The Option Investor Newsletter Tuesday 9-21-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com Published three times weekly, Sunday, Tuesday, Thursday evenings. ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 9-21-99 High Low Volume Advances Decline DOW 10598.50 - 225.40 10822.90 10551.90 788,857k 679 2,350 Nasdaq 2821.10 - 65.05 2886.15 2819.69 1,035,914k 1,267 2,668 S&P-100 689.82 - 15.10 703.92 686.78 Totals 1,946 5,018 S&P-500 1307.58 - 27.95 1333.81 1302.06 27.9% 72.1% $RUT 426.50 - 6.70 433.20 426.04 $TRAN 2937.64 - 41.66 2980.57 2930.77 VIX 26.94 + 2.61 27.68 25.39 Put/Call Ratio .69 ****************************************************************** Apple, earthquakes, gold, oil, interest rates, record trade deficit Pick the excuse you like. Earnings warnings, earthquakes and record trade deficits gave the markets a big headache today as the Dow tested it's August 10th lows. The market suffered from attacks on all sides today with the lead negative being the trade deficit report this morning. The U.S. trade deficit soared to a record -$25.18 Bln in July. Analysts think this points to a soaring consumption rate as U.S. consumers rush to buy anything in sight. The Fed wants to see consumption slow and this record number brought back the cloud of rate increase gloom. Analysts were almost evenly divided about an Oct rate increase until today. Now the trend is indicating about an 80% chance of the Fed taking back it's third and final rate cut from last year. The earthquake in Taiwan had all the chip companies on the run as investors frantically tried to determine which if any were impacted and who would take up the slack. After the entire sector dropped -3% several brokers came out and said there was no problem and the damage was light. Mostly only power outages. Several brokers stressed it as a buying opportunity. One of the biggest market hits today came from the dropping dollar. The bank of Japan failed to take action to slow down the soaring Yen and the dollar dropped another -3%. This is a big negative and completely wiped out the gains from last Friday. A weaker dollar makes foreign goods and services more expensive and would also increase the trade deficit as well. The dropping dollar also hit the bond market for another loss with the yields breaking 6.10% at midday. Lawrence Summers came out this afternoon to make the case for a strong dollar and vowed not to back away. The most visible excuse given today for the sell off was the earnings warning by Apple Computer last night. Sorry folks, I don't buy it. Apple said that business was so good that Motorola could not make chips fast enough to meet demand. So what is the problem? The problem is the rapid ramp up, not of sales, but of analyst expectations. Analysts had dollar signs in their eyes and set the bar too high. Steve Jobs said this was just a very short term problem and Motorola was ramping up production to meet the strong demand. Apple will simply move a large portion of the sales into the next quarter and Apple will have a blowout. We think this is an entry point for a play on Apple. In the "ask Karnac" dept today, JP Morgan downgraded Goodyear because of a possible earnings warning to come. I am sure Goodyear is glad JPM can see the future and cost their stock holders about $4.63 a share today. Of course JPM will be vindicated if Goodyear does announce but you would think the perfect day would be when the cat is already out of the bag. Time will tell. Tech stocks were dropped for a 62 point loss today as profit taking pushed the Nasdaq back down to 2821. The Nasdaq was only -6 points from another new all time high on Monday after gaining +140 points from last Thursdays low of 2755. Does +140 points lead any sane person to think that maybe profit taking was due? It should! Sure the selling was fueled by the Dow drop and the drop by the earthquake in the chip sector but there was still some bright spots which point to underlying strength. When the recent big gainers hold their own and even gain in the face of a big Dow drop, then the sell off has no depth. Check out GOTO +8.44, RBAK +8.19, JNPR +7.50, EBAY +4.63 (already beaten up), PCLN +2.69, VRIO +2.56, YHOO +1.38. The Dow dropped -225 points to log the third worst day, point wise, for the year. The biggest point loser was HWP -4.69 to lead the NYSE tech wreck. The Dow low was 10551 and missed by only one point the low of 10550 from August 10th. By holding the 10550 level, and rebounding to close at 10600 (10598) it is entirely possible this is a near term bottom. Volume was only moderate and showed no panic. The advance/decline line was negative 4:1 and the down volume exceeded up volume by a 5:1 margin. While most capitulation events occur on heavier volume there was some significant selling today. I would not bet all the marbles that today was a bottom but I did buy some OEX calls when the Dow bounced off 10550. Call it speculation, intuition or depending on the open tomorrow, simply stupidity, but I have faith in this market. Of course what faith I have is immaterial to market direction. I simply looked at the previous lows and felt this was a good spot to make a play. The previous lows were 8/10 10550, 6/24 10475, 6/11 10430, 6/1 10408. Yes, we could easily retest any of those numbers but a break under 10550 would be highly negative. We held today. Tomorrow is another story. We have been range bound since May and 10600 is the lower boundry of the recent range. Ranges change and nothing precludes it from changing tomorrow. Today the Dow was besieged with a virtual flood of negative events. Record trade deficit. Sinking dollar with no help from the Bank of Japan. Earnings warnings from Apple and others. Sinking transports and rising interest rates. The Fed even got into the act with comments from two Fed heads. One was heard to question if "two hikes were enough?" and Poole said after the close that "rising market interest rates may signify inflation pressures on their own." I could make a career out of being a bear with just the ammunition that came out today. Instead I