversal, it is essential to confirm the strength of a real turn from a false turn, which is weak and tenuous. Anyway, those are the lessons I have learned through close reading of the newsletter and through trial and error in the last 8 months. I wish I didn't have to learn the hard way! Janar Wasito Janar@OptionInvestor.com ************* 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 11028.43 -50.02 Nasdaq 2887.06 43.92 $OEX 712.79 -1.10 $SPX 1351.66 -5.58 $RUT 441.19 5.22 $TRAN 3090.83 -89.36 $VIX 22.35 0.96 Calls Week INKT 128.19 12.44 New, flying high reaching for the top INTU 103.00 11.00 New, 3:1 split but don't play yet! HGSI 87.50 10.50 This one is up over 40% since picked DISH 94.00 8.12 This one was up over 12% in two days CHKP 93.63 7.94 Rising again and putting up a new high SFE 72.50 4.62 Continuing to build strong relationships BGEN 89.00 4.19 Performing in the classic bull manner AMZN 66.50 4.06 New, no post-split depression here LGTO 49.13 4.00 After splitting, this ones on a role CMGI 89.88 3.63 The earnings run is picking up speed VRSN 112.38 3.13 Dropped, great ride but no more steam ADI 56.25 2.69 Will the stock hit a new all-time high? TXN 90.63 2.69 Riding the wave with the tech stocks EMC 68.13 2.63 New, charts are showing strong momentum SFA 55.69 2.25 The one that keeps going and going... QLGC 96.19 2.22 New, check out this chart and trend ERTS 76.19 1.44 It delivers the games and the gains! CNXT 77.63 1.25 Its chips are found in mobile devices SUNW 85.69 1.19 Stock continues to exhibit its strength FLEX 63.75 0.63 Is history going to repeat itself again? DELL 49.56 0.13 Renewed interest after strong earnings CSCO 70.75 -0.19 Dropped, no more strength on this play NTAP 67.75 -0.75 New, the 4th fastest growing company MSFT 95.00 -0.88 Dropped, stalling and going nowhere JDSU 112.00 -1.25 Showing some weakness but still holding INTC 87.38 -1.93 Riding high on a wave of new products BVSN 107.00 -2.50 Dropped, acting like a piece of driftwood MU 74.63 -5.50 Dropped, profit-taking was too strong Puts IDPH 105.44 -27.06 New, lower forecasts = worried investors GPS 35.44 -3.19 Will the stock penetrate its 10-dma? SWY 42.94 -3.19 New, more acquisitions mean trouble COST 69.88 -2.75 New, it broke another support level KO 55.13 -2.25 Another executive leaves the company HNZ 43.00 -1.06 New, ouch, Heinz missed its numbers CVS 39.88 -0.56 It bounced, but is it for real or not? JCP 36.13 -0.19 Dropped, we just couldn't break support ONE 38.81 -0.07 Dropped, moving sideways going nowhere HRB 47.13 0.69 Dropped, it found its support at $45 STOCKS ADDED TO THE PICK LIST ***************************** CALLS: QLGC - QLogic Corp AMZN - Amazon.com EMC - EMC Corporation INKT - Inktomi Corp. NTAP - Network Appliance Corp. INTU - Intuit Inc. PUTS: Please confirm downward motion before playing. With the market in rally mode any beat up stock starts looking like a value play. IDPH - IDEC Pharmaceutical HNZ - H.J. Heinz Company SWY - Safeway Inc COST - Costco Wholesale Corporation ****************************** SEE DISCLAIMER IN SECTION ONE ******************************
The Option Investor Newsletter 9-12-99 Sunday Part 3 of 7 *************************** 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: BVSN $107.00 (-2.50) BVSN has been acting like a piece of driftwood caught in an eddy. Yes it's stuck without direction. We feel it's best to get out of the water now, with a profit while we can. BVSN has given us a $13.50 gain since our pick. 14% isn't a bad return for a few weeks. Many of you did much better than that if you protected your returns at the highs. Some are just luckier than others, and yes folks, there is a certain amount of that in the markets. Since the market is still uncommitted and we could still see the "September sell-off" we are dropping BVSN for now. In addition, BVSN's momentum is fading in the stochastic, MACD and volume. Remember you can't emotionally hope for that luck, so stick to what you know and what the charts are telling you. They are telling us that BVSN is a bit to risky now. MSFT $95.00 (-0.88) Like a nail in a piece of wood, we have hit a knot. It looks like MSFT is range bound and in stall mode for a bit. Since we are turning negative in our technicals and have started to sputter, we are dropping MSFT before the September weakness and Y2k fears set in. For you loyal "stick to the play" OIN investors, you should have a $2 plus gain, which is definitely better than nothing. We should know by now, that if a stock is not moving in the direction we expect, we make an assertive decision to drop and invest in some that are. Such is our case. Resistance is at $96 now, so we may see our software giant again when it breaks out of the stall and starts a new trend. VRSN $112.38 (+3.13) VRSN has been a great stock to play since we first added it in to our call list in mid-August. The options gave us lots of action providing a multitude of opportunities for the HIGH RISK INTERNET players to cash in on big profits. Even though the stock once again reached new heights on Thursday and set another 52-week on an early morning spike, VRSN seems to have lost its overall steam. So we're sticking by our rule to not fight the trend and retiring the play this weekend. MU $74.63 (-5.50) The profit-taking on MU was strong this week after the stock peaked at $82.50 on Wednesday morning. And unfortunately, the company simultaneously announced that same day that its the price increase in its DRAM components will unfortunately not affect its 4Q earnings but instead be carried over to the following quarter's earnings. These two factors predominantly pressured MU to descend below its 10-dma by Friday even in light of positive ratings by 3 separate analysts mid-week and a powerful Nasdaq market. We don't recommend bucking this recent trend and our dropping MU as a call play. CSCO $70.75 (-0.19) Sorry Cisco Kid, it's back to the play-pen for you. CSCO hasn't been a fast mover. While the rest of the NASDAQ market was showing strength and setting records last week, CSCO never came to the party. CSCO's trading volume became progressively lower throughout the week, as the rest of the market traded a billion or more shares. Currently, money managers don't appear to be as interested in the issue. That doesn't mean dump it at any price. Just make an exit on any strength. Though CSCO is a fine company that dominates its field, we can deploy our capital for better use in other plays right now. PUTS: ONE $38.81 (-0.66) ONE appears to be moving more sideways now and we feel its time to look for an exit point for this play. Currently, the stock technically and fundamentally is bearish but we feel there are more profitable investment opportunities out there incurring the same amount of risk. ONE has only dropped $0.66 this week despite the interest rate fears and a volatile bond market. This just isn't enough movement in conjunction with these catalysts. We'll continue to monitor ONE's performance in the future and we'll be the first to let you know of any new opportunities associated with this stock arise. JCP $36.13 (-0.19) Another play has run its course and so we are dropping JCP for other opportunities. Despite recent downgrades and earnings warnings on JCP, last week the stock has managed to hold its ground. JCP traded just above the $35 range throughout the week and on several occasions attempted to break though this support level with no avail. Unfortunately, investors were too resilient and bought just enough stock to keep JCP above this level. For these reasons we have decided to end this play and concentrate our efforts elsewhere. HRB $47.13 (+0.69) It was a battle between the technical and fundamental indicators and unfortunately the technicals were too strong. We continued to play HRB as a put because of investors concerns over the announcement to buy Olde brokerage. The stock plummeted after the announcement and continued to fall until it reached a support level of $45. However, the stock has managed to hold its support throughout the week indicating that the panic may be over. We were relying on weak fundamentals to break through this support but it never happened. Even though weak fundamentals remain momentum has subsided, therefore we decided to end the play. STOCK SPLIT CANDIDATES *********************** SNE - Sony Corp. PMCS - PMC-Sierra, Inc. SLR - Solectron, Inc. JDSU - JDS Uniphase STOCKS WITH UPCOMING SPLITS **************************** We don't list all splits available, only those we feel may have play possibilities. Symbol - Stock Splits/Date 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 $49.56 (+0.13) See details in sector list Chart = http://quote.yahoo.com/q?s=DELL&d=3m ****** SFA - Scientific Atlantic Inc. $55.69 (+2.25) See details in sector list Chart = http://quote.yahoo.com/q?s=SFA&d=3m ****** BGEN - Biogen Inc $89.00 (+4.19) See details in sector list Chart = http://quote.yahoo.com/q?s=BGEN&d=3m ****** *********** CALLS *********** *************** Software *************** CHKP - Check Point Software $93.63 (+7.94) 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 put in another impressive week, rising again and putting in another 52-week high - a recurring theme since mid- August. How long the winning streak will last is anyone's guess, but reaching new highs has not attracted any significant selling. In fact, recent dips have been accompanied by a decrease in volume, indicating more a lack of buyers rather than an increase in selling pressure. News is scarce so we continue to follow the trend. With the Nasdaq pushing to new highs, Check Point should be in good shape. There is one caveat, however. With CHKP up almost 20 points in two weeks, you may want to move stops up to protect profits. No upgrades or downgrades for the week. In fact, the only news items in which CHKP appeared, it was only mentioned peripherally. ***November strikes will open this week*** BUY CALL OCT-90*KEQ-JR OI=160 at $10.25 SL=7.50 BUY CALL OCT-95 KEQ-JS OI= 21 at $ 7.63 SL=5.75 low OI Picked on Sep 5th at $85.56 P/E = 44 Change since picked +7.94 52-week high=$95.50 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 **** LGTO - Legato $49.13 (+4.00)(+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. For our new readers, this is a pure momentum play. It all started last month after LGTO split 2:1 on August 16th. The stock began consistently trading above its 10-dma and steadily making gains. Then on August 26th, Legato announced the formation of the Celestra Consortium which promotes an open and integrated architecture that optimizes data movement and management within Storage Area Networks (SAN). This company event boosted the stock out of its $42 support level on very strong volume. After the bounce, a short period of consolidation followed which offered players lots of opportunities to get into this play. This week was fantastic. LGTO tacked on $4.00 (or 8%) as it stretched into new territory on each consecutive trading day - $50.38 is the newest 52-week high. Now, except for a nasty market, there should be nothing to hold LGTO back. New support may be forming around $46 so if we are afforded an intraday dip to this level, it certainly would be a good entry point. Again recall from previous write-ups, any descent below the 10-dma (now at $44) should be a warning to tighten those stops or move on. In the news this week Legato announced its Legato Continuum, an integrated set of open software systems and services designed to provide users with an enterprise-wide infrastructure to meet both data and application availability requirements across business units, technologies and geographical boundaries. Earnings are expected next month on October 14th. BUY CALL OCT-40 EQN-JH OI= 73 at $10.13 SL=7.75 BUY CALL OCT-45*EQN-JI OI=608 at $ 6.13 SL=4.50 BUY CALL OCT-50 EQN-JJ OI=307 at $ 3.38 SL=1.75 BUY CALL DEC-45 EQN-LI OI= 65 at $ 8.50 SL=6.50 low OI BUY CALL DEC-50 EQN-LJ OI=317 at $ 6.13 SL=4.50 Picked on Aug 29th at $44.44 P/E = 133 Change since picked +$4.69 52 week high=$50.38 Analysts Ratings 11-5-1-0-0 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 = 914 K Chart = http://quote.yahoo.com/q?s=LGTO&d=3m **** ERTS - Electronic Arts, Inc. $76.19 (+1.44)(+6.81)(P3W +11.82) 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. ERTS continues to deliver the games and the gains. Sega Dreamcast Internet gaming station was released to sellout crowds earlier this week. It looks like a big hit. Guess who just bought the online interactive gaming company, PlayNation? Yep, ERTS did. With interactive CD-ROM games (Sega Genesis, Nintendo, Sony PlayStation), and online gaming now more popular than ever, plus the Christmas season on the earnings horizon, it's no wonder money managers want a piece of the action. Helping out in that department is 95% institutional ownership, making the float fairly low, which requires new entrants desiring large blocks of the issue to pay up. Daily volume between 900 K and 1 mln shares last week confirms the interest. As long as volume remains, ERTS should continue to perform. Support is in the $72-$73 range. But on Friday, support came at $75. Thanks to another new high set on Friday, there really is no resistance to speak of, except the intraday high of $76.94. Wait for the market to give us a direction on Monday. Buy the dip, or wait for a clean breakout over $77 with volume. Beware of a potential landmine on Wednesday, when the CPI figures will be have been released before the market opens. ERTS continues to roll out new products and spokespersons. This week they announced that Michael Jordan and women's soccer star, Julie Foudy would join the line up in interactive game appearances and as spokespersons for EA SPORTS. BUY CALL OCT-70 EZQ-JN OI= 56 at $9.25 SL=7.00 BUY CALL OCT-75*EZQ-JO OI=186 at $6.25 SL=4.50 BUY CALL OCT-80 EZQ-JP OI= 15 at $3.75 SL=2.25 low OI BUY CALL DEC-75 EZQ-LO OI= 55 at $9.88 SL=7.50 BUY CALL DEC-80 EZQ-LP OI= 25 at $7.75 SL=6.00 low OI Picked on Aug 22 at $65.50 P/E = 67 Change since picked +10.69 52 week high=$77.94 Analysts Ratings 8-4-1-0-0 52 week low =$33.25 Last earnings 7/99 est= 0.01 actual= 0.04 surprise +300% Next earnings 10-22 est= 0.25 versus= 0.17 Average daily volume = 733 K Chart = http://quote.yahoo.com/q?s=ERTS&d=3m **** INTU - Intuit Inc. $103.00 (+11.00) Intuit is the #1 maker of personal finance software. Its small business accounting and tax software accounts for about half of sales but Intuit also makes the well-known Quicken personal finance and Turbo Tax filing applications. The Internet has created a simplified opportunity for finance transaction processing and Intuit has jumped on the bandwidth wagon. The company offers Internet products and services such as financial news site Quicken.com, payroll processing, insurance marketing and mortgage filing. Intuit sells via retailers and resellers. Intuit just recently ended its fiscal year 1999 with solid financial performance and a strong