The Option Investor Newsletter Thursday 9-16-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com Published three times weekly, Sunday, Tuesday, Thursday evenings. ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 9-16-99 High Low Volume Advances Decline DOW 10737.50 - 63.90 10799.30 10626.60 727,146k 888 2,066 Nasdaq 2806.72 - 7.45 2820.84 2756.03 960,306k 1,358 2,501 S&P-100 694.89 + 1.08 697.37 684.10 Totals 2,246 4,567 S&P-500 1318.48 + 0.51 1322.51 1299.95 32.9% 67.1% $RUT 430.25 - 6.08 436.63 429.31 $TRAN 2986.88 - 100.72 3089.85 2979.02 VIX 26.99 + 0.61 29.95 25.96 Put/Call Ratio .81 ************************************************************* Storm clouds blow in, bringing uncertanity to the markets. As if the ever changing interest rate climate was not enough to give the markets indigestion, Hurricane Floyd, now downgraded to a tropical storm, pounded away on the east coast and threatened to shut down trading early. After the bond markets and the NY Mercantile Exchange closed early the SEC rushed to assure traders that the equity markets would be open on triple witching Friday. Traders rushed to cover positions this morning after various rumors made the rounds about a possible Friday closure. Closing the markets on Friday would have been a disaster for the options and futures expirations. Traders were concerned about when/how the expiration would be handled. Would Thursdays close be the number? No, not hardly. Would trading be carried over to Monday with expirations occurring on Tuesday? The question was ruled mute when officials rushed to assure traders that the markets would be open for trading. As with a collective sigh of relief the Dow roared back from a -177 point drop but still ended the day down -64 points. The Nasdaq also recovered from a -58 point fall to flirt with positive territory near the close. Four days, four drops, where is the Sept rally I was looking for? It looks like the positive market fell victim to a variety of problems. Last week we had not one, not two, but six FED speak appearances. After the Kelley attack the week before, the markets were very cautious of any future FED stealth bombs. Secondly the PPI was another milestone holding traders back last week and the CPI marked this weeks deadline. Both to be avoided by big investors. Thirdly, the wildly optimistic earnings for the third quarter of +20% are now being called into question almost daily with earnings warnings by big name companies. The fourth market problem was the falling dollar which makes our goods and services more expensive and investments in the U.S. less desirable for Japanese investors. Last and not least is the soaring price of oil. At $24.50 today, a 2.5 yr high, the damage is being felt. With future estimates of $28-30 now commonplace the transport sector, the first sector to be impacted strongly, set a new yearly low. Honorable mention here should also be the impending Y2K sell off. It appears investors are becoming more and more concerned that their might not be a third quarter earnings run and selling into any rally is picking up speed. Federal Express was a major factor in today's drop with an earnings warning for the next quarter. After missing estimates for last qtr by -.02 and warning about next, FEDEX dropped -5.44 to lead the transports down. QTRN was the next lucky loser of the day with a -14.75 after warning of slowing orders for several drugs that were not living up to expectations. But, you point out that those are not tech stocks. Sorry pardner, but some of those leaders took a bullet also. HWP dropped on news that sales of their UNIX servers were slowing for the fourth quarter. One analyst said that SUNW had a much better product and SUNW sales were increasing rapidly. That was enough to drop HWP for a -4.56 loss and account for about -20 of the Dow drop. As if that was not a big enough name to attract attention, Xerox also reported that sales were expected to grow in the +3 to 4% range when analysts were expecting +5% growth. Boom! Another one bites the dust to the tune of -4.31 for the day. Raytheon (RTNA) rounded out the trio of big tech losers with it's own warnings of a pending shortfall and was dropped for a -7.25 loss. Things are not looking good in the market. However, that is probably a good thing. Sometimes, like the hurricane problem, things look blackest just before the storm. When the storm actually arrives it's bluster and fury don't always equal the expectations. Look at Floyd. This morning it was a market mover as the entire north east geared up to be blown away. Tonight it is turning into just a strong thunderstorm. The Dow had dropped -516 points from its recent high of 11142 last Friday. -500 points in four days = a strong possibility of a technical bounce. Secondly, we are at the very bottom of our longer term trading range. Right at the bottom set on Sept 2nd/3rd and the bounce today came only a couple dozen points off the August lows. Another receipe for a technical bounce. Thirdly there are not any earth shaking economic reports due out tomorrow. Sure, we have another Fed scare at 8:45 AM ET tomorrow as Alan Greenspan talks about Y2K preparedness but the downside is very slim. I doubt he will preach doom and gloom. I suspect he will brag about measures already in place and try to reassure investors that Y2K will just be another holiday. While many will not believe it there are also many who are hoping that the government will just "take care of it" and their investment plans will not suffer. These people will be encouraged and the market could rally from here. The technicals of the market continue to be very negative. Today there were 17 new highs compared to 147 new lows and the advance/decline line was negative by better than 2:1. However, even with all the doom and gloom in the technicals the market has been know to turn on a dime just when the outlook looked worst. My take on today? ENTRY POINT !! But never fight the tape. If I am wrong, and it will not be the first or the last time, sell too soon. Friday could be just a technical rally or the start of a more prolonged move. Lets just hope the direction is up. Watch out for more earnings warnings in the morning and wait for amateur hour to be over before opening any new positions. Jim Brown Editor ***************** MARKET POSTURE ***************** As of Market Close - Thursday, September 16, 1999 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,500 11,320 10,737 Neutral 7.20 SPX S&P 500 1,330 1,420 1,318 BEARISH 9.16 * OEX S&P 100 675 735 694 Neutral 8.13 RUT Russell 2000 440 465 430 BEARISH 9.14 NDX NASD 100 2,320 2,400 2,467 BULLISH 9.03 MSH High Tech 1,120 1,200 1,241 BULLISH 9.03 XCI Hardware 1,035 1,050 1,103 BULLISH 8.24 CWX Software 750 800 868 BULLISH 9.03 SOX Semiconductor 515 520 552 BULLISH 8.24 NWX Networking 555 625 604 Neutral 8.13 INX Internet 500 580 455 BEARISH 7.20 BIX Banking 690 710 586 BEARISH 7.23 XBD Brokerage 410 440 367 BEARISH 7.23 IUX Insurance 645 660 578 BEARISH 7.23 RLX Retail 915 960 818 BEARISH 7.23 DRG Drug 365 390 359 BEARISH 9.16 * HCX Healthcare 745 785 729 BEARISH 9.16 * XAL Airline 180 190 137 BEARISH 5.21 OIX Oil & Gas 285 310 302 Neutral 9.16 * Posture Alert Hurricanes, hedge funds, insurance companies, whatever the excuse, sector after sector is slowly breaking down. With Thursday's action, we have turned BEARISH on Healthcare, Drugs, and the S&P 500. We have also turned Neutral on Oil & Gas, which could not hold the positive gains from the previous week. Technology (semi's, software, hardware, NDX) seems to be the only place that is holding, but we have all felt the speed at which these sectors can drop, so we will continue to watch these sectors with close scrutiny. A detailed description of our Market Posture and its applications can be found at: /members/marketposture ***************** MARKET SENTIMENT ***************** Thursday, September 16, 1999 Name 3 Things You Want To Avoid This Week? Planes, Trains, and Hurricanes. Anyway, is Wall Street waiting for October's earnings, or waiting for the capitulation that we spoke about in July/August? Our guess is the latter. Many Wall Street professionals were caught off guard by the run up that we've had recently, and many did not even participate. We never really had the huge intra-day drop, with the outcome being positive at the end of the day. The rubber band snapping back into place. Is it around the corner, or are new highs? We are seeing failed rallies in many sectors across the board. They had a bounce late August, but are now back