The Option Investor Newsletter Sunday 9-19-99 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 9-17 WE 9-10 WE 9-3 WE 8-27 DOW 10803.63 -224.80 11028.43 - 50.02 11078.45 - 11.72 - 10.44 Nasdaq 2869.64 - 17.32 2886.96 + 43.85 2843.11 + 84.21 +110.57 S&P-100 704.96 - 7.83 712.79 - 1.10 713.89 + 5.92 + 11.38 S&P-500 1335.42 - 16.23 1351.65 - 5.59 1357.24 + 8.97 + 11.66 RUT 434.46 - 6.73 441.19 + 5.22 435.97 + 3.52 - 1.93 TRAN 2999.79 - 91.04 3090.83 - 66.07 3156.90 - 14.45 + 20.62 VIX 24.22 + 1.87 22.35 - .96 21.39 - 1.82 - 0.85 Put/Call .67 .52 .57 .73 ******************************************************************* Warnings, witches, warlocks and hurricanes Sounds like a new action movie from Steven King but it pretty well sums up the action for the week. The good, the bad and the ugly came in the form of earnings warnings and downgrades from some big name companies. The big names from earlier in the week were followed on Friday by a downgrade on IBM but the market seemed to say "enough is enough." A Merrill Lynch analyst cut growth estimates on IBM hardware revenues from +6% to +4% and IBM dropped -$5 on the news. IBM is a Dow component and the drop took -25 points off the Dow at midday. HWP was caught in the same downdraft for -$3 to take another -15 points off the index. The Dow had been up +120 points at midday after a terrible first four days this week. Triple witching option expiration Friday was credited with some of the big swings on Thr/Fri and we are likely to see some carry over into Monday. This option cycle was somewhat more rocky than most. September is normally considered the worst performing month of the year and many traders take negative positions in anticipation of a market drop. Don't look now but we are only trading -25 points from where we started the month and most of the last two weeks was spent over 11,000. Not exactly a down month in anybody's book. With the exception of the the first four days of the week the market has been holding it's own very well. In fact the Nasdaq is only 30 points from a new high. Not too shabby! The Fed warlocks tried their best to curse the bull this month but their fire and brimstone speeches are impacting the market less and less. Prosperity is still breaking out all over and inflation is still weak at best. We had a benign CPI, soft August jobs and on Friday a drop in housing permits. All market friendly events. The drop in housing permits should mean a corresponding drop in housing starts in the coming months. This means the interest rate hikes and their impact on mortgage rates is having the desired result of putting the brakes on the economy. An article in the Washington Post on Friday by John Berry was very positive that the Fed would not raise rates at the Oct 5th FOMC meeting. (full text of article) www.washingtonpost.com/wp-srv/business/feed/a8199-1999sep17.htm The market celebrated with a resounding bounce off it's Thursdays lows. Some Fed watchers think the Fed has moved from a pre-emptive stance to a reactive stance. Instead of acting in advance of inflation the Fed appears to be reacting to the actual appearance of inflation in economic reports. This is a major change in Fed policy and could mean a more erratic Fed policy in the future. Hurricane Floyd caused only minimum disruption in the market with flood related problems. The flood of negative earnings warnings caused more damage but even so the expected third quarter profits are still very strong. The quantity of earnings warnings was much more than expected but many of the warnings came from non-S&P-500 companies and have no impact on the +20% or so profits expected in the third quarter. This 20% profit growth will not be lost on investors and in fact is probably what is holding the market so close to record levels. I still look for the market to rise into the October earnings cycle but the next hurdle will be the earnings from banks and brokers next week. These will be scrutinized for signs of weakness and then factored into the October outlook. Alan Greenspan spoke before the Presidents Council on Y2K Friday and he basically said he was not concerned about the problem with computers as much as he was concerned with the actions of the public in preparing for the possible disruptions. (text) http://www.bog.frb.fed.us/BOARDDOCS/SPEECHES/1999/19990917.htm This is what I have been saying for over a year. There may not be a crisis at all on 1/1/2000 but the worry by the investing public is the real problem. I talk to more and more people every day that are moving out of stocks and into money market funds. The thought is simple. Yes, we could lose another 5-10% profits in the stock market if the sell off never materializes but that is lost "profit" not lost "money". If the sell off in the market DOES start in October then Dow 9000 is easily possible. Better safe than sorry appears to be the plan and I have yet to speak with anyone who plans to keep all their money in the market and ride it out. The exception to this is of course those who would suffer a substantial taxable event by selling. If your own Dell at a cost of $5 or MSFT at $10 then it is best for you to ride out any dip and hope for a quick rebound in January. There are many funds that will take advantage of any rally over the next three weeks to sell into strength and hope for the mother of all blue light specials in December to open new positions at a significant discount. Check out the great article in today's newsletter on Y2K by one of our editors. Speaking of mothers, the mother of the bull rally, Abbey Cohen, came out and restated her bullish stance again on Friday. She feels the current worry about another Fed increase in October is over blown and even if they do raise rates she feels it will be the last for some time. Probably the best news on Friday was the rebound of the dollar against the Yen. The dollar posted a +2.03 gain against the Yen and closed at 107.13. Abbey Cohen thinks the dollar slide is actually positive long term since it means the global economy is improving. Note the Advance/Decline line stopped skidding. Temporary? The Nasdaq is only a few ticks away from another new high. My outlook for the week is positive. The Yom Kippur holiday on Monday is sure to wreak havoc on volume again. There are no economic events of note for the week so interest rate worries are likely to subside due to lack of new data. Traders should be cautious long term since we only have three more weeks before the start of the October earnings cycle and a possible market event. Make your planning short term and go with the flow. If you think education is expensive, how much does ignorance cost? With the many trading tools and strategies available it is simply very costly not to have the latest tools and information at your disposal. With one bad trade you can lose several thousand dollars. Multiply that by two or three or ?? trades and how much did the lack of education cost? Yes, there is a point to this. I am sure you have seen the new seminar schedule on the website. We have put together the very best options education available and made it available at a city near you. The seminars are different every time as we incorporate the new information and techniques. George Fontanills and Tom Gentile are professional optional educators and bring the latest tools to show you how to trade profitably. Have you been having trouble trading in this choppy market? Do you seem to lose money routinely? Are you ready to learn how to do it right? Here are the fall dates: Oct 17/18 Chicago Oct 24/25 New York Nov 8/9 Miami Nov 14/15 San Francisco For complete details http://www.OptionInvestor.com/seminar/ There is a 100% money back guarantee and you can take a friend for free. What else could you ask for? A parting thought. You have seen those ads that say "there are only xxx shopping days until Christmas" well in case your interested there are only 71 trading days before Y2K. Pick your entry points and sell too soon. Jim Brown Editor Some comments from OIN readers that attended the summer seminar series. " I've worked for years to build my portfolio. George & Tom have showed me how to protect my portfolio and grow it at rates that I couldn't do without their knowledge. 2 thumbs up! I know what I know. Now I also know what they know." Ed Hecht, GA. " Very professional presentation of the world of options trading. This seminar moved me to the next level in trading options" Marshall Klarfeld, CA " This class gave me an intelligent way to safely trade options. This is a needed class for anyone trading options!" Herb Fong, CA " The OptionInvestor/Optionetics Seminar is excellent!" Charles Kroha, CT " This seminar is well thought out and all of the information is presented in an understandable fashion. It is packed full of options strategies. Keith McKellop, CT " I now have a greater understanding of how to play different market conditions. This seminar also taught me to think more creatively about how to invest in today's market." Tammy Heeber, CT " I learned how to decrease risk, and make money any way that the market moves!" Liane Hesse, KS " The optionetics seminar opened up a whole new way of viewing the markets. The course gives you the tools that you need to succeed." Joseph Aiello, NJ "George & Tom teach a lot of very difficult information in a down to earth fashion that makes it easy to understand." Elizabeth Caldwell, NC " This seminar is a great value for the money!" Eased Sid, TX " It was very valuable information worth every penney! I attended this seminar on 2-day notice. I flew from Michigan to Texas just to be here!" Zuni Anita, MI " This is the first time that I have actually been taught how to trade options!" Clay Eaves, LA " I needed to put a trading program together and this way was the only possible way. These two-days saved me two-months of work!" Lee Burkholder, TX " I learned how to work the market through trading options the optionetics way to increase wealth with less stress." Jon Berliner, HI " This seminar taught me a great way to control risk while capturing substantial rewards." Charlene Garland, LA " Not only did I learn and reinforce strategies but I met numerous traders that I could share ideas with at this seminar. Cay Chock, MN " 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 Little, TX " Extremely valuable. Opened up a whole New World of reduced risk trading." Krishna Addepalli, TX " I have made 166% profit in 10 days on a Optionetics style trade." Watson P. Roye, TX " This seminar expanded my knowledge base and gave me a lot of confidence" Mike Shaw, NE " Detailed description of investment procedures both visually & verbally. If you can't learn from George and Tom - you shouldn't trade" Anne Cox, TX " I have taken other trading seminars, and believe me. This seminar is the best by far." Dennis Nowack, OR " This course taught me how to take the risk out of trading options." Rein Hollar, HI " This 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 Ehr, CA " I've taken other options courses, this is the best by far. The strategies for trading any market direction have made me a better trader." Steven Hoff, OR " Knowledge is power. This seminar empowers you! Bradley Phelps, CA "Excellent! I have learned more strategies after I attended this class than ever before!" Clifford Phan, CA " I learned entirely new (better) way to look at trading options." Jeff Farrell, NV " I the seminar was great, I can't wait to use these techniques!" Fausto Sanchez, CA " This seminar is great. I wish I would have known about these methods before I took some other seminars." Mike Manual, IA " The seminar exposed me to many strategies I was familiar with but have not applied. I am confident that after attending this seminar that I will become a more profitable trader, while carefully managing my risk." Philip Arana, NY JIM'S PLAYS *********** Week ending 9/17/99 I got back into Denver at 10:PM Wed night and just in time to catch the big market drop on Thursday morning. In my book this was a textbook entry point. With the Dow down over -500 points from its high from last Friday, a technical bounce was almost a guaranteed event. I immediately looked at my targets from last week and saw several opportunities. SFA - Target $52 My previous target on SFA had been $52. With the stock soaring the possibility for profit taking had been good. The drop with the market on Thursday filled that critera. The OCT 80 call traded as low as $4.63, down from the $9.63 high on Sept 14th. I waited longer than I should to confirm the market and the stock were going to recover. I am now the proud owner at $5.88 and hoping for a continued rebound next week. AMZN - Target of $60 It never hit $60 again and bounced off $67 twice. I removed AMZN from my watch list in sympathy to the EBAY sell off. Guilty by association maybe? EXDS - Target of $80 and hold. EXDS did bounce over $80 but failed to hold after the sell off from the week before. I have removed EXDS from my watch list until a new trend appears. SUNW - Target of $82 Excellent, excellent, excellent!! I had missed SUNW at $82 the prior week and then again last Thursday because I was leaving town for a week. When it bounced off $82.25 with the market on Thursday, I stepped up to the plate and it looks like a home run with the split announcement after the close on Friday. I picked up the OCT-80 calls SUQ-JP for $6.25 and they closed today at $11.00. I will probably sell at the open on Monday and then look for another pull back to re-enter the position again. QCOM - Target $160 This is really painful. I had a target of $160 for two weeks and then dropped it for non-movement last week. If you had maintained a $160 target and bought on the bounce, you would be a happy camper. I missed it because I was out of the office and when I saw the chart on Thursday I was sick. A picture perfect play, perfect entry point, perfect bounce. Study this and look for other charts like this. We have consolidation, capitulation and rebound all in ten days. Remember, if we had forced a trade on QCOM during the prior week we might have been scared out of the trade for a loss on Monday of this week when the sell off came. If we had forced a trade on SUNW on any day except the prior Tuesday we would probably have exited for a loss. Every stock moves in cycles and profit taking ALWAYS follows rapid gains. Wait for stocks and they will NORMALLY come to you. If they don't, you did not lose any money. If you got tired of waiting and bought high then the eventual dips will make you crazy. Targets for this week. YHOO - I am a buyer above $166. I want to play the YHOO earnings run again like we did last quarter but After the downtrending weakness last week I want to see it trade and hold above $166 before I take a position. If it dips any on market weakness I plan to sell 150-155 puts as well. I think an earnings run into Oct-7th will hold it above $160 so the plan would be to sell puts now and cover the day or two before earnings at hopefully the $175 level. I am a call buyer if we break $166 and hold. I would sell these on any run to $175. I will also sell naked calls on any strong run at earnings and look for YHOO to drop again after earnings. NXTL - $75 I think NXTL is a play. Strong chart with good daily bottoms which provide support. If NXTL does not sell off after the opening flurry on Monday I will probably take a small position and look to target shoot an equal amount at about 75% of the current ask. That way if a dip does come I can average down the current position. If no dip then I am in play. TXN - Above $91 and holding TXN took some heat last week but came off the bottom well. If it can break $91 again and hold over it then I would be a buyer. I am concerned that $91-92 may become resistance and Buying here at $90 would only set me up for another broken play. Holding above $91 is no guarantee but it is just another point in our favor. Good luck, sell too soon. Jim COMING EVENTS Monday: none scheduled Tuesday: International Trade July Forecast: -$22.3B Previous: -$24.6B BTM Schroders 9/18 Forecast: -- Previous: 0.3% LJR Redbook 9/18 Forecast: -- Previous: -0.1% API Oil Stocks 9/17 Forecast: -- Previous: -1.29M Wednesday: none scheduled Thursday: Jobless Claims 9/18 Forecast: 283k Previous: 288K Help Wanted Index August Forecast: -- Previous: 85 Money Supply 9/13 Forecast: -- Previous: -$10B Friday: none scheduled Next week's economic releases (preliminary) Sept 27 Existing Home Sales - August Sept 28 Consumer Confidence - Sept Sept 29 Durable Goods Orders - August Sept 30 GDP - Final - Q2 Sept 30 APICS Survey - Sept Sept 30 Chicago PMI - Sept Sept 30 New Home Sales - August Oct 1 Personal Income - August Oct 1 Construction Spending - August Oct 1 NAPM Index - Sept MARKET SENTIMENT **************** Sunday, September 19, 1999 The Four Horsemen! Ever since the market had a precipitous selloff several months ago, we have continuously noted the strengths and weaknesses in numerous sectors. The breadth has continued to be poor, however, the 4 sectors that continue to lead the way are Semiconductors, Software, Hardware, and Networking. The four horsemen continue to defy gravity, while sectors such as banking, insurance, brokerage, internet, airlines, and retail all continue to lag far behind, and some even continuing on their downtrend. This divergence is becoming greater by the day. Here at Pinnacle, we have also noted for many weeks, that this market would be trading range bound, which it has. If you own and index fund or any static product, you have made absolutely nothing during these last several months. The Dow, SPX, and OEX have all traded in a very narrow range. The real money has been made in the four horsemen, and buying the dips in these few sectors. We noted on Thursday how quickly these stocks can drop, so always use a little caution. However, as long as this market trends, (which it looks like it will at least until OCT), continue buying the leaders on a dip, and you shall do fine. If the market does finally break out, look for the four horsemen to post impressive numbers. The market had a nice rebound on "Triple Witching" Friday. The weakness in the market the previous couple of days were probably attributed to option traders clearing out positions ahead of Friday. The September options are now all done, and we move on to October. Based on the sentiment in the OEX, should this market have any follow-through, we could see 720-725 as the next stop. Put/call ratio's on many of the sectors that we follow here at Pinnacle Capital are currently favorable, and may indicate further upside potential. As long as inflation stays put, and the 30yr bond doesn't make new highs, we should be back on a upswing within the range. 