balance sheet. Fiscal Q4 results, released on Thursday Aug 26, were also $40 million stronger than what analysts were expecting. Intuit said it had a loss of $0.26 per share, before special adjustments from the sale of securities of $16.3 million, compared with pro forma net income of $1.6 million, or 3 cents a share in the year-earlier period. Analysts had expected Intuit to report a loss of $0.33 cents a share. Lise Buyer, an analyst at Credit Suisse First Boston raised her rating on the stock to a Strong Buy from a Buy. She believes that this is one of the few stocks you can invest in that has a clear firing-on-all- cylinders business model and also offers all the potential benefits of the Internet. Based on her calculations she has put a price target of $115 on the stock. But we haven't got to the good stuff yet, Intuit announced on Thursday after the close that its Board of Directors has declared a 3:1 stock split. The payment date for the stock dividend will be September 30. This caused the big jump on Friday. We are expecting a strong run up ahead of a rather sudden ex-date for the stock. The problem is entry points. We are listing INTU now to be able to jump in at a moment's notice. We should see some support on a pullback to $98 which would make for a nice entry and possible resistance is at the 52-week high of $110.75. So keep this one up high on your watch list and cross your fingers for a pullback that will allow us jump on board. ***NO OPTIONS LISTED YET*** Wait for pullback! Picked on Sep ??? at P/E = 17 Change since picked 52 week high=$110.75 Analysts' ratings 3-8-1-0-0 52 week low =$ 34.50 Last earnings 08/99 est= -0.33 actual= -0.26 Next earnings 11/99 est= -0.56 versus= -0.45 Average daily volume = 741 K Chart = http://quote.yahoo.com/q?s=INTU&d=3m *************** Semi-Conductor *************** INTC - Intel Corp $87.38 (-1.93)(+6.31)(+3.06)(P3W +10.94) 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. Intel has been riding high on a wave of new products and analyst enthusiasm. The company's foray into the lucrative and growing networking market will provide INTC with both diversity and a means for future growth. In the interest of brevity and avoiding repetition, we refer you to the INTC write-ups from the past week (available on the website) for greater detail. This play has given us ample returns since we added it 6 weeks ago and, while the trend is still up, we must be concerned about protecting profits. As we mentioned Thursday, a drop greater than one point below the 10-dma could indicate trouble and INTC did dip just below its 10-dma on Friday. Therefore, we either need to see a bounce in the stock price this week or be prepared for the possibility of more consolidation. A bounce off this level will keep us solidly in the play. However, further consolidation would move us to the sidelines until we see a new uptrend, perhaps caused by an earnings run. (Earnings are still a month away.) Remember too that interest worries can weigh heavily on tech stocks and the CPI report will come out this week. A great deal of news on INTC has been summarized in our write-ups over the last 10 days. Again, please refer back. One new item: on Sept. 20th, the CBOE will begin trading INTC, among other options that are now traded on the other exchanges. BUY CALL OCT-85*INQ-JQ OI=12417 at $6.25 SL=4.50 BUY CALL OCT-90 INQ-JR OI=11868 at $3.63 SL=2.00 BUY CALL OCT-95 INQ-JS OI= 8696 at $1.94 SL=1.00 Picked on Jul 31st at $69.00 P/E = 37 Change since picked +18.38 52 week high=$89.50 Analysts' ratings 13-15-6-0-0 52 week low =$37.28 Last earnings 6/99 est= 0.54 actual= 0.51 surprise=-5.56% Next earnings 10-13 est= 0.56 versus= 0.44 Average daily volume = 22.8 mln Chart = http://quote.yahoo.com/q?s=INTC&d=3m **** FLEX - Flextronics International $63.75 (+0.63) 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. Remember that we are playing FLEX because of it's historical predictability to use it's chart and 10-dma as support. This gave us a nice little bump last week in profit, while the market was negative. We now appear to be consolidating back to support at $62. Savvy investors should have protected gains and stand ready to re-enter on dips close to support. Friday gave us a dip to $62.88 which would be a buy able point. Our trend still looks good however, there should be some continued selling back to support, as our stochastic has dipped and the market is uncommitted. A note of comfort could be the flat interval chart on Friday. FLEX hung out pretty steady at the $63.75 level, which should be a short-term support level. Remember that support is a base and as a climber climbs, the base camp moves with him. Watch the charts to establish your base and move parallel with the markets to know when to buy. We are still getting mixed signals as to a rally so use caution. FLEX has not provided us with any recent news right now but as we approach Y2K, we would expect some attention. They are in fact very closely tied to the event with their circuit boards. Since most tend to procrastinate preparation, watch for more news in the next few months. BUY CALL OCT-55 QFL-JK OI=111 at $10.75 SL=7.88 BUY CALL OCT-60*QFL-JL OI=135 at $ 7.25 SL=5.38 BUY CALL OCT-65 QFL-JM OI=225 at $ 4.68 SL=2.75 Picked on Sept. 5th at $63.13 P/E = 42 Change since picked +0.63 52 week high=$66.25 Analysts Ratings 9-7-1-0-0 52 week low =$12.00 Last earnings 06/99 est= 0.34 actual= 0.34 Next earnings 10-8 est= 0.37 versus= 0.30 Average daily volume = 764 K Chart = http://quote.yahoo.com/q?s=FLEX&d=3m **** ADI - Analog Devices Inc $56.25 (+2.69)(+2.25)(+5.44) 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. ADI had another positive performance on Friday despite the sell off at the end of the trading session. The stock was up $0.25 Friday to close at $56.25 on above average volume. With Friday's gain, ADI is now once again pushing toward a new all-time-high. Currently, the stock is only $0.63 away from setting a new benchmark above $56.88. Technically, the stock is still looking strong. ADI is still consistently closing above its 10-dma, which has also been a good entry point. Also, the semiconductor sector had a fairly good day on Friday as well. The PHLX semiconductor Index was up 5.91 points to close at 564.77. Texas Instruments, LSI Logic and National Semiconductor are other stocks to gauge sector performance and were also bullish on Friday. For those of you wanting to get into the play, watch the markets direction on Monday before you pick your entry point. If its bullish, ADI could breakout to new highs. With the higher-lows pattern that ADI has in place, it either needs to breakout early next week or break below support at the 10-dma. This means stops are a good idea at this level. ADI announced on Sep 10th reiterated its development of the new controllerless V.90 modem chipset. ADI designed the chip set with its exclusive partner on the project, 3Com. The AD1807 and AD1804 chipset are the first to feature a integration between the digital signal processor and the silicon data access arrangement. This feature will lead to future cost and space reductions. BUY CALL OCT-50 ADI-JJ OI=152 at $8.00 SL=6.25 BUY CALL OCT-55*ADI-JK OI=489 at $4.88 SL=3.25 BUY CALL OCT-60 ADI-JL OI=265 at $2.56 SL=1.25 Picked on Aug 28th at $51.31 P/E = 62 Change since picked +4.94 52 week high=$56.88 Analysts Ratings 8-6-1-0-0 52 week low =$12.00 Last earning 08/99 est= 0.29 actual= 0.30 Next earning 12-02 est= 0.35 versus= 0.16 Average Daily Volume = 1.01 mln Chart = http://quote.yahoo.com/q?s=ADI&d=3m **** JDSU - JDS Uniphase $112.00 (-1.25)(+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. JDSU is beginning to show some weakness in the technical chart, which is confirmed by diminishing volume. While the NASDAQ was trading over 1 bln shares per day, JDSU traded just 70% of its ADV. Nobody was lining up to buy this stuff, despite what was reported to be a positive analyst meeting at the Salomon Smith Barney conference last Tuesday. Of course, this weakness could be a buying opportunity. JDSU can't keep up with its orders, even though it is the largest and most able to supply the increasingly demanded volume of active and passive laser subsystems that run and manipulate the light down a strand of fiber in this new age of photons. The Growth rate is still 60%; margin rate is 23%; thus demand is huge. We don't think this lull in price will last, as long as the rest of the market continues its advance into earnings season. Friday's trading found support at $111 but it's a bit stronger at $106. This play is still volatile. With low volume, plus the jitters that may occur prior to Wednesday's CPI figure release, there's added risk. If you can stomach the uncertainty, target shoot the dips at your favorite support level. For you more conservative types looking for some action, wait for the move over $115 backed by strong volume and of course confirm market direction before playing. In a recent SEC filing, JDSU will be holding a special shareholder meeting September 28 to vote for an increase of authorized shares to 300 mln from 200 mln. This could allow for a 3:2 split, but with 173 mln shares already outstanding, a 2:1 won't be possible. Don't read too much into this yet. It could be that JDSU just needs some currency to go shopping for other companies that could add to the mix. SG Cowan has a Strong Buy rating issued with a $130 price target. Gruntal and Co. has a Strong Buy rating issued with a price target of $185(!!). Salomon Smith Barney, like the gracious host it is, issued a Buy rating this week with a $130 price target. BUY CALL OCT-110*UNQ-JB OI=1050 at $ 9.38 SL= 7.00 BUY CALL OCT-115 UNQ-JC OI= 166 at $ 7.00 SL= 5.25 BUY CALL OCT-120 UNQ-JD OI=1540 at $ 5.13 SL= 3.25 High Risk! BUY CALL DEC-115 UNQ-LC OI= 180 at $12.50 SL=10.00 BUY CALL DEC-120 UNQ-LD OI=3275 at $10.13 SL= 7.75 Picked on Aug 29th at $110.19 P/E =N/A Change since picked +1.81 52 week high=$120.88 Analysts Ratings 9-10-0-0-0 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 = 1.60 mln Chart = http://quote.yahoo.com/q?s=JDSU&d=3m PLAYS CONTINUED IN SECTION FOUR ******************************* SEE DISCLAIMER IN SECTION ONE
The Option Investor Newsletter 9-12-99 Sunday 4 of 7 *************** CALLS CONTINUED *************** *************** Semi-Conductor Continued *************** CNXT - Conexant $77.63 (+1.25)(+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. On Friday, despite losing over $2 with volume only 60% of its ADV, CNXT continued to find support at $77, and did so again in the final 4 minutes of trading, pulling substantially off its low with a final volume surge. The technical chart is still in the positive. No matter what the day-to-day action looks like, CNXT still plays a big part in digital communications. Just last week, Sega released its Dreamcast interactive Web terminal, with CNXT modem technology to sellout crowds. It's a big hit. Not only that but CNXT chips are finding their way into more GSM and CDMA mobile PCS devices, cable modems and corporate networks. Business is brisk and, according to some analysts, demand is outstripping their ability to produce, necessitating construction of new capacity in a hurry. Nonetheless, though setting an all- time closing high on Thursday, volume remains low, indicating CNXT may need a breather. As noted earlier, support is $77; overhead resistance is $81, its intraday high. Feel free to target shoot this at $77 (or better, if your greed factor is a bit higher), or wait for a breakout over $81 with volume if you want to play it a bit safer. Target shooting in front of the CPI numbers Tuesday may get you a good entry. Just be mindful that investors' cool reception to the numbers may put the chill on the play too. News is sparse but the big announcement last week was Sega's release of CNXT powered equipment. See above. BUY CALL OCT-75*QXN-JO OI=150 at $ 8.50 SL=6.50 BUY CALL OCT-80 QXN-JP OI=283 at $ 5.50 SL=3.75 BUY CALL JAN-80 QXN-AP OI= 78 at $12.38 SL=9.75 BUY CALL JAN-85 QXN-AQ OI= 28 at $10.25 SL=8.00 low OI Picked on Sep 5th at $76.38 P/E = N/A Change since picked +1.25 52 week high=$81.00 Analysts Ratings 6-6-0-0-0 52 week low =$13.00 Last earnings 07/99 est= 0.17 actual= 0.24 surprise +41.2% Next earnings 10-20 est= 0.26 versus= N/A Average daily volume = 1.51 mln Chart = http://quote.yahoo.com/q?s=CNXT&d=3m **** TXN - Texas Instruments Inc. $90.63 (+2.69)(+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. The roller coaster ride we experienced throughout the week finally came to an end, lucky for us we ended on the top. Technology stocks rallied Friday as sidelined investors rushed back into Internet and Technology stocks, resulting in an all-time high for the NASDAQ. Participating in the tech rally was our play, TXN. Making a slight comeback from Wednesday's losses, the stock managed to end the week on a positive note. Other events helping our play are two press releases. First, PaineWebber's raised its price target on TXN to $110 and second, Merrill Lynch started TXN as its top maker of semiconductor communications chips on its list of top 10 technology companies. With such good news about the company lately and considering the strength in the overall technology sector, let's see if we can maintain this upward momentum into Monday's trading and reach higher highs. We are expecting another volatile week of trading as investors prepare for the release of the CPI numbers on Wednesday. To be safe, make use of the recommended stops. There was little news on Texas Instruments this week. On Thursday, TXN was listed on the Merrill Lynch top 10-tech. stocks pick list. This news should help our play as investors update up their own portfolios with the recommended stocks. On Wednesday, PaineWebber said it raised its price target on Texas Instruments to $110 per share from $85. BUY CALL OCT- 85 TNZ-JQ OI= 993 at $8.88 SL=6.75 BUY CALL OCT- 90*TNZ-JR OI=1950 at $5.88 SL=4.25 BUY CALL OCT- 95 TNZ-JS OI= 660 at $3.63 SL=1.75 BUY CALL OCT-100 TNZ-JT OI= 797 at $2.06 SL=1.00 High Risk! Picked on Aug 31st at $82.06 P/E = 78 Change since picked +8.56 52-week high=$92.69 Analysts Ratings 14-9-5-1-0 52-week low =$22.69 Last earnings 07/99 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 *************** Hardware *************** DELL - Dell Computer $49.56 (+0.13)(+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. A week of opportunity is what we will call this past week for Dell. We mentioned that buying the dips to the 10-dma have proved to be profitable lately and we got our chance mid-week. Dell dipped to $47.63 on Wednesday before rebounding to close right back at short-term highs. We have built a nice pattern of higher-lows which makes us believe we could break above $50 next week if the market cooperates. Our next resistance point would be at the old 52-week high at $55. Dell's strength for the past few weeks have come from renewed interest after a strong earnings report. Dell