bought OEX calls. I am not recommending that anyone else do the same since ALL the indicators are negative but I am going on record that I STILL expect the market to go up from here. (again, expectation may not be relative to actual events) You need to make your own judgement as to market direction and act accordingly. My justifications other than the 10550 bounce, and it was not very convincing either, are subtle things like AOL +4 intraday after confirming that subscriber growth was still great. YHOO +1.38 after hitting $175 intraday, up from $157 only three days ago. No profit taking here. The earthquake impact was over done and the chip sector should rebound tomorrow. Everybody knew the trade deficit was going to be up. We just had too many news events gang up on the market today. Heck we could have been down -300 just as easy. The lack of volume is also a clue. If it was serious the sellers would be lining up. Did not happen, only 788 mln on the NYSE. Yesterday after the close it was an Apple warning, today COMS announced blowout earnings after the close and beat estimates by +.09. Will it help? I don't know. We could have more bad news before the open tomorrow that will drive the DOW through 10550 faster than calories to hips but this is the way I see it tonight. If you have open positions then please protect them with stop losses. If the market goes our way, sell too soon, October is just around the corner. Jim Brown Editor *************** Market Posture *************** As of Market Close - Tuesday, September 21, 1999 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,500 11,320 10,598 Neutral 7.20 SPX S&P 500 1,350 1,420 1,308 BEARISH 9.16 OEX S&P 100 675 735 690 Neutral 8.13 RUT Russell 2000 440 465 427 BEARISH 9.14 NDX NASD 100 2,320 2,400 2,474 BULLISH 9.03 MSH High Tech 1,120 1,200 1,240 BULLISH 9.03 XCI Hardware 1,035 1,050 1,104 BULLISH 8.24 CWX Software 750 800 876 BULLISH 9.03 SOX Semiconductor 515 520 543 BULLISH 8.24 NWX Networking 555 590 600 BULLISH 9.17 INX Internet 500 580 451 BEARISH 7.20 BIX Banking 690 710 572 BEARISH 7.23 XBD Brokerage 410 440 364 BEARISH 7.23 IUX Insurance 645 660 580 BEARISH 7.23 RLX Retail 915 960 814 BEARISH 7.23 DRG Drug 365 390 356 BEARISH 9.16 HCX Healthcare 745 785 717 BEARISH 9.16 XAL Airline 180 190 136 BEARISH 5.21 OIX Oil & Gas 285 310 295 Neutral 9.16 Posture Alert Tuesday's action saw all indexes across the board in negative territory, and most with 2-3% drops. The loser board was lead by Networking (-3.11%), followed by Semiconductors (-3.05%), and Hardware (-3.02%). The Internet sector was the strongest sector of the day, posting only a marginal loss, on the strength of big-name-net stocks. Several other indexes are getting close to downgrades, but as it stands today, there are no changes in posture. A detailed description of our Market Posture and its applications can be found at: /members/marketposture *************** Market Sentiment *************** Tuesday, September 21, 1999 Breaking down? Here at Pinnacle Capital Advisors, we talk a lot about key benchmarks. These benchmarks represent potential key turning points or moments in the market. We use a variety of technical and sentiment indicators to develop these benchmarks but one of the most popular benchmarks technicians like to use is the short-term 50-day moving average. We have summarized many of the broad market and industry indices and where the market closed today in relation to this key benchmark including the percent above or below (+/-) and our alert flag. As shown by the schematic, apart from the hot technology sectors, notice how many of the industry sectors are still trading below their key benchmarks or decision point. What's more, some sectors such as the airline, banking, brokerage and retail sectors are beginning to drift even lower - not encouraging for those expecting the market to break out. Does anyone expect the broader market to reach record levels WITHOUT participation from these key sectors? The Technology sectors are clearly leading the way, but some might argue that these are over extended as measured by the percent above its 50-day moving average. We also know how fast these leading sectors can come back to earth, so caution should be had by all. Broad Market Indices Key Today's Index Benchmark Close +/- Alert MSH High Tech 1,180 1,240 +5.0% Over Extended? NDX NASD 100 2,380 2,474 +3.9% Over Extended? OEX S&P 100 700 690 -1.4% Key Moment RUT Russell 2000 440 427 -3.0% Key Moment SPX S&P 500 1,350 1,308 -3.2% Key Moment DOW Industrials 10,970 10,598 -3.5% Key Moment Industry Sectors Key Today's Index Benchmark Close +/- Alert CWX Software 790 876 +10.8% Over Extended? SOX Semiconductor 510 543 +6.5% Over Extended? XCI Hardware 1,050 1,104 +5.1% Over Extended$ NWX Networking 575 600 +4.3% Turning Lower? INX Internet 455 451 -0.1% Key Moment! IUX Insurance 620 580 -7.2% Continuing Slide RLX Retail 875 814 -7.5% Continuing Slide XBD Brokerage 400 364 -9.8% Continuing Slide BIX Banking 650 572 -13.6% Continuing Slide XAL Airline 160 136 -17.6% Continuing Slide Several weeks ago, we highlighted this schematic with all the indexes and where they stood in the market. Since then, the four horsemen (semi's, networking, software, hardware) + the internet sector have treaded water, and everything else has broken down or added to their losses. Looking at the short term, we would watch for any breakdowns below key benchmarks in the leaders (or watch for the bounce and take advantage), and we continue to believe the laggards will add to their losses. On the bright side, earnings season is around the corner, and with September (historically) being the worst month of the year, this market could have a good October. 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 several weeks, with Apple Computer being the latest casualty. Advance/Decline Line: The A/D line continues to be poor and is getting worse. Volatility Index: The VIX is above the 25 benchmark, which may indicate further weakness. However, should it hit the 30-32 level and hold, it may prove to be a good buying opportunity. 