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 recently, including the Nasdaq 100, Morgan Stanley High Tech, Software, Hardware, Semiconductors and Networking. Mixed Signs: Interest Rates: The yield on the 30-yr Treasury is above the 6% benchmark and nearing the 6.272% high. It has shown signs of basing, however, any negative economic indicator can easily knock the long bond into new highs. BEARISH Signs: 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. 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% Friday, September 10 144,711 +249.9% October Expiration Cycle OEX OTM Call Analysis (Open Interest October 710-800) Date Open Interest Change % Alert Friday, September 17 34,361 - Market Sentiment at a Glance Friday Tues Thurs Indicator (9/17) (9/21) (9/23) Alert Pinnacle Index (OEX): Underlying Support (710-730) 2.4 Underlying Support (660-690) 1.6 Put/Call Ratios: CBOE Total P/C Ratio .7 CBOE Equity P/C Ratio .6 OEX P/C Ratio 1.2 Peak Open Interest (OEX): Puts 640 Calls 680 P/C Ratio 1.02 Market Volatility Index (VIX): CBOE VIX 24.22 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 (9/17) (9/21) (9/23) Overhead Resistance (710-730) 2.38 OEX Close 704.96 Underlying Support (660-690) 1.62 Average ratings: Resistance levels 2.0 / Support Levels .5 What the Pinnacle Index is telling us: Overhead sentiment resistance is light at the 710-730 range. Put/Call Ratio Friday Tues Thurs Strike/Contracts (9/17) (9/21) (9/23) CBOE Total P/C Ratio .69 CBOE Equity P/C Ratio .57 OEX P/C Ratio 1.18 Peak Open Interest (OEX) Friday Tues Thurs Strike/Contracts (9/17) (9/21) (9/23) Puts 640 / 6,356 Calls 680 / 6,234 Put/Call Ratio 1.02 Market Volatility Index (VIX) Major Date Major 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 17, 1999 24.22 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 Sept 1, 1999 42.9 31.9 Sept 8, 1999 44.1 30.5 Sept 15, 1999 41.5 31.4 * MARKET POSTURE As of Market Close - Friday, September 17, 1999 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert DOW Industrials 10,500 11,320 10,803 Neutral 7.20 SPX S&P 500 1,350 1,420 1,335 BEARISH 9.16 OEX S&P 100 675 735 705 Neutral 8.13 RUT Russell 2000 440 465 434 BEARISH 9.14 NDX NASD 100 2,320 2,400 2,536 BULLISH 9.03 MSH High Tech 1,120 1,200 1,262 BULLISH 9.03 XCI Hardware 1,035 1,050 1,123 BULLISH 8.24 CWX Software 750 800 895 BULLISH 9.03 SOX Semiconductor 515 520 565 BULLISH 8.24 NWX Networking 555 610 622 BULLISH 9.17 * INX Internet 500 580 455 BEARISH 7.20 BIX Banking 690 710 589 BEARISH 7.23 XBD Brokerage 410 440 370 BEARISH 7.23 IUX Insurance 645 660 597 BEARISH 7.23 RLX Retail 915 960 834 BEARISH 7.23 DRG Drug 365 390 361 BEARISH 9.16 HCX Healthcare 745 785 732 BEARISH 9.16 XAL Airline 180 190 137 BEARISH 5.21 OIX Oil & Gas 285 310 306 Neutral 9.16 Posture Alert Triple witching Friday brought nice buying across the board, as investors snatched up just about everything, expect airlines and internet stocks. Insurance was the biggest winner Friday, posting a +3.31% gain, followed by Software (+3.06%), Networking (+3.00%) and Semiconductors (+2.41%). With Friday's action, we have turned BULLISH on Networking. FREE TRIAL READERS If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an Email to "subscribe@OptionInvestor.com" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 DISCLAIMER This newsletter is a publication dedicated to the education of options traders. The newsletter is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The newsletter picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. The newsletter staff makes every effort to provide timely information to its subscribers but cannot guarantee specific delivery times due to factors beyond our control.
The Option Investor Newsletter 9-19-99 Sunday 2 of 7 ************** TRADERS CORNER ************** The Intelligent (Option)Investor In his book, The Intelligent Investor, Benjamin Graham, who taught Warren Buffet everything he knows, wrote: "An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative." I am sitting at a sushi place in San Francisco's Richmond district, watching the last hour of trading on an expiration Friday, thinking about Graham. I have some thoughts on investing (instead of speculating) on options. First, here are my trades: JDSU Sept 110. Sold at 1 1/8. Bought at 4 3/4 two weeks ago. - 76% Loss. No post Labor Day Rally. I waited, and waited... Of course, for all these plays, holding until expiration is completely wrong from the standpoint of risk management. Since I am now trying to set some kind of example for our readers, I won't be doing this again, though I hope my honesty hopes you to see your plays in a realistic light. MSFT Sept 95. Sold at average price of 1 1/8. Bought at average price of 2 1/8 two weeks ago. - 45% Loss. I added to this position a few weeks ago, when the price dipped. This was a mistake because I didn't confirm that the market and stock really had turned back up again. CSCO Sept 70. Sold last contracts at 2 1/8. Bought at 1 1/4 at two separate points two weeks ago. 70% Gain. Probably my best overall play. I added to this play when the market took a big dip, but CSCO was very strong compared to the rest of the market. SUNW Sept 80. Sold last contracts at 5 7/8. Bought at 1 5/8 two weeks ago. 360% Gain. I failed to add to this position when the price started to go up, even though all my analysis said this is still going higher. Also a mistake, but the opposite of the MSFT mistake, above. My intent on this contract was to back up the truck, but instead I only loaded the passenger seat in the VW Bug on this killer play. Over the last few weeks, I have been watching the profit/loss in my trading acount bounce around by multiples of a semester's tuition. Up 3 semesters on the Friday before Labor Day. Down 1.3 semesters Wednesday. Up a semester today. Overall, down 1.5 semesters over the last 3 weeks. I've second guessed myself. Could have held those SUNWs for a 4+ bagger this afternoon as it broke through resistance at 88. Could have held CSCO and MSFT to the close for another semester. I'm sure a lot of you have similar experiences, especially if you subscribed to the Inevitable Post Labor Day Rally thesis. But despite this performance, I'll be right back at option trading next week (but not necessarily on Monday), wiser for my experience. I have 10 semesters of tuition in my core stock portfolio, which is the first lesson that any successful trader needs to learn: never risk more money in speculation than you can afford to lose. I also have 9 semesters of tuition in my option trading portfolio, which is completely separate from my core stock holdings -- another important lesson: never mix the two types of accounts so that you are never tempted to replace your option trading losses with money from your stocks (or mortgage, or kid's tuition). Warren Buffet would never agree, but I hope to "invest" rather than "speculate" in options by following these rules: (1) Use 15% to 25% of my option portfolio in every play. (2) No more than 3 plays at once. (3) Pick good entries by looking for positive index movement, positive ticks, positive sector movement, and positive stock movement (for calls). (4) take 25% profit on half of EVERY position. (5) Set a second limit sell at 75 - 100% profits. (6) Have a specific stop loss point and follow it. (7) Have a 1-4 day drop dead time limit on each play. I consider every play that I Iisted to be a failure (even SUNW) because I broke these rules. I could have booked profits on the losers, and saved myself from fatigue. Graham points out this pitfall: speculating seriously instead of as a pastime, when you lack proper knowledge and skill for it. I have build up my option trading portfolio while maintaining a totally separate stock portfolio at the exact same level. But as the last 3 weeks demonstrates, I still lack the knowledge and skill to be a real master at this craft. But, I am learning from my mistakes and improving. Good Luck & let me know how it's going. Janar Wasito janar@OptionInvestor.com ************** EDITORIAL ************** The sky is falling, the sky is falling! Here we go again. It is time to sell your home, sell your car, sell your furniture, sell your dog. What ever it takes to generate as much cash as possible to buy a year's supply of food and clothing. Grab your kids and head for the hills. The end of the world is coming! Am I supposed to be scared or what? So the CPI came out better-than-expected...it almost always has for the past 4 years. And so the market didn't rally...we can't go up everyday. Let's face it, if we couldn't hold a rally after the more important employment numbers and PPI numbers of the past 10 days, then we never really had a chance today. Besides smart money knew there would be no surprise in the August CPI as it is a product of the PPI anyway. Gasoline had the biggest price increase and Airfare had the biggest price decrease for the month. Hmm, like you couldn't have guessed that if you had been following the market for the past couple of months. It was a suckers rally from the get-go. But don't feel bad though because this market isn't going anywhere. That is what the term range-bound means. And yes folks, if you haven't noticed, we've been range-bound since May 1st. Don't get me wrong, we've had some great moves within the range during this period. Even some moves that have resulted in new highs for lots of stocks and some indices but nevertheless we are stuck in a range. So was Wednesday's bear market the real deal? Simply put, no. (as you may have guessed from Friday's rally) But there may be some reasons to be worried. For instance, Wednesday's close put us well below the 100-dma on the Dow Industrials. We have seen dips below the 100-dma a couple times in the last 6 weeks but it was usually an intraday dip before we rallied to close at or above that key support level. Wednesday's close was different. We had been holding on all day and tried to rally the market in the final hour only to have a major reversal in the final 20 minutes to send the Dow right past the 100-dma to close at the low for the session. It is this kind of technical picture that has analysts and investors alike trembling. Another worry is the all the worrying that is going on. Why are we so bent on avoiding a big market bust? Some traders act like they have their hand in the cookie jar and are just waiting for dear ol' Mom or Dad to come around the corner to catch us. So what is our escape plan...drop the cookie quick and run out the door! Right, that usually works. It's hard not to feel guilty though with the returns the market has given us this decade. Now with Y2K (i.e. Mom or Dad) rapidly approaching we are all ready to drop the hot-potato head for the door. Some investors are expecting a crash similar to 1987's Black Monday or, even worse, dare I say 1929. There is no question we would all rather avoid such catastrophes in our investments but according to my calculations (1987-1929 = 58 years) we still have 46 more years to go before the next major debacle. I think secretly we all want the a big shake out in the markets. We have become used to the fall clearance sale on stocks. A chance to pick up your favorite tech and internet plays for a 50-to-70% discount from old highs. A chance to stock up while you can. The problem is we don't have a catalyst like we had the last couple seasons. There are no more failing economies in the east, no more fear of high P/E ratios and no more wild currency fluctuations in Brazil. In reality, Japan is doing quite well. Take a look at how the Yen has been hammering the Dollar lately. P/E ratios went out the door when Internet stocks came to town. And no more pegged currency in Brazil has forced currency speculators to find a new racket, thus leaving more money at home for Brazil to cure their ailing economy. So we are left to hope that Y2K will scare small time investors to give up their shares of AOL, EBAY, YHOO, CSCO, SUNW and DELL for fractions of their true value so we can swoop in like vultures and clean up. But, at last, it may only turn out to be a dream this year. If 2 interest rate hikes, a possibility of another hike in October and the big, bad Y2K can't do more than keep us range-bound then tomorrow might be the cheapest we ever see our favorite stocks. Where are we really going to go from here? 10,600, where we have ample support. 10,500, where we have enormous support. That may be it, folks. The Fed can't keep raising rates either on "fears" of inflation. Do you really think Alan Greenspan would risk such a bold move and run his chances of being the greatest Fed Chief in history? Not likely. So we will just have to keep dreaming of another great garage sale on Wall Street. Our only hope is for some trigger, some catalyst, some collapse that will help us to break the behemoth we call 10,500. If that happens, then get your hand out of the cookie jar because 10,000 here we come. Then it is time to step aside. Then it is time to start planning your buying strategy. But you will only have a short-time to get ready so be prepared. Can we can conclude this is our dream? To see a four-digit close on the Dow instead of five-digits. Something like 9999.99 or less. If so, I will be the first one in line to back up the truck and take all I can get. Ryan Nelson Asst. Editor ************** BROKERS CORNER ************** TRADING PSYCOLOGY 101 SCARED MONEY RARELY MAKES MONEY We always have a healthy respect for the market. There is a fine line between being respectful and being fearful. Scared money trades based on emotion not reason. Traders without confidence in their abilities are destined to lose because they fail to act with a plan. They react and more often overreact emotionally. Human nature forces traders to enter the market because they do not want to miss an opportunity. The reality for option traders is that there are always opportunities with over 4000 optionable stocks available. Plan your trades based on your research and always be prepared to live with the worst-case scenario. For option buyers the worst thing that can happen is that the option expires worthless, but that happens much too often because people fail to plan. Plan your entry, exit, and stop loss to relieve trading stress and to free your mind for positive thoughts. Those people that are convinced that they are going to fail often do. Think about how important the entry point is for any trade and many times you are better to miss a trade than to enter at a BAD price or to chase the market. If you become consumed with winning and losing: option trading becomes personal not logical. Do not be afraid of losing money, it is no reflection on you as a person or how smart you are. The market cannot be controlled; only your risk and exposure can be managed. As long as you do not allocate more than 15 to 25 percent of your account to any one trade even the "disastrous " event of an option expiring worthless will hurt your pride more than your pocketbook. The reality of not having the discipline of a stop-loss should be as disappointing as the monetary loss. Take your small loss and move forward not dwelling on something you cannot control. Your assumptions on the market were incorrect but you took your lump, hopefully learning more about the markets and more importantly learn more about yourself. Do not be afraid of losing money, that is part of trading. Control your emotions and make a simple plan and consistency will follow. Simply put, any profit is better than losing money regardless of how much money you could have made. If you plan on playing the game set your own disciplined rules before you put on a trade and the results should not scare or surprise you. Call us for assistance in choosing the best options: strike price and time duration to be successful based on a solid plan of attack and a trading style you can be comfortable with. Alan Knuckman and Andrew Aronson firstname.lastname@example.org ******************* TRADING CLUB UPDATE ******************* September 19, 1999 FALL HAS BEGUN AND THE TRADING CLUBS HAVE STARTED EXPLODING!! If you would like to join contact us at Visit@OptionInvestor.com and Organize@OptionInvestor.com. UPDATE FROM ATLANTA, GA: ***************************** There were a few people interested in selling leaps as covered calls. I asked (OI newsletter) to give us some selling facts (basic). If you will look on September 12th (Sunday's) newsletter, section 7, it's first off the bat. I have never done one, but I am looking seriously. I will report more at our September 25th meeting at Sandy Springs library at 11:30 in Atlanta, GA. The library is looking into letting us meet on either a Monday or Tuesday night from 6:00-8:00 right after the 3rd Friday of each