to trending lower. There are several sectors still doing well (semiconductors, hardware, software, MSH high tech, NDX), however, anyone with experience can tell you how quick these sectors can drop. Tech wrecks happen and happen quickly. In the blink of an eye, you're down 10 points on a stock that you thought had already bottomed out. Right now, in the Market Posture section, 5 sectors are bullish (named above), 4 neutral, and 10 are bearish. This is not a good sign. How quick can those 5 bullish sectors become neutral or bearish? You know the answer. Several other things of note, first of all, negative sentiment is once again building. Bullish sentiment dropped 2.6% this week, while bearish sentiment increased .9%. It looks as if we had a one-week head-fake, with more bearishness to come. As we have stated before, this will be good for the market down the road. Also, the VIX broke above and closed above the 25 mark. This technically may also indicate further weakness in the market. For the last several months, the VIX did break into the low 30's, which proved to be an excellent buying opportunity, so watch and see if that number holds again. On Tuesday, Pinnacle noted that for OEX traders, there was good support at 690. This number did come into play, and held ground as evidenced by today's action. However, based upon current indications and our sentiment research, our new support level is 680. 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. Mixed Signs: Market Posture: Several indexes have broken new highs recently, including the Nasdaq 100, Morgan Stanley High Tech, Software, Hardware, and Semiconductors. However, as volatile as these specific sectors are, any weakness can lead to a steep drop in a short period of time. BEARISH Signs: Volatility Index: The VIX broke above the 25 mark, indicating further weakness ahead. It has held ground in the low 30's, which may indicate a bottom, if held. Interest Rates: The yield on the 30-yr Treasury is now above the 6% benchmark and nearing the 6.272% high. Any negative economic indicator can easily knock the long bond into new highs. 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 these last two weeks. Advance/Decline Line: The A/D line continues to be poor and is getting worse. 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) 108.9 313.0 325.0 Underlying Support (710-730) 2.5 2.4 3.1 Underlying Support (630-690) 4.2 6.1 5.8 Put/Call Ratios: CBOE Total P/C Ratio .5 .5 .7 CBOE Equity P/C Ratio .5 .5 .6 OEX P/C Ratio 1.3 1.2 1.2 Peak Open Interest (OEX): Puts 660 Calls 720 P/C Ratio 1.36 Market Volatility Index (VIX): CBOE VIX 27.09 Investors Intelligence: Bullish 41.50% * Bearish 31.40% * The Power of Sentiment Analysis It has often been said that the crowd is right during the market trends but wrong at both ends. Measuring and evaluating the sentiment of the crowd, therefore, can give savvy option traders a decided edge. OEX Pinnacle Index Friday Tues Thurs Benchmark (9/10) (9/14) (9/16) Overhead Resistance (735-780) 108.90 313.00 325.00 Overhead Resistance (710-730) 2.45 2.38 3.08 OEX Close 712.79 704.80 694.89 Underlying Support (630-690) 4.20 6.06 5.83 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 .56 .71 CBOE Equity P/C Ratio .46 .50 .56 OEX P/C Ratio 1.32 1.21 1.18 OEX Peak Open Interest Friday Tues Thurs Strike/Contracts (9/10) (9/14) (9/16) Puts 660 / 14,393 660 / 14,375 660 / 14,080 Calls 720 / 13,506 720 / 12,384 720 / 10,385 Put/Call Ratio 1.06 1.16 1.36 Volatility Index Major Date Turning Point VIX October 97 Bottom 54.60 July 20, 1998 Top 16.88 October 8, 1998 Bottom 60.63 January 11, 1998 Top 26.38 March 4, 1999 Bottom 28.15 May 14, 1999 Top 25.01 July 16, 1999 Top 18.13 August 5, 1999 Bottom? 32.12 September 16, 1999 27.09 Investors Intelligence Major Percent Percent Date Turning Point Bullish Bearish October 97 Bottom 22.0 48.3 July 20, 1998 Top 52.0 24.0 October 8, 1998 Bottom 38.5 42.7 January 11, 1999 Top 58.3 30.0 March 4, 1999 Bottom 49.1 32.5 January 6, 1999 58.3 30.0 January 13, 1999 60.0 30.0 January 20, 1999 61.7 25.9 January 27, 1999 60.7 28.2 February 3, 1999 60.0 26.7 February 10, 1999 61.7 25.9 February 17, 1999 55.7 28.7 February 24, 1999 54.1 31.5 March 3, 1999 50.9 32.1 March 10, 1999 49.1 32.5 March 17, 1999 52.6 17.6 March 24, 1999 55.9 29.7 March 31, 1999 55.6 31.6 April 07, 1999 56.4 31.6 April 14, 1999 55.9 30.5 April 21, 1999 56.4 30.8 April 28, 1999 56.1 30.7 May 05, 1999 58.1 27.6 May 12, 1999 56.9 31.0 May 19, 1999 60.9 28.7 May 26, 1999 61.6 27.7 June 2, 1999 61.6 27.7 June 10, 1999 58.3 28.7 June 16, 1999 58.8 26.3 June 24, 1999 57.5 26.5 June 30, 1999 55.8 25.7 July 7, 1999 52.6 27.2 July 14, 1999 55.2 26.7 July 21, 1999 54.1 27.9 July 28, 1999 53.6 24.6 Aug 4, 1999 52.2 27.8 Aug 11, 1999 50.0 29.3 Aug 18, 1999 45.8 31.3 Aug 25, 1999 44.5 31.1 Sept 1, 1999 42.9 31.9 Sept 8, 1999 44.1 30.5 Sept 15, 1999 41.5 31.4 * Please view this in COURIER 10 font for alignment ***************************************************** CHANGES THIS WEEK Index Last Mon Tue Wed Thu Week Dow 10737.46 1.90 -120.00 -108.91 -63.96 -290.97 Nasdaq 2806.72 -42.29 23.52 -54.12 -7.45 -80.34 $OEX 694.89 -4.03 -3.96 -10.99 1.08 -17.90 $SPX 1318.48 -7.53 -7.84 -18.32 0.51 -33.18 $RUT 430.25 -1.54 -1.41 -1.91 -6.08 -10.94 $TRAN 2986.88 0.70 -0.84 -3.23 -100.72 -104.09 $VIX 26.99 1.49 1.21 1.33 0.61 4.64 Calls Mon Tue Wed Thu Week NTAP 72.00 -0.69 2.94 2.19 -0.31 4.13 Impressive ADI 57.06 -1.63 4.13 -2.19 0.50 0.81 Come back INKT 128.63 -6.44 4.19 3.13 -0.78 0.44 Surfing SFA 55.75 2.63 0.13 -2.06 -0.63 0.06 Volatile EMC 67.75 0.69 -0.38 -2.56 1.88 -0.38 Defiant AMZN 65.25 -3.25 2.69 -0.44 -0.31 -1.25 Stalling SUNW 84.69 0.00 -0.69 -3.00 2.31 -1.38 Blazing INTU 99.75 -0.50 5.13 -4.31 -1.75 -1.44 Opportunity ERTS 74.50 -4.31 3.63 -1.19 0.19 -1.69 Bounced DISH 91.00 0.38 -2.88 -0.56 0.00 -3.00 Drifting TXN 87.63 -1.63 2.88 -5.25 0.88 -3.13 New venture FLEX 60.25 2.13 1.81 -2.63 -5.19 -3.50 Dropped SFE 68.81 -2.88 2.38 -2.00 -1.19 -3.69 Hanging on BGEN 84.88 -0.69 -0.94 -3.25 0.75 -4.13 Earnings up JDSU 107.63 -2.56 2.69 -2.31 -2.19 -4.38 Rough ride LGTO 44.31 -0.88 -1.09 -1.00 -1.88 -4.81 Dropped QLGC 91.00 -3.00 -0.44 -1.00 -0.75 -5.19 Stormy YHOO 163.44 -9.75 4.44 -2.44 1.06 -7.06 Entry point CHKP 86.00 -2.50 -0.41 -2.94 -1.50 -7.63 Dropped CMGI 81.69 -5.50 1.88 -0.69 -3.81 -8.13 Downslide HGSI 76.81 2.38 -4.31 -6.69 -1.19 -10.69 Dropped Puts LLY 67.56 -0.50 -2.00 -1.75 -0.56 -4.81 Free fall COST 66.69 -1.06 -1.25 -0.50 -0.38 -3.19 Wounded GPS 33.00 -0.81 0.94 -2.13 -0.81 -2.81 No support JNJ 95.75 -0.19 -1.38 -0.75 0.00 -2.31 New play KO 54.06 0.44 -0.81 -0.69 -1.44 -1.06 Sell-off CVS 41.19 0.06 0.19 1.25 -0.25 1.25 Dropped HNZ 44.50 0.19 0.00 1.44 -0.13 1.50 Merger? SWY 45.25 1.75 0.25 1.19 -0.69 2.31 Breakout PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. ****** CALLS: ****** HGSI $76.81 -1.19 (-10.69) Take what you can and run for cover! That's what investors have been saying as HGSI has been acting like it's running from Floyd. The hurricane that is. We took a turn for the worse as investors cashed in their gains and worry about the markets future. The turn has dropped HGSI below support of $83 and now rests on the 20-dma. Yesterday the stock started it's tumble on negative earnings news in the biotechnology sector. Hopefully OIN investors took our advice and protected those gains with stops. Because our technical indicators have turned bearish in all areas, this play is now being dropped. Although HGSI has been speculative, it has been a very profitable play. Rising over $35 since our pick, most investors should have realized nice gains in this stock. We hate to see it turn but it's a drop until better days. FLEX $60.25 -5.19 (-3.50) Break the rules and your out! Flex broke our rule and dropped significantly below support so FLEX is a drop. Closing up from the days low, it now rests close to the 20-dma at $60. With all the technicals in a negative mode, this play is history. So why the sudden change in direction? The company announced that it is selling 14.4 million shares of stock to re-pay dept. This decision is providing negative pressure since investors like companies to buy back shares, not sell them. It dilutes the stock and the earnings. Because of the many good bounces off support, FLEX did provide us with opportunities for profit, although not the long-term play we had expected. Hopefully you profited as you played the stock off support and protected gains with stops. CHKP $86.00 -1.50 (-7.63) Check Point today is suffering from a swift