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 2.5 Underlying Support (660-690) 1.6 2.0 Put/Call Ratios: CBOE Total P/C Ratio .7 .5 CBOE Equity P/C Ratio .6 .4 OEX P/C Ratio 1.2 .9 Peak Open Interest (OEX): Puts 640 640 Calls 680 680 P/C Ratio 1.02 1.07 Market Volatility Index (VIX): CBOE VIX 26.94 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. Pinnacle Index OEX Friday Tues Benchmark (9/17) (9/21) Overhead Resistance (710-730) 2.38 2.52 OEX Close 704.96 689.82 Underlying Support (660-690) 1.62 2.01 Average ratings: Resistance levels 2.0 / Support Levels .5 What the Pinnacle Index is telling us: Underlying support is light to moderate (660-690). Put/Call Ratio Friday Tues Strike/Contracts (9/17) (9/21) CBOE Total P/C Ratio .69 .52 CBOE Equity P/C Ratio .57 .43 OEX P/C Ratio 1.18 .90 Peak Open Interest(OEX) Friday Tues Strike/Contracts (9/17) (9/21) Puts 640 / 6,356 640 / 7,952 Calls 680 / 6,234 680 / 6,272 Put/Call Ratio 1.02 1.07 Volatility Index Major Date Turning Point VIX October 97 Bottom 54.60 July 20, 1998 Top 16.88 October 8, 1998 Bottom 60.63 January 11, 1998 Top 26.38 March 4, 1999 Bottom 28.15 May 14, 1999 Top 25.01 July 16, 1999 Top 18.13 August 5, 1999 Bottom? 32.12 September 21, 1999 26.94 Investors Intelligence Major Percent Percent Date Turning Point Bullish Bearish October 97 Bottom 22.0 48.3 July 20, 1998 Top 52.0 24.0 October 8, 1998 Bottom 38.5 42.7 January 11, 1999 Top 58.3 30.0 March 4, 1999 Bottom 49.1 32.5 Sept 1, 1999 42.9 31.9 Sept 8, 1999 44.1 30.5 Sept 15, 1999 41.5 31.4 * Please view this in COURIER 10 font for alignment ************************************************* CHANGES THIS WEEK Daily Results Dow 10598.47 20.27 -225.43 -205.16 Nasdaq 2821.10 16.53 -65.05 -48.52 $OEX 689.82 -0.04 -15.10 -15.14 $SPX 1307.58 0.11 -27.95 -27.84 $RUT 426.50 -1.25 -6.70 -7.95 $TRAN 2937.64 -20.49 -41.66 -62.15 $VIX 26.94 0.11 2.61 2.72 Calls Mon Tue Week VOD 216.63 3.44 4.63 8.06 The split is coming! YHOO 169.56 5.25 1.19 6.44 The number one portal SUNW 92.56 5.88 -2.00 3.88 Target priced at $105? ETYS 63.44 0.31 1.63 1.94 A pillar of strength EMC 71.94 3.63 -2.69 0.94 It's only a flesh wound NTAP 75.13 2.31 -2.00 0.19 Introduces Netcache 4.0 INTU 102.94 1.06 -1.13 -0.06 Holding its ground CKFR 41.44 1.94 -2.13 -0.25 We don't need surprises CTXS 66.53 -0.50 -0.34 -0.72 Technicals remain intact GE 119.25 2.00 -2.75 -1.00 New, breaking resistance BGEN 84.94 0.97 -2.47 -1.50 Broke through it 10-dma AMZN 62.25 -1.06 -0.50 -1.56 Dropped, not moving NT 48.06 -0.75 -0.94 -1.69 Expanding their markets INKT 129.25 0.94 -2.44 -1.94 New deals are announced CSCO 71.13 -0.31 -2.06 -2.38 It's a split candidate TXN 86.88 -1.44 -1.63 -3.00 Looking for the bounce AMAT 81.31 -1.00 -2.50 -3.50 Will supplies be short? ADI 55.56 -2.69 -2.19 -4.88 It's a troubled sector NXTL 70.06 -1.19 -3.94 -5.13 Hang in there Baby!!!! AAPL 69.25 2.13 -9.81 -7.69 New, buying opportunity DCLK 108.50 -2.13 -5.50 -7.75 Their acquiring Adforce DISH 87.50 -7.00 -2.50 -9.50 Dropped, more bad weather Puts WLP 65.75 -0.56 -2.44 -3.00 Falling like a rock JNJ 94.00 0.44 -2.50 -2.06 Is there more shortfalls LLY 65.63 0.13 -1.50 -1.38 More short-term lows ELNK 38.81 -0.56 -0.69 -1.31 Rumors have emerged COST 66.75 -1.38 0.63 -0.75 Fighting natures forces GPS 33.00 -1.25 0.63 -0.63 Still no relief in site PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** AMZN $64.25 -0.25 (-1.56) That was quick. It looks like Christmas isn't coming early, so we're closing the book on AMZN. AMZN lost its support at its 10-dma just under $64. It didn't even hold historical support at $63 and is now down for the 5th day in a row. Statistically, it means we could get an overdue bounce. Not even news that AMZN was in talks with Home Depot for marketing and logistics purposes could buoy the stock. Given the lack of conviction in this e-tail issue, we'd take the opportunity to exit on any strength. Though there are pockets of strength in the Internet sector, AMZN is one coin that can't fill it right now. **** DISH $97.00 -2.50 (-2.06) It seems the weather in Florida has taken to throwing DISH's in a figurative way. First, it was hurricane Floyd scuttling the launch of DISH's new bird which, would enable viewer selection from 500 TV channels, then came just plain old lousy weather scuttling tomorrow's mission too. Not to worry - it's been rescheduled again for Thursday. But the bad news is that DISH suffered a valuation downgrade from Buy to Hold yesterday at the hands of CE Unterberg Towbin, which cited, "Although EchoStar's future is bright, the share price has run ahead of the business". That pretty well sums it up. On volume of 10 times the ADV, DISH shattered $7 off the price tag yesterday and another $2.50 today. Super-Glue won't hold this one together and repairs may take some time. Thus we're dropping this play tonight. PUTS: ***** No dropped puts tonight. ***************** PICK NEWS - CALLS ***************** TXN $86.88 -1.63 (-3.06) There was no escaping the bears today, not even the strongest of sectors could run fast enough. Semiconductor stocks made such a nice run the last two weeks so it's understandable that some of those gains would be lost. Despite today's setback we are still bullish with the sector as a whole and foresee a comeback. In particular, there are technical signs that TXN may bounce. The stock's next support level is at $85, which is very close. Even though things look gloomy on the horizon, if the technology stocks make another run, expect TXN to be one of the leaders again. Keep a close eye on the stock as it approaches this level, this may be the buying opportunity were looking for. Because it is an unpredictable market right now use caution with this play and make sure use the stops are in place. INKT $129.25 -2.44 (-1.94) Going against the grain, blazing its own trail. These were the sayings used to describe INKT today as it pulled a reversal on the broader markets and ended the day in the black. Helping separate the stock from the rest of the pack was news that was released yesterday. On Monday, INKT