month (Options cutoff date). We will have refreshments. We will have a paper trade contest for the month of October, month of November and month of December. I can not tell you what the prize will be of yet, since I am working on that. However, we want each person to pick 10 covered calls for each month. An example in our newsletter this weekend has 6 already listed for October. What you need to do each Sunday or Monday is send me your list with the additions up to the 3rd Friday in October. Example: Out of the 6 listed I could pick 4 of my 10 as CS, MOGN, DCTM, SOFN. I could then add 3 more next Sunday and 3 more the following Sunday and that would be my 10 for the month. We'll see who has the most winners. I will not tell everybody's results; just the top 3. I got an inquiry on "where do I find stock losses or target stock losses" to help to reduce the chance of a huge loss after buying the stock at a certain price. One of the best is in the same area where you do your charts within OI with the corporate snapshot. When I get the corporate snapshot showing the graph, the top window which normally says selected company report, this is where I normally get my options list. Another choice within that selected company report is called Macro World Price Forecast. You normally will get a 2 1/2 page report, showing the chart with predictions of a four week price, plus a 5 week alert showing where your stock loss should be. At the end of the report is a forecast for the next 4 months. It's a great section to do some research with figures. I hope this is clear; if not, we will cover it at great detail on the 25th and for those of ya'll who can not be at our meeting, if you send me your address, I'll mail it to you. I will not e-mail it because my scanner is not working. Looking forward to our meeting on the 25th in Atlanta. Anyway I can help, let me know! (removed) ************* 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: *************************************** Daily Results Index Last Week Dow 10803.63 -224.80 Nasdaq 2869.62 -17.44 $OEX 704.96 -7.83 $SPX 1335.42 -16.24 $RUT 434.45 -6.74 $TRAN 2999.79 -91.18 $VIX 24.22 1.87 Calls DCLK 116.25 8.50 New, the company was granted a patent CTXS 67.25 7.41 New, the stocks a flyer, one to watch NTAP 74.94 7.19 This stock has a mind of its own AMAT 84.81 6.06 New, if a rally exists, it will find it ADI 60.44 4.19 The stock hit another all-time high NXTL 75.19 3.19 New, showing signs of rally potential DISH 97.00 3.00 Dish's new bird is about ready to fly INKT 131.19 3.00 Resisting the bears, waiting to rally SUNW 88.69 3.00 The energy and driving force is strong EMC 71.00 2.88 The stock bounced just like we planed CKFR 41.63 2.75 New, announces a deal with ExciteAtHome CSCO 73.50 2.75 New, this is a leader and it shows NT 49.75 1.88 New, fitting the profile of a real bull SFA 56.50 0.81 Dropped, it stalled and ran out of gas INTU 103.00 0.00 Have we reached the short-term bottom? TXN 89.88 -0.75 Short-term stall but looking to move SFE 71.19 -1.31 Dropped, not a convincing effort here ERTS 74.75 -1.44 Dropped, no artful touch to make money JDSU 110.50 -1.50 Dropped, close but no cigar, its gone BGEN 86.44 -2.56 Leadership and momentum are present AMZN 63.81 -2.69 There may be some buying opportunities QLGC 92.75 -3.44 Dropped, there's no more waves to ride YHOO 163.38 -7.38 Earnings are coming, lets make a run CMGI 80.00 -9.81 Dropped, not much of an earnings run Puts WLP 68.75 -8.00 New, fell through long-time support LLY 67.00 -5.38 Downgrades and weak sector plague stock ELNK 40.13 -4.88 New, depressed valuations hurting stock JNJ 96.06 -3.44 Falling industry = falling stock COST 67.50 -2.38 Was it a head fake or was it for real?? GPS 33.63 -2.06 Odds are there going to come up short KO 54.13 -1.13 Dropped, this drink has lost its fizzle HNZ 43.88 1.25 Dropped, this games over, were done SWY 45.38 2.44 Dropped, set foot on stable ground STOCKS ADDED TO THE PICK LIST ***************************** CALLS: NT AMAT CTXS CSCO CKFR DCLK NXTL PUTS: WLP ELNK *************************** 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 QLGC $92.75 (-3.44) We lost our wave! If you have ever body surfed, you know it's critical to catch the wave right in order to have a good ride. Well our wave seems to have died on us with QLGC. A look at the chart shows resistance at around $98. Despite Friday's bounce, QLGC did not want to participate. Considering a turn in our indicators, showing the momentum's gone, it's time to find a new wave to ride. Investors may get a boost next week but why risk this ride when the conditions are not right. To be the best you need to recognize when the play turns and focus your resources on plays with power. Hopefully you were able to protect the small $2 gain we saw since our pick. Good job if you did. CMGI $80.00 (-9.81) We're disappointed with CMGI's recent performance ahead of its earnings date on September 27th (after the bell). Historically this stock has been a solid runner ahead of earnings. However on Thursday we brought it to your attention that CMGI was walking a tight rope on the long-term 200-dma. Well to our dismay on Friday, CMGI didn't advanced betwixt the broad market rally and the strong tech sector. Instead it slid under this bottom support level of $82.71 on moderate volume. Perhaps it'll spike up again next week but, at present, the indication is that it's not going anywhere fast and we must drop it. SFA $56.50 (+0.81) Even though we had a nice technology rally to end the week, SFA was one of the lagers and ended the day only fractionally higher. Wednesday's and Thursday's profit- taking was too much for SFA, taking the stock below its 10-dma, which should have acted as support but did not. Unfortunately, by Friday what once was its support became its resistance. While other technology stocks rallied and recouped losses from the previous day, SFA tried but stalled near its 10-dma. Because the stock could not rebound convincingly, we are lead to believe that the tides may be turning. It was a nice little ride while it lasted but due to profit-takers and signs of weakness in the stock we have decided to end the play and concentrate our efforts elsewhere. SFE $71.19 (-1.31) On Friday the bulls came to life, charging forward and leaving few unconvinced that today was their day of glory. Many stocks rallied recouping losses from earlier in the week. SFE participated in the rally, however not to the extent we had hoped. Without much conviction, the stock managed to break above its 10-dma and end the week just above its support. With a whole week of consolidating between $69 and $72, Friday's outcome was no surprise. Lack of direction and slowing momentum was enough to convince us it is time to end the play. ERTS $74.75 (-1.44) ERTS no longer has the artful touch to make us money so we're dropping it. For the last 3 days ERTS has been unable to get back above its 10-dma, which wouldn't be so bad if the market were tanking. . .except that the market was up substantially on Friday with no participation by ERTS. ERTS volume has been lacking lately, indicating that interest in this issue has waned with investors. Technical indicators have headed south on us too. Time to exit, especially if you can sell into any strength, perhaps during amateur hour on Monday. JDSU $110.50 (-1.50) Close, but no cigar. JDSU showed us no strength in Friday's trading as the rest of the NASDAQ tacked on 62 points. You may recall we put JDSU on double-secret probation Thursday, giving it just one more chance to perform on Friday. Though it had a $2.88 recovery, it still lacked volume and failed to rise out of its trading range, which tells us that immediate interest has dried up. For continued insubordination, we're expelling it from the list. DROPS - CONTINUED IN SECTION 3 **************************** SEE DISCLAIMER IN SECTION ONE ****************************
The Option Investor Newsletter 9-19-99 Sunday Part 3 of 7 ************** DROPS - CONTINUED ************** Puts HNZ $43.88 (+1.25) Heinz actually went down in a positive market Friday, so why are we dropping it? To many positives create to much risk and as investors, we don't want to be classified as gamblers. It's not a game that we play. Our technical indicators show a positive breakout on both the stochastic and the MACD. We have positive news that HNZ is looking to merge with another company. And we hope we have a positive outlook to the market next week. All these stack up against our HNZ as a put play and unless you want to gamble with fate, it is better to drop this and play for something else. SWY $45.38 (+2.44) For the new readers, we picked up SWY last Sunday after watching it decline a steep 7% amid bearish trading patterns and company-specific news events. Unfortunately as this week progressed SWY played tag with its overhead resistance at the 10-dma. By Friday SWY had firmly established that its descent was over for the time being. Therefore we must drop SWY to make room for more definitive movers. KO $54.00 (-1.13) Coca-Cola has lost its fizzle and has ended the weak flat. With a move to the downside of little over a point this past week, we are ready to take our money and move it into more profitable situations. As the Dow goes so goes Coke and the technicals are presenting us with information that looks like we have reached a near-term bottom in the Dow, the risk reward to the downside with this one is no longer in our favor. And it is burning up our time period with these painfully slow declines. Although Coke might continue to drift in the days to come, without much news to report and a recovering Dow, lets close out any open positions at this point. STOCK SPLIT CANDIDATES *********************** None this week. STOCKS WITH UPCOMING SPLITS **************************** We don't list all splits available, only those we feel may have play possibilities. Symbol - Stock Splits/Date 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 INTU - Intuit 3:1 09-30-99 ex-date 10-01 VOD - Vodaphone 5:1 10-01-99 ex-date 10-04 HLIT - Harmonic 2:1 10-14-99 ex-date 10-15 TYC - Tyco 2:1 10-21-99 ex-date 10-22 VTSS - Vitesse Semi 2:1 10-21-99 ex-date 10-22 ADBE - Adobe Systems 2:1 10-26-99 ex-date 10-27 CNXT - Conexant 2:1 10-29-99 ex-date 11-01 SEBL - Siebel Systems 2:1 11-12-99 ex-date 11-15 SUNW - SunMicro 2:1 12-07-99 ex-date 12-08 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: ********************** CTXS - Citrix Systems Inc $67.25 (+7.41) See details in sector list Chart = http://quote.yahoo.com/q?s=CTXS&d=3m ****** NT - Nortel Networks Corp. $49.75 (+1.44)(+1.88) See details in sector list Chart = http://quote.yahoo.com/q?s=NT&d=3m ****** Put play of the day: ******************* WLP - Wellpoint Health $68.75 (-8.00) See details in put list Chart = http://quote.yahoo.com/q?s=WLP&d=3m *********** CALLS PLAYS *********** Software *********** INTU - Intuit Inc. $103.00 (+0.00)(+9.19) 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. In choppy market conditions you are going to have a lot of buyers and a lot of sellers battling it out to see who will finish on top. Seeing that the technical and fundamental picture for Intuit are both very strong, you would think that after announcing a 3:1 stock split on September 10th, that you would not have a chance to be involved in the inevitable run up in the stock price after an announcement such as this. Especially if you did not enter into a position immediately. Wrong!! You can be thankful for the choppy market conditions (that we believe have reached a bottom short-term) for providing you with another opportunity. After a week of uncertainty in the market, Intuit finished the week exactly where it started at $103. On numerous occasions the stock bounced off of good support, just below the $100 level. If you have not already taken a position in this one, now may be the time. With approximately nine more trading days until the payment date on September 30th, we are looking for positive price movement in the stock ahead of this event. Furthermore, analysts have been in favor of their business model and feel that they are firing on all cylinders. One current price target is $115 on the stock. In a market that has a bias to the upside for this week, look for Intuit to test the 52-week high of $110.75 if volume and momentum pick-up in the sector. BUY CALL OCT-100*IQU-JT OI=3428 at $9.88 SL=7.50 BUY CALL OCT-105 IQU-JA OI= 768 at $7.50 SL=5.75 BUY CALL OCT-110 IQU-JB OI=1192 at $5.63 SL=3.75 Picked on Sep 12th at $103.00 P/E = 17 Change since picked +0.00 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 **** INKT - Inktomi Corp. $131.19 (+3.00)(+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. As the Thursday's rally continued into Friday along for the ride was our play INKT. While some stocks like to blaze there own trail, Inktomi would rather follow the lead of the broader markets. The last two sessions there is a distinct pattern between the stock and the NASDAQ, with one exception. The exception being INKT shows more resilience to the down side. Investors are rallying behind the stock anytime bargains are available, which last week was around its 10-dma at $123. Thanks to the end of the week rally, the stock trades well above this level and may continue to rise if conditions permit. If the markets continue its rally into next week expect INKT to be a participant. For those investors placing new trades, watch for dips in the stock. Even though the bulls have the upper hand at this point, inflation woes still exist making for volatile market conditions. Continue using the recommended stops and you may want to tighten them as the stock approaches $140, it next resistance point. To reiterate last week's news, there was a press release on Thursday stating that Inktomi 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. BUY CALL OCT-125 QYK-JE OI=2029 at $14.00 SL=11.25 BUY CALL OCT-130 KYQ-JF OI= 669 at $11.38 SL= 8.75 BUY CALL OCT-140 KYQ-JH OI= 869 at $ 6.75 SL= 4.75 Picked on Sep 10th at $128.19 P/E = N/A Change since picked +3.00 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 **** NTAP - Network Appliance Corp. $74.94 (+7.19)(-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. NTAP has seemed to have a mind of its own this past week. With the sentiment in the broader markets depressed, seemingly looking for anything negative to hang their hat on, shares of NTAP have have managed to move higher. With nothing new on the news front, investors have continued to buy stocks in the tech and networking sectors. Shares of SUNW, EMC, CSCO all shared in the limelight this week as well, with each ending the week on the plus side. Volume has been somewhat light, which makes us question the overall strength of the move. However a move up of over $7 is still a positive, regardless of the volume supporting it. After bouncing off its 10-dma at the $67 area early Tuesday morning, NTAP gave us a great opportunity by mid afternoon to jump on board as the price increased as did the volume. We would be remiss if we did not point out that technically NTAP is beginning to become overbought and could be due for a pullback. After a move of over $25 since its early August lows in the $50 area, we could see the bulls decide to take some money off the table at any time. On the other hand, there are scores of investors that will not consider buying a stock until it has taken out old highs and made a move similar to the move made by NTAP. We do believe that NTAP will continue higher but picking your entry point could be tough. If we see a pullback, there is good intraday support for NTAP in the $71 area and then again at $69. If you are in a play on NTAP move your stops up close to protect your profits. In considering a new play be patient, consider your risk profile and look for a positive move by the stock and others in its industry. No other news at this time. BUY CALL OCT-65 NJQ-JM OI= 145 at $11.13 SL=$8.75 BUY CALL OCT-70*NJQ-JN OI=1406 at $ 7.25 SL=$5.50 BUY CALL OCT-75 NJQ-JO OI= 65 at $ 4.38 SL=$2.50 low OI BUY CALL DEC-70 NJQ-LN OI= 83 at $11.88 SL=$9.50 low OI BUY CALL DEC-75 NJQ-LO OI= 168 at $ 8.75 SL=$6.75 Picked on Sep 11th at $67.75 P/E = 138 Change since picked +7.19 52 week high=$75.25 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 = 1.10 mln Chart = http://quote.yahoo.com/q?s=NTAP&d=3m **** CTXS - Citrix Systems Inc $67.25 (+7.41) Citrix provides application server products and technologies that allows networked computers to run Windows-based programs from a central server. This gives their clients effective and efficient management of their applications. Its WinFrame software is used by well-known companies such as Sears Tire Centers and Hewlett-Packard Europe. The Citrix iForum on September 9th, a technological conference on application server-computing, was well received by the industry and investors. The keynote address by Chairman Edward Iacobucci focused on "digital independence". In other words, freedom to reliably access applications from "anywhere, anytime" over any connection with speed. Trading volume has since surged to levels as high as 65% above the normal ADV and share price has increased $7.41, or 14%. At this point CTXS is being added as a pure momentum play. If CTXS climbs to the $80 range it will be a considered a split candidate too. That'd work out just fine with earnings coming up next month around October 19th. Bottom support appears to be at $60-61 with overhead resistance now at the new 52-week high of $68.75 set on Friday. Look for intraday volatility to find a daily low or wait for a possible pullback to find an entry point. Following the Citrix iForum last Friday on September 10th, Banc of America Securities