kick of 'all the news is out' syndrome and the stock is selling off. After a nice run to new highs in the previous days it has just run out of steam. Today it pulled back to its 10-dma after it was downgraded by "Sands Bros" from a Buy to a Neutral. Strangely enough, two weeks ago they started it as a Buy. The overall weakness in the stock market did not help its case. Although no fundamental bad news has been reported on Check Point, it is time to retreat from this trade. In current market conditions, stocks like Check Point that have continuous technical price extensions are a profit-taking target for Wall Street. We believe that the target practice has not ceased at these levels and the shares may continue to sell-off. LGTO $44.31 -1.88 (-4.81) The nasty market has pressured LGTO to below its ominous 10-dma and this is definitely not a favorable condition for this momentum play. On Tuesday we noted the dwindling volume and warned that LGTO's strength may be waning. Well the recent performance is especially anti- climatic since LGTO just set a new 52-week high at $50.38 on Friday. And to top it off, this latest record followed 4 straight days of the stock exploring new territory! But we can't fight a trend and are dropping LGTO tonight. Your stop losses should have minimized any losses if you hadn't jumped ship before today. ****** PUTS: ****** CVS $41.19 -0.25 (+1.25) Well, we were hoping for the best and unfortunately received the worst. We were watching for a bounce off the 10-dma but it never developed, instead the stock broke through its resistance and continued to show signs of strength. Originally we emphasized the need for caution with this play because of the possibility of this event. When a stock falls to the extent CVS has, it's just a question of what price investors feel it is a fair value. In this case, it was just under $40 where investors were willing to buy back in. For the obvious reason we have decided to end our play on CVS. ****** Plays continued in Section Two ****** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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The Option Investor Newsletter Thursday 9-16-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ************** TRADERS CORNER ************** Judgment Judgment is the result of experience, and experience is the result of bad judgment. That rings through my head as I sit here and watch a market fall apart, knowing that I should have closed some positions. At least, I closed enough positions so that my core option trading capital was protected. Here are my plays: CSCO Sept 70. Bought at 1 1/4 two weeks ago, sold at 2 yesterday at the open. 60% return. I saw CSCO spike over 72 on the positive CPI Report, then begin to head south with the rest of the market. Remember: don't buy calls during amateur hour, but consider selling calls on the opening spike. That's what I did when it looked like the CPI would not be enough to push the market up. The ORCL numbers were disappointing, and that didn't help the tech sector either. SUNW Sept 80. Bought at 1 5/8 two weeks ago, sold at 5 3/8 yesterday at the open. 230% return. Same situation as CSCO above. Here is an exercise that I recommend to anyone evaluating your plays from the last 3 weeks. Take the options that you played, and print out a chart of the price over the last three weeks. Now, ask yourself what your entry and exit strategy was. I have detailed how I could have set up better entry points in past columns (patiently target shoot, allocate a certain % of capital over a several day period). But, on the exit strategy I have (re)learned another lesson: 25% is beautiful. And easy. Almost every option play that the newsletter recommended over the last 3 month had multiple opportunities to take 25% profits. Bad entry, good entry -- regardless of your entry, on most plays, you could have made easy 25% gains, often in a couple of hours. Now, take out a financial calculator, and do a simple compounding exercise. Put in $1000 and add 25%, and repeat the process 5 times. You get $3051. That's a 200% return. That's what the 10 rules (see the left side of the menu bar near the bottom) mean by Cash Flow is King. This is why I have returned to the most basic learning point of my first two months as an option trader. Go for the cash flow profits of 25% on my plays. My hard and fast personal rule now is to take 25% profits on half of EVERY position. As I look back on the winning and losing trades that I made over the last 3 weeks, I realize that I would have done very well if I had followed that. I want to make one further point about this rule, which is the downside protection that it gives you. Suppose you buy 10 contracts of IBM January 100 Calls at a cost of 5. You have $5000 dollars in the play. If you follow my rule of taking half of the position off the table at 25% profit, you will sell 5 of the contracts at a price of 6.25. You get back $3125 on an original investment of $2500. That's good cash flow, especially if you accomplish that in a few hours, or a day. You can use the money again immediately in other good opportunities. But, look at your remaining 5 contracts. If they go to 75% or 100% profit, great, you should have limit sells set at those levels too. The newsletter picks good plays, and you will often get this. But often your entry timing will be bad. You STILL make a profit, if you chose to sell the remaining 5 contracts at anything above 3 3/4 (excluding commissions). That gives you some peace of mind if you let the play run a few days in a volatile market. Anyway, this will be my approach to playing options for the next two months. After the Oct Earnings Season, I also plan to transition into the more advanced strategies which Jim Brown and Fontanills are teaching at their seminars. Good Luck. Janar Wasito janar@OptionInvestor.com ***************** PICK NEWS - CALLS ***************** QLGC $91.00 -0.75 (-5.19) The relentless pounding of the market storm, has driven QLGC back, close to it's 10-dma of $93. We are currently slightly below that level and sitting in a bearish mode. Our stochastic, MACD and relative strength have all taken a negative turn, so the caution light is officially on. At this level, we could see a turn around and, with some market help, have this play back on track. The risk is great however and only for the brave of heart. There is nothing wrong with waiting out the storm for a better forecast. Hopefully after today's recovery from the day-low in the markets, we could be back on track. But for now, be content to sit it out and wait for the positive confirmation. EMC $67.75 +1.88 (-0.38) EMC defied the odds today. While the market in general was in retreat mode, EMC managed to give us a slight gain. This strength puts EMC in a very favorable position to rise on a market turn around. Don't hold your breath however, as many traders may not be around to take take the stock higher due to the storm. With support at $66, we are close enough to still have a good entry point, should the market favor us with a positive run. EMC is being buoyed by positive investor outlook and expectations. Although the news on EMC is not recent, it is good with buy recommendations and information on the companies using their products to increase productivity. Be cautious, do not jump in too soon! Wait for an upward move in both the market and the stock. NTAP $72.00 -0.31 (+4.13) The beat goes on for NTAP despite any positive news or a positive market to help the stock. The strength NTAP is displaying is impressive as it continues to hold well above the 10-dma at $68.50 despite the overall market jitters. We were looking for a pullback to open new plays but it only made a quick dip to $70 before bouncing right back to close only $0.75 from a new high. With today's nice turn around in the broad markets, we would not be surprised if NTAP does make a run for a new record. At this point, new plays will be tricky. You may now want to consider an intraday dip for an entry point. But use caution because NTAP is now carrying a lofty valuation with a P/E of 122. This is not the kind of play you want to have reverse on you without a stop loss. INTU $99.75 -1.75 (-1.44) Intuit continues to provide us with buying opportunities ahead of its 3:1 stock split. After another round of profit-taking today, it pulled back to as low as $98.18 (or right to the 10-dma) before bouncing back to close down slightly at $99.75 on average volume. Tomorrow the market should be rather volatile on a triple witching Friday and should