said it had inked a deal to incorporate Microsoft audio and video transmission software into its Web traffic routing software. Separately, the company invested $20 million in InterNAP Network Services ahead of its IPO as part of an alliance between the two designed to speed traffic over the Internet. The recent alliances will add additional strength to an already technically strong stock, which should help us in the near-term. INKT continues to trade well above its moving averages and does not show resistance until $140. With all the indecisiveness in the markets, watch for pullbacks in the stock for new entry points. SUNW $92.56 -2.00 (+3.88) Today the bears flexed their muscles showing the bulls how strong they really are. By doing so, the bears managed to wipe out the gains the bulls fought so hard to establish on Friday and Monday. Unfortunately our earnings/split play on SUNW was also influenced by the recent downturn in the markets. After setting another 52-week high yesterday at $94.69 the stock pulled back slightly, which would be expected after today's session. Despite this slight setback, the stock is poised both fundamentally and technically set newer highs in the near-term. With earnings around the corner and split happy investors wanting a piece of the pie, it's the basic economic principle of supply and demand. In addition, don't forget about Daniel Kunstler's Buy rating and 12-month target price of $105 for SUNW. If the broader markets cooperate, we may see these levels sooner than he thinks. With the recent downturn in the markets, use the bargain prices for opportunities to place new trades however, confirm the market direction before doing so. FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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The Option Investor Newsletter Tuesday 9-21-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ***************** PICK NEWS - CALLS contd ***************** DCLK $108.50 -5.50 (-7.75) Again we bring up the word volatile. Yesterday and again today shares of DCLK showed why we suggested Sunday that this play might not be for everyone. After exploding $8.81 in the first hour of trading Monday, shares of the Internet advertising company began to fall just about as quickly as they went up. Volume was heavy with 6.71 mln shares exchanging hands, as DCLK ended the session down $2.25. Monday CMGI, announced it would acquire AdForce (ADFC) which may boost CMGI's presence in the online advertising infrastructure. Many analysts believe this infrastructure business is shaping up the be a battle between DCLK and CMGI. This morning DCLK received two Buy and one Strong Buy reiterations from analysts at Friedman, Billings; DLJ, and CE Unterberg Towbin respectively. The twelve month price target from the brokerage companies for DCLK was between $140 and 190. After making a low of $105.75 DCLK did manage to come back to close over its 10-dma at $107.44, which is somewhat positive. If you tried to get into a play on DCLK yesterday you should have been stopped out. Technically, DCLK is in an area of support between $107 and $108. The next area would be $103-$104. In considering a new play, use patience in finding an entry point. Look for a bounce of the support levels confirmed by a positive move in the broader markets and keep your stops tight. NTAP $75.13 -2.00 (+0.19) NTAP made a new 52 week high Monday in the last thirty minutes of trading. As we mentioned Sunday NTAP might be due for some profit-taking or a pullback. Well that started today. With the sell-off that occurred in the broader markets today, NTAP held up amazingly well. Volume was just under 589K, about half of what would be consider normal. At this point, we would be cautious when considering adding to or initiating a new play in NTAP. Initial intraday support is in the $74-$75 and then down near $71.00. Overall we do believe NTAP will continue higher but as we mentioned it has had a nice ride in the last six weeks, so use patience in picking a new point of entry and keep your stops close to protect any profits. But it is hard to argue with the momentum which has kept NTAP right near new-highs. Today, NTAP introduced NetCache 4.0, a high-performance architecture to deliver Internet traffic. NetCache 4.0 supports Network News Transfer Protocol and provides a platform to integrate Microsoft Windows Media Technologies and other emerging Internet protocols natively into NetCache appliance. AMAT $81.31 -2.50 (-3.50) Chicken Little may have been partially right today in saying the sky was falling. That's how it appeared for many stocks in the tech sector. First a drop on the news of the earthquake in Taiwan. Then an earnings warning from Apple for Q3 profits. This took it's toll on AMAT's price today, albeit a sympathy reaction to many of the days events. 20% of AMAT's sales come from Taiwan and the concern is that supply will be short due to damage from the quake. AMAT has a technology and service center in Taiwan and early estimates are that up to 2 weeks of production could be lost from the quake. As further information becomes available, we will see if this will really affect AMAT or not. There's a good chance that supply at other facilities will meet any shortfalls. Despite this set back, demand and prices should benefit this sector in the long run. We managed to stay above our support of $80 so as the dust settles we should see continued movement to the plus side. Given any positive move in the market, this could serve as an entry point. Use caution however! With today's events, all calls become more risky than average. What we do have going for us is the momentum of our trend. At current levels it is 60% better than average. Do not start any new plays until we get a positive market or upside direction in the stock. NT $48.06 -0.94 (-1.69) Big, bigger, biggest. This describes the trend in news we received from Nortel today. Good news to say the least. NT is expanding their markets as several companies have added the use of Nortel networks recently. Among them is Touch America for the Montana