is also in a hot sector, which is entering it's strong season. The next entry points should be a bounce off the 10-dma again or a breakout over $50. Either way we will need the NASDAQ to continue to shine for optimum success. The big news this week was Wednesday's announcement after the close to purchase ConvergeNet Technologies for $340 million. This is part of Dell's plan to become one of the top 3 companies in computer storage. The Dell will record a one-time charge against after-tax earnings of five to seven cents per share for purchased in-process research and development expenses. We think of this a positive development as storage is considered to have the best growth potential among the computer sector in the next couple years. BUY CALL OCT-45 DLQ-JI OI=15793 at $5.88 SL=4.25 BUY CALL OCT-50*DLQ-JJ OI=31123 at $2.81 SL=1.50 BUY CALL NOV-50 DLQ-KJ OI=36147 at $4.38 SL=2.75 BUY CALL NOV-55 DLQ-KK OI=22198 at $2.25 SL=1.00 Picked on Sep 5th at $49.44 P/E = 73 Change since picked +0.13 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, $85.69 (+1.19)(+8.31)(+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. Shares of Sun Microsystems managed to close out the week on a positive note. After a long holiday weekend investors came back to work ready to buy. SUNW made a new high Wednesday at $88.00 before the bulls decided to take some money off the table. Prices of the chip maker then slid to an intraday support level of $81.75 when the buyers decided to step back up to the plate. Volume on the decline was a solid 11.0 mln shares but did seem to be "orderly" as compared to a mad rush to get out. Can SUNW continue the strength exhibited in Friday's session? We believe it probably can but it will require some fresh buying and new found enthusiasm. Investors and analysts alike aren't overly excited about the release of Sun Microsystem's "Sun Ray" desktop computer unit released earlier this week. Being selected by Merrill Lynch to be one of their "Top Ten Tech" investments may help light a fire under SUNW and a reiteration of a Buy rating from Bear, Stearns & Co. won't hurt either. We have more reports being released this week, with most eyes focused on the CPI, which will be out bright and early Wednesday. PPI didn't help much Friday and the CPI may not either. If SUNW is going to make its way higher it may have to go it alone or get some help from others in the hardware industry. We should see more institutions back in the game this week which could also give SUNW an added nudge. If you are in a play in SUNW, keep your stops tight. In considering a new play assess your risk profile, and look for a positive movement supported by strong volume. In the news, SUNW lost two more members of its corporate family this week. Wednesday A. Michael Spence resigned from the board of directors, to pursue other interests. Friday William J. Raduchel resigned to join America Online, as the company's chief technology officer. Raduchel's departure come just weeks after SUNW lost its chief Java technology executive Alan Baratz. BUY CALL OCT-80 SUQ-JP*OI=11070 at $8.63 SL=$6.50 BUY CALL OCT-85 SUQ-JQ OI= 5442 at $5.50 SL=$3.75 BUY CALL OCT-90 SUQ-JR OI= 4130 at $3.38 SL=$1.75 Picked on Aug 28th at $76.19 P/E = 67 Change since picked +9.50 52 week high=$88.00 Analysts Ratings 10-9-3-0-0 52 week low =$19.19 Last earnings 06/99 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 **** QLGC - QLogic Corp. $96.19 (+2.22)(+2.69) If time is money, then QLogic is providing eight of the ten top server manufacturers with better speed and performance than their competition. Companies like IBM, Dell, Fujitsu, Quantum, Hitachi and others, all view QLogic as the innovator and the place to be when it comes to providing SCSI, enclosure management products, storage subsystems and data storage peripherals. QLOGIC is so innovative that they were the ones who provided the industry with the first standard SCSI processor. Labeled as one of the "most booming young companies" of 1998 by Fortune Magazine, they are responsible for the new growth market of Fibre Channel. This is allowing them to be ranked a true leader in the electronic components and semiconductor industry. QLGC has an incredible chart and a strong trend. The stock has been very consistent in using it's support lines as stability and offering good buying opportunities. For the most part, this support has been the 10 & 20-dma's however, the 50-dma has also prevented the stock from turning into a negative trend. So onward and upward QLGC went to a new 52-week high on Friday. Business and earnings have also been good for QLGC. In a very bullish move, the company announced a 2:1 stock split days before their earnings announcement. They then gave investors a 20% surprise in earnings, along with the stock split in August. QLGC looks poised to continue this high growth and investors have been rewarded for the companies good management. QLGC stands ready to gain on any tech rally and, as stated above, is resilient to support on corrections. It is prudent to point out, that we haven't seen the conviction in the market yet so be careful. Y2K and the ever present economy could throw us a wrench. Confirm a commitment upward in the market and stock before entering. Robert Zuccaro, manager of the Grand Prix Fund referred to QLGC as one of his picks for successful, high growth stocks. He noted that the companies strong growth are one of the reasons his fund does so well. Kevin Marder of CBS Marketwatch also listed QLGC in his list of companies that showed a lot of institutional buying interest. BUY CALL OCT- 90 QLQ-JR OI=117 at $12.13 SL=9.50 BUY CALL OCT- 95*QLQ-JS OI=137 at $ 9.38 SL=6.83 BUY CALL OCT-100 QLQ-JT OI=266 at $ 6.63 SL=4.75 Picked on Sept 12th at $96.19 P/E = 109 Change since picked +0.00 52 week high=$98.75 Analysts Ratings 3-3-1-0-0 52 week low =$12.63 Last earnings 06/99 est= 0.25 actual= 0.30 Next earnings 10-08 est= 0.31 versus= 0.17 Average daily volume = 565 K Chart = http://quote.yahoo.com/q?s=QLGC&d=3m **** EMC - EMC Corporation $68.13 (+2.63)(+5.25) At times, we all need someone to back us up. Well EMC makes it their business to back us up. They focus solely on providing the world with leading solutions on information storage and retrieval systems. They are literally the world leaders in this area on every platform. Because of their focus and dedication, they have obtained significant customers in banking, telecommunications, airline, manufacturing, Internet and other industries where the management of massive information is critical. There's a good chance that your information is handled by an EMC system somewhere. They're managed well also with a 52% return in net income. They're back! Talk to almost any investor and they'll probably tell you they're familiar with EMC. This was an incredible growth stock last year and then it fell into some range trading in early April of this year. Friday EMC broke resistance at $66 and shot ahead to a new 52 week high of $68.94. This move is showing momentum as well with a little above average volume and a widening MACD due to news. The stock has been impressively resilient to the recent market fluctuations and appears ready to ride any tech rally that we may see. Typically a break above resistance with momentum is a sign of a continued and renewed trend. We'd like to think so. Friday the stock closed near it's high but not quite there due to some late day profit-taking. This is a sign of caution so confirm continued buying and a positive market before playing. On Friday, Merrill Lynch listed it's top recommendations in technology stocks, of which EMC was listed in the "favored 15" list. They mentioned that they were focusing away from the Internets and more on the underlying hardware and software companies. This news was definitely a contributing factor to Friday's move in EMC shares. Worth noting, DELL announced they would buy ConvergeNet Technologies, a competitor of EMC. They said however that they were going to focus on mid- range systems and leave the large enterprise market to EMC. BUY CALL OCT-60 EMB-JL OI= 8640 at $9.63 SL=7.38 BUY CALL OCT-65*EMB-JM OI= 6491 at $6.00 SL=4.25 BUY CALL OCT-70 EMB-JN OI= 9886 at $3.25 SL=1.63 Picked on Sep 12th at $ 68.13 P/E = 74 Change since picked +0.00 52 week high=$68.94 Analysts Ratings 14-6-2-0-0 52 week low =$20.81 Last earnings 06/99 est= 0.24 actual= 0.27 Next earnings 10-19 est= 0.27 versus= 0.19 Average daily volume = 5.56 mln Chart = http://quote.yahoo.com/q?s=EMC&d=3m **** NTAP - Network Appliance Corp. $67.75 (-0.75) Their customer base is an impressive group of clients. Names like Yahoo, AOL, Motorola, Siemens and the UK's #1 ISP Demon Internet depend on them daily. Network Appliance uses its Netcache software and NetApp suite of network storage servers or filers. These products are designed for and provide fast reliable cost effective service for Internet service providers and corporate intranets. NTAP's hi-powered ONTAP operating system allows simultaneous access by users from Windows, UNIX and Web platforms. NTAP is located in Sunnyvale, Ca and competes against EMC, Sun Microsystems, Cisco Systems and Novell. What's not to like about a company that has made it to the number 4 spot on Forbes 1999 list of "America's Fastest Growing Companies." NTAP also earned a position in the S&P 500 Index. NTAP was one of the lucky few this past earnings season that didn't get kicked in the teeth for reporting better than expected earnings. Since beating the street by $0.02 on August 18th NTAP has climbed from the $55 area to a high Tuesday of $69.69. After retreating to the $65 area near its 10-dma, NTAP regained its focus yesterday closing up over $2 for the session on better than average volume with 1.5 mln shares changing hands. Sales for the computer networks company rose over 80% and net income jumped 90% in the latest quarter and current projections are for more of the same. We would look for more upgrades from analysts as the last upgrades came in May. It may a little early yet but on August 27th, NTAP filed with the SEC to have an additional 3.3 mln shares reserved for issuance. Their annual stockholders meeting is scheduled for October 26th in Sunnyvale, Ca. NTAP did split in late December of 1997 and 1998. When they announced the split last year shares of NTAP were trading in the $70-$72 area. The tech sector has basically remained very strong and has led the NASDAQ to new highs. Intraday support for NTAP is in the $65 area. When considering a play in NTAP, look for a positive move in the stock itself accompanied by those in its industry. As always assess your risk profile and set your stops accordingly. Earlier this week NTAP and Legato Systems announced a partnership dedicated to delivering open and scalable data protection solutions for enterprise customers. The two companies are co-founders of the Network Data Management Protocol(NDMP), an open standard protocol for network-based backup of network- attached storage. BUY CALL OCT-60*NJQ-JL OI= 72 at $ 9.75 SL=$7.50 BUY CALL OCT-65 NJQ-JM OI= 30 at $ 6.50 SL=$4.75 low OI BUY CALL OCT-70 NJQ-JN OI=341 at $ 3.88 SL=$2.50 BUY CALL DEC-65 NJQ-LM OI=130 at $10.13 SL=$7.50 BUY CALL DEC-70 NJQ-LN OI= 78 at $ 7.75 SL=$6.00 Picked on Sep 11th at $67.75 P/E = 130 Change since picked +0.00 52 week high=$69.69 Analysts Ratings 6-3-1-0-0 52 week low =$16.00 Last earnings 08/99 est=-0.14 actual= 0.16 surprise +14.3% Next earnings 11-17 est= 0.17 versus=-0.11 Average daily volume = 1.07 mln Chart = http://quote.yahoo.com/q?s=NTAP&d=3m *************** Biotechnology *************** HGSI - Human Genome Sciences $87.50 (+10.50)(+5.25)(P5W+27.38) 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. Our speculation play with HGSI has paid off for us, to the tune of over 40% since our pick. We choose HGSI, as a play for it's technical strength and ability to use it's 10-dma as a guide. Kudos to those who have profited, as we have seen investors expectations of HGSI become reality on the hope of new a break through in the drug and biotechnology sector. A word to the wise. Even though HGSI still has a lot of potential, protect your success. Friday's action in the stock has turned us negative on our 9/3 day stochastic. We are also seeing a significant drop in volume. Over 50% less than average. Combine this with the uncertainty of the market and you can see the need for caution. Any news surprise can start us up again but for now we don't see anything immediate. Support sits at $78 and resistance is at $90. Wait until HGSI approaches support or breaks through resistance before initiating any new plays. Patent filings play a key role in the price movement of HGSI. Friday, Roger A Armitage announced his resignation from the board of directors with HGSI. He has accepted a position with Eli Lilly as Vice President, and general patent counselor. His effort on behalf of HGSI will be greatly missed. BUY CALL OCT-80*HQI-JP OI=50 at $12.00 SL=9.50 BUY CALL OCT-85 HQI-JQ OI=19 at $ 9.13 SL=6.75 low OI BUY CALL OCT-90 HQI-JR OI=97 at $ 7.38 SL=5.75 High Risk! Picked on Aug 8th at $60.50 P/E = N/A Change since picked +27.00 52-week high=$96.25 Analysts Ratings 1-3-2-0-0 52-week low =$24.50 Last earnings 07/99 est=-0.20 actual= -0.10 Next earnings 10-28 est=-0.32 versus= -0.09 Average Daily Volume = 526 K Chart = http://quote.yahoo.com/q?s=HGSI&d=3m **** BGEN - Biogen Inc $89.00 (+4.19) Biogen is a biopharmaceutical company that researches, develops, manufactures, and markets drugs for human health care. They develop and test drugs for multiple sclerosis, pulmonary diseases, kidney diseases and disorders, inflammatory afflictions and cardiovascular dysfunction as well as focusing on developmental biology and gene therapy. However, Biogen derives about 55% of its revenues from the sale of AVONEX, a drug used to treat different forms of relapsing multiple sclerosis. They also make money from royalties received on worldwide sales by licensees. Biogen also has research alliances with global pharmaceutical firms such as Creative BioMolecules, CV Therapeutics and Merck. We just added this call play on Thursday evening and there are numerous conditions in its favor. First it's evident from looking at a 10-day chart that BGEN first broke out during the powerful market rally last Friday on September 3rd. It left its firm support level of $77 and $79 to consecutively climb into new territory by the day. On Friday, BGEN peaked at $90.44 to set the newest 52-week high. On both Thursday and Friday, the stock performed in a classic bull manner by advancing straight up from the open. Second the biotech sector is hot and is continuously gaining the respect of WallStreet investors. Couple these factors with earnings just around the corner, expected on October 4th, and BGEN should have some good momentum for a profitable earnings' run. The following tidbit of information may or may not play into this scenario but nonetheless needs to be mentioned. BGEN is actually