give us another opportunity to enter this play, if you have not already done so. We are anticipating a nice run in the next 7 to 10 trading days ahead of the ex-dividend date. As the stock split draws nearer, the positive action in the stock should pick-up. Technically it has shown good support at the 10-dma level and the overall fundamental picture remains positive for the company. Before entering a trade always confirm market direction and momentum in the overall market. ADI $57.06 +0.50 (+0.81) The semiconductor industry was weak again today in early trading, before bouncing nicely off of the lows around midday. We were looking for an entry point on an intraday dip in the market near the 10-dma and that is exactly what we got. ADI traded as low as $55, which is just what we were looking for. The semi's commenced to rallying off of their lows across the board and although it only ended up $0.50, this was 2 points off of the lows and the uptrend seems to be intact for both the stock and the sector. There are rumors in the market that DRAM chip prices have hit there high levels for the year, this and a weak stock market could have caused some of the early morning selling pressure. Going forward we would advise that you confirm sector momentum before entering a new position. If momentum in the sector remains strong, look for ADI to take out the 52-week high of $59.94 in the short-term. BGEN $84.88 +0.75 (-4.13) BGEN was up on news today it will report higher-than-expected 3Q estimates on October 7th, after the bell. First Call's EPS consensus for this biotech firm is $0.36 and Biogen announced it will come in at $0.38 as a result of increased sales of AVONEX, the best selling treatment for relapsing Multiple Sclerosis. AVONEX 3Q sales are expected to be $160 mln and this is welcome news. One of the first analysts out of the gate was Elise Wang from PaineWebber. On Wednesday she reiterated a Buy rating and upped the target price for BGEN to $105 from $90. Ms. Wang also adjusted the fiscal 2000 and 2001 estimates to $1.72 from $1.70 and $2.00 from $1.96, respectively. Today Raymond James reiterated their Buy rating and issued a target price of $100. US Bancorp Piper Jaffrey also reiterated a Buy rating and put a price target on the stock at $90. After the dip yesterday, we're right at the 10-dma indicator. But the slight bounce today was backed by strong trading volume and this is a plus sign. It'd be wise to keep the stops in place. Much of a descent below here could hint at a lower consolidation level and remember time costs us money. CMGI $81.69 -3.81 (-8.13) CMGI went on another downslide today ahead of its confirmed earnings' date on September 27th, after the bell. Volume advanced to 5.03 mln closer to its ADV of 5.66 mln, unfortunately it occurred during the sell-off. This volatility has offered a variety of entry points but now CMGI is walking the tight rope on the long-term 200-dma. Last month this mark served as bottom support for the stock so there's some technical indication that it could bounce again under better market conditions. In the news, CMGI announced the completion of Cha! Technologies. CMGI paid $12.5 mln for an 80% stake in the 1ClickCharge(TM) Internet Payment Service Company and will commit an additional $12.5 mln to support current business operations. This is the first of its kind to be added to CMGI's portfolio. SUNW $84.69 +2.31 (-1.38) SUNW was one of the few winners on the Nasdaq today! The stock didn't wait for a bullish market to make a rebound after slinking down to the low end of its support at $82. This level can certainly be considered an entry point but it may be more prudent to confirm the upward movement over the next few days. Remember too that the stock is facing overhead resistance at $88, a new record set just a week ago. On a positive note, analyst Daniel Kunstler at J.P. Morgan Securities reiterated his Buy rating and issued a 12-month target price at $105. SUNW is now heading into its earnings season with the company expected to report on October 14th and if anything, this should add some spark to this momentum play. (Remember the strong earnings run it had last quarter) In the industry news yesterday, Microsoft (MSFT) announced it will acquire the Visio Corporation in a $1.26 bln stock deal. TXN $87.63 +0.88 (-3.13) Markets remain mixed these last few trading sessions as investors rallied behind benign inflation news then quickly sold, taking profits. TXN has a similar story except it was increasing demand for PC's and rising chip prices that rallied the computer and semiconductor stocks. Fortunately, the result of the rally was different from the broader markets. Even though we sustained loses yesterday, a late rally in the broader markets this afternoon helped TXN close in positive territory. Other positive information helping the stock was a press release this morning. Chinese telecom equipment maker Eastern Communications announced it had set up a joint venture with TXN. The venture, with registered capital of $7 million, was primarily for research, development and design of digital information products. Considering the good news, overall technical strength of the stock and the late afternoon rally, lets see if the momentum can carry over into tomorrow. Because it is a crazy market, choose your entry points carefully and confirm market direction. SFE $68.81 -1.19 (-3.69) The bears had the upper hand throughout the day but the bulls showed their existence by late afternoon. When all was said and done the bears still won the war but the bulls managed to recoup most the morning losses. Unfortunately, these loses extended into our current play on SFE. After consolidating between $69 and $72 for the past week, the stock managed to break its 10-dma support level at $69.58 resting just above it 100-dma at $68.67. We decided to continue the play to see if SFE will hold this level. Continue to use caution with this play and wait for positive momentum before placing new trades. Remember to place the recommended stops for protection in case the bears get another death grip. SFA $55.75 -0.63 (+0.06) Just when the stock was flirting with another high, profit-takers stepped in and spoiled the party. For the last 2 sessions profit takes have taken many technology stocks (including SFA) to lower levels. Despite closing fractionally lower for the day, a late afternoon rally sparked SFA, closing the stock more than five points higher than its intraday low. Talk about a comeback. If the technologies carry this rally into tomorrow, expect SFA to be a participant. The stock closed just above its 10-dma at $55.25, which is it's nearest support. Watch for entry points at this level and confirm the stock holds before placing new orders. Expect more volatile trading to end the week so keep your stops in place and adjust them accordingly. INKT $128.63 -0.78 (+0.44) If you think the waves created by Hurricane Floyd are rough, check out the past week of trading on INKT. Considering the current market conditions INKT has reacted accordingly, rolling with the punches. Today's trading was a good example as the stock traded as low as $123.75 then rebounded to close on a respectable rally. The stock shows support at its 10-dma at $122 and resistance around $140. Expect more volatile trading within this range as the bears and bulls continue to battle it out. For those placing new trades, confirm positive direction in the stock and buy on the dips. Historically speaking, there should be plenty. Other events that may influence our play was a press release on Thursday. INKT agreed to a definitive deal to buy WebSpective Software, a maker of software used for Internet content distribution and tracking, for about $106 million in stock. The deal will help Inktomi offer Web site content management services to firms that rent computer capacity to companies and manage Web sites on their behalf. WebSpective software will also allow it to begin serving corporate customers directly, later this year. With this news and the help of a late market rally, lets see if we can make a run for $140. ERTS $74.50 +0.19 (-1.69) Volume slacks off and the price falls or stays even. We've noted frequently that volume is the key to moving ERTS, as institutions own 95% of the outstanding issues, leaving very little float to trade. If you want it, you've got to pay. Average volumes here tell us the demand has been slack. We also noted that the 10-dma was lending support at $74, which had been true. Sometimes, like in ERTS case, historical support from