reiterated a Buy rating and issued a $75 price target. BUY CALL OCT-60 XSQ-JL OI= 932 at $ 9.88 SL=7.50 BUY CALL OCT-65*XSQ-JM OI=1471 at $ 6.38 SL=4.75 BUY CALL OCT-70 XSQ-JN OI= 60 at $ 3.88 SL=2.50 low OI BUY CALL DEC-65 XSQ-LM OI= 307 at $10.88 SL=8.75 BUY CALL DEC-70 XSQ-LN OI=1422 at $ 8.13 SL=6.25 Picked on Sep 19th at $67.25 P/E = 48 Change since picked +0.00 52 week high=$68.75 Analysts Ratings 6-2-0-0-0 52 week low =$23.12 Last earnings 07/99 est= 0.31 actual= 0.32 surprise +3.2% Next earnings 10-19 est= 0.34 versus= 0.22 Average Daily Volume = 1.40 mln Chart = http://quote.yahoo.com/q?s=CTXS&d=3m *************** Semi-Conductor *************** ADI - Analog Devices Inc. $60.44 (+4.19)(+2.69) 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. Once again ADI had another positive performance, despite it being a Triple witching Friday and the uncertainty during the week in the semiconductor sector. Friday the sector continued the uptrend and the stock was up $3.38 to close at $60.44 on just about average volume. With Friday's gain, ADI has now once again hit a new all-time-high $60.44. The stock continues to look strong technically and is in a sector that has momentum on its side. The PHLX semiconductor Index continued higher and was up strong 13.29 points to close at 565.22. Gauging sector performance once again we see that Texas Instruments, Applied Materials and National Semiconductor were also bullish again on Friday as the NASDAQ took off. ADI once again bounced nicely off of its 10-dma, which has provided the stock with good support. If you are looking to enter this play, it looks as though a short-term bottom has been reached and we could see higher prices from here, including the possibility of a new high. As always, watch the market direction on Monday before picking your entry point. Tight stops are always a good idea at new high levels. BUY CALL OCT-55 ADI-JK OI=2427 at $7.25 SL=5.50 BUY CALL OCT-60*ADI-JL OI= 553 at $4.13 SL=2.50 BUY CALL DEC-55 ADI-LK OI= 424 at $10.00 SL=7.50 BUY CALL DEC-60 ADI-LL OI= 728 at $7.25 SL=5.50 Picked on Aug 28th at $51.31 P/E = 66 Change since picked +9.13 52-week high=$60.44 Analyst Ratings 8-6-1-0-0 52-week low =$12.00 Last earnings 08/99 est= 0.29 actual= 0.30 Next earnings 12/02 est= 0.35 versus= 0.16 Average daily volume = 1.08 mln Chart = http://quote.yahoo.com/q?s=ADI&d=3m ***** AMAT - Applied Materials $84.81 (+3.38)(+6.06) So who's responsible for this information and technology age we live in? Arguably, AMAT could be listed as one of the companies who has contributed most. Supported by the Smithsonian Institutions display of their equipment. AMAT designs and builds systems that make semiconductors and microchips available. Specifically focusing on wafer boards and display film equipment, their success over the last 30 years has placed them as the world leader in this market. The company has positioned itself to service the world community with offices in the U.S., Europe, Middle East and Asia. As the information age continues to develop, it does so with the help of AMAT's innovation. AMAT has weathered the market storm of this last week quite well, as it continues it's upward trend on positive news and outlooks. Friday's technical bounce added more fuel to AMAT's fire, sending it to a new 52 week high and widening the MACD. This indicates any continuation in a market rally, should drive AMAT higher on momentum. Again, the 10-dma is holding at support very nicely at $79. Wednesday the stock pulled back to support and has been on a climb since, confirming this stock as a play. Indications of a positive market and stock direction will provide an entry but, watch out in case the September sell-off rears it's head. We are hoping for an improvement in the trading environment however, be cautious as the market has been unpredictable lately. The semiconductor industry has been extremely strong lately due to forecast growth in sales. David Wang, Senior V.P. of Applied says a recovery is at hand and forecasts look very good for the next few years. This due in part to increased sales in PC's and telecom equipment. This optimistic outlook now for the sector prompted BB Robertson to upgrade AMAT to a Strong Buy on Wednesday. In fact, spot prices for chips hit multi-year highs this week at $15.50. Analysts say that when the cycle turns positive, like it is now, it usually lasts for at least 6 months. BUY CALL OCT-75 ANQ-JO OI=3360 at $11.50 SL=8.88 BUY CALL OCT-80*ANQ-JP OI=5341 at $ 8.13 SL=6.25 BUY CALL OCT-85 ANQ-JQ OI=4575 at $ 5.13 SL=3.25 BUY CALL OCT-90 ANQ-JR OI=2009 at $ 3.13 SL=1.50 Picked on Sep 19th at $84.81 P/E = 131 Change since picked +0.00 52 week high=$84.94 Analysts Ratings 15-15-3-0-0 52 week low =$21.56 Last earnings 07/99 est= 0.53 actual= 0.61 Next earnings 11-16 est= 0.63 versus= 0.07 Average daily volume = 7.5 mln Chart = http://quote.yahoo.com/q?s=AMAT&d=3m **** TXN - Texas Instruments Inc. $89.88 (-0.75)(+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. As an investor, whether you're fortunate or unfortunate depends on which side of the fence you're on when the stock falls. It's all part of the game but it sure does sting if you're on the wrong side of the fence. This was the case for many TXN investors last week as they watched gains disappear as fast as the came. An increasing demand for PC's and rising chip prices helped rally both computer and semiconductor stocks only to be foiled by profit-takers. TXN was no exception, leaving the stock fractionally lower for the week. Despite this slight setback our views remain bullish on TXN and the semiconductor industry. Fundamentally the stock is sound, with the price of DRAM chips on the rise and computer sales skyrocketing, TXN is in a very good position. Technically speaking, the stock continues to trade above all its moving averages, indicating the strength of the stock. Despite strength in the stock, with inflation fears still in the air and the existence of profit-takers, there should be plenty of opportunities to buy on the dips. Confirm the market direction before placing new trades and use the recommended stops. An interesting article was released on TXN last week that may influence our play. Chinese telecommunications equipment maker Eastern Communications announced it had set up a joint venture with TXN. The venture, with a registered capital of $7 million, was primarily for research, development and design of digital information products. BUY CALL OCT- 85*TNZ-JQ OI=1990 at $8.13 SL=6.25 BUY CALL OCT- 90 TNZ-JR OI=3554 at $5.00 SL=3.25 BUY CALL OCT- 95 TNZ-JS OI=1354 at $2.75 SL=1.25 BUY CALL OCT-100 TNZ-JT OI=1429 at $1.63 SL=0.75 Picked on Aug 31st at $82.06 P/E = 77 Change since picked +7.81 52-week high=$93.44 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 ******** EMC - EMC Corporation $71.00 (+2.88)(+3.25) 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. Our strategy using the 10-dma as support and signal has served us well on EMC. The play is now on a successful track since our pick, as we bounced nicely off support of $66 on Wednesday. Powering ahead on better than average volume, we reached a new 52-week high on Friday of $71.88. This bullish confirmation from Wednesday's dip has turned all indicators positive and is showing break-out potential. We expect the rally to continue next week, as we continue a technical bounce from last weeks storms and unrest. We can't let all this good news go to our head however. The market is an expert fighter and just when you feel most confident, it will teach you a lesson. Be humble and anticipate the market's moves before it hurts you. EMC is profitable so protect your gains with trailing stops. As Jim so wisely teaches us, sell too soon. This advice is especially relevant after what happened to IBM on Friday. The stock started to plummet around 2:00 ET after comments from a Merrill Lynch analyst said he lower than expected results could plague the Hardware sector in the 3rd quarter. This is the same sector that EMC is in. So do not let a successful play turn negative! EMC is approaching the expected earnings announcement on 10-19. This will also help move the stock, as EMC is usually a good run candidate. It's too early however to play the stock on this merit alone. Confirm a positive move in the price and market before playing. News on Friday talked of the new trend into storage array. A scaled down, work group approach to central storage. This is a move away from the enterprise storage that EMC focuses on. For this reason, EMC has been thinking about Data General as a possible interest. EMC was also listed Friday as one of NASDAQ's most active stocks. This indicates that it is a good participator in any tech rally that may ensue. BUY CALL OCT-60 EMB-JL OI= 8174 at $12.25 SL=9.50 BUY CALL OCT-65*EMB-JM OI= 7270 at $ 7.75 SL=5.75 BUY CALL OCT-70 EMB-JN OI=11957 at $ 4.38 SL=2.75 BUY CALL OCT-75 EMB-JO OI= 2117 at $ 2.13 SL=1.00 Picked on Sep 12th at $68.13 P/E = 74 Change since picked +2.88 52 week high=$71.88 Analysts Ratings 14-9-1-0-0 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 = 5.50 mln Chart = http://quote.yahoo.com/q?s=EMC&d=3m **** SUNW - Sun Microsystems $88.69 (+3.00)(+1.19)(+8.31) 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. This momentum play has continued to provide players with money-making opportunities since we first picked it up on August 28th. SUNW's energy and driving force have since carried into its earnings' season. We certainly expect a profitable run and especially now that SUNW announced a 2:1 stock split after hours on Friday! Shareholders' approval to increase authorized shares to 3.6 bln is expected at the company's Annual Meeting on November 10th. After the split the number of outstanding shares will be approximately 1.56 bln. This is the 2nd time in a calendar year SUNW has had a stock split - just recently in April the shares also split 2:1. It's notable that SUNW has more than tripled its share price over the past year. We were watching for SUNW to give us further confirmation of its upward movement after slinking down to support at $82 mid-week. Well we certainly got it! SUNW set another new 52-week high on Friday on double its normal trading volume (and this was before the 2:1 split announcement). You can't beat that for confirmation. The previous day, analyst Daniel Kunstler at J.P. Morgan Securities reiterated his Buy rating and issued a 12-month target price of $105. It's expected SUNW will continue to rise under reasonable conditions next week. So you'll likely have to target shoot for an intraday low to get a sensible entry into the play. Earnings are in a few weeks around October 14th and this date will be confirmed ASAP. This play is a potential gold-mine - remember the strong earnings' run last quarter? It'd be great to see history repeat itself in this case. BUY CALL OCT-85*SUQ-JQ OI=7132 at $ 7.50 SL=5.75 BUY CALL OCT-90 SUQ-JR OI=4864 at $ 4.63 SL=3.00 BUY CALL OCT-95 SUQ-JB OI=1596 at $ 2.56 SL=1.25 BUY CALL JAN-90 SUQ-AR OI=4939 at $10.63 SL=8.25 BUY CALL JAN-95 SUQ-AB OI=2613 at $ 8.38 SL=6.50 Picked on Aug 28th at $76.19 P/E = 69 Change since picked +12.50 52 week high=$89.75 Analysts Ratings 9-8-3-0-0 52 week low =$19.19 Last earnings 07/99 est= 0.47 actual= 0.48 surprise +2.1% Next earnings 10-14 est= 0.31 versus= 0.25 Average Daily Volume = 7.87 mln Chart = http://quote.yahoo.com/q?s=SUNW&d=3m PLAYS CONTINUED IN SECTION FOUR ******************************* SEE DISCLAIMER IN SECTION ONE
The Option Investor Newsletter 9-19-99 Sunday 4 of 7 *************** CALLS CONTINUED *************** Networking *************** CSCO - Cisco Systems $73.50 (+2.75) Cisco builds 85% of the routers and switches that make the Internet work. They are the leading supplier of products that link local and wide area networks. The company's other products include dial-up access servers and network management software. Cisco has been on an acquisition binge (about 37 since 1993) to broaden its product line. It also derives revenue by licensing products as it seeks to widen the influence of its Cisco Internetwork Operating System (Cisco IOS) software, in hopes of making it an industry standard. Strategic relationships with the industry's biggest players (including Alcatel, Microsoft, Qwest, and U S WEST) are boosting Cisco's influence on the networking industry. In short, Cisco Systems is the worldwide leader in networking for the Internet. Murphy is alive and well, this time in our favor. It was just 1 week ago we sent the Cisco Kid back to the playpen due to lack of performance. It appeared that interest (indicated by volume) had waned in the issue. CSCO really showed us its stuff, as it ran from its low of the day (and week) on Thursday from $69.75 to a new all-time high and close of $73.50 on Friday. Backing it up (and convincing us the move was for real) was huge volume of 26 mln shares. That's a 44% increase over its ADV of 18 mln. Looks like the funds are buying again. While Cisco has a great story to tell in that it's the leader in providing equipment for development of the Internet backbone, we think it will run on momentum this week (though it doesn't hurt either that they acquired a new growth engine in the recent purchase of Cerent and Monterey Networks 2 weeks ago and their recent announcement of an equipment and patent exchange with IBM). Confirm market direction before playing. We're putting CSCO on our split candidate list. The last announcements have come between $69 and $83. We're there now and likely headed higher as earnings approach. The announcement will likely come between now and earnings on November 9. They currently have 5.4 bln shares authorized, which would allow them their usual 3:2 split. However, this doesn't leave them with much stock currency for further acquisitions. Thus in their pre- proxy statement (no final proxy yet), one of the items on the agenda is to increase the outstanding shares to 10 bln., which would allow them either a 2:1 or two 3:2 splits without another vote. A 2:1 is outside their normal M.O., thus a 3:2 is more likely. Stay tuned. ***No November strikes available yet*** BUY CALL OCT-70*CYQ-JN OI=31821 at $5.38 SL=3.75 BUY CALL OCT-75 CYQ-JO OI=20961 at $2.38 SL=1.25 BUY CALL JAN-70 CYQ-AN OI=30057 at $9.63 SL=7.25 BUY CALL JAN-75 CYQ-AO OI=11802 at $6.75 SL=5.00 Picked on Sep 19 at $73.50 P/E = 114 Change since picked +8.44 52 week high=$73.56 Analysts Ratings 21-12-0-0-1 52 week low =$20.56 Last earnings 08/99 est= 0.20 actual= 0.21 surprise +5.0% Next earnings 11-09 est= 0.22 versus= 0.16 Average daily volume = 18.19 mln Chart = http://quote.yahoo.com/q?s=CSCO&d=3m *************** Biotechnology *************** BGEN - Biogen Inc $86.44 (-2.56)(+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. Biogen initially started out as a simple momentum play when it broke out on September 3rd (remember that explosive market?). Since then BGEN has climbed to new heights reaching $90.44 at one point showing strength in the biotech sector even when there is scuttlebutt amongst investors. This leadership and powerful momentum are now also good components for a potentially strong earnings run. Biogen confirmed it will report its earnings on October 7th, after the bell. That only leaves a couple weeks for us to make our plays because it's never recommended to hold over an earnings' announcement. It appears bottom support has established itself at about $84. The range between this mark and the 10-dma at $86.38 is certainly a solid entry point into this play. Look for a strong market to give this stock another boost. This week was full of wonderful surprises. Foremost Biogen announced on Wednesday that it will report $0.02 higher-than- expected for the 3Q - First Call has a $0.36 EPS consensus for the company. This news is a result of the increased sales from AVONEX, the best selling treatment for relapsing Multiple Sclerosis. Sales figures are expected to report in at $160 mln for Q3. Also that day, Elise Wang from PaineWebber 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. On Thursday two more analyst came forward with reiterations. Raymond James reiterated their Buy rating and issued a target price of $100 and US Bancorp Piper Jaffrey reiterated a Buy rating but set their target price only at $90. Then during the bullish market on Friday, analyst Todd R. Nelson at Dain Rauscher Wessels reiterated Buy rating. He also issued a $112 price target. As the play moves forward in time it's evident that the conditions surrounding BGEN continue to become more and more favorable. Side note: When BGEN reached $80 it once again became a split candidate. Granted the stock just split 2:1 on June 25th and with only 220 mln shares authorized and 150 mln shares outstanding, there's not quite enough for another 2:1 stock split. Nevertheless these circumstances should be brought to your attention. The last Annual Stockholder's Meeting was on June 11th and thus far, there's no word on a special meeting. BUY CALL OCT-85 BGQ-JQ OI=1073 at $5.63 SL=4.00 BUY CALL OCT-90 BGV-JR OI= 539 at $3.13 SL=1.50 BUY CALL OCT-95 BGV-JS OI= 69 at $1.50 SL=0.75 low OI BUY CALL JAN-90 BGV-AR OI=1191 at $8.00 SL=6.25 BUY CALL JAN-95 BGV-AS OI= 103 at $6.25 SL=4.50 Picked on Sep 9th at $89.19 P/E = 66 Change since picked -2.75 52 week high=$90.44 Analysts Ratings 9-12-5-0-0 52 week low =$25.18 Last earnings 07/99 est=-0.32 actual= 0.34 surprise +6.3% Next earnings 10-07 est= 0.36 versus=-0.25 Average Daily Volume = 1.97 mln Chart = http://quote.yahoo.com/q?s=BGEN&d=3m *************** Internet *************** AMZN - Amazon.com $63.81 (-2.69)(+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. Why are we keeping AMZN if it was down on Friday (for the third day in a row) while all