area, Ameritech which is the first U.S. service provider to come on board, and my favorite, Premier Purchasing, a health care concern. Premiers contract is for $105 million and is a break through in having Nortel as the "single vendor" for telephony, video, and data in the healthcare industry. In addition to this news, Soundview set a new price target of $70 for NT today and reiterated their opinion of Strong Buy. This confirms our expectations and direction in the stock. For these reasons, NT's stock did pretty well, considering the attack on the tech sector today from the market. The volume came back and gave us a wide range. We are resting close to support at $48, so any positive market direction should give us an entry point here. We are hopeful that the last 30 minute bump in the stock shows this as a buying opportunity! NXTL $70.06 -3.94 (-5.13) Hang in there baby! NXTL is holding on by the skin of our teeth, due to a barrage of news today. We took it on the chin, as the tech sector was hurt today by Apple's warning and the fear of chip supply from the quake in Taiwan. Then the news was confirmed that Bell Atlantic and Vodafone have agreed to complete their deal to form a $70 bln dollar force. Definitely competition for our NXTL. We're hanging on to NXTL as a play, hoping this is a bump in the road. Perhaps a buying opportunity as we hover right at the 10-dma of $71. Recent history has allowed us to dip slightly below, providing an entry with a good gain afterwards. Use caution! Our technical indicators have turned negative and the market is choppy. Just make sure those stops are in place as we are definitely at the testing point. Remember, the outlook for telecommunications is very good with analysts projecting another banner year. So despite the new competition and market, if we can hold on at this level we still may have a play. Capture the positive market and stock move before jumping in. EMC $71.94 -2.69 (+0.94) It's only a flesh wound! Despite the recent negative news from analysts on hardware companies, Monday's gloomy market and today's market attack on tech stocks, EMC has held up quite well. We did lose a bit today but what do you expect in war? Actually our EMC is proving to be a stronger warrior than expected given our environment. We are still quite a ways above our 10-dma support of $69 and may have developed some short-term support at $72, according to interval charts. Further analysis shows EMC has historical resistance and safety in comparison to the market. This combined with it's recent momentum are factors providing us strength. There was a great article today by Courtney Smith at CBS MarketWatch on EMC. Advising Investors to look at the Internet infrastructure, it lists EMC as a favorite, sighting several reasons why EMC shall grow as it manages the massive amount of growing Internet data. Because of market conditions, maintain a stance of caution and readiness. Use stops to protect your capital, and do not start any new positions without confirming a positive market and stock movement first. INTU $102.94 -1.13 (-0.06) In Monday's trading session for Intuit, it started the day as anticipated in an uptrending market. On strong volume, it proceeded to trade up in the morning to a high of $106 before pulling back later on in the day to close the day up a little over 1 point at $104. Today, a sell-off in the shares continued from Monday afternoon, as seller's stepped up in an overall weak market. Trading as low today as $101 on lower than average volume but the shares bounced back off of its lowest levels to close the day right around $103. The overall market continued to get weaker as the end of trading approached, but Intuit held its ground. The market weakness is surpressing the stock from running to new highs but it is not breaking below the 10-dma at $101. This keeps our bullish sentiment in place ahead of the stock split in a few days. If you have already entered a position look for another intraday price increase similar to Monday's surge and consider taking profits at that point. Then look to re-enter the stock on weakness around the 10-dma level. If you are looking for an entry point at this time, continue to look for the stock too bounce off the support levels that have been mentioned above. CKFR $41.38 -2.19 (-0.25) CheckFree, in a mixed internet sector, held up well in light of the overall weakness in the market today. Shares pulled back today as low as $40.50, which is right at its 10-dma. The weakness in the shares (before it rebounded) was on very low volume, almost three times lower than average. It bounced nicely off of the 10-dma to close at the low from Monday $41.38. This return at the close of the day to this level keeps our sentiment in the shares bullish going forward. We should see these shares continue the uptrend, but be cautious in the current market conditions, seeing that there has been no new news to report this week. Support is at the 10-dma just under $40. Unfortunately if the market bounces back tomorrow, we mat not get a chance to jump aboard at that price. Therefore look to intraday weakness to an entry point. ADI $55.56 -2.19 (-4.88) Stocks that continue to hit new highs have to be monitored and tight stops are always a good idea, as we requested in Sunday's update. Such was the case with ADI, we had a nice round of profit-taking in ADI after it had soared to record highs, in a high flying sector. Watching the market direction and sector momentum should have kept you from entering a new position in this high flier on Monday. After the earthquake in Taiwan, there definitely wasn't much for entry points today. This is a good example of why you should have stops. No one can predict earthquakes. The overall sector performance was weak as the high fliers came down to earth. The PHLX semi-conductor Index was down to 543.17 and is down over 20 points in two days. Although the shares were downgraded today by "ABN AMRO" from an Outperform to a Hold, going forward from a technical standpoint at this time we are cautiously bullish on ADI, as well as the semi-conductor