at a price level where it can be considered a split candidate. Now granted the stock just split 2:1 on June 25th and presently with only 220 mln shares authorized and 150 mln shares outstanding there's not quite enough for another one but still it became a possibility when BGEN reached $80. The last Annual Stockholder's Meeting was on June 11th and thus far, there's no word on a Special Meeting, but we'll keep you posted on any new developments. If the stock pulls back to $85 (which could evolve as new support), this would be a solid entry point. If not, you'll need to look for an intraday bottom next week to jump into a position. On Thursday, analyst Todd R. Nelson of Dain Rauscher Wessels started coverage for BGEN with a new Buy Average rating and issued a 12-month target price of $112. He cited a strong outlook for near-term revenue for AVONEX and also stated that ROE looks to be over 25% for 1999-2000. BUY CALL OCT-85*BGQ-JQ OI=319 at $7.50 SL=5.75 BUY CALL OCT-90 BGV-JR OI=165 at $4.63 SL=3.00 BUY CALL OCT-95 BGV-JS OI= 0 at $2.69 SL=1.25 **NEW STRIKE** BUY CALL JAN-90 BGV-AR OI=542 at $9.50 SL=7.25 BUY CALL JAN-95 BGV-AS OI= 0 at $7.63 SL=6.00 **NEW STRIKE** Picked on Sep 9th at $89.19 P/E = 68 Change since picked -0.19 52 week high=$90.44 Analysts Ratings 9-12-5-0-0 52 week low =$25.18 Last earnings 06/99 est=-0.32 actual= 0.34 surprise +6.25% Next earnings 10-04 est= 0.36 versus=-0.25 Average Daily Volume = 1.91 mln Chart = http://quote.yahoo.com/q?s=BGEN&d=3m *************** Internet *************** CMGI - CMG Information Services Inc $89.88 (+3.63)(-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. CMGI is a pure and simple earnings' run play. We added it to our call list last week to give readers the opportunity for an early entry. Historically, CMGI is a good candidate for a run a couple weeks before its earnings' announcement. It's confirmed that CMGI will report on September 27th, after the bell. So this gives us two weeks to make our plays. Remember, plan to be out of any positions by the time the company reports. It's not worth the risk to hold over earnings as many stocks will then decline no matter how good the numbers turn out. Overall the tech sector is doing well amid the looming interest rate scuttlebutt and this is certainly a consequential factor in this play. On Friday, the friendly PPI data gave CMGI investors the green light to leave near-term support at $84-85 and move ahead. CMGI advanced $2.50 on an increasing level of volume (4.71 mln) placing it right on its 50-dma. A more conservative player may wait for it to break through this technical indicator as it has previously acted as a point of resistance. In the news this week, CMGI announced its second offering for its discretionary Direct Share Program for its majority- owned operating companies. If you have a minimum of 100 shares in one account as of record on August 25th, then you may qualify for an invitation to purchase shares of CMGI's NaviSite, a Wesite and application hosting & management services company, at the IPO offering price which is scheduled to take place in late September. Also, Mondera.com, an e-tailer of luxurious gifts and fine jewelry, secured $13 mln from @Ventures to expand its marketing campaign. BUY CALL OCT-85 QGW-JQ OI=750 at $11.75 SL= 9.25 BUY CALL OCT-90*QGW-JR OI=762 at $ 8.88 SL= 6.75 BUY CALL OCT-95 QGW-JS OI=565 at $ 6.50 SL= 4.75 BUY CALL DEC-90 QGW-LR OI=502 at $15.50 SL=12.00 BUY CALL DEC-95 QGW-LS OI=506 at $13.13 SL=10.75 Picked on Sep 5th at $86.25 P/E = 154 Change since picked +3.63 52-week high=$165.00 Analysts Ratings 2-7-0-0-0 52-week low =$ 8.87 Last earnings 04/99 est=-0.19 actual=-0.27 surprise -42.1% Next earnings 09-27 est=-0.20 versus= 0.32 Average Daily Volume = 5.66 mln Chart = http://quote.yahoo.com/q?s=CMGI&d=3m PLAYS CONTINUED IN SECTION FIVE ******************************* SEE DISCLAIMER IN SECTION ONE
The Option Investor Newsletter 9-12-99 Sunday 5 of 7 *************** CALLS CONTINUED *************** *************** Internet Continued *************** SFE - Safeguard Scientifics, $72.50 (+4.62) 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, It's one of those companies you don't hear a whole lot about in the news. SFE continues to locate and develop partnerships with quality young high-tech companies, takes them through their IPO, aides in the management of the companies and the shareholders of SFE continue to reap the rewards. One such company is Chroma Vision Medical Systems(CVSN), which yesterday entered a partnership to aid in developing a cancer angiogenesis test. In short, it will aid in determining the treatment necessary for particularly aggressive cancers and guide Doctors in the needed therapy. SFE gave us good entry point Wednesday and again Friday. SFE has continued its "text-book" upward channel which began back in the first week of August. We are looking for shares of SFE to continue higher as the interest in the stock and the volume picked up late in the week, even considering the mixed mood in the broader markets. Technically, if SFE can break through resistance in the $75.50 area there is no overhead resistance until the $83-$84 area. MACD has just rolled over into positive territory as well. SFE was able to shake off the non-event PPI report Friday and hopefully will do the same Wednesday with the release of the CPI numbers. SFE did gap up at the open Friday. For the "Techies" amongst us there is a gap just under $71 which should provide support for SFE. If you entered a play on SFE, adjust you stops accordingly. Before entering a new play, confirm a positive move with volume. In the news, SFE received its first upgrade in nearly six months Wednesday when First Union upgraded it from an Outperform to a Buy. BUY CALL OCT-65 SFE-JM OI=119 at $10.25 SL=$7.75 BUY CALL OCT-70*SFE-JN OI=165 at $ 6.75 SL=$5.00 BUY CALL OCT-75 SFE-JO OI= 75 at $ 4.50 SL=$2.75 BUY CALL NOV-70 SFE-KN OI=705 at $ 9.38 SL=$7.00 BUY CALL NOV-75 SFE-KO OI=969 at $ 7.25 SL=$5.50 Picked on Sep 7th at $70.75 P/E = 18 Change since picked +1.75 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 = 472 K Chart = http://quote.yahoo.com/q?s=SFE&d=3m **** AMZN - Amazon.com $66.50 (+4.06) Amazon.com has become the icon for e-commerce, as they have expanded from books to include CD's, online auctions, videos, etc. They also have invested in companies offering online pharmacy, groceries and pet supplies. We're talking online diversification here. Sales have grown to $608 million as of the last quarter, up from $203.3 million. This growth is due to Amazon's unique methods of retaining customers and servicing those customers like no other online site. CEO Jeff Bezos started Amazon in 1995, they now have more than 10.7 million customers that they sell to. Looking for a great value and fundamental play? Don't go here. This one is purely Internet momentum based (ok; some fundamentals - Christmas selling season is coming). We were playing AMZN on a split run prior to its split date of September 2 but had to drop it then in anticipation of a normal split depression. The good news is that AMZN never had a split depression. Having remained flat or risen in price on increasing volume since the split, it's back on our list. Very simply, AMZN now trades back over its 200-dma since mid-July, excepting a short pop up (reminiscent of a prairie dog temporarily sticking its head out of the hole) and consolidation in late August. The whole Internet sector as a subsection of technology has momentum behind it and we expect that rotation to carry through next week, barring any unpleasantries on the inflation front. Technically, there is good support at $62 and we believe dips are buyable to that point. Resistance is at $68, then $70. However, based on a cup and handle formation (a favorite of Investors' Business Daily readers) in the making since mid-July, it appears that AMZN is likely to continue up. While we're not making any predictions, the next resistance point is at $80. Remember that playing the Internets is for seasoned roller coaster stomachs. Gyrations are wild. Exercise caution, especially in front of the CPI figures on Wednesday morning and wait for the market to give us direction before getting in. Note the change in symbol roots. In real news, Delta Airlines lost its CFO to AMZN last week, who will replace Joy Covey, the current CFO. Don't fret. She's been promoted to chief strategy officer (is that a title?). Furthermore, CIBC began coverage with a Buy rating. If you're watching the buzz on the Net, there were chat rooms buzzing that Oprah was going to be auctioning some of her memorabilia on the site October 2 and that Jeff Bezos, AMZN's CEO would be making an appearance on the Oprah show. That part is for fun so don't base your play on it. BUY CALL OCT-60 YZZ-JL OI=6183 at $10.38 SL= 8.00 BUY CALL OCT-65*YZZ-JM OI=6400 at $ 7.63 SL= 5.75 BUY CALL OCT-70 YQN-JN OI=6532 at $ 5.38 SL= 3.50 BUY CALL JAN-65 YQN-AM OI=6144 at $13.75 SL=11.00 BUY CALL JAN-70 YQN-AN OI=4287 at $11.63 SL= 9.25 Picked on Sep 12th at $66.50 P/E = N/A Change since picked +0.00 52 week high=$110.62 Analysts Ratings 10-6-4-0-0 52 week low =$ 11.69 Last earnings 07/99 est= -0.49 actual= -0.51 surprise -4.1% Next earnings 10-27 est= -0.53 versus= -0.47 Average daily volume = 9.30 mln Chart = http://quote.yahoo.com/q?s=AMZN&d=3m **** INKT - Inktomi Corp. $128.19 (+12.44) Inktomi develops and markets software applications designed to increase performance of large-scale networks. Products consist of network cache application, Internet search engines and Internet shopping engines. Inktomi's software applications are used by Yahoo and also by Hotbot. For the first nine months of 1999, revenues totaled $45 mln. This was an increase from $12.2 mln in 1998. Also, net loss rose 21% to $19.3 mln during the same time period. INKT is a powerful internet stock with a lot of bullish momentum behind it. The stock was up $3.31 points on Friday to end the trading session at $128.19. The benign PPI report on Friday morning eased fears of further interest rate hikes and was the catalyst that sparked the rally for the entire internet sector. The Goldman Sachs Internet Index gained 2.5% on Friday, showing renewed strength in the Internets. Right now INKT, and the Internets, have a favorable interest rate environment to operate within which is causing the sector to gain momentum and the confidence from investors. From a technical perspective, INKT is strong, trading well above its 10-dma of $128.19. More importantly, it has broken above the $122 level that was the previous resistance. Market willing, INKT should climb to the next resistance at $140. If the market decides not to cooperate, it will send INKT back to support at $122. If it holds, it will make for a good entry point. This is purely a momentum play so keep your ear on the pulse of the markets to make sure it maintains the current rhythm. Currently, there are no recent news articles impacting INKT at this time. BUY CALL OCT-125*QYK-JE OI=1036 at $13.88 SL=11.25 BUY CALL OCT-130 KYQ-JF OI= 524 at $11.63 SL= 9.50 BUY CALL OCT-140 KYQ-JH OI= 457 at $ 7.38 SL= 5.75 Picked on Sep 10th at $128.19 P/E = N/A Change since picked +0.00 52 week high=$159.13 Analysts Ratings 6-6-3-0-0 52 week low =$ 26.56 Last earning 07/14 est= -0.11 actual= -0.10 Next earning 10-22 est= -0.09 versus= -0.16 Average Daily Volume = 2.11 mln Chart = http://quote.yahoo.com/q?s=INKT&d=3m **** SFA - Scientific Atlantic Inc. $55.69 (+2.25)(+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. Time and time again SFA ceases to amaze us with its relentless strength for reaching new highs. Once again, with a little help from a late market rally in technology stocks, SFA managed to set yet another 52-week high to end the week. This stock keeps going and going higher and higher, it's not the fastest moving stock but it gets results. As a momentum play, SFA has continued to meet our expectations with its resilience. Currently driving SFA are investors that continue to buy and hold the stock and patiently wait for those higher highs. These individuals have been rewarded very handsomely for their patience, as the stock has increased just under $20 or 45 percent in the past month alone. Hopefully this upward trend will continue on Monday, which is very possible considering how technology stocks rallied to end the week. After consolidating since Tuesday, SFA is looking anxious to make a new move higher. It bounced off the 10-dma on Wednesday as is now right under the 52-week high. If SFA starts moving, you may have to resort to an intraday dip if you want in. Even though we remain bullish, place the recommended stops to be safe after this already amazing run. There was no additional news to report on SFA at this time. BUY CALL OCT-45 SFA-JI OI= 30 at $11.75 SL=9.00 BUY CALL OCT-50 SFA-JJ OI=160 at $ 7.63 SL=5.75 BUY CALL OCT-55*SFA-JK OI=631 at $ 4.25 SL=2.50 BUY CALL OCT-60 SFA-JL OI= 45 at $ 2.06 SL=1.00 Picked on Aug 26th at $51.13 P/E = 41 Change since picked +4.56 52-week high=$55.69 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 *************** Miscellaneous *************** DISH - EchoStar Communications, $94.00 (+8.12)(+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. DISH had a volatile week, but did give us a chance at a fair profit. Tuesday started the week off with a merger in the broadcast industry between industry giants Viacom and CBS. Investors seemed to like what they saw and the potential in the merger. Shares of DISH chimed in closing up $3.13 on the day. If traders and investors approved of the news Tuesday, they were apparently exuberant Wednesday, as DISH exploded to a high of $96.38 in the first hour of trading. Apparently investors figured a move of over 12% in less than two days wasn't a bad return and the selling began. By the end of the day DISH had fallen back to an intraday low of $87.25. Did we mention DISH had a volatile week? Friday the buyers returned to the party driving DISH $5.94 higher on volume of over 1.60 mln shares. All eyes will be on Cape Canaveral early Monday morning as EchoStar will hopefully see the launch of EchoStar V, a satellite that will allow the DISH network to offer 500 channels, including high definition television, Dolby Digital surround sound and high-speed interactive television and data services. DISH seemed to be unaffected by the mixed results in the broader markets Friday. We have the release of CPI on Wednesday and are really expecting no big surprises. We do expect shares of DISH to continue higher but it has been volatile so keep you stops close. If you are looking at a new play in DISH, as always confirm market and stock direction before entering a new play. There is no other news at this time. BUY CALL OCT- 90*UAB-JR OI=286 at $11.38 SL=$ 9.00 BUY CALL OCT- 95 UAB-JS OI= 8 at $ 8.88 SL=$ 6.75 low OI BUY CALL OCT-100 UAB-JT OI= 16 at $ 6.88 SL=$ 5.00 BUY CALL DEC- 95 UAB-LS OI= 16 at $15.38 SL=$12.00 BUY CALL DEC-100 UAB-LT