a hard number can be more telling. ERTS didn't think twice about piercing $74 on its way to historical support at $72, from where it bounced nicely today. The technical chart is still showing signs of weakness. Keep your stops set folks. ERTS now rests at $74.50, its 10-dma as of today's close, and could break either way. Frankly, were it not for today's after lunch rally, we'd have dropped the play. To many traders were missing from today's market action for us to draw hard conclusions about this great performer though. If volume comes back tomorrow and takes the price with up with it, ERTS will be a great play. If however the market is ugly, don't waste a minute hoping this play back up. Protect your capital and get out. No price moving news to be found. JDSU $107.63 -2.19 (-4.38) Moving dangerously close to the edge of being dropped, JDSU stays on the list 1 more day with our expectation that following a week of weak trade, tomorrow could be an up day, thanks to triple witching. Note though that JDSU broke south of its $108 trading range support, all the way to $105, a level not seen since late August. Worse, it exceeded its ADV by about 20% in the process. That's a negative that may portend weak trading in the near future. The good news (if you call it that) is that it bounced nicely at noon with the rest of the market, though volume remained flat and JDSU sold off $1 at the close. Candidly, it's looking weak and we don't recommend starting a new play until the market and the stock show some conviction. In short, JDSU is on double secret probation. Cross your fingers for tomorrow but avoid heroism in trying to call a bottom if JDSU stagnates or heads south. Dutifully, we offer another reminder that JDSU is holding a special shareholders meeting Sept. 28 to increase the outstanding shares from 200 mln to 300 mln. This could foreshadow a 3:2 split but more likely just a pocket full of currency to go on the acquisition trail. AMZN $65.25 -0.31 (-1.25) Despite that the NASDAQ got clobbered yesterday, AMZN gave up only $0.44, while drifting south another $0.31 today. Though there are no earnings until late October, AMZN will act in sympathy with YHOO, which reports earnings October 6. AMZN has its own story too, as it continues to add new divisions ahead of the Holidays, which investors will perceive to be building the revenue stream (don't ask about profitability yet). No only that, but AMZN ranked second in sales volume in the top 100 e-tailers as determined by the National Retail Federation. AMZN still has good support at $63. If the market cooperates, dips are buyable but wait for a bounce back up. You don't want to lose fingers catching a falling knife. A flat morning followed by a steady progression of volume since noon today sent AMZN back up in the latter half of the day. We continue to see strength in the Internet sector but remember, AMZN is still a stomach churner for those with a low to moderate risk tolerance. Confirm market direction and use support as a buying opportunity. No value or fundamentals here. DISH $91.00 +0.00 (-3.00) DISH made a nice recovery from this morning's gap-down low, only to fall off a cliff, then re-scale half of it in the final hour of trading. That such a volatile issue would lose just $0.50 yesterday and break even today in the face of market weakness is good testimony to the sentiment this issue carries. Part of our concern earlier this week was that they might lose a new satellite on the launch pad to Hurricane Floyd. From all appearances, the rocket and satellite are safe, and investors can breath a sigh of relief but it still needs to get off the ground in order for DISH to generate new revenue. The 10-dma is providing support at $90 but recent historical support is $89. Take your pick. Resistance is still $96. Though tomorrow may be an up day thanks to triple witching, technicals are fading just slightly from their previous good looks (sort of like looking at yourself in the mirror 10 years from now!). Wait for the market to give us a direction before taking a new position. YHOO $163.44 +1.06 (-7.06) YHOO got bonked on the head yesterday, along with everything else on the NASDAQ. However, as testimony to its strength in the downdraft, it only gave up $2.81 and $1.06 yesterday and today, respectively, both on low volume. Pure and simple, this is an earnings play scheduled for reporting on October 6, 1 day after the FOMC meeting. If history repeats, we will have a strong run, followed by a sell-off prior to or after the release. That's proven true in the last 4 quarters. We noted Tuesday that support was at $160, its 10-dma but look for dips to $155 in the normal course of trading. If you had this on your radar screen today, you would have noted a great entry point following YHOO's 3-time bounce off of roughly $157.50. There is still time to get a good entry, especially during a triple witching Friday, wherein we expect the market to be up. Be patient, let YHOO come to us. No chasing. Target shooting at your own comfort level should yield the best results. In light of the FOMC news conflict, you may want to be out of the play by Friday, October 1, depending on your risk tolerance. Braver souls will be taking their chances by holding through the Fed meeting. Unless you have a financial death wish, you should not even consider holding through earnings. ************** NEW CALL PLAYS ************** No new call plays today. **************** PICK NEWS - PUTS **************** LLY $67.56 -0.56 (-4.81) We have had a couple of good days for our play of LLY. You may have noticed it as the 'play of the day' for Thursday after a failed rally Wednesday that left Lilly to close right on the day low. We got the continuation we were looking for as LLY dropped to $66.38 on the low before rebounding with the markets. This rebound shouldn't be considered a bounce as there is no support until $65 but it may provide an entry point. The entire sector was weak again today, further fueling the decline in shares of Lilly. One news article hit the wire today but it was of little importance. They made a change in their front office that won't affect trading in the shares. Looking for a good entry point? Watch the 50-dma at $70 for resistance but make sure it bounces before jumping in. GPS $33.00 -0.81 (-2.81) Support at $35 was finally broken on Wednesday in a big way. We were concerned, as you may recall, in Tuesday's update that investors were trying to halt the slide at $35. The stock had been consolidating before a quick bounce back up to resistance at the 10-dma. Fortunately, the 10-dma continued to hold the stock down and knocked it right back and this time GPS dropped right past $35. Our next target for support is $30. The Gap released their 10-Q report on Tuesday but it didn't reveal any new information. The overall negative sentiment stems from lackluster results and angry investors from insiders selling at high prices in July. This sector is filled with stocks heading in different directions so don't try and pick a bottom just because you see other retailers moving up. We continue to see any bounce off the 10-dma (currently $35.75) as an excellent entry point as long as it bounces first. HNZ $44.50 -0.13 (+1.50) Heinz has shown some extraordinary strength for a put play considering our negative market. So what's up? Mostly speculation. News had been circulating that Heinz and BestFoods were in merger talks to create one of the largest companies of their kind. Yesterday however, BestFoods denied that they are considering a merger with HNZ. The point of certainty in this is that HNZ is looking for a partner, even though it may not be the company of choice, BestFoods. We are keeping HNZ as a play, as the stock should continue down due to the uncertainty and from continued troubles the company is having. The stock is sitting right below resistance at $45, a good entry point for any continued movement down. Wait for negative market and stock price confirmation before starting a new play. KO $54.06 +0.00 (-1.06) Coca-Cola today traded through a major support level at $54 to as low as $53.63 during today's sell- off in the stock market, before bouncing back to unchanged as the Dow recovered due to short covering ahead of Friday's option expiration. Stock patterns remain weak and it continues to drift downward. If you have not been stopped out of this play previously, you should be making money. Going forward we expect Coke to remain weak. Continue to keep stops set tight and only enter new positions at this point below