sector. Conservative traders should take there profits and park them until all the news is out concerning the earthquake's damage to the plants in Taiwan. As always confirm market direction and momentum before entering a new position and in this case, look for news to drive the sector. CTXS $66.53 -0.34 (-0.72) After hitting another record high on Monday at $69.94, shares of CTXS began to sell-off as high fliers often do in a rocky market. We feel it was due to an overall weak market and not because of any negative news to report. Although it did manage to pass through last weeks resistance point at $68.75 before its retreat. Today the shares held up nicely in a market that was selling off heavily. Although the shares are off of the highs, there has been no major weakness in the shares. We still remain bullish and the technical positive picture remains intact. If current market conditions persist look for more of the same volatility. At this point the momentum in the shares have taken a breather and this could be a buying opportunity. This market is nervous right now, so look to the market returning to its uptrend before entering the shares. Keep it on your radar screen if you have not entered any plays at this point. The stock is in a nice "tug of war" between buyers and sellers. If you have not been stopped out of this one yet, keep your stops tight in case of more weakness in the overall market. Support remains strong at $61. YHOO $169.56 +1.19 (+6.44) In a monthly Media Metrix study (they are the Neilson ratings of the Internet), Yahoo! moved ahead of AOL to become the number one portal by a significant margin, though AOL-properties still garnered more overall traffic. Henry Blodget, the newest Merrill Lynch sage penned in a note to clients, "Yahoo is now more than 8 ... points ahead of Microsoft". Beating out Microsoft and AOL appears to have investors giving some juice to this earnings run. That's why we're in this play. Earnings are due out October 6, one day after the FOMC meeting. If you don't like the uncertainty of that meeting's outcome, you may want to plan to exit the play by Friday, October 1 and avoid the turbulence. In any case, you should plan to out by or before earnings, as YHOO has a history of selling off - a true case of "buy the rumor, sell the news". Don't play this one if you suffer from motion sickness. CSCO $71.13 -2.06 (-2.38) So far, this week has proven to be tough on CSCO. In light of a lousy day on the NASDAQ today, CSCO, which makes up 5% of the NASDAQ 100 still managed a close on its 10-dma of $71, slightly above its historical support of $70-$70.50. Mercifully, the volume was low, indicating that despite a lack of buyers, sellers were not lining up either. It looks a bit stronger than other issues. The good news is that CSCO is still on our radar as a split candidate. Here's the scoop from Sunday. Previous announcements have come between $69 and $83. The announcement would 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. Careful though, we're on the edge of what some technicians refer to as capitulation, where everybody gives up and sells everything they own en masse. We don't think it's likely, but you'll still want to protect yourself on the downside. If the market reverses to the upside, this dip looks buyable. Wait for the market to give the direction before taking a new position. BGEN $84.94 -2.47 (-1.50) Uh oh. While a $2.47 drop on a bio- drug stock isn't inherently bad on an otherwise crummy day, don't look now, but BGEN just broke south of its 10-dma of $86.50. If there is a saving grace here, it's that historical support is closer to $80. Another reason not to fret, recall from last week that BGEN pre-announced what is anticipated to be good earnings, and they may also be a split candidate, since they are in split territory anywhere over $80. In what is currently an earnings run play, look too for some split news, which will likely appear before or at earnings scheduled October 7. No paperwork has been filed with the SEC that would tip their hand regarding a split though. So don't play BGEN on that reason alone. While we should definitely remain cautious with this stock, we're going to give it a reprieve tonight on the theory that the market will get at least a technical bounce tomorrow, in which BGEN should participate given their earnings run strength. **************** PICK NEWS - PUTS **************** LLY $65.63 -1.50 (-1.38) New short-term lows are here again! After a couple of days of consolidation with lows of $66.38, Eli Lilly broke out to the downside today on overall market weakness. The stock hit $65.00 for the low on average volume and no new developments to move the stock. The sector and market continue to look bad and our next target for support is at $65 (soft support) and $62 (better support). One bit of news on Monday was that Sepracor and Lilly announced that they have entered into a license agreement that will enable Lilly to exclusively develop and commercialize R-fluoxetine. R-fluoxetine, a new chemical entity patented by Sepracor, is a modified form of an active ingredient found in Prozac. This is seen as the replacement for Prozac which loses its patent protection in the year 2004. GPS $33.00 +0.63 (-0.63) Still no relief in sight for Gap. Investors picked up in the selling first thing Monday morning as a lack of news has left the stock to drift lower. There is nothing new to report since Sunday, either positive or negative. It is clear that GPS, which at one point was an awesome stock, has been forgotten by traders. Some of the catalysts we've outlined recently include insider selling, slowing sales and tough year-over-year comparisons. So we are left to trade off the technical picture until we get a fresh batch of fundamental developments. The 10-dma at $34.25 is still the key resistance point but is quickly dropping. At this point, any bounce off this resistance mark should be considered for new plays. We will be watching the 10-dma resistance, news developments and an increase in volume as potential triggers to change the