the rest of the market was up? Good question. The short answer is that AMZN found good support on 2 different occasions over the last week and again on Friday at $62.50 to $63. Thus we consider the current level of $63.81 a buying opportunity. With big economic fears temporarily out of the way, we look for this week to be generally up, which should carry AMZN with it. For the long answer, we would add the new online auction consortium of Dell, MSFT, Lycos, etc., concocted to take on e-bay (who got clobbered on Friday), sparked a sympathetic reaction in AMZN, since they too are in the online auction business. We think the sympathy thing is overdone though and expect upward movement as investors should soon realize e-bay has 5 times as many users as "E-PEC" (borrowed from OPEC), which is in formative stages only. For the play, note that resistance is at $68, giving us a few dollars of upside potential. We caution too that AMZN is a risky play but if you fancy your style a bit more conservative, wait for the breakout over $68 backed by strong volume before taking a position.. The really big news is contained above in the Dell, Microsoft, Lycos, Excite at Home, and a number of other on-line vendors are going to combine their resources to form an online auction alliance to take on e-bay. From Associated Press, "The combined customer reach of the FairMarketPlace alliance could top 50 million a month, dwarfing the 6 million who use industry pioneer eBay. eBay, however, would still have greater volume, with about 3.5 million individual items for sale, compared to 70,000 on FairMarketPlace sites." This is only important in that AMZN has an on-line auction site too but will not participate in "E-PEC". BUY CALL OCT-60*YZZ-JL OI=6053 at $ 7.88 SL=6.25 BUY CALL OCT 65 YZZ-JM OI=7174 at $ 5.00 SL=3.25 BUY CALL OCT-70 YQN-JN OI=9344 at $ 3.13 SL=1.50 BUY CALL JAN-65 YQN-AM OI=6279 at $11.13 SL=8.75 BUY CALL JAN-70 YQN-AN OI=4417 at $ 9.25 SL=7.00 Picked on Sep 12th at $66.50 P/E = N/A Change since picked -2.69 52 week high=$110.62 Analysts Ratings 10-7-4-0-0 52 week low =$ 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 = 9.29 mln Chart = http://quote.yahoo.com/q?s=AMZN&d=3m **** YHOO - Yahoo! $163.13 (-7.38)(-5.31) Yahoo! Inc. is a global Internet media company that offers a branded network of comprehensive information, communication and shopping services to 80 million users worldwide. As the first online navigational guide to the Web, YHOO is the leading guide in terms of traffic, advertising, household and business user reach and is one of the most recognized brands associated with the Internet. The company's global Web network includes 19 World properties. Yahoo has offices in Europe, the Asia Pacific, South America, Canada and the United States and is headquartered in Santa Clara. Along with AMZN, YHOO is another online auction site did not join the consortium of MSFT, DELL, LCOS and XCIT (along with more than 100 other companies), designed to squash e-bay. The market decided that if a company was not part of the solution, it was part of the problem, which kept a lid on YHOO all day Friday, while the rest of the NASDAQ mounted a 62-point gain. Fortunately, online auctions aren't responsible for a big portion of YHOO's revenue, which should serve to keep investors squarely focused on earnings (October 6 after the close, and the basis of this play), now just over 2 weeks away. Historically over the last 4 quarters, YHOO has made nice earnings runs prior to the announcement, then surprised to the upside. Of course, around that time, the price takes a nosedive anyway, which is why we don't recommend holding over earnings. In this case, you may even want to be out by Friday, October 1, since news from the FOMC meeting on October 5, the day before YHOO announces earnings, may spark some selling jitters into this play before the actual earnings announcement. This is a true case of "buy the rumor, sell the news". If you've been following the play, entry points in the $160 range and below have been plentiful. Market willing, we're looking for the run to begin this week. Pick your entry carefully, hopefully on intra-day weakness and confirm market direction. Since this is an earnings play, news generally won't affect the sentiment as much during this earnings run period. However, we'd be remiss if we didn't point out that the online auction community formation known as FairMarketPlace will affect not just e-bay but others in the online auction business, including YHOO, though we think the short-term negativism is overdone. ***No November strikes available yet*** BUY CALL OCT-160*YHV-JL OI=3146 at $13.88 SL=11.00 BUY CALL OCT-165 YHV-JM OI=1329 at $11.75 SL= 9.25 BUY CALL OCT-170 YHV-JN OI=4316 at $ 9.38 SL= 7.00 Picked on Sep 14th at $165.19 P/E = 392 Change since picked -2.06 52 week high=$244.00 Analysts Ratings 9-17-5-0-0 52 week low =$ 40.81 Last earnings 07/99 est= 0.08 actual= 0.09 Next earnings 10-06 est= 0.09 versus= 0.05 Average daily volume = 9.07 mln Chart = http://quote.yahoo.com/q?s=YHOO&d=3m **** DCLK - Doubleclick Inc, $116.25 (+8.50) Doubleclick provides comprehensive global Internet advertising solution. With headquarters in New York, the online firm uses its DART technology that measures Web traffic and ad effectiveness and in turn provides data to both the Web publishers and the advertiser. With over 1300 sites in its network Doubleclick delivers ads in such search engines as AltaVista, Egghead.com and U.S. News Online. Two of its bigger advertisers include AT&T and IBM. Doubleclick has agreements to buy consumer-purchasing data information provider Abacus Direct and software firm NetGravity. DCLK competes primarily with America Online, 24/7 Media and Flycast Comm. Shares of DLCK are on the move again. As all investors should know stocks in the Internet industry can be extremely volatile. DCLK is no different so check your risk profile at the door before entering. Monday shares of the Internet advertising company traded at a low of $104 and a high of $114.75. Those levels held throughout the week until Friday, when the interest, the volume and the price of DCLK began to increase. Shares of DCLK climbed $7.63 Friday on volume of 4.1 mln shares. With the net stocks getting soaked for most of the week, DCLK seemed to find its way out of the doom and gloom surrounding Wall Street for most of the week when analyst Perry Boyle at Thomas Weisel Partners reiterated his Buy rating. After meeting with DCLK's management Boyle came away with lots of warm fuzzies and confidence in his near term earnings estimates. He expects DCLK to beat his estimates for third quarter gross revenues by $50.6 million or approximately 9%. DoubleClick announced Monday it was granted a patent for its method of delivering advertising over the Internet. The technology called "DART" delivers ads over in Internet through a third party server to one or a network of Web sites. We are looking for DCLK to continue its recent moves higher. Again we bring up the word VOLATILE! Should we see a pullback, the $112-$113 area could provide support, followed by the $108-110 levels. This is not a play everyone should consider. Keep your stops close and hang on. No other news at this time. BUY CALL OCT-110*TDU-JB OI= 807 at $13.13 SL=$10.50 BUY CALL OCT-115 TDU-JC OI= 558 at $10.63 SL=$ 8.00 BUY CALL OCT-120 TDU-JD OI=1145 at $ 8.25 SL=$ 6.25 BUY CALL OCT-125 TDU-JE OI= 446 at $ 6.50 SL=$ 4.75 High Risk! Picked on Sep 18th at $116.25 P/E = N/A Change since picked +0.00 52 week high=$176.00 Analysts' ratings 8-6-0-0-0 52 week low =$ 6.75 Last earnings 07/99 est= -0.13 actual= -0.13 surprise=0% Next earnings 10-08 est= -0.13 versus= -0.14 Average daily volume = 2.83 mln Chart = http://quote.yahoo.com/q?s=DCLK&d=3m **** CKFR - CheckFree Holdings Corp. $41.63 (+2.75) CheckFree Holdings subsidiaries offer electronic data interchange systems that allow customers to make routine payments and collections, do paper-based financial transactions electronically and make secure purchases on the Internet. Serving More than 2.5 million consumers and hundreds of financial institutions, CheckFree also provides electronic banking services (balance checking, stop payments), electronic bill payments, collections and other types of electronic commerce. Other subsidiaries provide investment services and software for financial applications. Yahoo!'s Bill Pay service operates via an agreement with CheckFree. Intuit owns nearly 20% of CheckFree. CheckFree announced its third deal with an Internet company last week when it announced the deal with ExciteAtHome. It already has deals with Internet media network Yahoo! and Quicken.com of Intuit Inc. to have bills presented and paid through their respective Web sites. CheckFree's CEO, Pete Kight, said in a recent interview that the company was in talks with all major Internet companies but stopped short of acknowledging analyst assertions that it had approached America Online Inc. This technology will enable consumers to sign up for and immediately begin using electronic billing and payment services. This adds to CheckFree's current arsenal of 100 billers and 3 million payees. On the news, shares of CheckFree added on 2.75 points to end the week comfortably above its 10-dma at $38. The shares consolidated nicely in the earlier part of September before resuming the current uptrend. Look for volume and momentum to pick-up under current market conditions. The sector has seemed to have hit a short-term bottom but market direction and sector momentum must be confirmed before entering a play on Monday. Look for an entry point above Friday's intra- day high of $42.13 backed by strong volume. If profit-takers step up to the plate this week look for some support and a bounce at the 38-39 level. There were a few other news articles this week of alliances and products but none that would really move the stock so we have left them out. If anything of importance comes out we will be sure to let you know. BUY CALL OCT-35 FCQ-JG OI=195 at $7.75 SL=6.00 BUY CALL OCT-40*FCQ-JH OI=466 at $4.38 SL=2.75 BUY CALL NOV-35 FCQ-KG OI=408 at $8.88 SL=6.75 BUY CALL NOV-40 FCQ-KH OI=477 at $5.75 SL=4.25 Picked on Sep 19th at $41.63 P/E = 221 Change since picked +0.00 52week high=$69.13 Analysts Ratings 6-5-2-0-0 52week low =$ 5.75 Last earnings 07/99 est= 0.05 actual= 0.05 Next earnings 10/26 est= -0.07 versus= -0.05 Average daily volume = 1.55 mln Chart = http://quote.yahoo.com/q?s=CKFR&d=3m ******* Telecom ******* NT - Nortel Networks Corp. $49.75 (+1.44)(+1.88) Nortel is a one stop answer shop for communication companies. Offering products to customers in wireless, carrier, IP and telephony networking, NT is unique and the first to offer network package solutions of this kind. Their product line allows them to bring together network solutions for public and private carriers, ISP's, PCS and cellular companies. NT has expanded with manufacturing facilities worldwide. Revenues grew 26% to $4.5 billion in the first quarter of this year. This continues a revenue growth trend over the last three years. NT is a technical play. It broke through it's prior resistance of $44 on Sep 7th and has since powered ahead to a new 52-week high of $50 on Friday, forming a new trend. Even more impressive is it's recent break through ability, turning positive quite convincingly on the MACD and Stochastics. This is pointing to a sustained rally in the stock. Remember that bulls demonstrate convincing strength to penetrate previous levels on momentum and volume. NT fits this profile. Stocks breaking new 52-week highs are considered leaders in the market. If investors are convinced to follow, then a general market rally occurs. Given the technical bounce last Friday, this could be the week the traders follow. Again, be cautious of a historical September sell off. Protect your positions with stops and confirm positive direction in both the stock and market before playing. AT&T and British Telecom confirmed their confidence in NT Friday stating that it would be influential in bridging the technology gap that now separates the worlds communications. Continuing their expansion plans, NT acquired $210 million to build a network for data and voice, linking 50 cities. The Motorola and General Instrument merger, spawned rumors that NT may also be looking for a partner to expand in the communication equipment industry, along with the likes of Lucent and Scientific-Atlanta. We'll wait and see. BUY CALL OCT-45 NT-JI OI=2372 at $5.50 SL=3.75 BUY CALL OCT-50*NT-JJ OI=1490 at $2.13 SL=1.00 BUY CALL DEC-45 NT-LI OI= 639 at $7.50 SL=5.75 BUY CALL DEC-50 NT-LJ OI= 932 at $4.38 SL=2.50 Picked on Sep 19th at $49.75 P/E = N/A Change since picked +0.00 52 week high=$50.00 Analysts Ratings 9-16-2-0-0 52 week low =$13.38 Last earnings 06/99 est= 0.25 actual= 0.28 Next earnings 10-26 est= 0.26 versus= 0.21 Average daily volume = 2.14 mln Chart = http://quote.yahoo.com/q?s=NT&d=3m **** NXTL - Nextel Communications $75.19 (+3.19) Nextel provides customers with solutions to many wireless nightmares, providing fully digital service world wide. By offering items such as no roaming charges, flat rate long distance, second rounding, superb quality and service, NXTL has increased their customer base to 3.5 million subscribers. Revenues have hit $1.5 billion for the first half of this year. That's a 95% increase! Although still not in the black, with a net loss of $800 million, NXTL is on the right path. With wireless communications continuing to grow stronger and customers looking for more cost effective solutions. NXTL is positioned to capture the two way digital market. NXTL is a play because of new price targets and it's new trend. Because of NXTL's impressive revenue growth, analysts have raised their price target to $82 by year end. This plus continued growth projections propelled the stock price higher to a new 52-week high, continuing a bullish 45 degree trend started on Sept. 3rd. When investors can find confirmed 45 degree lines in trends and indicators, it's good news and signs that the rally has momentum and potential. NXTL also turned bullish with 45 degree lines on the MACD and Stochastic indicators. A sign that now may be a good time to participate in a further bull run. We think so, on a continued tech rally through next week. NXTL is also scheduled to announce earnings on Oct. 14th. Although a bit early to expect an earnings run, considering the companies positive outlook, it can only help. Confirm the rally in both stock and market before playing. Friday's gain was not significant so watch for a slow down. Don't get caught in a trap. September's famous for bear traps. As mentioned, Tim analyst Tim O'Neil raised his year end price target to $82 for NXTL. NXTL had very positive comments on Monday regarding continued growth in customer base. This should bode well for revenues and earnings. NXTL also signed a three year contract with LHS group, to continue it's customer service and billing program. BUY CALL OCT-70 FQC-JN*OI=1255 at $7.63 SL=5.75 BUY CALL OCT-75 FQC-JO OI= 958 at $4.88 SL=2.75 BUY CALL OCT-80 FQC-JP OI= 392 at $2.69 SL=1.25 BUY CALL NOV-75 FQC-KO OI= 463 at $7.00 SL=5.25 BUY CALL NOV-80 FQC-KP OI= 79 at $5.13 SL=3.25 low OI Picked on Sep 19th at $75.19 P/E = N/A Change since picked +0.00 52 week high=$76.00 Analysts Ratings 10-9-3-0-0 52 week low =$15.38 Last earnings 07/99 est= -1.35 actual= -1.27 Next earnings 10-14 est= -1.09 versus= -1.56 Average daily volume = 4.98 mln Chart = http://quote.yahoo.com/q?s=NXTL&d=3m ************* Miscellaneous ************* DISH - EchoStar Communications $97.00 (+3.00)(+8.13)(+8.63) Located in Littleton, Co is the second-largest provider of satellite broadcasting. EchoStar operates the DISH Network and offers more than 300 channels of digital TV and audio programming. They have over 2.4 million subscribers and also provide satellite delivery of local network stations in several large markets. DISH has formed a partnership with Microsoft to provide WebTV access through its DBS system. They compete with industry heavy-weights DIRECTV, Time Warner and AT&T Broadband & Internet Services. The rocket launches! Well, almost. Though the new satellite, once imperiled by hurricane Floyd, is safe on the ground the launch has been rescheduled for Wednesday, September 22 at 1:08 a.m. That DISH's new bird isn't yet flying didn't keep investors from gradually bidding up the price on Friday. Because the total Friday volume was low, we suspect there was a "buy on close" order of pretty good size, which served to spike the price by $2 in the final 15 minutes for a total gain of $6 on the day. With that much profit in one day, don't be surprised to see some profit-taking following what might be a good-looking amateur hour. After setting another all-time high on Friday of $97.25, and closing within $0.25 of its all-time high, any weakness should be considered a buying opportunity. DISH has good support at $90 and no upper resistance right now if it wants to move up right from the start. If there is a pullback, resistance might be encountered at $97.25. Be on the lookout Tuesday for the "sell on fact" crowd following the launch of the new satellite. Technically, this play is still strongly in the positive part of the graph. Pick your entry carefully and sell too soon. DISH is still a volatile play with lots of inherent risk. The new satellite launch will create the nation's first TV company offering 500 channels from which to choose. BUY CALL OCT- 90 UAB-JR OI=354 at $11.88 SL=$ 9.50 Higher Delta BUY CALL OCT- 95*UAB-JS OI=200 at $ 9.38 SL=$ 7.00 BUY CALL OCT-100 UAB-JT OI=116 at $ 6.63 SL=$ 4.75 BUY CALL DEC- 95 UAB-LS OI= 5 at $15.50 SL=$12.50 low OI BUY CALL DEC-100 UAB-LT OI= 61 