today's low $53.63 on strong volume and or a sell-off in the stock market. SWY $45.25 -0.69 (+2.31) We picked up SWY last week after seeing a 7% decline amid bearish trading patterns and critical company-specific news events; and so far this put play hasn't been painless. On Wednesday, SWY climbed up another notch breaking through its overhead resistance (the 10-dma at $45) with $1.19 in gains on very strong volume. Then today the stock swung back around (also on strong volume) demonstrating it couldn't hold any advances over its long-time opposition. So we have it that SWY is now teetering on a breakout point and which way it'll go is, of course, the million-dollar question. The weakening retail sector is certainly a plus but beware this play could go either way. Until SWY firmly demonstrates a definitive direction, it's best to stay out or play very conservatively. There was no news worthy event since Tuesday to report to affect SWY's trading. COST $66.69 -0.38 (-3.19) Despite the good news of a benign inflation report on Wednesday, investors were not convinced and sold positions, taking profits from earlier in the week. COST investors were in a different situation however, there were no profits from earlier in the week to take yet the stock managed to continue to lose ground. All the better for us, as the negative momentum of the broader markets add salt to the wounds of COST, as the possibility of even lower price levels increase. COST is currently trading well below its moving averages and shows little support until the $58-$60 price range. For those individuals placing new trades, confirm the stocks direction and look for entry points during intraday spikes. Because the stock has fallen almost 20 percent in the last month keep your stops in place for protection. ************* NEW PUT PLAYS ************* JNJ - Johnson and Johnson $95.75 -1.44 (-3.75 this wk) J&J is the world's largest and most diversified maker of health care products. They are engaged in the manufacturing and sale of their products through 3 distinct divisions. They are pharmaceuticals, consumer products and professional products. The pharmaceuticals are in the allergy, antibacterial, pain management contraceptive and dermatology. The consumer products include Tylenol and Motrin analgesics, Reach toothbrushes and Band-Aid bandages. The professional division includes ACUVUE contact lenses, surgical instruments, joint replacements which assist physicians, nurses, therapists, hospitals and clinics. What went wrong with the Drug sector? At last check this group was riding high on new found optimism that a bottom may have been reached this summer after a couple months of retracement. Unfortunately, it was a short-lived rally as we have gone downhill ever since August 25th. This sector is one that moves tightly together and negative sentiment will hurt even the stronger players like JNJ. There are also concerns over the acquisition of Centocor. It will be dilutive to JNJ profits for both the 4th quarter of this year and also next year. Analysts are speculating over the size of the one-time charges but needless to say, it will hurt over the short-term before adding value down the road. The technical picture is an interesting one on JNJ as well. We are right on the 100-dma at $95 which may provide some short-term relief from the fall but historically the 100-dma hasn't done much to help the stock. We have much stronger support at $90 which is over a $5 move and would make for a tidy profit. Anyone interested in buying JNJ stock would likely wait for support to be reached first. Conservative players may want to wait until the stock cleanly breaks $95, on good volume, before opening plays. Otherwise, for you brave souls, jump aboard on an intraday bounce. Any bounce should be met by resistance at $97.50 from the 50-dma. BUY PUT OCT-100*JNJ-VT OI= 955 at $5.50 SL=3.75 BUY PUT OCT- 95 JNJ-VS OI=1495 at $2.75 SL=1.50 Average Daily Volume = 2.06 mln Chart = http://quote.yahoo.com/q?s=JNJ&d=3m SEE DISCLAIMER IN SECTION ONE **********
The Option Investor Newsletter Thursday 9-16-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. *************** PLAY OF THE DAY *************** NTAP - Network Appliance Corp. $72.00 (+4.13) 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. Sunday's Write Up 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. Tuesday's Write Up What a day for NTAP as it bounced perfectly off of support at $67. The support I am referring to is the 10-dma which has held the stock up for the past month. If you used this to your advantage, you are sitting with a tidy profit. The reason for the gains may be purely technical and momentum driven as there has not been any company specific news released this week. We also could still be riding the momentum from Merrill Lynch's positive comments to end the week last Friday. Today's close is a new high after moving above the previous high and resistance at $69.69. This is a bullish indicator as we have no resistance above us but with the CPI due out in the morning, it is always wise to use caution and keep your stops close. Thursday's Write Up The beat goes on for NTAP despite any positive news or a positive market to help the stock. The strength NTAP is displaying is impressive as it continues to hold well above the 10-dma at $68.50 despite the overall market jitters. We were looking for a pullback to open new plays but it only made a quick dip to $70 before bouncing right back to close only $0.75 from a new high. With today's nice turn around in the broad markets, we would not be surprised if NTAP does make a run for a new record. At this point, new plays will be tricky. You may now want to consider an intraday dip for an entry point. But use caution because NTAP is now carrying a lofty valuation with a P/E of 122. This is not the kind of play you want to have reverse on you without a stop loss. BUY CALL OCT-60*NJQ-JL OI= 84 at $13.13 SL=$10.75 BUY CALL OCT-65 NJQ-JM OI= 145 at $ 8.75 SL=$ 6.50 BUY CALL OCT-70 NJQ-JN OI=1406 at $ 5.50 SL=$ 3.75 BUY CALL DEC-65 NJQ-LM OI= 152 at $12.50 SL=$10.00 BUY CALL DEC-70 NJQ-LN OI= 83 at $ 9.75 SL=$ 7.00 Picked on Sep 11th at $67.75 P/E = 122 Change since picked +4.25 52 week high=$72.75 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 ***************** COMBINATION PLAYS ***************** Stormy Weather On The Horizon.. Wednesday, September 15 U.S. equity markets closed lower on Wednesday as the weak dollar overwhelmed positive inflation data in the CPI report. The Dow slumped 108 points to close at 10,801 after rallying early in the session. The Nasdaq composite index fell 54 points to 2,814. In the broader market, declining issues beat advances 1,760 to 1,181 on moderate volume of 780 million shares on the NYSE. Tuesday's new plays (positions/opening prices/strategy): Bell Atlantic BEL APR65C/SEP65C $6.00 debit calendar Sprint FON OCT55C/SEP55C $2.38 debit calendar Sprint FON JAN55C/OCT55C $6.50 debit LEAPS/CC's Qwest QWST OCT22C/OCT27C $3.00 debit bull-call All three of our new communications issues started strong with the blue-chip rally but the positive movement lasted barely an hour. By 10:45 AM, each stock was fighting its own battle for survival and the outcome was grim. By the end of the day, all of them succumbed to profit-taking and the short-term outlook is now less attractive. Of course the target entry points were easily achieved but most traders were scrambling (like I was) to withdraw their limit orders. Sprint was the most hideous of the three, falling $3.38 by the end of the day and taking our $2.38 position to $1.93. We did not open the LEAPS/CC's play but even with today's loss, the discount on the long position should help it finish profitably. BEL was less gruesome, with the long option reduced to $5.50; a $0.50 loss to open. Qwest was the most surprising of the three, falling back through a short-term bullish trend to a recent range near $28. Lets hope that the technical (buying) support starts there. Portfolio plays: This morning's rally provided a great opportunity to make some final adjustments on the long-term plays. Many of our October positions (new short options) benefitted from increased volume and volatility. First up was Biogen (BGEN), and the stock price opened $1.12 higher with the target option (OCT-90C) trading at $3.75 bid. The cost to close our short position was $0.50 so a credit of $3.25 was entered against the price of our 2001 LEAP. Johnson & Johnson (JNJ) also moved higher in the morning, up $1.25 by 10:00 AM and that brought new