OI= 61 at $13.50 SL=$11.00 Picked on Sep 4th at $85.88 P/E = N/A Change since picked +8.13 52 week high=$96.38 Analysts Ratings 10-6-0-0-0 52 week low =$ 8.75 Last earnings 06/99 est=-0.93 actual=-0.80 surprise +13.98% Next earnings 11-10 est=-0.83 versus=-0.68 Average daily volume = 734 K Chart = http://quote.yahoo.com/q?s=DISH&d=3m PLAYS CONTINUED IN SECTION THREE ***************** PUTS ***************** KO - Coca-Cola Co $55.13 (-2.25) 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. After Monday's sharp decline, Coke had a fairly quiet week. The main news items for the week was that another executive has left Coke for another company. By my math this is the 3rd executive to jump ship during the past six months. Perhaps more significant, S&P is now considering a downgrade in KO's corporate credit rating. Their senior notes are currently an AA-, so they are far from a junk bond but obviously S&P is seeing reason for concern with KO's bottom line. With no other news to go on, we will keep our current positions. Coke still has not broken through support at the 52-week low of $53.63 but has failed at every rally attempt. Looking at a fast stochastic, KO was probably a little oversold after Monday so it appears that a little time is needed to get the bears ready to push through the support level. Upside resistance appears fairly strong at 60 but a strong rally seems unlikely unless the market as a whole takes off, in which case any put becomes risky. BUY PUT OCT-60*KO-VL OI=1536 at $5.50 SL=3.75 BUY PUT OCT-55 KO-VK OI=2635 at $1.94 SL=1.00 Average Daily Volume = 3.20 mln Chart = http://quote.yahoo.com/q?s=KO&d=3m **** GPS - The Gap Inc $35.44 (-3.19)(-3.44) The Gap Inc is a international clothing retailer that operates almost 2,600 clothing stores in the United States, Canada, France, Germany, Japan, and the UK. Its stores offer a tremendous variety of men's and women's casual clothing. The clothing sold at The Gap consist of T-shirts, jeans, and khakis pants. The company's owns other retail chains including Banana Republic, Old Navy Clothing Co, and GapKids. For the first 13 weeks ending in May 1, 1999, net sales increased 32% to $2.28 bln and net income increased 49% to more than $202 mln. GPS gained $0.25 on Friday to finally end the trading session at $35.69. From a technical perspective, GPS closed well below its 10-dma of $37.87. The 10-dma seems to be a barrier that GPS has not been able to penetrate over the last couple of days. If the stock starts to rally, it could climb back to the 10-dma so watch out. We are concerned about the double-bottom GPS put in on Thursday and Friday at $35. This may act as short- term support. The high open interest in the 35-strike contracts is also confirming this. This sector is full of mixed stocks lately. GPS is obviously on the downside thanks to tough year-over-year comparisons and a tougher retail environment from interest rate fears. We are not recommending any new plays on GPS until it breaks below $35. The next support will then be $30. BUY PUT OCT-40*GPS-VH OI=133 at $5.25 SL=3.50 BUY PUT OCT-35 GPS-VG OI=846 at $2.06 SL=1.00 Average daily volume = 2.09 mln Chart = http://quote.yahoo.com/q?s=GPS&d=3m **** CVS - Cvs Corporation $39.88 (-0.56) CVS is a drugstore chain specializing in prescription drugs, over-the-counter drugs, photofinishing services and film, greeting cards, beauty & cosmetics, convenience foods and seasonal merchandise. It operates about 4,200 drugstores in 24 states in the eastern US. Thanks to its acquisitions of Revco and Arbor Drugs, CVS is the #2 drugstore chain in the US in total sales and #1 in store count and prescriptions filled. Nearly 60% of sales come from pharmacies. CVS's purchase of online pharmacy Soma has expanded its market reach to the Internet. Unfortunately Friday was not a good start for our new put play on CVS. The stock broke away from its normal downward trend that was present for the last month and a half. We mentioned in Thursday's write up that since the stock had fallen so far so fast it had the potential to turn and disappointingly, this is what happened. Whether this was a dead cat bounce or and actual turnaround remains to be seen. We decided to continue the play to confirm whether or not the bounce was for real. From a technical standpoint, CVS remains in poor standing, the stock continues to trade well below its moving averages and just above its 52-week low set last Thursday at $37.25. Even though we remain bearish on CVS, use extreme caution because Friday's rally was supported by above average volume, which indicates strength behind the move. Continue to watch the stock carefully and confirm negative movement before placing new trades. BUY PUTS OCT-40*CVS-VH OI=94 at $2.50 SL=1.25 BUY PUTS OCT-35 CVS-VG OI=40 at $0.69 SL=0.00 High Risk! Average daily volume = 2.30 mln Chart = http://quote.yahoo.com/q?s=CVS&d=3m **** IDPH - IDEC Pharmaceutical $105.44 (-27.06) IDEC Pharmaceuticals focuses on the commercialization and development of targeted therapies for the treatment of cancer and autoimmune diseases. The company's only approved product, the best-selling Rituxan, treats non-Hodgkin's lymphoma which afflict approximately 240,000 patients in the United States and rheumatoid arthritis, which afflicts almost 2 million people in the United States. IDEC's antibody products act chiefly through immune system mechanisms, exerting their effect by binding to specific, readily targeted immune cells in the patient's blood or lymphatic systems. How quickly the momentum can change! IDPH had been soaring for months before comments from the company that sales may not live up to Q3 forecasts have investors jumping ship. The news came out Thursday morning and caused the stock to fall from $138 to $105 in less than 30 minutes. The concern stems from the company saying that sales would come in at the low end of estimates. This is because Q2 sales numbers were partially over-inflated because IDEC was raising the price for their drug on Sep 01 and therefore companies bought more into inventory before the price rise. That would obviously hurt Q3 because some buyers may already be stacked with product. Another problem hurting the stock is a very thin float, thus the $33 drop in 30 minutes. The stock did instantly turn around to end Thursday at $124 as the CEO reiterated his confidence in Rituxan's growth potential. It didn't matter though as the selling resumed on Friday and the stock ended at a short-term and day-low, below the 50-dma. This is an EXTREMELY HIGH-RISK PLAY and not for all investors. But we see potential for the stock to drop to support at $83 from the 100-dma. IDPH will remain VERY VOLATILE in the short-term so you need pick good entry points to be successful. There is no doubt the long-term outlook for IDEC is bright but the steep run up and thin float make the stock vulnerable to some more profit-taking. BUY PUT OCT-110 IDQ-VB OI=290 at $13.38 SL=10.75 BUY PUT OCT-105 IDQ-VA OI= 39 at $10.25 SL= 7.50 low OI BUY PUT OCT-100*IDQ-VT OI=547 at $ 8.13 SL= 6.25 Average Daily Volume = 531 K Chart = http://quote.yahoo.com/q?s=IDPH&d=3m **** HNZ - H.J. Heinz Company $43.00 (-1.06) We've all seen the bottle of Heinz on the restaurant table but did you know that Heinz is also responsible for items like Weight Watchers, StarKist, Ore-Ida, 9-Live's and others that we've come to know and love? In fact Heinz has 5000 varieties of products that they produce and distribute world wide. The company has grown from a horse drawn delivery in the 1800's, to a world leader in the food industry. The company continues to grow through acquisition, creative distribution and pricing, to the tune of 1%. The bottom line however, has been hurt by increased costs and lower margins. So are we not putting Ketchup on our eggs or what? Heinz has missed their earnings numbers and is now experiencing trouble with their stock. It's pay back for having to use the knife to get the ketchup out of the bottle! Seriously, this is every stocks worry, the dreaded downgrade. Investors knew this was coming, as the stock has been in a slide for some time. HNZ has dropped below all moving averages and has no clearly defined support level. Look out below, a new 52-week low! What's to catch us? Not much right now. Our technical indicators are looking pretty bearish and we've doubled our volume on the news. We expect to continue the down trend as our market frets and more analysts follow with opinions. As always, confirm both market and stock direction before playing. September 8th was not a good day for bullish HNZ investors, the company missed their numbers. An expected 66 cents per share was met with a 65 cent result. Even though HNZ showed some growth, it didn't meet expectations. Worries are that sales are slipping, which brought about a DLJ downgrade on Friday. It appears the salsa revolution has taken over. BUY PUT OCT-45 HNZ-VI*OI=113 at $3.13 SL=1.50 BUY PUT OCT-40 HNZ-VH OI=155 at $0.50 SL=0.00 High Risk! Average daily volume = 850 K Chart = http://quote.yahoo.com/q?s=HNZ&d=3m **** SWY - Safeway Inc $42.94 (-3.19) Safeway operates a retail food and drug chain throughout the US and Canada. They have over 1,500 supermarkets operating under the Safeway, Dominick's, Vons and Carr-Gottstein names. Safeway also operates a network of distribution, manufacturing and food processing facilities. They are continuing to add to their portfolio and are presently acquiring the privately- held Houston-based grocer, Randall's Food Markets. In the foreign markets, Safeway holds a 49% interest Casa Ley, S.A. de C.V., a food chain in western Mexico. Kohlberg Kravis Roberts owns about 6% of Safeway. SWY first caught our attention when it descended against the back drop of an explosive market on Friday, Sep 3rd following a Strong Buy reiteration by Banc of America Securities the previous day. This was the first sign of its threatening downward spiral. Then on Wednesday the company announced a $1.5 bln three-tranche debt offering. This news event wasn't well received by investors and the stock edged lower. To add to the discord, on Friday SWY announced the $1.8 bln acquisition of Randall's Food Markets was approved. Safeway will pay approximately $855 mln in cash and issue about $10.9 mln in shares. Overall SWY has lost $3.19 or 7% of its share price this week. Plus, these losses were amid strong volume. For example, by Thursday trading volume had reached more than double its ADV - a very bearish implication. From a technical view, SWY is now below its near-term support level of $46-47 and heading towards its 52-week record low of $37.62 reached back in Sep/Oct of 1998. Typically once SWY definitely makes its move under the 10-dma (now at $46) it will generally fall about 8 or so points. This can be confirmed by looking at a 6-month chart. SWY trades in a relatively narrow range so on one hand this makes it more difficult to get an entry if the stock continues in a perpetual downslide but on the flip side it's much easier to protect your capital and profits with stops. BUY PUT OCT-50 SWY-VJ OI=300 at $7.38 SL=5.75 BUY PUT OCT-45*SWY-VI OI=161 at $3.25 SL=1.75 BUY PUT OCT-40 SWY-VH OI=102 at $0.88 SL=0.00 High Risk! Average Daily Volume = 1.95 mln Chart = http://quote.yahoo.com/q?s=SWY&d=3m **** COST - Costco Wholesale Corporation $69.88 (-2.75) Costco Companies is the largest wholesale club operator in the US. The company operates about 300 membership warehouse stores serving 27 million members in the eastern and western US, Canada, Mexico, South Korea, Taiwan and the UK, primarily under the Costco Wholesale name. Stores offer discount prices on 3,600 to 4,000 products ranging from alcoholic beverages and computer hardware and software to pharmaceuticals and tires. Certain club memberships also offer products and services such as car and home insurance, mortgage services, and small-business loans; many stores also sell fresh food. If your seeking a momentum play that has potential, you may want to take a look at our latest put play on COST. Like many of the retail stocks this summer, Costco's stock price has been plagued by earnings warnings form various competitors. Investors, worried that the whole sector is plagued, have been selling shares and making there way to greener pastures. This is evident throughout stocks within the sector, including Costco. The stock is currently trading below its 50-dma and 200-dma and on Friday fell below its support level at $70. Technically, this is not a good sign for the stock seeing that the next support level is over $10 away around the $57-$58 range. Considering the depressed nature of the sector it is possible that the stock may fall to these lower levels. In contrast to our views, there was an article released on Friday stating that Boring Portfolio announced its intention to add COST to its portfolio, a total of $7000 during the next 5 days. (No that $7000 was not a misprint) Obviously this invest is meaningless to support the stock, you never know how strong his following is that will mimic his moves. Even though we stand by our bearish outlook, use caution with this new play and we recommend you confirm the stocks direction before placing a trade. Remember the play rides on COST falling below its strong support at $70. Friday's close at $69.88 may just be a head fake so confirm direction first. BUY PUT OCT-70 PRQ-VN OI=791 at $3.75 SL=2.50 BUY PUT OCT-75 PRQ-VO*OI=319 at $6.88 SL=5.25 Average daily volume = 1.85 mln Chart = http://quote.yahoo.com/q?s=COST&d=3m SEE DISCLAIMER IN SECTION ONE ******************************