at $13.75 SL=$11.00 Picked on Sep 4th at $85.88 P/E = N/A Change since picked +11.13 52 week high=$97.25 Analysts Ratings 10-6-0-0-0 52 week low =$ 9.75 Last earnings 07/99 est=-0.93 actual=-0.80 surprise +13.98% Next earnings 11-10 est=-0.83 versus=-0.68 Average daily volume = 759 K Chart = http://quote.yahoo.com/q?s=DISH&d=3m PUTS, PUTS, PUTS ***************** Put plays can be very profitable but have a larger risk than call plays. When a stock is falling the entire investment community (except the shorts) is hoping it will reverse andstart back up. The company management is also doing everythingthey can to shore up their stock price. The company issuespress releases, brokers talk it up, analysts try to put apositive spin on everything. Then of course there is the deathknell, the "buy recommendation" simply because the price hasdropped to some level that analysts feel attractive again. Buyers who like the stock wait until it appears a bottom hasbeen reached and then jump on it in a feeding frenzy. They mayalready have a large position and are averaging down. Manyfactors can stop a free falling stock in mid drop. ***** COST - Costco Wholesale Corporation $67.50 (-2.38)(-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. It took a broad market rally on Friday to tarnish our almost perfect week. COST was trying to reach five straight days in negative territory only to be foiled by anxious investors rushing back into the market after Thursday's massive sell-off. What needs to be decided is whether Costco's gain on Friday was a head fake or the beginning of the end for our play. Most likely it was a head fake brought about by the broader markets. Despite this slight setback the overall picture remains the same, retail stocks remain in poor standings with investors and the prognosis for any changes in the near-term are bleak. COST is trading below its 50-dma and 200-dma indicating the prolonged weakness that unfortunately investors have had to endure. Whether their endurance continues to hold remains to be seen. For those individuals placing new trades, watch for opportunities to buy your puts on the spikes. As seen on Friday, broader market movements can influence the stock so please use caution with this trade. BUY PUT OCT-70*PRQ-VN OI=1061 at $4.88 SL=3.00 BUY PUT OCT-65 PRQ-VM OI= 510 at $2.50 SL=1.25 Average daily volume = 1.85 mln Chart = http://quote.yahoo.com/q?s=COST&d=3m **** GPS - Gap Stores $33.63 (-2.06)(-3.19) 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. Now that support at $35 is out of the way, GPS has looked weak and continues its descent. Even the market rally on Friday didn't do much to save the stock. Hopefully you weren't scared out of the play by Friday's morning rally in Gap which turned out to be just that. A morning rally followed by GPS rolling over. GPS traditionally has support and resistance at the psychological numbers like 30, 35, 40, etc. Now that we are past $35, we don't expect the decline to stop until $30, barring any unforeseen news. The rumors are that Gap stores are in the process of offering markdowns and sales to try and beat some very tough comparable sales numbers from last year. Maybe there is a strong enough market for vests and cords this year but odds are they will come up short. Needless to say, we prefer riding the momentum which is still signaling for a lower stock price. Intraday bounces like the one of Friday should be considered for an entry point and place stops just in case investors come flocking back to GPS based on its valuation and previous incredible performances. BUY PUT OCT-40 GPS-VH OI= 403 at $6.88 SL=5.25 BUT PUT OCT-35*GPS-VG OI=3084 at $2.94 SL=1.50 huge volume Fri Average Daily Volume = 2.25 mln Chart = http://quote.yahoo.com/q?s=GPS&d=3m PUTS CONTINUED IN SECTION FIVE ******************************* SEE DISCLAIMER IN SECTION ONE
The Option Investor Newsletter 9-19-99 Sunday 5 of 7 Puts Continued ************** LLY - Eli Lilly and Company $67.00 (-5.38) Eli Lilly is a major U.S. drug company that discovers, develops, manufacturers and sells products in the Life Sciences industry. Some of Lilly's products include Prozac, to treat depression, Zyprexa, used in treatment of schizophrenia, Permax, a treatment for Parkinsons disease and Gemzar used for treatment of a pancreatic cancer. Also the company produces a wide range of antibiotics, growth hormones, cardiovascular therapy medications, anti-ulcer agents, vitamins and animal health products. The company also has subsidiaries through which it provides health care management services in the U.S. The weakness for Lilly continues despite a strong market on Friday. The entire sector seems to be stuck in the mud and not many drug stocks participated in rebound. LLY is actually suffering more than most stocks as bad news continues to trickle in. On Friday, LLY got their second downgrade of the week, this time from Gruntal & Co. They downgraded LLY from Outperform to Market Perform. Gruntal said they expect the entire sector to be weak while discussions of healthcare plans intensify this fall. You may recall this is the second downgrade this week as Banc of America Securities nailed LLY with a downgrade on Tuesday. This reinforces our play and we could easily see $65 before hitting support. From there it may bounce slightly but it doesn't hit major support until $61, which is what we are subconsciously targeting for this play (but, of course, we will let the momentum dictate). You may have noticed a slowing in the decline since Thursday afternoon despite the downgrade. This is because we have now hit an oversold condition on the Bollinger Bands. This has brought some investors back to the buy side. We are less concerned with this indicator on Lilly though since it did this in July and still dropped another $5 after hitting this same indication. In fact, it was at this same price during the decline in July. Look for entry points on any sector or stock rally that is not accompanied by news or volume. BUY PUT OCT-70*LLY-VN OI=1886 at $4.63 SL=2.75 BUY PUT OCT-65 LLY-VM OI=2628 at $1.88 SL=1.00 Average Daily Volume = 2.84 mln Chart = http://quote.yahoo.com/q?s=LLY&d=3m **** JNJ - Johnson and Johnson $96.06 (-3.44) 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. We are still curious about what's going on in the drug sector. That curiosity extends to JNJ as well. We have takeover rumors and approvals of drugs and technology coming from the FDA and we have stocks that are going south. After peaking in late August at $105.88, shares of JNJ have declined in an orderly fashion but declined none-the-less. In recent days we have seen JNJ receive marketing clearance from the FDA for its Mammotome Hand Held device to diagnose breast abnormalities, which is an alternative to an open surgical biopsy. They also received approval to market its new CrossFlex LC coronary stent this past Wednesday. Friday Business Week reported that Chiron Corp (CHIR) could be a takeover target of Novartis AG and Johnson & Johnson. JNJ currently has a joint venture in operation with Chiron. The negative news is the industry seems to suggest an industry wide slow down, in certain segments. One example is shares of Boston Scientific Corp. which tumbled nearly 20% on Wednesday after they warned of a third quarter sales shortfall. This is probably an example of being guilty by association rather than a sign of serious problems at JNJ. JNJ bounced off its 100-dma Thursday but at this point we really don't see any signs of a bottom. Considering the recent positive events surrounding JNJ, shares of the drug company have still declined. A bounce up to the 10-dma in the $99 area is possible but without some serious new buying entering the market place, we expect JNJ to continue its slide. Consider your risk profile, before entering a new play on JNJ and set your stops accordingly. BUY PUT OCT-100*JNJ-VT OI= 946 at $5.25 SL=3.50 BUY PUT OCT- 95 JNJ-VS OI=1535 at $2.63 SL=1.50 Average Daily Volume = 2.04 mln Chart = http://quote.yahoo.com/q?s=JNJ&d=3m **** ELNK - EarthLink Inc $40.13 (-4.88) Earthlink provides Internet access and other related services to 1+ mln subscribers in the US and Canada. The company provides Internet access through a network of leased high-speed dedicated data lines and over 1,700 dial-up access sites. Sprint owns 29.5% stake in EarthLink and the ISP services are co-branded as EarthLink Sprint Internet. They stand behind America Online, Microsoft Network and AT&T WorldNet and are in competition with MindSpring for the #4 spot among US ISPs. We can talk about the rough week in the market and the volatility of Internet shares or even eBay's downward spiral that of course didn't help the ISPs but let's go right to the root of things. Since incredible highs last Aprils when ELNK hit $99.37, its share price has dropped about 60% in about 5 months. You can see that from taking a look at a chart. Well after Elliot Prince and Marlowe Burke, analysts from Wit Captial, examined a few of ISP companies including EarthLink (ELNK), OneMain.com (ONEM) and Prodigy (PRGY), they believe they know why. Now obviously they took into consideration the interest rate fears and other general economic factors but specifically the risk of increasing competition is causing depressed valuations. This risk factor is growing and especially noted is the companies who offer free access in exchange for being able to advertise. Therefore, they concluded that from an investment point of view "until the impact of industry risks is clearer" they don't anticipate any sustained rally. Now for our put play. Losses have been steady all month and technically ELNK is perched on its near-term bottom support. Of course, it's a safer bet to wait for it to slip under this level and move closer to the ultimate 52-week low at $29.50 but this is still a good entry point for the more HIGH RISK players who are looking for a higher reward. BUY PUT OCT-45 QKL-VI OI=449 at $7.00 SL=5.25 BUY PUT OCT-40*QKL-VH OI=328 at $3.63 SL=2.00 BUY PUT OCT-35 QKL-VG OI=363 at $1.63 SL=0.75 Average Daily Volume = 1.31 mln Chart = http://quote.yahoo.com/q?s=ELNK&d=3m **** WLP - Wellpoint Health $68.75 (-8.00) Wellpoint Health Networks serves about 32 million individuals in the U.S. through HMOs, PPOs, and special networks such as dental, vision and mental health plans. The company operates as Blue Cross in California and UNICARE through the rest of the nation. Wellpoint also sells life insurance and third party administration to self-employed businesses. In 1997, they acquired the group health and related life business of John Hancock Mutual. It's back and were playing it again. We couldn't help it, it was right in front on us and we decided to grab it. The stock I am referring to is Wellpoint Health Networks. The reason why we decided reestablish the stock on our put list is obvious to anyone that has been following long-term health care stocks. The sector has been beat to a pulp and one of the front runners is WLP. Even the monster rally on Friday was not enough to convince its investors to take a chance. The stock closed near its low for the day, which has become the norm for the past week. If you look at a five-day chart, you notice a nice sloping pattern ending at Friday's close. This is just a morsel to what actually happened. We expected a bounce on Thursday at $70 (historically speaking has been its main support) and it did. However, after rising only two points the stock rolled and never looked back, breaking the long lasting support of $70. Another interesting fact is the stock does not show any real support until $60 so there is plenty of room to fall. When placing new trades on the stock, watch for slight pullbacks however, if the indication points south, go with the flow. Even though we do not expect a turnaround, we always recommend using the stop loss orders to be safe. Just to let you know and contrary to our feelings on Friday, ABN AMRO announced it was making WLP its top stock pick of the health management organization sector, based on valuation. They also reiterated a Buy rating and price target of $98. In the long- term this may be true however near-term is highly unlikely. BUY PUT OCT-70*WLP-VN OI=56 at $3.88 SL=2.00 low OI BUY PUT OCT-65 WLP-VM OI=78 at $1.56 SL=0.75 low OI Average Daily Volume = 322 K Chart = http://quote.yahoo.com/q?s=WLP&d=3m ************************ SPREADS/STRADDLES/COMBOS ************************ Inflation Fears Swept Away By Hurricane Floyd... Friday, September 17 The market rallied Friday on strength in technology stocks and a rise in the almighty dollar. The Dow rose 66 points to close at 10,803 while the Nasdaq composite index moved 62 points higher to 2,869. The S&P 500 index closed up 16 points at 1,335. In the broader market, 1,687 advancers beat 1,216 decliners on strong volume of 842.6 million shares on the NYSE. The 30-year treasury bond rose 12/32, pushing its yield down to 6.05%. Thursday's new plays (positions/opening prices/strategy): IDT Corporation IDTC DEC17C/DEC25C $3.38 debit bull-call Network Associates NETA DEC12C/DEC17C $3.62 debit bull-call Both of our new positions were difficult plays to open at the suggested entry price. There was plenty of movement for those who leg-into spreads but neither of the plays were observed at the debit targets (based on a simultaneous order) at any point during the day. The best prices were probably available early in the session when the issues had greater potential for large movements. Our estimated entries are based on quotes obtained during the first hour of trading. Portfolio plays: September has been another great month for the spreads/combos portfolio and our star performer this week was the short-term speculation play on Sprint (FON). The position that we opened on Wednesday at $2.38 debit was easily closed Friday morning for $3.25 credit, a three-day profit of $0.88. That's not much in the world of (directional) option trading but it's certainly a favorable return based on the small amount of risk involved in the position. Our other communications issues continued to rebound today in the broad market rally and Bell Atlantic (BEL) finished right where it should have. Those of you who took the early morning (safe) exit should have achieved at least $1.62 credit for the move to October ($65) options. Our calendar spreads on 3Com Corp (COMS), Peoplesoft (PSFT), and Occidental Petroleum (OXY) all consolidated to the sold (short) positions towards the end of the week, demonstrating the need for downside protection. We also had a few issues that pulled back too far, leaving our overall cost basis well above the current value. Those include: General Dynamics (GD), The Limited (LTD), Motorola (MOT) and Philip Morris (MO). The one stock that we may have missed the chance to recover on is Sun Micro (SUNW) and it's probably worse now that they have set a 2-for-1 stock split (payable on 12/7/99). We adjusted a few of the long-term plays prematurely; Polaroid (PRD) was probably the worst, but we also made some good moves with stocks like Cabletron (CS) and Computer Associates (CA), provided they remain in their new trading ranges. Our debit and credit portfolios were outstanding but most of that performance can probably be attributed to good luck as the market was quite unpredictable this month. The flagging health sector produced three winning (bearish) plays in IMS Health (RX) and Liposome (LIPO) while the interest rate scare toppled the great financial giant J.P. Morgan (JPM). Our deep ITM debit spread on that issue (SEP140P/130P) was one of the more rewarding (personally) plays of the month as it took a great deal of stamina to watch it repeatedly test resistance at $135. Our combination straddle on Doubleclick (DCLK) has performed better than expected, moving near the maximum profit range a month before expiration and two of the recent "readers request" positions, Intuit (INTU) and Conexant (CNXT) were also closed early for excellent short-term returns. As you know from last Sunday's narrative, we recently decided to close the majority of our older positions; including those that are significantly profitable (or beyond reasonable salvation) in order to reduce the workload in tracking the portfolio. We hope this move will allow us to focus more on individual plays and the techniques that are used to evaluate each play for probability of profit, along with the common entry/exit strategies and methods of adjustment. The end result should be a much better product for the majority of our readership. Good Luck! Questions & comments on spreads/combos to ray@OptionInvestor.com ************* STRANGLES ************* This week, we are offering a small assortment of neutral credit strangles to compliment the long list of debit straddles. These plays are considered highly speculative and are generally used by large portfolio traders. In this case, I tried to find some issues that would be favorable to own if they broke through the downside support in their current trading range. The premium for the sold options will reduce the cost basis for the purchase of the underlying stock, if you should choose to own it. Credit Strangle: A credit strangle is an options strategy which involves the sale of a call and a put that are both slightly out of the money and have the same expiration date. This strategy is similar to a credit straddle but utilizes OTM positions to reduce risk. This strategy is intended to take advantage of overpriced options in range bound issues. The upside potential is limited to the two premiums received. The downside risk is unlimited unless STOPS are used to reduce potential losses. The idea is that the stock will trade between the sold strike prices. When initiating this strategy, it is