sentiment for our play. ELNK $38.81 -0.69 (-1.31) The rocky market finally took its toll on ELNK after a bit of a relief rally in the morning. This lack of strength is just what we like to see in our put plays. ELNK jumped in the morning as AOL and other ISP's decide to rebound from the recent trouncing they have taken. ELNK had even more reason to move on rumors that MSFT may be looking to acquire ELNK in their pursuit of AOL. But it was a very short-lived rumor and rebound, which took ELNK just under the 10-dma at $42.25. The stock has not been above the 10-dma in September. Even more impressive is the close right near the low of the day. So despite the early gains, ELNK still closed lower on the day. Our next target for support is at $35. Use stops to avoid a traditional market bounce falling a large decline. COST $66.75 +0.63 (-0.75) Costco makes a move higher? On a day were most stocks ended in lower territory our put play hit the brakes, fought off forces of nature and closed the day fractionally on the upside. From the standpoint of the Dow or Nasdaq, this gain was quite impressive. However, if you view this from a technical standpoint, a slight rise in the stock was expected. Not necessarily on a trading session like today but it does fit in the picture if you look at the stock itself. When looking at a five-day chart you notice a distinct pattern of lower-highs being established. The next lower-high is around $67, at this point the stock should turn and fall to lower-lows around $64, let's see if this holds to be true. Expect more volatile trading sessions in the near-term as the falling dollar and inflation fears continue to unnerve investors. Therefore, before placing new trades confirm a directional bounce to the negative side and keep your stops in place for protection. WLP $65.75 -2.44 (-3.00) It's all happening like clockwork. With today's downturn in the market fueling the fire, our put play on WLP is riding high and taking advantage of market conditions. Just as we expected, once WLP broke its support at $70 it has been nothing but down hill. The stock has been in negative territory for the last seven trading sessions, an indication that investors are still worried about Wellpoint's positioning in an already depressed sector. Considering matters like these are not resolved overnight, we expect this downward trend to continue in the near-term. We still have plenty of room to fall before we reach the next support level at $60. For investors placing new trades, wait for intra-day spikes in the stock, there should be plenty considering current volatile market conditions. JNJ $94.00 -2.50 (-2.06) Stocks in the drug sector took a pounding today. Shares of JNJ fell $2.50 on volume of over 2.6 mln shares. There was still really no major news driving the stock or sector lower. It mainly seemed to be joining in on the negative tone in the broader markets. We did get a bit of a bounce Monday up to $97.63 which was probably more technical in nature than anything else. At this point there is nothing in the news that would appear to prop up the drug sector or JNJ. Analysts are looking for an industry wide slow down, are concerned that there sill be revenue shortfalls and missed earnings. Technically there is good support for JNJ in the $89-$90 area, with the 200 dma sitting at $91.13. We would look for JNJ to continue to slide, until we see something in the earnings or revenues to tell us different. In entering a new play on JNJ, pick your points carefully and keep in mind the support levels mentioned above, as this may be a quick in and out play. ************** NEW CALL PLAYS ************** GE - General Electric $119.00 -3.00 (-1.00 this wk) One of the most profitable companies in the world, General Electric has been able to make money in all kind of different industries. The company is engaged in developing, marketing and manufacturing of a wide variety of products involved in generation, transmission, distribution and utilization of electricity and other goods. It produces aircraft engines, transportation equipment such as locomotives, appliances (both kitchen and laundry equipment), lighting, generators and turbines, nuclear reactors, medical imaging equipment, and plastics. With this diversity and reach, it is no wonder they count their profits in the billions. Here it is! The long awaited breakout over resistance at $120, thanks to a little help from Merrill Lynch. On Monday, Merrill came out with bullish comments for the huge conglomerate. They said GE's story keeps improving and the stock could reach $150 by next year. Merrill also cited strong management, new ways to leverage its existing base, and other comments that sound as if GE is set to outperform in the short-term. This helped GE pierce the long time resistance at $120. These comments mirror those of Salomon Smith Barney from two weeks ago when they upgraded GE to Buy from an Outperform. If you look at the chart, you will notice that GE has actually had a strong trend since early August while the Dow has been flat. Today's shake out in the markets could be the entry point we are looking for. The stock has a nice pattern of higher-lows since early August and today's close puts us at the low end of that range. There should be little resistance over $120 since we are then in new high territory. Support was set today on the bounce at $118 (which is where the 10-dma roams at $118.50). If we get the market bounce we are expecting tomorrow, GE should be set to outperform. Any move below 10,500 on the DOW will be extremely negative and should trigger the stops to take you out of the position. Don't forget we have earnings in 3 weeks so that is another catalyst for our play. The main news was mentioned above and there hasn't been any other stock-moving news. To elaborate on the Merrill Lynch report. Merrill also placed GE on their Focus One list, which is the highest ranking and reiterated the Buy rating. Other comments in the report said an improving global economy and improving sentiment for the post-Jack Welch management era. (Jack Welch is