The Option Investor Newsletter 9-12-99 Sunday 6 of 7 ****** SPREADS/STRADDLES/COMBOS ****** A New Record And Another Key Moment.. Friday, September 10 Markets were mixed Friday after a report on inflation clouded the issue of inflation and the probability of higher interest rates. The Dow Jones industrial average fell 50 points to 11,028 while the Nasdaq composite rose 35 points to a new record high of 2887. The S&P 500 index rose 4 points to 1351 and advances "edged-out" declines on volume of 802 million shares. The long Treasury bond rose 26/32, pushing the yield lower to 6.03%. Thursday's new plays (positions/opening prices/strategy): Philip Morris MO JAN35C/OCT40C $6.38 debit LEAPS/CC's Philip Morris MO OCT32C/OCT37C $4.00 debit bull-call Barnes/Noble BNBN OCT15C/OCT17C $1.75 debit bull-call Unify UNFY OCT12C/OCT17C $4.12 debit bull-call We started the day chasing a big mover as Unify opened almost $3 higher with the Internet/Tech rally. It appeared as though there would be no chance for this play but eventually, the stock came back to earth. By 10:30 AM, the stock was up less than a dollar and the option prices had stabilized. The opening target was not available and a slightly higher entry at $4.12 was probably the best one could expect. Barnesandnoble.com opened with slightly less enthusiasm and it remained in a fairly small range for most of the morning. The options were relatively un-traded and while the target was never achieved, a reasonable entry of $1.75 was available for a short time before 10:00 AM and then again near 10:45 AM. Philip Morris was down from the start and never made much of an effort at a positive day. The LEAPS/CC's play traded much lower than our target but because a limit order would have been filled on the way down, we will record the entry as $6.38. The bullish debit-spread target was easily achieved at $4.00. Portfolio plays: Another day of selective trading as Blue-chip issues faltered while technology stocks moved higher. Hardware and chip stocks started the rally and big advances by Compaq (CPQ) and National Semiconductor (NSM) led our small and mid-cap portfolios. NSM reported a first-quarter profit with stronger-than-expected bookings and said improving market conditions put them ahead of schedule in their efforts to turn a profit. CPQ was also a standout with the stock climbing over $2 to a recent high near $25. Both of these positions are being closed on the rally to lock-in favorable returns. Peoplesoft (PSFT) continued its bullish run with a close above the 26-week high near $18. Now we are looking for some consolidation near this price with our sold strike (October) at $17.50. In the group of larger issues, Echostar (DISH) and EMC Corp (EMC) were the leaders. DISH moved another $6 to a new closing high at $94 and EMC vaulted $2.62 to a 52-week high near $68. Both of these plays have achieved substantial profits and may be closed early to avoid future downside risk. Home Depot (HD) was another outstanding performer today, up $1.62 to the $68 range. This position is also being closed early to protect favorable profits. Even our brokerage stocks participated with Lehman Brothers (LEH) and Merrill Lynch (MER) both moving up during the session. Oil stocks have been on a rampage and we used the recent rally to close and roll-forward many of our positions. Most notable in the portfolio are Halliburton (HAL) and Unocal (UCL) which have profited in every play offered since we started following those issues early in the year. The long-term position on Exxon (XON) was moved forward to October for a small credit of $0.75. Other adjustments in the LEAPS/CC's section included; General Motors (GM), which was rolled to October for a $1.00 credit at the $70 strike; and Computer Associates (CA), a brand new play that we were bounced out of on today's $5 rally. The stock rose 10% today on speculation that a recovery in the software market would boost their revenues. CA is also rumored to have landed several new deals and this helped push the stock to another of today's 52-week highs at $60. The only solace was that the move was nice and slow throughout the early part of the day and our buy-to-close STOP was filled near 10:00 AM, well before the big surge. Had we been able to predict the giant closing rally, our transaction might have ended profitably. This dilemma is all a result of our aggressive stance in the bullish opening position (JAN01-60C/SEP55C) and it will surely require a few months to repair, if we can manage to stay ahead of the stock. A superb lesson for the teacher may be the best that comes from this one. Here are today's new positions (adjustments to October plays): Exxon XON JAN01-85/OCT85C $9.12 debit Comp Assoc. CA JAN01-60/OCT60C $8.62 debit General Motors GM JAN01-75/OCT70C $8.50 debit General Motors GM JAN01-75/OCT70C $5.75 debit New Items: This month I received a number of suggestions from readers and have decided to make some subtle changes in the Spreads/Combos section to improve the quality of our product. The majority of questions that we answer for this section are very basic and the primary failure that we see in new traders is the inability to manage their positions effectively. One of our goals is to teach investors everything they must know to become successful traders. One problem with the spreads section is that much of the research time is spent tracking old plays that are deep ITM with little need for further adjustment. One way we can remedy this situation is to close the majority of our older positions; including those that are significantly profitable (or beyond reasonable salvation). Then we will try to focus on individual plays and the conditions that we use to evaluate each position for probability of profit. We will also discuss common entry and exit strategies along with basic roll-out/up techniques for specific spreads. In this manner, we can began to improve our role as a trading resource rather than just a play provider. Hopefully, this will result in a much better product for the majority of our readership. Good Luck! Questions & comments on spreads/combos to ray@OptionInvestor.com ****************************************************************** - NEW PLAYS - Today we have some new volatility plays based on small disparities in the front-month option prices. The short-term positions will profit if the underlying issue remains in a small range and the longer-term calendar spreads will benefit from the sale of new options (a lower cost basis) at the end of each strike period. There is also a conservative (bullish) debit spread based on a recent spike in implied volatility. ****************************************************************** BCR - C.R. Bard $51.25 *** Takeover Rumors *** C.R. Bard is engaged in the design, manufacture, packaging, distribution and sale of medical, surgical, diagnostic and patient care devices. Hospitals, physicians and nursing homes purchase approximately 90% of the company's products, most of which are used once and discarded. C.R. Bard is also a leading multinational developer, manufacturer and marketer of health care products. Standard & Poor recently revised its outlook on C.R. Bard and affirmed its outstanding ratings for the company. The outlook revision reflects improved operating performance and a more conservative financial profile. Bard's investment-grade ratings come from the medical device manufacturer's solid position in several business segments, strong cash flow, and moderate debt burden. Bard also holds important positions in the surgical, urological, and vascular products markets, with a particular strength in catheters and access port products. New product development will also be a key to their success, as offerings are subject to technological changes and the company's product breadth is an advantage because customers are increasingly dealing with fewer vendors. The company has in the past been rumored as a takeover candidate and with OTM call options active, there is a favorable (bullish) position for those who like to speculate. PLAY (aggressive - bullish/calendar spread): BUY CALL JAN-55 BCR-AK OI=71 A=$3.75 SELL CALL OCT-55 BCR-JK OI=330 B=$1.68 INITIAL NET DEBIT TARGET=$1.87 TARGET ROI=50% Chart = http://quote.yahoo.com/q?s=BCR&d=3m ****************************************************************** ZOLT - Zoltek Companies $7.68 *** Cheap Speculation *** Zoltek develops, manufactures and markets advanced materials and industrial products. The Carbon Fibers Division manufactures carbon fibers for use in composites which replace metals or conventional fiberglass materials. The Equipment and Services Division supplies industrial process equipment, aftermarket components and repair services for the chemical, petrochemical and food processing, and power generating industries. They also have a subsidiary, Zoltek Properties, a real estate holding company. A very unique niche company that once traded in the $50 range. Not much news but the third quarter report suggested that any significant growth potential for the carbon fiber industry was still a year or more in the future. Some of their International products (Mavilon acrylic fiber lines) are being converted to production lines and even though sales are up for carbon fiber, margins are down. Their acrylic fiber sales are down, and now the losses are widening for these products. Who knows when the company will return to glory. A strange technical formation suggests this stock may have come to the bottom and the low-cost of this play negates any serious risk. You will need to trade with at least 10 contracts for any reasonable profit (and to overcome the commission costs of each month's adjustments). PLAY (conservative - neutral/calendar spread): BUY CALL JAN-7.50 QOT-DU OI=26 A=$1.50 SELL CALL SEP-7.50 QOT-IU OI=35 B=$0.31 INITIAL NET DEBIT TARGET=$1.00 TARGET ROI=50% Chart = http://quote.yahoo.com/q?s=ZOLT&d=3m ****************************************************************** BJS - BJ Services Company $39.00 *** Technicals Only *** BJ Services Company is a leading provider of pressure pumping and other oilfield services serving the petroleum industry worldwide. BJ's pressure pumping services consist of well stimulation, cementing, sand control and coiled tubing services used in the completion of new oil and natural gas wells and in remedial work on existing wells, both onshore and offshore. Oilfield services include casing and tubular products, missioning and inspection, pipelines and offshore platforms and specialty chemicals. BJS is one of the many oil service companies that is benefitting from the recent rise in crude oil prices. While we favor the short-term bullish trend for this issue, it appears that some consolidation may need to occur near the current price. We do expect to buy-back the sold option next Friday but the premium disparity is significant and hopefully the stock movement will allow us to profit on the way up. PLAY (aggressive - neutral/calendar spread): BUY CALL OCT-40 BJS-JH OI=128 A=$2.75 SELL CALL SEP-40 BJS-IH OI=98 B=$0.81 INITIAL NET DEBIT TARGET=$1.75 TARGET ROI=20% Chart = http://quote.yahoo.com/q?s=BJS&d=3m ****************************************************************** TUTS - Tut Systems $29.75 ** We Still Use Copper? *** Tut Systems designs, develops and markets advanced communications products which enable high-speed data access over the copper infrastructure of telephone companies, as well as the telephone wires in homes, businesses and other buildings. These products incorporate Tut's proprietary FastCopper technology in a cost effective, scalable and easy to deploy solution to exploit the underutilized bandwidth of copper telephone wires. A nice rally occured last week after ReFlex Communications signed a multi-year agreement to purchase Tut's Expresso MDU high-speed Internet access product line, in a deal worth an expected minimum of $15 million. ReFlex is a rapidly growing provider of enhanced broadband Internet communication and they are positioned to deploy Tut's IP equipment for high-speed Internet services in the booming multi-tenant marketplace. TUT recently announced successful tests of voice over IP (VoIP) residential gateways with the Clarent Command Center and Tut's Expresso MDU system providing the underlying IP network. The tests validated interoperability and the use of the emerging Media Gateway Control Protocol (MGCP), for linking remote VoIP gateways to central VoIP call agents. Together, these products allow service providers to offer bundles of voice over IP and high-speed Internet services over a common IP infrastructure to both commercial and residential subscribers. The new technical trend appears favorable with positive upward bias on excellent buying pressure and heavy volume support. The deep ITM position offers a relatively safe investment for the possibility of a 30% return. PLAY (conservative - bullish/debit spread): BUY CALL OCT-22.50 QSS-JX OI=38 A=$8.25 SELL CALL OCT-25.00 QSS-JE OI=99 B=$6.25 INITIAL NET DEBIT TARGET=$1.88 ROI(max)=33% B/E=$24.38 Chart = http://quote.yahoo.com/q?s=TUTS&d=3m ****************************************************************** - STRADDLES - ****************************************************************** These plays are based on the current price or trading range of the underlying issue and the statistical pricing history of its options along with the probability of a profitable outcome. 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. ****************************************************************** DLJ - Donaldson, Lufkin and Jenrette $50.13 Donaldson, Lufkin and Jenrette is an integrated investment and merchant bank that serves institutional, corporate, governmental and individual clients. Co. is a holding company which conducts its business through various subsidiaries including its principal broker-dealer subsidiary, Donaldson, Lufkin & Jenrette Securities Corporation. The company's businesses include underwriting, sales and trading; merchant banking; financial advisory services; investment research; correspondent brokerage services; and asset management. PLAY (conservative - neutral/debit straddle): BUY CALL JAN-50 DLJ-AJ OI=110 A=$7.25 BUY PUT JAN-50 DLJ-MJ OI=38 A=$6.25 INITIAL NET DEBIT TARGET=$13.25 TARGET ROI=30% Chart = http://quote.yahoo.com/q?s=DLJ&d=3m ****************************************************************** CAL - Continental Airlines $36.43 Continental Airlines is the fifth largest airline in the U.S., offering more than 2,000 jet and Express departures daily to 132 domestic and 57 international destinations. Operating major hubs in Newark, Houston, Guam and Cleveland, they are strategically positioned for transcontinental travel, and offer extensive service to Latin America and Europe via its Houston and Newark gateways. Continental was recently ranked the top airline in customer satisfaction among the nine major U.S. carriers on long-haul flights. PLAY (conservative - neutral/debit straddle): BUY CALL MAR-35 CAL-CG OI=0 A=$5.50 BUY PUT MAR-35 CAL-OG OI=25 A=$3.37 INITIAL NET DEBIT TARGET=$8.62 TARGET ROI=50% Chart = http://quote.yahoo.com/q?s=CAL&d=3m ****************************************************************** AVI - Avis Rent-A-Car $22.81 Avis Rent A Car is a holding company which operates the second largest general use car rental business in the world, based on total revenue and volume of rental transactions. The Company rents vehicles to business and leisure travelers in over 530 rental locations in airport, downtown and suburban markets in the United States, Canada, Puerto Rico, U.S. Virgin Islands, Argentina, Australia and New Zealand. PLAY (conservative - neutral/debit straddle): BUY CALL DEC-22.50 AVI-LX OI=5 A=$2.68 BUY PUT DEC-22.50 AVI-XX OI=3 A=$2.00 INITIAL NET DEBIT TARGET=$4.50 TARGET ROI=25% Chart = http://quote.yahoo.com/q?s=AVI&d=3m ****************************************************************** About Straddles.. One of the most conservative, neutral combination strategies profits from large, abrupt movements in the underlying issue. Before we can begin a discussion on the proper techniques for purchasing straddles, there are a few definitions that must be fully understood. Option Pricing: The primary influence on an option's price is the movement of the underlying security. The next important factor is time value. An option's price decays