interest (50 contracts) to the buy side of our target option (OCT-100C). The roll-out credit for our new position (LJAN100C/OCT100C) was $2.25. Once again, we are protecting the downside in almost every position because of the potential for an October sell-off. The last play in the 2001 LEAPS portfolio, The Limited (LTD), was rolled to October for a $1.50 credit at the $40 strike. While we are discussing the long-term plays, its important to note that Motorola (MOT) fell significantly today on the actual announcement of the anticipated merger with General Instrument. The deal is valued at $11 billion and each GIC share would be exchanged for 0.575 shares of Motorola, or $53.58, based on Tuesday's closing prices. This is not a favorable move as far as analysts are concerned and they have succeeded in scaring the public from this issue. Our personal intention to roll to the $95 strike for the month of October looks more promising now but we will wait for the issue to settle into a new trend before making any new adjustments. General Dynamics (GD) and Riggs National (RIGS) were our other two active positions. The GD transaction added $1.62 credit to the FEB70C/OCT65C, now a collateral position. RIGS is an older diagonal spread, NOV15C/SEP20C, that we are closing at $4.25, for a profit of $2.25. Zoltek (ZOLT) moved up on speculation of an increase in product demand by the B.F. Goodrich Company. The BFGoodrich has opened a new $66-million high tech manufacturing process plant in Spokane, Washington, to produce carbon disk braking components for the aircraft industry. The new facility was built in response to strong demand for replacement brake components, driven by increased acceptance of carbon technology and aircraft fleet growth. It will be interesting to see if the news can change the character of this issue. Thursday, September 16 U.S. stocks closed lower on Thursday, as traders exited the area with Hurricane Floyd nearing the New York. The Dow Jones average was down 63 points at 10,737 after a volatile morning session. The technology-driven Nasdaq composite index fared much better, closing at 2,806, down only 7 points. Decliners outpaced gainers 2,065 to 891 on volume of 723,220,240. Portfolio plays: Although the broad market moved significantly, there wasn't much excitement in our spreads portfolio. Most of the issues are now consolidating after recent rallies while others are marooned on on islands between support and resistance. Luckily, all three of our new communications plays bounced back today. Sprint will be the most interesting play in the coming days as investors decide how long to hold their positions. Another communications issue; Qualcomm (QCOM) appears to have weathered the recent sell-off and is now back to its bullish ways. Motorola (MOT) is still licking its wounds over the GIC buyout and it will take some time before that aggressive act is accepted by its investors. One of our current straddle plays; Allied Capital (ALLC) is now trading at break-even on the November position and the technical outlook is at a key moment. A break below the current range may end at a significantly lower price while a rebound will signal a new support level above $20. We will watch this one closely for the next few days. Our bearish debit spread on Sealed Air Corp. (SEE) is now at a favorable profit ($1.00) with four weeks left. You should consider closing this play to protect gains and limit potential losses. Good Luck! Questions & comments on spreads/combos to ray@OptionInvestor.com ********* NEW PLAYS ********* IDTC - IDT Corporation $22.62 *** More Telecom *** IDT is a leading emerging multinational carrier that combines its position as an international telecommunications operator, its experience as an Internet service provider and its leading position in Internet telephony to provide a broad range of telecommunications services to its wholesale & retail customers worldwide. The company provides its customers with integrated and competitively priced international and domestic Internet telephony services including Net2Phone Direct and Net2Fax. The big news with IDT is still Net2Phone, one of the most popular issues in communications stocks right now. Net2Phone's strategy appears to be on track and daytraders are fueling the current movement. Over the last two weeks, the stock traded an average of 7 million shares, the equivalent of more than one trade-a-day for each share. In that same period, the stock has risen over 100% and IDT's ownership goes with it. The company still controls 57% of Net2Phone. While IDT is valued at almost $700 million, their stake in Net2Phone is worth $2.45 billion. IDT is also poised for future growth with recent deals involving Northpoint Communications (NPNT) and Spain's Telefonica de Espana (TEF). Both of these agreements should help the company boost its revenues in the months to come and the recent technicals appear to support a long-term bullish outlook. PLAY (conservative - bullish/debit spread): BUY CALL DEC-17.50 IQJ-LW OI=70 A=$7.12 SELL CALL DEC-25.00 IQJ-LE OI=535 B=$3.62 INITIAL NET DEBIT TARGET=$3.25 ROI(max)=130% B/E=$20.75 Chart = http://quote.yahoo.com/q?s=IDTC&d=3m ***** NETA - Network Associates $19.80 *** On The Rebound! *** Network Associates (formerly known as McAfee Associates), is a leading supplier of enterprise network security and management solutions. Network Associates' product offering includes four individual software suites, Total Virus Defense, Total Network Security, Total Network Visibility and Total ServiceDesk. NETA recently announced new strategy initiatives with Novell to protect NetWare customers against the growing number of virus and malicious code attacks. The launch of new anti-virus solutions for NetWare evolves their relationship and boosts the mission to protect customers against the dramatic rise in dangerous viruses. They also unveiled a family of integrated software and hardware appliances designed to make securing e-business environments simpler and less expensive. The new WebShield E-ppliance family of products delivers web-enabled, remotely manageable versions of their award-winning anti-virus, firewall and VPN software. NETA's software gives corporate customers and service providers an easy way to ensure integrated network security for customers of all sizes. Their products are great and the fundamental outlook is favorable but we really like the way the chart is shaping up. The recent consolidation and the break above the long-term moving average suggests a new interest from retail investors. The institutional support is also excellent and the volume is more than adequate; this issue should continue higher. PLAY (conservative - bullish/debit spread): BUY CALL DEC-12.50 CQM-LV OI=390 A=$7.88 SELL CALL DEC-17.50 CQM-LW OI=1157 B=$4.12 INITIAL NET DEBIT TARGET=$3.50 ROI(max)=115% B/E=$16.00 Chart = http://quote.yahoo.com/q?s=NETA&d=3m ******************** INDEX OPTION SPREADS ******************** As a trader, you may be familiar with options on individual stocks where you have the right to buy (call option) or the right to sell (put option) a particular stock at some predetermined price within some predetermined time. The buyer has the rights and the seller the obligations. With index options the basic ideas are the same. Index options allow you to make investment decisions on a specific market industry or on the market as a whole. Spread strategies can be made with index options similar to those made with individual stock options. Many professional traders employ index spreads as a hedge strategy. We favor debit positions on the SPX for momentum and hedge or longer-term plays and OTM credit spreads on the OEX when the risk/reward is favorable. Low ROI disparity spreads will be listed (when available) for the conservative index trader. ***** OEX - S&P 100 Index $694.88 OTM Credit-Spreads The Standard & Poor's 100 Index is a capitalization-weighted index of 100 stocks from a broad range of industries. The component stocks are weighted according to the total market value of their outstanding shares. The impact of a component's price change is proportional to the issue's total market value, which is the share price times the number of shares outstanding. OBSERVATIONS: For OTM credit spread trades, we like to use the actively-traded S&P 100 Index options because they contain much more premium than options on individual stocks and provide an underlying instrument less prone to huge, gapping moves. Review the 'Market Sentiment' section for specific technical