important to calculate the margin required and the maximum gain in order to determine if the risk/reward is suitable for you portfolio. These plays are based on the current price or trading range of the underlying issue and the recent technical history or trend. The probability of profit from these positions is higher than other plays in the same strategy but current news and market sentiment will have an effect on the underlying issue. Please review each play individually and make your own decision about the future outcome of the stock price. **** MER - Merrill Lynch $71.94 Merrill Lynch is a holding company that, through its subsidiaries & affiliates, provides investment, financing, insurance & related services. Such services include underwriting, trading & brokering, investment banking and corporate finance, investment advisories, trading of foreign exchange, commodities & derivatives, banking, lending, and insurance sales. PLAY (aggressive - neutral/credit strangle): SELL CALL OCT-80 MER-JP OI=7487 B=$1.31 SELL PUT OCT-65 MER-VM OI=4469 B=$1.37 INITIAL NET CREDIT TARGET=$2.88 ROI(max)=25% UPSIDE B/E=$82.88 DOWNSIDE B/E=$62.12 Chart = http://quote.yahoo.com/q?s=MER&d=3m **** JNJ - Johnson & Johnson $96.06 Johnson & Johnson is engaged in the manufacture and sale of a broad range of products in the health care field. Johnson & Johnson's business is divided into three segments: Consumer, Pharmaceutical & Professional. The Consumer segment's principal products are personal care and hygienic products while the Pharmaceutical segment's are in the allergy, antibacterial, antifungal, contraceptive, dermatology, gastrointestinal, and pain management fields. The Professional segment's products are used by physicians, nurses, therapists, hospitals, diagnostic laboratories and clinics. PLAY (aggressive - neutral/credit strangle): SELL CALL OCT-100 JNJ-JT OI=5077 B=$1.43 SELL PUT OCT-90 JNJ-VR OI=1327 B=$1.00 INITIAL NET CREDIT TARGET=$2.50 ROI(max)=20% UPSIDE B/E=$102.50 DOWNSIDE B/E=$87.50 Chart = http://quote.yahoo.com/q?s=JNJ&d=3m **** HWP - Hewlett-Packard $100.81 Hewlett-Packard & subsidiaries designs, manufactures & services equipment for measurement, computation and communications. They offer a variety of systems and standalone products; computer systems, printers, calculators, electronic test equipment, medical electronic equipment, & instrumentation for chemical analysis. Services such as systems integration and outsourcing management, consulting, education, product financing & rentals, as well as customer support & maintenance, are also an integral part of the company's offerings. PLAY (aggressive - neutral/credit strangle): SELL CALL OCT-115 HWP-JC OI=1440 B=$1.00 SELL PUT OCT-90 HWP-VR OI=724 B=$1.31 INITIAL NET CREDIT TARGET=$2.50 ROI(max)=20% UPSIDE B/E=$117.50 DOWNSIDE B/E=$87.50 Chart = http://quote.yahoo.com/q?s=HWP&d=3m ********** DISCLAIMER This newsletter is a publication dedicated to the education of options traders. The newsletter is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The newsletter picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. The newsletter staff makes every effort to provide timely information to its subscribers but cannot guarantee specific delivery times due to factors beyond our control.
The Option Investor Newsletter 9-19-99 Sunday 6 of 7 ************************ SPREADS/STRADDLES/COMBOS - continued ************************ ********* STRADDLES ********* It was a good week for straddles as volatility ruled the market. The event-driven play on Liposome (LIPO) that we mentioned in Tuesday's narrative surpassed all expectations. LIPO stock lost nearly half its value after an advisory panel to the FDA voted not to recommend the company's breast-cancer drug, Evacet. The stock price plummeted over $8 on volume of 9 million shares, 12 times the average daily volume. The ATM straddle traded at $6.50 on Thursday afternoon and opened at $11.25 Friday morning. A big move was forecast but I don't think anyone expected that outcome. Thursday's new plays (positions/prices): The Williams Cos. WMB JAN40C/JAN40P $8.12 debit Ames Dept. Stores AMES JAN30C/JAN30P $8.88 debit We actually opened only one new position on Friday but there were a few occasions where the quoted debit on the AMES straddle was within $0.12 of the listed target. We will record it at the best observed price and follow its progress for educational purposes only. The WMB position traded at our suggested entry during the session and it appears that at least one reader opened the play for a debit of $8.00. Strategies.. As you know, I have recently assumed the duties previously held by Tom Gentile, lead instructor for the OIN/Optionetics seminar series and well-known professional trader, while he attends to duties as the father of a newborn child. I must say that I was a tried and tested McMillan follower until Tom came along with his unique style of trading. I truly read with interest his new ideas on how to profit from straddles and I think its important to understand the differences between the two approaches. Tom's method involves issues that are consolidating. These shrinking markets act as springboards to new highs and lows. He also looks for cheap options (a must for almost any successful straddle), and the final requirement is impending news or events that might alter the character of an issue. These three criteria will help you increase profits, while limiting risk on straddle positions. Tom did a great job educating OIN readers in this technique and if you would like to learn more about delta-neutral trading, as well as many other option strategies, then join him this fall in another round of OptionInvestor/Optionetics seminars. There will be shorter-term segments including trading the earnings reports, stock splits, and momentum plays. Many of these techniques will be straight from Jim's personal treasure chest of strategies. Find out more at: http://www.OptionInvestor.com/seminar/ ****************************************************************** - NEW PLAYS - Here are some new positions, based on the Optionetics method for straddles; Consolidating markets, inexpensive options and the probability of upcoming news or events. As with all candidates, review each play carefully and make your own decision about the future outcome of the underlying issue. Good Luck! ****************************************************************** UNH - United Healthcare $60.93 United HealthCare is a national leader offering health care coverage and related services to help people achieve improved health and well-being through all stages of life. The company operates in all 50 states, the District of Columbia, Puerto Rico and internationally. The Company also offers specialized health care management services and products such as behavioral health services, workers compensation and disability services, utilization review services, specialized provider networks, employee assistance programs, and knowledge and information services. Rumors of reorganization and layoffs, mergers, buyouts & other significant issues including lawsuits. With all that going on in the background, its amazing how the recent technical trend is wedging to the $60 range. PLAY (conservative - neutral/debit straddle): BUY CALL DEC-60 UNH-LL OI=76 A=$6.38 BUY PUT DEC-60 UNH-XL OI=13 A=$4.62 INITIAL NET DEBIT TARGET=$10.75 (or better) Chart = http://quote.yahoo.com/q?s=UNH&d=3m **** EGRP - E*trade Group $22.43 E*trade Group is a leading provider of cost-effective, secure online discount brokerage servcies. It offers automated order placement, portfolio tracking and related market information, news and other information services 24 hours a day, seven days a week by means of the Internet, online service providers CompuServe and America Online, direct modem access, touch-tone telephone and, to a lesser extent, interactive television. The big news is that E*TRADE is starting after-hours trading of stocks from both the New York Stock Exchange and the Nasdaq. Now investors will be able to trade until 6:30 p.m. EST, much longer than other after-hours online trading services. E*Trade is also offering a new bulk commission program that will allow investors to pay as little as $4.95 per trade. Lets see how the revenues fare this quarter. PLAY (conservative - neutral/debit straddle): BUY CALL JAN-22.50 QGR-AX OI=377 A=$4.75 BUY PUT JAN-22.50 QGR-MX OI=665 A=$4.62 INITIAL NET DEBIT TARGET=$9.25 (or better) Chart = http://quote.yahoo.com/q?s=EGRP&d=3m **** GM - General Motors $65.06 The major portion of General Motors' operations is derived from the automotive products industry segment. GM also has financing and insurance products along with services in other industry segments. Their automotive products consists of the design, manufacture, assembly, and sale of automobiles, trucks, related parts and accessories. The financing and insurance operations, primarily General Motors Acceptance Corporation (GMAC), assist in the merchandising of GM products as well as other products. A federal probe into GM's airbags is gaining attention and the current bout with the UAW certainly appears daunting. A deal reached last week between the UAW and DaimlerChrylser may set a precedent for higher wages and richer pensions that GM would need to match in negotiations expected to intensify next week. PLAY (conservative - neutral/debit straddle): BUY CALL JAN-65 GM-AM OI=515 A=$5.50 BUY PUT JAN-65 GM-MM OI=446 A=$4.88 INITIAL NET DEBIT TARGET=$10.12 (or better) Note: December options are also available. Chart = http://quote.yahoo.com/q?s=GM&d=3m **** PD - Phelps Dodge $58.00 Phelps Dodge Corporation is among the world's largest producers of copper. Gold, silver, molybdenum, copper and sulfuric acid are also produced as byproducts of their copper operations. PD's international mining interests include Candelaria, its major copper mine in Chile, and other operations and investments in Chile, Peru and South Africa. These mines produce a variety of metals and minerals including copper, gold, fluorspar, silver, lead and zinc. The company also explores for metals & minerals throughout the world. Phelps Dodge (PD) has made a three-way merger offer for fellow U.S. miners Asarco (AR) and Cyprus Amaz Minerals (CYM). With its recent rejection, they are now pursuing a hostile tender of the outstanding shares. Lawsuits are pending. PLAY (conservative - neutral/debit straddle): BUY CALL JAN-60 PD-AL OI=0 A=$4.12 BUY PUT JAN-60 PD-ML OI=0 A=$5.38 INITIAL NET DEBIT TARGET=$9.25 (or better) Chart = http://quote.yahoo.com/q?s=PD&d=3m **** LCOS - Lycos $44.43 Lycos a "New Generation Online Service" that offers a network of globally branded media and aggregated content distributed primarily through the World Wide Web. Under the "Lycos" brand, the company provides guides to online content, Web search and directory services and community and personalization features. It might appear to be a costly position but look at the range on this issue over the past 120 days. There is a well-defined median near the current price and any short-term spike away from this area should produce favorable profits. PLAY (conservative - neutral/debit straddle): BUY CALL JAN-45 QWL-AI OI=20 A=$8.50 BUY PUT JAN-45 QWL-MI OI=0 A=$8.25 INITIAL NET DEBIT TARGET=$16.25 (or better) Chart = http://quote.yahoo.com/q?s=LCOS&d=3m ************* COVERED CALLS ************* Technical Indicators Explained.. Each week we receive a number of Emails concerning the basic techniques that are used in our analysis of covered-call plays. Today we will discuss some common technical indicators; Volume and Buying Power. Volume: Trading volume, or the number of shares traded is an important indicator in interpreting market direction and stock price. The change in stock price is the result of supply and demand; those who want to buy versus those who want to sell. The key point is that a rise or fall in price on a small volume of shares traded is far less important than a move supported by heavy volume. If there is heavy trading on an upward move, buyers control the market, and their enthusiasm for the stock often pushes it even higher. Most technicians agree that volume usually precedes the direction of a stock's price and when reviewing candidates, we favor issues with bullish trends that have heavy volume support. Buying Power: Buying power has many forms but the most basic definition refers to institutional sized accumulation or distribution over a long period. BOP tells you whether the underlying activity in a stock is characterized by systematic buying or selling. The single most definitive and valuable characteristic of this indicator (for a specific issue) is its pronounced ability to contradict the price movement; it can help you spot changes of character in a stock's trend. A market-wide definition is somewhat different. It is generally understood as the amount of money available to buy securities; determined by the cash in brokerage accounts plus the money that would be available if securities were fully margined. The basic rule of buying power is the market cannot rise above the capital outstanding. The principle is that investors have only so much money available to purchase stocks. If it's being used in money market funds and cash, their buying power is readily available, not only to move into stocks but to push up prices. In contrast, if most investor buying power is already in equities, there's little left for purchasing more stock. These two indicators work well together and volume is usually the key; it rises on rallies when the trend is up and rises on reactions when the trend is down. When volume is rising on new rallies, investors are eager to buy and the demand is greater than the supply, thus prices go up. Volume trends will usually reverse before pricing trends in a broad market scenario. The shrinking volume almost always appears before the top of a bull market, as new capital dries up and before the bottom of a bear market, when investors become reluctant to sell. Good Luck! SUMMARY OF PREVIOUS PICKS (Final Summary For September) **** Stock Price Last Mon Strike Opt Profit ROI Monthly Sym Picked Price Price Bid /Loss ROI AERL 17.50 19.94 SEP 17.50 1.00 *$ 1.00 6.1% 14.2% NFLD 12.63 13.63 SEP 12.50 0.75 *$ 0.62 5.2% 12.2% WSTL 7.75 8.38 SEP 7.50 1.25 *$ 1.00 15.4% 11.1% NETS 27.38 25.25 SEP 25.00 3.00 *$ 0.62 2.5% 11.1% TRVL 13.50 13.00 SEP 12.50 1.31 *$ 0.31 2.5% 11.1% OLS 9.94 10.38 SEP 10.00 1.00 *$ 1.06 11.9% 10.3% VTS 19.25 21.13 SEP 17.50 3.25 *$ 1.50 9.4% 10.2% MXTR 5.03 6.00 SEP 5.00 0.63 *$ 0.60 13.6% 9.9% NPIX 18.94 17.44 SEP 17.50 2.13 $ 0.63 3.7% 8.8% IDTI 14.69 23.44 SEP 15.00 1.31 *$ 1.62 12.1% 8.8% PILL 13.94 13.75 SEP 12.50 1.88 *$ 0.44 3.6% 8.5% LYNX 13.00 12.75 SEP 12.50 1.13 *$ 0.63 5.3% 7.7% NRES 24.50 25.63 SEP 20.00 5.13 *$ 0.63 3.3% 7.6% TMAR 7.63 8.63 SEP 7.50 0.81 *$ 0.68 10.0% 7.2% IMNR 5.63 5.50 SEP 5.00 1.00 *$ 0.37 8.0% 6.9% PR 19.25 22.75 SEP 20.00 0.94 *$ 1.69 9.2% 6.7% KING 31.50 39.75 SEP 30.00 2.81 *$ 1.31 4.6% 6.6% PCYC 29.13 40.06 SEP 22.50 7.88 *$ 1.25 5.9% 6.4% NTAI 14.88 14.88 SEP 15.00 1.00 $ 1.00 7.2% 6.3% MRVC 14.88 23.25 SEP 12.50 3.00 *$ 0.62 5.2% 5.7% ADAP 33.00 33.00 SEP 30.00 4.13 *$ 1.13 3.9% 5.7% CS 15.50 19.75 SEP 15.00 1.06 *$ 0.56 3.9% 5.6% GNSS 24.88 24.06 SEP 22.50 2.88 *$ 0.50 2.3% 5.3% FLC 13.13 15.25 SEP 12.50 1.19 *$ 0.56 4.7% 5.1% IRF 16.00 17.13 SEP 15.00 1.81 *$ 0.81 5.7% 5.0% MOGN 11.88 12.50 SEP 10.00 2.31 *$ 0.43 4.5% 4.9% IDTI 18.88 23.44 SEP 17.50 2.13 *$ 0.75 4.5% 4.9% IDTC 18.88 22.63 SEP 15.00 4.50 *$ 0.62 4.3% 4.7% MRVC 14.50 23.25 SEP 12.50 2.63 *$ 0.63 5.3% 4.6% PESC 23.88 28.63 SEP 22.50 2.69 *$ 1.31 6.2% 4.5% RIGS 19.81 18.19 SEP 17.50 3.00 *$ 0.69 4.1% 4.5% USAI 45.94 45.00 SEP 45.00 3.50 $ 2.56 6.0% 4.4% RNBO 13.88 14.88 SEP 12.50 2.19 *$ 0.81 6.9% 4.3% ATML 39.88 38.69 SEP 40.00 2.63 $ 1.44 3.9% 4.2% NETA 17.56 19.94 SEP 15.00 3.50 *$ 0.94 6.7% 4.2% PENN 9.88 9.38 SEP 10.00 0.75 $ 0.25 2.7% 2.0% MAK 13.69 12.00 SEP 12.50 1.81 $ 0.12 1.0% 0.9% PXD 12.69 10.94 SEP 12.50 1.13 $ -0.62 -5.4% 0.0% TIE 11.19 8.06 SEP 10.00 2.13 $ -1.00 -11.0% 0.0% SBGI 20.31 15.56 SEP 20.00 1.69 $ -3.06 -16.4% 0.0% CS 18.06 19.75 OCT 17.50 2.00 *$ 1.44 9.0% 7.8% MOGN 13.13 12.50 OCT 12.50 1.63 $ 1.00 8.7% 7.6% BRKT 15.88 15.88 OCT 15.00 2.25 *$ 1.37 10.1% 6.2% ENER 13.88 13.88 OCT 12.50 2.31 *$ 0.93 8.0% 6.0% RDRT 5.88 5.19 OCT 5.00 1.31 *$ 0.43 9.4% 5.8% DCTM 17.13 18.50 OCT 15.00 3.00 *$ 0.87 6.2% 5.4% SOFN 26.25 24.75 OCT 22.50 5.00 *$ 1.25 5.9% 5.1% OIL 13.19 13.81 OCT 12.50 1.38 *$ 0.69 5.8% 5.1% COMS 25.69 27.56 OCT 25.00 2.50 *$ 1.81 7.8% 4.8% NVDA 26.00 24.38 OCT 25.00 3.38 $ 1.76 7.8% 4.8% CIEN 39.75 42.38 OCT 35.00 6.13 *$ 1.38 4.1% 3.6% PCTL 5.69 4.47 OCT 5.00 1.19 $ -0.03 -0.7% 0.0% TSK 17.50 14.75 OCT 17.50 1.63 $ -1.12 -7.1% 0.0% NTMV 7.19 5.66 OCT 7.50 1.00 $ -0.53 -8.6% 0.0% * Stock price is above the sold strike; should be called away. Comments/Observations On Current Plays. September: NPIX, NTAI, USAI, ATML - Nice profit now. If your outlook remains neutral to bullish, consider rolling forward. PENN, MAK - Current rally is offering an exit above break-even though rolling forward remains viable. PXD, TIE, SBGI - Rolling forward verses limiting losses?!? October: PCTL - Consider exiting early on continued weakness, oversold. TSK - Earnings warning, consider closing to limit losses. NTMV - BOP positive, bounced off support on heavy volume. 