each day it is in existence. The closer the option gets to expiration, the faster it decays. There are other, less important factors that affect the price of an option including interest and dividend rates. Volatility: The volatility component of option pricing is a measure of the range the underlying security is expected to change over a given period of time. The actual measurement is the standard deviation of the daily price changes in the issue. Historical (statistical) Volatility: A measure of how quickly the underlying security has moved in the past. It is a mathematical definition based on historical prices. In most cases, the higher the statistical volatility, the more an option is worth. Implied Volatility: The market's estimate of future volatility of the underlying security. Implied volatility calculators start with the current option price and extrapolate the theoretical value of volatility. Even though it is a computed value, it is still just an estimate and is subject to errors (or irregularities) when the market performs unexpectedly. In general terms, implied volatility is the volatility value that makes an option's fair value equal to its actual market price. Debit straddle: A neutral option trading strategy, which consists of the purchase a put and a call, generally with the same strike and the same expiration month. The position will benefit from a large move in one direction or the other and based on the size and timeliness of the move, it can generate large profits. The risk, (if little or no movement occurs) is limited to the initial amount paid for the straddle. By carefully identifying undervalued options and making reasonable assumptions about future movements in the underlying security, this can be a profitable strategy with very limited risk. There are three rules to identifying favorable conditions for a straddle purchase. First, the trader should select options that are undervalued (cheap). Next, the underlying security must have the potential to move (high or low) enough to make the straddle profitable. Finally, the underlying stock should have a history of multiple movements through a sufficient range in the required amount of time to justify the overall risk/reward of the position. The first step is to determine how fairly the options are priced. This may be done with sophisticated pricing software or by simply comparing the current levels of implied volatility to past levels of implied volatility. When the relative implied volatility is low, options are effectively under priced. After identifying a series of inexpensive options, the trader must determine if the underlying stock has the ability to move to a profitable position in the required amount of time. (Three months is generally the shortest recommended period for debit straddles; shorter-term positions suffer from time decay too quickly.) With a simple probability calculator, it is easy to estimate the chance of the underlying stock finishing outside the break-even points at expiration. One thing you must understand when using these tools is that historical volatility measures are generally based on 10, 20, 50 and 100 day statistics and thus it is important to make a conservative estimate so as to not to artificially inflate the probability of profit. The next step is to look at a price chart of the stock to see if it has a history of moving the required distance in the allotted time frame. The important thing to examine is how often the issue moves through the necessary profit range in each of the past four or five 'three-month' periods. Once again, simple option analysis software will do this automatically and more importantly, it will forecast the probability of actually profiting from the position. One thing to be aware of when buying any option is that time decay becomes greatest during the last month before expiration. A three month debit straddle will have lost approximately 50% of its value before the beginning of the worst erosion period even if the stock remains exactly at the original price when the position was opened. This makes it very important to use a mental loss limit near one- half the cost of the initial straddle purchase to preserve capital in the event the underlying issue does not perform as expected. After the position is open and the underlying stock begins to make a move, it is necessary to decide whether to ride the trend to the break-even point or trade against the straddle. One technique is to hold the straddle until the value of either option pays for the entire position, then the remaining option is risk free with unlimited profit potential. A similar method bases the target exit on the sum total of both positions. When one position is worth the total initial debit, both positions are closed and the premium from the lower priced option is profit. The latter strategy works well when there is still ample time until the options expire. 'Riding the trend' is considered the more profitable technique for directional traders but it involves additional risk and requires knowledge of basic technical analysis. The most common approach to this strategy is to monitor the underlying issue for a breakout or key reversal through a technical support or resistance level. When the new trend has been positively identified, the lower priced options (losing side) are sold along with one-half of the higher priced options (profitable side). The remaining position is held until a reasonable profit target is met and downside protection is maintained with a trailing stop. Advanced traders favor this follow-up technique because it is based on known technical trends and the action generally occurs near the position's break-even points. When one of these points is reached, two simple trades lower the overall cost basis while retaining a high probability of eventual profit. Determining how and when to exit a play is a matter of personal preference but in most cases, if the underlying issue performs poorly, the play should be liquidated before time value decay erodes the entire position significantly. As the last month of option life approaches, you should begin to plan an exit. Study the daily movement of the underlying issue and use it to your advantage to exit the position; selling each option for whatever you can get when instincts (not emotion!), tell you it's right. It's very difficult to learn to close out losing plays early but the simple fact is; there is no reason to hang on to a losing position when there are so many other profitable plays that deserve your time and money. Accept your losses, learn from your mistakes, evaluate each one critically, then move on! Favorable debit straddles are relatively simple to uncover. The basic requirements are inexpensive options on issues that have proven historical volatility. The strategy is very simple and perfect for the novice trader providing he or she understands option pricing basics and follows a few simple guidelines. This type of strategy can generate excellent returns because losses are limited to the initial investment and profits are limited only by time and volatility in the underlying issue. More information on this and other spread/combination strategies can be found in Larry McMillan's book, "Options As A Strategic Investment", available in the OIN bookstore. Good Luck! SEE DISCLAIMER IN SECTION ONE *****************************
The Option Investor Newsletter 9-12-99 Sunday 7 of 7 ************* COVERED CALLS ************* Selling LEAPS... One of our subscribers requested that we discuss selling LEAPS as covered-calls. Here are the basic facts... LEAPS - Long-term Equity AnticiPation Securities are options with expiration dates far in the future (now available for the year 2002), that allow investors to establish long or short positions. Strategies involving selling LEAPS options do not differ much from those involving shorter-term options. LEAPS can be sold against the underlying stock just as short-term options can. The covered write position will have the same limited profit potential when compared to outright stock ownership but will outperform that strategy if the stock price falls or remains relatively unchanged. A trader that sells LEAPS will take in substantial premium when compared to the short-term covered-call and thus has a smaller cash investment (since he is selling a more expensive option). The larger premium of this call also produces a significantly lower break-even price for the overall position and the LEAPS writer has a higher net return if exercised, because he wrote a more expensive option initially. The long-term position can also benefit from regular dividends. The most significant difference in the LEAPS options is the slow rate of time decay. These long-term options also retain their time value even when they are substantially 'in' or 'out' of the money. This characteristic will significantly affect a traders ability to roll-out of a position because the option is relatively expensive to buy back. On the other hand, the short-term covered call writer that is faced with rolling down may transition to LEAPS as a means of retaining a large premium even though he is moving to a less profitable position. (Rolling down means to buy back the call that is currently written and sell another with a lower strike price.) The large absolute premiums available in this type of strategy make these positions unusually attractive. The key is to compare the difference in annualized returns from LEAPS versus those that can be made from repeatedly selling the shorter-term calls. Good Luck! SUMMARY OF PREVIOUS PICKS ***** Stock Price Last Mon Strike Opt Profit ROI Monthly Sym Picked Price Price Bid /Loss ROI AERL 17.50 19.00 SEP 17.50 1.00 *$ 1.00 6.1% 14.2% NFLD 12.63 13.50 SEP 12.50 0.75 *$ 0.62 5.2% 12.2% WSTL 7.75 8.44 SEP 7.50 1.25 *$ 1.00 15.4% 11.1% OLS 9.94 10.44 SEP 10.00 1.00 *$ 1.06 11.9% 10.3% VTS 19.25 20.81 SEP 17.50 3.25 *$ 1.50 9.4% 10.2% MXTR 5.03 7.00 SEP 5.00 0.63 *$ 0.60 13.6% 9.9% NPIX 18.94 17.50 SEP 17.50 2.13 $ 0.69 4.1% 9.6% IDTI 14.69 21.81 SEP 15.00 1.31 *$ 1.62 12.1% 8.8% PILL 13.94 13.50 SEP 12.50 1.88 *$ 0.44 3.6% 8.5% LYNX 13.00 12.81 SEP 12.50 1.13 *$ 0.63 5.3% 7.7% NRES 24.50 24.00 SEP 20.00 5.13 *$ 0.63 3.3% 7.6% TMAR 7.63 9.44 SEP 7.50 0.81 *$ 0.68 10.0% 7.2% NTAI 14.88 15.50 SEP 15.00 1.00 *$ 1.12 8.1% 7.0% IMNR 5.63 5.53 SEP 5.00 1.00 *$ 0.37 8.0% 6.9% PR 19.25 21.50 SEP 20.00 0.94 *$ 1.69 9.2% 6.7% KING 31.50 36.00 SEP 30.00 2.81 *$ 1.31 4.6% 6.6% PCYC 29.13 41.06 SEP 22.50 7.88 *$ 1.25 5.9% 6.4% MRVC 14.88 24.50 SEP 12.50 3.00 *$ 0.62 5.2% 5.7% ADAP 33.00 36.25 SEP 30.00 4.13 *$ 1.13 3.9% 5.7% CS 15.50 17.94 SEP 15.00 1.06 *$ 0.56 3.9% 5.6% GNSS 24.88 25.63 SEP 22.50 2.88 *$ 0.50 2.3% 5.3% FLC 13.13 15.19 SEP 12.50 1.19 *$ 0.56 4.7% 5.1% IRF 16.00 17.00 SEP 15.00 1.81 *$ 0.81 5.7% 5.0% MOGN 11.88 13.13 SEP 10.00 2.31 *$ 0.43 4.5% 4.9% IDTI 18.88 21.81 SEP 17.50 2.13 *$ 0.75 4.5% 4.9% IDTC 18.88 23.38 SEP 15.00 4.50 *$ 0.62 4.3% 4.7% MRVC 14.50 24.50 SEP 12.50 2.63 *$ 0.63 5.3% 4.6% MAK 13.69 12.63 SEP 12.50 1.81 *$ 0.62 5.2% 4.5% PESC 23.88 28.88 SEP 22.50 2.69 *$ 1.31 6.2% 4.5% RIGS 19.81 18.81 SEP 17.50 3.00 *$ 0.69 4.1% 4.5% RNBO 13.88 13.19 SEP 12.50 2.19 *$ 0.81 6.9% 4.3% NETA 17.56 20.34 SEP 15.00 3.50 *$ 0.94 6.7% 4.2% USAI 45.94 44.31 SEP 45.00 3.50 $ 1.87 4.4% 3.2% ATML 39.88 38.19 SEP 40.00 2.63 $ 0.94 2.5% 2.7% SBGI 20.31 18.50 SEP 20.00 1.69 $ -0.12 -0.6% 0.0% TIE 11.19 8.75 SEP 10.00 2.13 $ -0.31 -3.4% 0.0% PXD 12.69 11.13 SEP 12.50 1.13 $ -0.43 -3.7% 0.0% PENN 9.88 8.63 SEP 10.00 0.75 $ -0.50 -5.5% 0.0% NVDA 26.00 26.44 OCT 25.00 3.38 *$ 2.38 10.5% 6.5% BRKT 15.88 17.19 OCT 15.00 2.25 *$ 1.37 10.1% 6.2% ENER 13.88 12.75 OCT 12.50 2.31 *$ 0.93 8.0% 6.0% RDRT 5.88 6.06 OCT 5.00 1.31 *$ 0.43 9.4% 5.8% COMS 25.69 27.25 OCT 25.00 2.50 *$ 1.81 7.8% 4.8% TSK 17.50 16.81 OCT 17.50 1.63 $ 0.94 5.9% 4.4% NTMV 7.19 6.50 OCT 7.50 1.00 $ 0.31 5.0% 3.7% PCTL 5.69 4.50 OCT 5.00 1.19 $ 0.00 0.0% 0.0% COMMENTS/OBSERVATIONS ON CURRENT POSITIONS: USAI - Tested $43 successfully. ATML - Consolidating. SBGI - Working back towards resistance. TIE - Oversold bounce? Short-term buy signals evident. PXD - Oils heating up, upgraded Friday and now oversold. PENN - Expect a short-term technical rally. TSK - Consolidating, negative indication closing below $15. NTMV - $6 should provide support. PCTL - Consider an exit if it moves below $4. NEW PICKS ********* Definitions: OI - Open Interest CB - Cost Basis (Price paid - Prem rec'd, 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 NETS 27.38 SEP 25.00 NTU IE 3.00 1912 24.38 2.6% 2.6% TRVL 13.50 SEP 12.50 TVU IV 1.31 28 12.19 2.6% 2.6% CIEN 39.75 OCT 35.00 EUQ JG 6.13 3946 33.63 4.1% 4.1% CS 18.06 OCT 17.50 CS JW 2.00 8999 16.06 8.9% 8.9% DCTM 17.13 OCT 15.00 QDC JC 3.00 1334 14.13 6.2% 6.2% MOGN 13.13 OCT 12.50 QOG JV 1.63 259 11.50 8.7% 8.7% OIL 13.19 OCT 12.50 OIL JV 1.38 330 11.81 5.8% 5.8% SOFN 26.25 OCT 22.50 SUC JX 5.00 339 21.25 5.9% 5.9% Sequenced by Return Called ***** Stock Price Mon Strike Option Opt Open Cost RC RNC Sym Price Symbol Bid Intr Basis NETS 27.38 SEP 25.00 NTU IE 3.00 1912 24.38 2.6% 2.6% TRVL 13.50 SEP 12.50 TVU IV 1.31 28 12.19 2.6% 2.6% CS 18.06 OCT 17.50 CS JW 2.00 8999 16.06 8.9% 8.9% MOGN 13.13 OCT 12.50 QOG JV 1.63 259 11.50 8.7% 8.7% DCTM 17.13 OCT 15.00 QDC JC 3.00 1334 14.13 6.2% 6.2% SOFN 26.25 OCT 22.50 SUC JX 5.00 339 21.25 5.9% 5.9% OIL 13.19 OCT 12.50 OIL JV 1.38 330 11.81 5.8% 5.8% CIEN 39.75 OCT 35.00 EUQ JG 6.13 3946 33.63 4.1% 4.1% Company Descriptions ***** NETS - YouthStream Media Networks $27.38 *** One Week Play *** YouthStream Media is a gateway to the young adult marketplace, with a strong emphasis on the high school and college audience. The company has 80 years of aggregate college market experience and their offerings are leveraged by more than 7000 high schools and 2000 U.S. college campuses. Recently launched mybytes.com, the first vertical Internet hub developed specifically for the college market. Will the advertisers pay to reach this core adult market; ages 18-25? Worthy speculation for one week. SEP 25.00 NTU IE Bid=3.00 OI=1912 CB=24.38 RC=2.6% RNC=2.6% Chart = http://quote.yahoo.com/q?s=NETS&d=3m ***** TRVL - Travel Services Intl. $13.50 *** One Week Play *** Travel Services is a specialized distributor of cruise vacations, domestic and international airline tickets and European auto rentals, and a provider of electronic hotel reservation services, to both travel agents and travelers. Travel Services rebounded strongly off its May low and is currently consolidating. Closing at the high on both Thursday and Friday raises the probability of a favorable outcome for this one week speculation play. SEP 12.50 TVU IV Bid=1.31 OI=28 CB=12.19 RC=2.6% RNC=2.6% Chart = http://quote.yahoo.com/q?s=trvl&d=3m ***** CIEN - CIENA Corporation $39.75 *** Merger Rumors *** CIENA designs, manufactures and sells open architecture, dense wavelength division multiplexing systems for fiberoptic communications networks. After