information on the S&P 100 Index. One strategy that's popular right now is the buying of collars on the major indexes. Traders are selling out-of-the-money calls in January, taking that premium and buying puts in October, either at the money or slightly out-of-the-money. The position benefits from a short-term pullback because the value of the calls drops and the puts rise on a downturn. We don't offer those types of plays (with large margin/risk) but it's a viable strategy for advanced traders. Very Conservative... PLAY (bullish/low ROI): BUY PUT OCT-630 OEY-VF OI=2159 A=$3.88 SELL PUT COT-640 OEY-VH OI=6090 B=$4.62 NET CREDIT TARGET=$0.75 ROI=8% (4 weeks) Conservative... PLAY (Bullish): BUY PUT OCT-650 OEY-VJ OI=2766 A=$6.12 SELL PUT OCT-660 OEY-VL OI=1970 B=$7.25 NET CREDIT TARGET=$1.12 ROI=12% Aggressive... PLAY (Bearish): BUY CALL OCT-745 OEZ-JI OI=2805 A=$1.75 SELL CALL OCT-740 OEZ-JH OI=494 B=$2.50 NET CREDIT TARGET=$0.75 ROI=17% CHART= http://quote.yahoo.com/q?s=^oex&d=b ********* STRADDLES ********* ********************* Straddle Strategies.. ********************* Now you've learned that time decay is working against us in the straddle. What other factors can help us to achieve our goal of selling at a higher price in the future? Two components; Implied Volatility and Intrinsic Value. Implied volatility is a characteristic of an option's time value. The higher the implied volatility, the higher the option's time value is. When you find a situation where implied volatility is statistically low (probability dictates that it should start to move higher), you can make a profit by selling your straddle at a higher price, even if the underlying stock price doesn't move. Obviously, any increase in implied volatility will boost the time value of your position and move your trade closer to a profitable outcome. Another basic component that can help us profit in a straddle is Intrinsic Value. Once again, assume that the underlying price is equal to the strike price; this means that our straddle does not have any intrinsic value. When the stock starts moving in either direction, one of our options will become in-the-money. This will cause the intrinsic value to grow in that option. In contrast, the time value of both of our positions begins to decrease as the underlying moves away from the at-the-money strike. Remember, the further the option is in or out-of-the-money, the less time value it contains. The rate of change for both of these values is very important. Intrinsic value has a rate of change equal to one; if the stock price moves one point into the money, intrinsic value increases by one point. Time value is much more complex. The rate of change depends on how far away the option is from the strike price; the further the option is in or out-of-the-money, the smaller the rate of change on a one point move in the underlying issue. With that concept in mind, it is easy to see that when the stock price moves away from the strike price, we gain more in intrinsic value than we lose in time value and that's one way a straddle profits. The measurement of the underlying move is statistical volatility and we look for straddle positions on issues where we expect that component to increase. To construct profitable straddle positions, it is important to be aware of the effects of all these components. A theoretical edge in one or two of these factors can make a position favorable but it is better to have the majority of them on your side. The most common mistake among new traders is the purchase of short-term straddles. You can profit from these positions but usually that occurs only when the underlying starts moving immediately after the play is opened. Of course it appears attractive because the straddle does not have a large amount of time value and the small movement required for profit seems very probable. The problem is, if the underlying doesn't move right away, time decay will start to increase rapidly and your position will suffer regardless of the eventual stock price movement. Most experienced traders agree that three months should be the minimum time frame for (debit) straddles. If you have a choice between two different series of expirations and the implied volatility for the longer-term options are lower, then you should probably go with the greater time value because those options are theoretically cheaper. Remember, we are always looking for volatility that is low with respect to its historic levels. The reason is the tendency for volatility to return to its historical trend or median. It is sometimes called the "Rubber Band" effect and it basically means there is a high probability that when it's pulled too far in one direction, it will eventually reverse and start moving the other way. This pattern of behavior is the main reason why experienced traders use volatility based positions to make money. They will construct plays that take advantage of the future volatility of an issue, when the current value is high or low compared to its recent history. Volatility a predictable and powerful component for options traders and understanding this concept is a must for consistent profits in the derivatives market. Good Luck! ray@OptionInvestor.com More Strategy Guidelines.. Today we have a new position submitted by one our lead editors. The underlying issue is Williams Companies (WMB) and its recent technical history along with favorable option pricing and the high probability of future news presents us with an excellent straddle candidate. ********** NEW PLAYS ********** WMB - Williams Companies $40.75 Williams is engaged in the transportation and sale of natural gas and related activities, natural gas gathering, processing and production activities, the transportation of petroleum products, natural gas trading, natural gas liquids marketing and provides a variety of other products and services to the energy industry and financial institutions. The company owns and operates: four interstate natural gas pipeline systems; a common carrier crude and petroleum products pipeline system; and natural gas gathering and processing facilities and production properties. Williams plans to spin off their fiber optics business in a tracking stock known as Williams Communications (WCG is the proposed symbol). WCG, 30%-owned by Nortel Networks, supplies communications equipment to various types of businesses. They also offer telecom providers voice, data, Internet, and video transmission services on its packet-switched 20K-mile network, which is being expanded to 32K miles. Unfortunately, there is no SEC filing reflecting the initial trading date, but there was a registration filed in April. SBC Communications agreed to buy up to 10% of the company, about $500 million worth, but The Williams Companies will maintain a controlling stake after the planned IPO. Who knows when that will be? PLAY (conservative - neutral/debit straddle): BUY CALL JAN-40 WMB-AH OI=498 A=$4.88 BUY PUT JAN-40 WMB-MH OI=488 A=$3.50 INITIAL NET DEBIT TARGET=$8.00 to $8.12 TARGET ROI=25% Chart = http://quote.yahoo.com/q?s=WMB&d=3m ***** We had an excellent candidate in Ames Department Stores (AMES) but today's move ($1.68 drop) increased the IV significantly for our target options. Based on the current price of the underlying issue and the recent technical history (trend), it could be an excellent candidate. The probability of profit from the position is higher than other plays in the same strategy but current news and market sentiment will have an effect on this play so review it carefully and make your own decision about the future outcome of the stock price. Here is the current play (for future reference): ***** AMES - Ames Department Stores $31.63 Ames and its subsidiaries are retail merchandisers. Their stores are located in rural communities, some of which are not served by other large retail stores, high-traffic suburban sites, small cities and several major metropolitan areas. The stores largely serve middle and lower-middle income customers. PLAY (conservative - neutral/debit straddle): BUY CALL JAN-30 QAF-AF OI=8 A=$5.62 BUY PUT JAN-30 QAF-MF OI=56 A=$3.50 INITIAL NET DEBIT TARGET=$8.75 or better TARGET ROI=25% Chart = http://quote.yahoo.com/q?s=AMES&d=3m ***** You might consider AMES again when the range consolidates, but for now we will continue Tuesday's discussion of option pricing. ****************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $10 off the monthly rate. We would like to have you as a subscriber. 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