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 Return Called and Return Not Called **** Stock Price Mon Strike Option Opt Open Cost RC RNC Sym Price Symbol Bid Intr Basis HTCH 31.00 OCT 30.00 UTQ JF 2.75 1398 28.25 6.2% 6.2% TALK 12.00 OCT 10.00 QQK JB 2.50 1552 9.50 5.3% 5.3% BNBN 18.38 OCT 17.50 BEU JW 1.75 132 16.63 5.2% 5.2% ASMI 8.44 OCT 7.50 IQB JU 1.31 12 7.13 5.2% 5.2% NMSS 13.81 OCT 12.50 YYQ JV 1.88 171 11.93 4.8% 4.8% NRES 25.69 OCT 22.50 QNN JX 4.13 287 21.56 4.4% 4.4% HELX 34.25 OCT 30.00 HHQ JF 5.50 1078 28.75 4.3% 4.3% AERL 20.00 OCT 17.50 IQA JW 3.13 196 16.87 3.7% 3.7% PLCM 45.88 OCT 40.00 QHD JH 7.13 238 38.75 3.2% 3.2% Company Descriptions AERL - Aerial Communications Inc $20.00 *** Wireless *** Aerial Communications (82.2%- owned subsidiary of TDS), was formed to acquire PCS licenses from the FCC, construct PCS networks in Minneapolis, Tampa-St. Petersburg-Orlando, Houston, Pittsburgh, Kansas City and Columbus-Ohio, and offer wireless communications services in these areas. A recent upgrade by Lehman Brothers and some speculation that TDS may consider selling Aerial makes this a favorable play. The chart remains strongly bullish - though overextended. OCT 17.50 IQA JW Bid=3.13 OI=196 CB=16.87 RC=3.7% RNC=3.7% Chart = http://quote.yahoo.com/q?s=AERL&d=3m **** ASMI - ASM International N.V. $8.44 *** Semiconductor *** ASM International designs, manufactures & markets equipment and materials used to produce semiconductor devices. They provide producing solutions for semiconductor water processing, assembly and packaging through its facilities in the United States, Europe, Japan and South East Asia. This week, ASMI jumped out of a lateral consolidation on heavy volume and reached a new 52 week high. As earnings season approaches, the semiconductor stocks continue to outperform the market. OCT 7.50 IQB JU Bid=1.31 OI=12 CB=7.13 RC=5.2% RNC=5.2% Chart = http://quote.yahoo.com/q?s=ASMI&d=3m **** BNBN - Barnesandnoble.com Inc $18.38 *** E-commerce *** Since launching its online business, barnesandnoble.com has become one of the world's largest Web sites and is the fourth largest e-commerce retailer, according to Media Metrix. Focused largely on the sale of books, music and related products, the company has capitalized on the recognized brand value of the Barnes & Noble name to become the second-largest, and one of the fastest growing, online distributors of books. BNBN is trending up towards the top of its trading range, establishing support above $16.50. A long term play on a stock which should benefit from the approaching holiday season. OCT 17.50 BEU JW Bid=1.75 OI=132 Bid=16.63 CB=5.2% RNC=5.2% Chart = http://quote.yahoo.com/q?s=BNBN&d=3m **** HELX - Helix Technology Corp. $34.25 *** Blue Sky! *** HELX is engaged in the development and application of cryogenic vacuum technology and provides innovative solutions to customer requirements in select markets worldwide. Helix 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 semiconductor stock that is displaying strong technical strength and has now closed at a new all-time high. OCT 30.00 HHQ JF Bid=5.50 OI=1078 CB=28.75 RC=4.3% RNC=4.3% Chart = http://quote.yahoo.com/q?s=HELX&d=3m **** HTCH - Hutchinson Technology $31.00 *** Disk Drives *** Hutchinson Technology is a supplier of suspension assemblies for hard disk drives. Suspension assemblies hold the recording heads in position above the spinning magnetic disks in the drive. They are a supplier to nearly all domestic and many foreign-based users of suspension assemblies (APM, IBM, MXTR, SEG, ...etc.). Hutchinson Tech broke out of a six month base and may run to a new high. The technical picture continues to improve and we favor the cost basis at support. OCT 30.00 UTQ JF Bid=2.75 OI=1398 CB=28.25 RC=6.2% RNC=6.2% Chart = http://quote.yahoo.com/q?s=HTCH&d=3m **** NMSS - Natural Microsystems Corp $13.81 *** What's Up? *** Natural MicroSystems designs, manufactures and markets integrated hardware and software products which enable its customers to develop and implement high-value telecommunications solutions that operate globally. No news to explain the last few days jump in price as NMSS closed at 52 week high. In August, the company announced a repurchase program of up to 400k shares. We like this new move above resistance with support at our cost basis. OCT 12.50 YYQ JV Bid=1.88 OI=171 CB=11.93 RC=4.8% RNC=4.8% Chart = http://quote.yahoo.com/q?s=nmss&d=3m **** NRES - Nichols Research Corp. $25.69 *** For Sale, IPO? *** Nichols Research is a provider of technical and information technology (IT) services, including information processing, systems development and systems integration. They provide these services to a wide range of clients, including the U.S. DOD, other federal agencies, state and local governments, healthcare and insurance organizations, and other commercial enterprises. Nichols has deferred plans to take its Nichols TXEN Corp public and had hired investment bankers to help it consider strategic alternatives. If you wish to speculate, this play offers a favorable entry point with a cost basis at technical support. OCT 22.50 QNN JX Bid=4.13 OI=287 CB=21.56 RC=4.4% RNC=4.4% Chart = http://quote.yahoo.com/q?s=NRES&d=3m **** PLCM - Polycom, Inc. $45.88 *** Stage II *** Polycom develops, manufactures and markets teleconferencing products that facilitate meetings at a distance. With its SoundStation product line, Polycom believes it has established itself as a leading provider of audioconferencing equipment designed for group use. With last quarters revenues up over 70% Polycom is getting attention: coverage initiated with a buy on Tuesday. PLCM remains in a stage II climb though it is somewhat overextended. We like a more conservative entry point with a cost basis near the July high. OCT 40.00 QHD JH Bid=7.13 OI=238 CB=38.75 RC=3.2% RNC=3.2% Chart = http://quote.yahoo.com/q?s=PLCM&d=3m **** TALK - Talk.com, Inc. $12.00 *** Short Squeeze? *** Talk.com, Inc. is a provider of long distance telecommunication services to small and medium-sized businesses and residential customers in the United States, primarily through its e-commerce platform. The Internet/telephone competition is heating up and TALK is showing signs of a potential breakout. The bullish move above its 150 dma supported by volume offers a favorable entry to speculate on a future news release. OCT 10.00 QQK JB Bid=2.50 OI=1552 CB=9.50 RC=5.3% RNC=5.3% Chart = http://quote.yahoo.com/q?s=TALK&d=3m ********** DISCLAIMER This newsletter is a publication dedicated to the education of options traders. The newsletter is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The newsletter picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. The newsletter staff makes every effort to provide timely information to its subscribers but cannot guarantee specific delivery times due to factors beyond our control.
The Option Investor Newsletter 9-19-99 Sunday 7 of 7 ************* NAKED PUTS ************* Technical Indicators Explained.. Today we will discuss some of the broad market indicators used to determine future trends. The first category is very similar to the one we focus on for individual issues; Volume. Market Volume: A day of high volume on a major exchange usually means the market is up and frenzied. Low volume generally indicates a negative or bearish outlook. Of course "high" or "low" is relative, depending on where we are in the market's overall history. In recent months (since mid-April), the volume for both the Dow Industrial Average and the S&P 500 Index has declined. However, trading volume on the Nasdaq Composite has increased significantly (from lows in late August) as the index approached record highs. That's a good example of heavy trading on an upward move, when buyers control the market and their enthusiasm pushes the issue or index higher. New Highs and Lows: Each day the market-wrap includes a list of stocks that hit a new price high or low for the year, during the previous day's trading activity. Analysts use the ratio between the new highs and lows as an indication of the market's direction. When more stocks are making new highs than lows, it is a generally bullish indication. This indicator is even more effective when converted to a chart and compared with a common average or index. When the high/low indicator confirms the outlook of the Dow or the S&P 500, it is far more significant. If the high/low indicator starts to fall while the major averages are moving up, that's often a signal that internal market conditions are deteriorating. The index of new highs and lows exposes the underlying strength or weakness of the stock market, which is often masked by the activity of the Dow. In an aging bull market, the Industrial's average may continue to rise with deceptive strength on upward moves in a handful of major stocks; but closer examination will usually reveal that most issues are too far below their yearly highs to make new highs. In such times, the small number of new highs is one of the most significant indicators of broad market deterioration. More on Market Indicators next week.. SUMMARY OF PREVIOUS PICKS (Final Summary For September) **** Stock Price Last Mon Strike Opt Profit ROI Monthly Sym Picked Price Price Bid /Loss ROI ENER 13.88 13.88 SEP 12.50 0.31 *$ 0.31 6.9% 16.2% IRF 16.81 17.13 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 33.00 SEP 25.00 0.88 *$ 0.88 11.8% 12.9% MCOM 25.56 23.00 SEP 17.50 0.88 *$ 0.88 14.7% 12.8% PAX 15.31 13.13 SEP 12.50 0.44 *$ 0.44 11.7% 12.7% PCYC 29.13 40.06 SEP 20.00 0.69 *$ 0.69 10.6% 11.5% RIGS 19.81 18.19 SEP 17.50 0.63 *$ 0.63 10.1% 11.0% NVDA 26.00 24.38 SEP 22.50 0.56 *$ 0.56 7.5% 10.9% NETG 22.25 31.56 SEP 17.50 0.63 *$ 0.63 12.4% 10.8% NSM 28.56 34.94 SEP 25.00 0.63 *$ 0.63 7.4% 10.7% ADAP 22.88 33.00 SEP 17.50 0.75 *$ 0.75 14.1% 10.2% ZRAN 30.63 30.63 SEP 25.00 0.50 *$ 0.50 7.0% 10.2% CMTO 18.81 14.56 SEP 15.00 0.75 $ 0.31 6.9% 10.0% VTS 19.25 21.13 SEP 15.00 0.38 *$ 0.38 9.0% 9.8% BEAS 24.25 29.94 SEP 20.00 0.38 *$ 0.38 6.5% 9.4% GNSS 24.06 24.06 SEP 20.00 0.38 *$ 0.38 6.4% 9.3% KING 28.63 39.75 SEP 25.00 0.69 *$ 0.69 8.1% 8.8% CYMI 36.88 35.63 SEP 30.00 0.50 *$ 0.50 6.0% 8.7% SCMM 47.88 49.13 SEP 35.00 0.75 *$ 0.75 7.3% 7.9% NMR 33.50 37.13 SEP 25.00 0.63 *$ 0.63 8.6% 7.5% PESC 23.88 28.63 SEP 17.50 0.50 *$ 0.50 9.5% 6.9% CORR 22.50 26.00 SEP 17.50 0.44 *$ 0.44 8.9% 6.5% BOBJ 47.19 53.25 SEP 35.00 0.75 *$ 0.75 7.4% 6.4% PLMD 17.88 27.00 SEP 15.00 0.31 *$ 0.31 6.8% 5.9% CSE 48.06 49.56 SEP 40.00 0.75 *$ 0.75 6.3% 5.5% USAI 45.94 45.00 SEP 40.00 0.81 *$ 0.81 6.1% 4.4% TDW 34.44 31.88 SEP 30.00 0.56 *$ 0.56 5.7% 4.1% CLTR 29.13 19.06 SEP 20.00 0.63 $ -0.31 -4.8% 0.0% DD 74.75 62.06 SEP 65.00 1.00 $ -1.94 -9.2% 0.0% SBGI 20.50 15.56 SEP 17.50 0.38 $ -1.56 -28.0% 0.0% NVX 7.19 9.00 OCT 5.00 0.38 *$ 0.38 21.0% 18.2% DUSA 15.50 14.88 OCT 12.50 0.88 *$ 0.88 21.6% 16.0% CYBX 18.69 16.44 OCT 15.00 0.69 *$ 0.69 15.4% 11.4% HELX 31.00 34.13 OCT 25.00 0.94 *$ 0.94 12.8% 11.1% MYGN 11.88 13.50 OCT 10.00 0.50 *$ 0.50 14.8% 11.0% IDTC 23.38 22.63 OCT 17.50 0.63 *$ 0.63 11.9% 10.3% CS 18.06 19.75 OCT 15.00 0.50 *$ 0.50 10.7% 9.3% HLTH 34.94 41.00 OCT 25.00 0.69 *$ 0.69 9.0% 7.8% ORTL 18.88 16.50 OCT 15.00 0.44 *$ 0.44 10.5% 7.8% PRTL 23.06 20.13 OCT 17.50 0.50 *$ 0.50 9.8% 7.3% MK 10.81 10.50 OCT 10.00 0.31 *$ 0.31 8.1% 7.0% USWB 28.50 29.44 OCT 22.50 0.50 *$ 0.50 8.1% 7.0% HELX 30.25 34.13 OCT 22.50 0.50 *$ 0.50 7.6% 5.7% KING 32.81 39.75 OCT 25.00 0.44 *$ 0.44 6.3% 4.7% CIEN 39.75 42.38 OCT 30.00 0.44 *$ 0.44 5.2% 4.6% * Stock price is above the sold strike; the option should expire. Comments/Observations On September Plays: CMTO - Sell now for a small profit or expect strength as traders speculate on the next CabelLabs result in November? CLTR - Must resubmit FDA application. Take a small loss or roll down if stock holds at support ~ $18.00. OCT $17.50 call - $2.50. DD - Selling pressure dropping as stock nears support ~ $61. The JAN 60 call - $6.25. You own it now so make the best of it. SBGI - Rolling forward verses limiting losses?!? NEW PICKS **** Definitions: OI - Open Interest CB - Cost Basis (break-even point if put exercised) ROI - Return On Investment Sequenced by ROI *** Stock Price Mon Strike Option Opt Open Cost ROI Opt Sym Price Symbol Bid Intr Basis Expired ENMD 23.50 OCT 20.00 QMA VD 0.81 175 19.19 12.1% ASPT 15.44 OCT 12.50 ATQ VV 0.38 55 12.12 10.5% REV 24.81 OCT 17.50 REV VW 0.50 295 17.00 9.2% AFCI 20.06 OCT 17.50 AQF VW 0.50 250 17.00 8.4% NETA 20.00 OCT 17.50 CQM VW 0.50 990 17.00 8.3% CEPH 20.44 OCT 17.50 CQE VW 0.44 61 17.06 7.7% AERL 20.00 OCT 15.00 IQA VC 0.31 100 14.69 7.2% INTU 103.00 OCT 85.00 IQU VQ 1.31 324 83.69 5.3% PR 22.88 OCT 20.00 PR VD 0.31 10 19.69 4.7% Company Descriptions **** AERL - Aerial Communications $20.00 *** Wireless *** Aerial Communications (82.2%- owned subsidiary of TDS), was formed to acquire PCS licenses from the FCC, construct PCS networks in Minneapolis, Tampa-St. Petersburg-Orlando, Houston, Pittsburgh, Kansas City and Columbus-Ohio, and offer wireless communications services in these areas. A recent upgrade by Lehman Brothers and some speculation that TDS may consider selling Aerial makes this a favorable play. The chart remains strongly bullish though overextended. OCT 15.00 IQA VC Bid=0.31 OI=100 CB=14.69 ROI=7.2% Chart = http://quote.yahoo.com/q?s=AERL&d=3m **** AFCI - Advanced Fibre Communications $20.06 *** Upgraded *** Advanced Fibre Communications designs, manufactures, and markets telephone delivery systems. The company's Modular Carrier system allows telephone and cable companies to connect customers to the central office switch, regardless of the combination of copper wire, fiber-optic line, or coaxial cable networks. Upgrades and Cisco's acquisition of Cerent Corp, which will provide AFCI with just over 5.3 million shares of CSCO, have helped initiated the recent breakout. A reasonable price to target shoot with a cost basis at support. OCT 17.50 AQF VW Bid=0.50 OI=250 CB=17.00 ROI=8.4% Chart = http://quote.yahoo.com/q?s=AFCI&d=3m **** ASPT - Aspect Telecom $15.44 *** Up, Up And Away! *** Aspect Telecommunications is a global provider of comprehensive business solutions for mission-critical call centers that exist to generate revenue, service customers, and handle inquiries. The company offers solutions for call transaction processing & automation, interactive voice response, networking, management information and comprehensive planning and forecasting packages. No news on the breakout last week but if you wish to speculate, why pay retail? OCT 12.50 ATQ VV Bid=0.38 OI=55 CB=12.12 ROI=10.5% Chart = http://quote.yahoo.com/q?s=ASPT&d=3m **** CEPH - Cephalon $20.44 *** Drugs Are Hot! *** Cephalon is engaged in the development of pharmaceuticals for the treatment of neurological disorders. The company combines research expertise in molecular biology, molecular pharmacology, biochemistry, cell biology & chemistry with a neurology focused drug development and clinical research effort. No recent news since August when Cephalon had coverage initiated. The current consolidation is providing a cost basis below technical support. OCT 17.50 CQE VW Bid=0.44 OI=61 CB=17.06 ROI=7.7% Chart = http://quote.yahoo.com/q?s=CEPH&d=3m **** ENMD - Entremed $23.50 *** Speculation Only! *** Entremed engaged primarily in the research and development of biopharmaceutical products that address the role of blood and blood vessels in the prevention and treatment of a broad range of diseases. Their core technologies include the development of products intended to inhibit the abnormal growth of new blood vessels associated with cancer and certain causes of blindness, and a device designed to enhance the ability of blood cells to deliver oxygen to organs and tissues. Make sure you know this issue very well before opening a position! OCT 20.00 QMA VD Bid=0.81 OI=175 CB=19.19 ROI=12.1% Chart = http://quote.yahoo.com/q?s=ENMD&d=3m **** INTU - Intuit $103.00 *** Blue Chip Play *** Intuit develops, markets and supports personal finance, small business accounting, tax preparation & other consumer software products, along with related electronic services that enable individuals and businesses to perform common financial tasks. Inuit jumped nicely after announcing a 3-for-1 split last week to SOR September 20. Don't chase a trending stock! We feel $1.31 is just reward for trying to own INTU at a discount. OCT 85.00 IQU VQ Bid=1.31 OI=324 CB=83.69 ROI=5.3% Chart = http://quote.yahoo.com/q?s=INTU&d=3m **** NETA - Network Associates $20.00 *** 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. New products a favorable long-term outlook plus a bullish chart. OCT 17.50 CQM VW Bid=0.50 OI=990 CB=17.00 ROI=8.3% Chart = http://quote.yahoo.com/q?s=NETA&d=3m **** PR - Price Communications $22.88 *** Own This One! *** PR is currently engaged through Price Communications Wireless in the construction, development, management and operation of cellular telephone systems in the southeastern United States. PR markets all of its products and services under the nationally recognized service mark CELLULAR-ONE. Price continues its strong stage II climb as the wireless sector continues to outperform the overall market. OCT 20.00 PR VD Bid=0.31 OI=10 CB=19.69 ROI=4.7% Chart = http://quote.yahoo.com/q?s=PR&d=3m **** REV - Revlon $24.81 *** On The Rebound? *** Revlon operates in a single business segment with different products, which include an extensive array of glamorous, exciting and innovative cosmetics and skin care, fragrance, personal care and professional products. Revlon is one of the world's best known names in cosmetics and is a leading mass market cosmetics brand. Once a take-over target...always a take-over target? Revlon continues to gyrate as speculators trade new rumors. OCT 17.50 REV VW Bid=0.50 OI=295 CB=17.00 ROI=9.2% Chart = http://quote.yahoo.com/q?s=REV&d=3m ********** DISCLAIMER This newsletter is a publication dedicated to the education of options traders. The newsletter is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. 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