beating estimates last quarter, CIENA was upgraded and on Friday had coverage started. CIENA has resumed its up-trend after a post earnings consolidation. Now rumors are circulating: a new merger attempt with TLAB? Favorable long-term position with support at our cost basis. OCT 35.00 EUQ JG Bid=6.13 OI=3946 CB=33.63 RC=4.1% RNC=4.1% Chart = http://quote.yahoo.com/q?s=cien&d=3m ***** CS - Cabletron Systems, Inc. $18.06 *** Take Over Target? *** CS provides high-performance networking solutions and delivers dependable network access and communications through its scaleable products designed for enterprise networks and service providers. Lots of news as Cabletron's new CEO works on rebuilding and/or positioning the company for a possible sale or partnership. The technicals remain strong as investors speculate on Cabletron's valuation. Past rumors mention a global telecom giant's interest and a price range of $20 a share. Earnings expected September 20. OCT 17.50 CS JW Bid=2.00 OI=8999 CB=16.06 RC=8.9% RNC=8.9% Chart = http://quote.yahoo.com/q?s=cs&d=3m ***** DCTM - Documentum, Inc. $17.13 *** Stage I Base *** Documentum develops, markets and supports a software application environment for automating the flow of knowledge in and between organizations, and a family of Web applications that accelerate product and process innovation. On Tuesday, Aug 31, Documentum announced its integration with PSFT's new contracts application. Now the stock is $3 higher on increased volume? Is DCTM ready to exit the top of its 6 month base? A cost basis at support with improving technicals offers another favorable speculation play. OCT 15.00 QDC JC Bid=3.00 OI=1334 CB=14.13 RC=6.2% RNC=6.2% Chart = http://quote.yahoo.com/q?s=dctm&d=3m ***** MOGN - MGI Pharma, Inc. $13.13 *** Long Term Uptrend *** MGI Pharma, Inc. is a human pharmaceutical company that acquires, develops and markets differentiated, specialty pharmaceuticals and medical products for therapeutic markets of unmet need. In July, MGI Pharma reported a 46% increase in revenues on a 2Q EPS of $0.04. Recently began co-promoting Azulfidine EN-tabs with Pharmacia & Upjohn for patients with rheumatoid arthritis. MOGN, in a slow up-trend since late '97, is a favorable long term play. OCT 12.50 QOG JV Bid=1.63 OI=259 CB=11.50 RC=8.7% RNC=8.7% Chart = http://quote.yahoo.com/q?s=mogn&d=3m ***** OIL - Triton Energy Ltd $13.19 *** Oil Sector *** OIL, an international oil and gas company, explores and produces through affiliates and subsidiaries. OIL's properties are located in Colombia, Malaysia-Thailand, Africa, Asia, Middle East and Europe. With Triton's restructuring plan and cost reductions almost complete, they should start to benefit from increased oil production and rising prices. The stock's technicals continue to improve with established support near our cost basis. OCT 12.50 OIL JV Bid=1.38 OI=330 CB=11.81 RC=5.8% RNC=5.8% Chart = http://quote.yahoo.com/q?s=oil&d=3m ***** SOFN - SoftNet Systems, Inc. $26.25 *** New Strength *** SoftNet is a high-speed broadband Internet access and content services company. SOFN provides a complete turnkey Internet service to cable partners and markets a high-speed commercial Internet link. Softnet is aggressively pursuing affiliation agreements with other cable operators to market cable-based Internet services. Last quarter their revenues increased over 300%. With the Internet sector rebooting, SoftNet is showing strength: taking out the August high on increasing volume and moving above its 150 dma. OCT 22.50 SUC JX Bid=5.00 OI=339 CB=21.25 RC=5.9% RNC=5.9% Chart = http://quote.yahoo.com/q?s=sofn&d=3m ************* NAKED PUTS ************* Position Trading For Profit... In option markets there are many ways to trade for profit. One strategy involves speculating on the direction in which the underlying security will move. If a trader correctly predicts the market direction and takes the appropriate position he can expect to make a profit. But even when the market moves in the predicted direction, owning the correct position (CALL or PUT) in an option market will not necessarily be profitable. The reason is, over short periods of time, (while the trader is waiting for the option price to move towards the theoretical value) the position is at risk from a variety of changes in the market which threaten his potential profit. A spread is a technique which involves the buying and selling of simultaneous but opposing positions in different option series. An experienced trader knows there is an identifiable relationship between the different series and when the relationship appears to be temporarily mispriced, the spread trader will try to buy the under-priced position and sell the overpriced position. The trader expects to maximize his profits as the prices of the instruments return to a linear relationship. Another type of spread involves the price relationship between different time periods or strike dates. In its simplest form, it is called a calendar spread. When this relationship is violated in the marketplace, a potential opportunity again exists by selling the overpriced contract and buying the under-priced contract. Much of the sophisticated trading in stock/option markets involves identifying and tracking spread relationships. When a trader finds that a spread position is mispriced, it can be just as profitable to buy or sell the spread as to take an outright long (or short) position in a single instrument. A trader will sometimes have to hold a correctly positioned option contract for an extended period in order to profit from the movement of the underlying security. Unfortunately, over short periods of time, he may have to endure adverse movements in the positions value. The price fluctuations might even be severe enough that the trader, (because of capital requirements) will not be able to maintain the position. If he is forced to liquidate the position prior to expiration, there is no guarantee that he will profit from a correct directional forecast of the underlying security. Basically, spread trading is an attempt to reduce the effects of short-term volatility that goes with any investment. The strategy benefits from the law of probability by enabling a trader to hold option positions over longer periods of time and most of these techniques will help maintain profit potential while reducing the short-term risk. Visit the spreads/combos section to learn more about position trading techniques. Good Luck! SUMMARY OF PREVIOUS PICKS ***** Stock Price Last Mon Strike Opt Profit ROI Monthly Sym Picked Price Price Bid /Loss ROI ENER 13.88 12.75 SEP 12.50 0.31 *$ 0.31 6.9% 16.2% IRF 16.81 17.00 SEP 15.00 0.31 *$ 0.31 5.9% 13.9% CRUS 8.88 11.75 SEP 7.50 0.38 *$ 0.38 14.9% 13.0% ADAP 30.75 36.25 SEP 25.00 0.88 *$ 0.88 11.8% 12.9% MCOM 25.56 23.63 SEP 17.50 0.88 *$ 0.88 14.7% 12.8% PAX 15.31 15.63 SEP 12.50 0.44 *$ 0.44 11.7% 12.7% PCYC 29.13 41.06 SEP 20.00 0.69 *$ 0.69 10.6% 11.5% RIGS 19.81 18.81 SEP 17.50 0.63 *$ 0.63 10.1% 11.0% NVDA 26.00 26.44 SEP 22.50 0.56 *$ 0.56 7.5% 10.9% NETG 22.25 29.13 SEP 17.50 0.63 *$ 0.63 12.4% 10.8% NSM 28.56 34.69 SEP 25.00 0.63 *$ 0.63 7.4% 10.7% CLTR 29.13 22.25 SEP 20.00 0.63 *$ 0.63 9.8% 10.6% ADAP 22.88 36.25 SEP 17.50 0.75 *$ 0.75 14.1% 10.2% ZRAN 30.63 33.88 SEP 25.00 0.50 *$ 0.50 7.0% 10.2% VTS 19.25 20.81 SEP 15.00 0.38 *$ 0.38 9.0% 9.8% BEAS 24.25 26.50 SEP 20.00 0.38 *$ 0.38 6.5% 9.4% GNSS 24.06 25.63 SEP 20.00 0.38 *$ 0.38 6.4% 9.3% KING 28.63 36.00 SEP 25.00 0.69 *$ 0.69 8.1% 8.8% CYMI 36.88 36.38 SEP 30.00 0.50 *$ 0.50 6.0% 8.7% SCMM 47.88 45.63 SEP 35.00 0.75 *$ 0.75 7.3% 7.9% NMR 33.50 36.94 SEP 25.00 0.63 *$ 0.63 8.6% 7.5% PESC 23.88 28.88 SEP 17.50 0.50 *$ 0.50 9.5% 6.9% CORR 22.50 22.72 SEP 17.50 0.44 *$ 0.44 8.9% 6.5% BOBJ 47.19 54.88 SEP 35.00 0.75 *$ 0.75 7.4% 6.4% SBGI 20.50 18.50 SEP 17.50 0.38 *$ 0.38 6.8% 5.9% PLMD 17.88 27.13 SEP 15.00 0.31 *$ 0.31 6.8% 5.9% CSE 48.06 49.81 SEP 40.00 0.75 *$ 0.75 6.3% 5.5% USAI 45.94 44.31 SEP 40.00 0.81 *$ 0.81 6.1% 4.4% TDW 34.44 34.13 SEP 30.00 0.56 *$ 0.56 5.7% 4.1% DD 74.75 65.75 SEP 65.00 1.00 *$ 1.00 4.7% 3.4% CMTO 18.81 13.44 SEP 15.00 0.75 $ -0.81 -18.0% 0.0% DUSA 15.50 15.00 OCT 12.50 0.88 *$ 0.88 21.6% 16.0% CYBX 18.69 19.63 OCT 15.00 0.69 *$ 0.69 15.4% 11.4% MYGN 11.88 13.63 OCT 10.00 0.50 *$ 0.50 14.8% 11.0% ORTL 18.88 17.50 OCT 15.00 0.44 *$ 0.44 10.5% 7.8% PRTL 23.06 21.00 OCT 17.50 0.50 *$ 0.50 9.8% 7.3% HELX 30.25 31.00 OCT 22.50 0.50 *$ 0.50 7.6% 5.7% KING 32.81 36.00 OCT 25.00 0.44 *$ 0.44 6.3% 4.7% COMMENTS/OBSERVATIONS ON CURRENT POSITIONS: DD - Will the oversold rally last till Friday? CMTO - Should continue to rebound out of oversold condition. Oct-$15 calls are $1.00. Speculation should increase towards November (and possible approval by CableLabs?). PRTL - A new public offering announced Friday; dilution? NEW PICKS ********* Definitions: OI - Open Interest CB - Cost Basis (break-even point if put exercised) ROI - Return On Investment Sequenced by Company ***** Stock Price Mon Strike Option Opt Open Cost ROI Opt Sym Price Symbol Bid Intr Basis Expired CIEN 39.75 OCT 30.00 EUQ VF 0.44 714 29.56 5.2% CS 18.06 OCT 15.00 CS VC 0.50 1008 14.50 10.7% HELX 31.00 OCT 25.00 HHQ VE 0.94 68 24.06 12.8% HLTH 34.94 OCT 25.00 HUT VE 0.69 95 24.31 9.0% IDTC 23.38 OCT 17.50 IQJ VW 0.63 29 16.88 11.8% MK 10.81 OCT 10.00 MK VB 0.31 0 9.69 8.2% NVX 7.19 OCT 5.00 NVX VA 0.38 244 4.63 20.7% USWB 28.50 OCT 22.50 QWB VX 0.50 536 22.00 8.1% Sequenced by ROI ****** Stock Price Mon Strike Option Opt Open Cost ROI Opt Sym Price Symbol Bid Intr Basis Expired NVX 7.19 OCT 5.00 NVX VA 0.38 244 4.63 20.7% HELX 31.00 OCT 25.00 HHQ VE 0.94 68 24.06 12.8% IDTC 23.38 OCT 17.50 IQJ VW 0.63 29 16.88 11.8% CS 18.06 OCT 15.00 CS VC 0.50 1008 14.50 10.7% HLTH 34.94 OCT 25.00 HUT VE 0.69 95 24.31 9.0% MK 10.81 OCT 10.00 MK VB 0.31 0 9.69 8.2% USWB 28.50 OCT 22.50 QWB VX 0.50 536 22.00 8.1% CIEN 39.75 OCT 30.00 EUQ VF 0.44 714 29.56 5.2% Company Descriptions ***** CIEN - CIENA Corporation $39.75 *** Merger Rumors *** CIENA designs, manufactures and sells open architecture, dense wavelength division multiplexing systems for fiberoptic communications networks. After beating estimates last quarter, CIENA was upgraded and on Friday had coverage started. CIENA has resumed its uptrend after a post earnings consolidation. Now rumors are circulating: a new merger attempt with TLAB? Favorable speculation with support above the strike price. OCT 30.00 EUQ VF Bid=0.44 OI=714 CB=29.56 ROI=5.2% Chart = http://quote.yahoo.com/q?s=CIEN&d=3m ***** CS - Cabletron Systems, Inc. $18.06 *** Take Over Target? *** CS provides high-performance networking solutions and delivers dependable network access and communications through its scaleable products designed for enterprise networks and service providers. Lots of news as Cabletron's new CEO works on rebuilding and/or positioning the company for a possible sale or partnership. The technicals remain strong as investors speculate on Cabletron's valuation. Past rumors mention a global telecom giant's interest and a price range of $20 a share. Earnings expected September 20. OCT 15.00 CS VC Bid=0.50 OI=1008 CB=14.50 ROI=10.7% Chart = http://quote.yahoo.com/q?s=CS&d=3m ***** HELX - Helix Technology Corp. $31.00 *** A New High? *** 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 its all-time high. Why pay retail if you don't have to? OCT 25.00 HHQ VE Bid=0.94 OI=68 CB=24.06 ROI=12.8% Chart = http://quote.yahoo.com/q?s=HELX&d=3m ***** HLTH - Healtheon $34.94 *** Speculation Only! *** Healtheon is applying advanced Internet technology to enable healthcare providers and consumers to interact with healthcare institutions; to securely communicate, exchange information and perform complex transactions. Healtheon's services simplify the business and clinical processes of healthcare, provide timely access to information and help provide better service. Rumors of a possible merger and the WebMD deal (now past the lockup period and 180-day insider restrictions) make this a favorable speculation play. OCT 25.00 HUT VE Bid=0.69 OI=95 CB=24.31 ROI=9.0% Chart = http://quote.yahoo.com/q?s=HLTH&d=3m ***** IDTC - IDT Corp. $23.38 *** Target Shooting With Naked Puts *** IDT Corporation is a telecommunications company which offers a range of integrated long-distance telephone, Internet access services, and prepaid calling cards. In August, IDTC jumped with the rocket-rally of its IPO after NTOP had a sleeper start. Now that NTOP is a day-trader's toy, analysts speculate whether IDTC is under-valued or NTOP is over-valued. IDTC then dropped when it announced its $0.05 attack on the long distance giants. For the speculative crowd: a cost basis at support offering a favorable risk-reward scenario. OCT 17.50 IQJ VW Bid=0.63 OI=29 CB=16.88 ROI=11.8% Chart = http://quote.yahoo.com/q?s=IDTC&d=3m ***** MK - Morrison Knudsen $10.81 *** Strange Pattern *** Morrison Knudsen is an international provider of engineering construction management services, comprehensive environmental and hazardous substance remediation services to governmental and private-sector clients, and diverse heavy construction for highway, airport, water resource, railway and commercial building industries. They also provide mine engineering for diverse customers. New service contracts and a very unusual technical history make this an interesting candidate. OCT 10.00 MK VB Bid=0.31 OI=0 CB=9.69 ROI=8.2% Chart = http://quote.yahoo.com/q?s=MK&d=3m ***** NVX - North American Vaccine $7.19 North American Vaccine is engaged in the research, development, production and marketing of vaccines for the prevention of infectious diseases in children and adults. Their first product is a patented, monocomponent acellular pertussis vaccine for the prevention of whooping cough. It's been combined with diphtheria and tetanus toxoids for use in an all-in-one pediatric booster. The Company has other vaccines in various stages of development. Speculation on negotiations involving strategic initiatives and product development has created some short-term volatility and higher option premiums. OCT 5.00 NVX VA Bid=0.38 OI=244 CB=4.63 ROI=20.7% Chart = http://quote.yahoo.com/q?s=NVX&d=3m ***** USWB - USWeb $28.50 *** Off And Running! *** USWeb/CKS is a professional services firm that was formed by the merger of USWeb Corporation and CKS Group. Together, they define strategies and implement innovative ways to build businesses by combining the expertise of strategy, Internet technology and marketing communications. USWeb/CKS helps clients differentiate their products and services, strengthen customer relationships, leverage human capital, and improve business efficiency in the new era of E-commerce. Buyout rumors drove it higher and now a growing interest in web enablers is sustaining the rally. OCT 22.50 QWB VX Bid=0.50 OI=536 CB=22.00 ROI=8.1% Chart = http://quote.yahoo.com/q?s=USWB&d=3m SEE DISCLAIMER IN SECTION ONE *****************************
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