the company's CEO) BUY CALL OCT-115*GE-JC OI=2905 at $6.13 SL=4.25 BUY CALL OCT-120 GE-JD OI=6821 at $3.13 SL=1.50 BUY CALL OCT-125 GE-JE OI=5672 at $1.31 SL=0.50 High Risk! BUY CALL NOV-120 GE-KD OI= 455 at $5.50 SL=3.75 BUY CALL NOV-125 GE-KE OI= 337 at $3.38 SL=1.75 Picked on Sep 21st at $119.00 P/E = 39 Change since picked +0.00 52-week high=$122.50 Analysts Ratings 8-10-2-0-0 52-week low =$ 69.00 Last earnings 07/99 est= 0.84 actual= 0.85 Next earnings 10-07 est= 0.79 versus= 0.69 Average daily volume = 4.30 mln Chart = http://quote.yahoo.com/q?s=GE&d=3m **** ETYS - Etoys Inc. $63.44 +1.63 (+1.94 this week) Etoys isn't just playing around with online retailing. The e-commerce company, created in 1996 by former Disney executive Toby Lenk and idealab! Founder Bill Gross, carries some 100,000 items and more than 750 brands. Products include well-known brands and obscure specialty items. The cyberstore offers customers convenience (eliminating a trip to the toy store), database search capabilities (for type of toy, age, price), and gift wrap and delivery services. Etoys has expanded with its purchase of BabyCenter, an online parenthood information provider and seller of baby gear. Idealab!, an Internet company incubator, owns 25% of Etoys. Other venture capitalists, including chip maker Intel own another 35%. Over the last month or so Etoys had consolidated nicely, before it resumed the uptrend very strongly over the last 8 trading days. There has been over a 40% rise in the stock price. Banc Boston Robertson Stephens Lauren Cooks Levitan reiterated her Buy on the shares and it has now broken-out nicely to the upside. Levitan cited Media Metrix numbers that showed Etoys maintaining its reach against Smartkids.com which recently filed for a $60 million initial public offering. According to the statistics, Etoys also surpassed Kbkids.com and is clearly the leader in this e-commerce space. From a technical standpoint the volume and sector momentum is currently with the shares. ETYS has been trading well above the normal average volume. As you know Etoys is a recent IPO and there is not much trading history to go on but we can base our trading decision on previous IPO's that we considered leaders in their current industry of business. Look for Etoys to continue the upward momentum although today the sector had mixed performances overall. Look to enter the shares after the first hour of trading to give it a chance to settle down from amateur hour price moves, this will also give you an opportunity to determine whether the smart money is buying or selling at current price levels $63.44. If profit-taking prevails, keep the shares on your radar screen for a bounce off of support around $55. Look for a major breakout run if shares bounce above $67. Beware! This is not a stock or a trade to take your eyes off of once you have entered. Volatility could be very high. Tight stops are a must after positions are entered. BUY CALL OCT-60*ETU-JL OI=284 at $ 7.75 SL=$ 6.00 BUY CALL OCT-65 ETU-JM OI=120 at $ 5.38 SL=$ 3.88 BUY CALL NOV-60 ETU-KL OI=116 at $11.00 SL=$ 8.75 BUY CALL NOV-65 ETU-KM OI= 20 at $ 8.50 SL=$ 6.50 Picked on Sep 21st at $63.44 P/E = N/A Change since picked +0.00 52-week high=$85.00 Analysts Ratings 1-4-3-0-0 52-week low= $28.13 Last earnings 07/99 est=-0.19 actual=-0.17 surprise +10.53% Next earnings 10-27 est=-0.28 versus= N/A Average daily volume = 892 K Chart = http://quote.yahoo.com/q?s=ETYS&d=3m *************** SEE DISCLAIMER IN SECTION ONE
The Option Investor Newsletter Tuesday 9-21-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. **************** NEW PLAYS contd **************** AAPL - Apple Computer $69.25 -9.81 (-7.69 this wk) Apple Computer designs, develops, produces, markets and services microprocessor-based personal computers. AAPL makes the popular and colorful I-mac computers and the Mac OS operating system, the first commercially viable graphical user interface. Its other products include laptop computers, peripherals, handheld devices, servers, Internet tools, and networking and connectivity products. Apple is run by the original founder, Steve Jobs. You have all probably heard the news, Apple is being punished because consumers like their product a little too much. Ok, maybe that is a bit over-simplified but in a nut shell, it explains why we like AAPL as a call play. After the close on Monday, Apple announced that they would miss earnings estimates due to Motorola not being able to supply chips fast enough to meet demand. A development that Steve Jobs called "a very temporary issue". This is what sent shares of AAPL plummeting on Tuesday. Apple said earnings would come in below Q3 where they earned a profit of $0.69 a share. The company also said it had received orders for 150,000 G4 computers since it was announced three weeks ago, more than double what some analysts were expecting. That doesn't sound like a reason to panic. Most likely today's selloff was a combination of events. First, the stock had a great run there are plenty of profits to be taken off the table. Second, some investors just get scared by the words 'earnings warning'. Third, the market decline didn't help either. We like AAPL here and agree that this is a "very temporary issue" but entry points are always tricky in a volatile environment. We expect a bounce back tomorrow but would encourage caution in amateur hour. Also wait for a bounce before opening new plays. Our one concern is that we may get negative analysts jumping on the bandwagon which may drive AAPL down to stronger support at $60. Either way, we would like to see positive sentiment or a bounce first. We are likely to see more news in the next few days which we will elaborate on Thursday or visit any of your regular news sites to read one of the dozens of articles on Aaple released today. BUY CALL OCT-65*AAQ-JM OI=2619 at $6.25 SL=4.50 BUY CALL OCT-70 AAQ-JN OI=1640 at $3.88 SL=2.50 BUY CALL OCT-75 AAQ-JO OI=1179 at $2.06 SL=1.00 BUY CALL NOV-70 AAQ-KN OI= 5 at $6.38 SL=4.75 vol today = 369 Picked on Sep 21st at $69.25 P/E = 16 Change since picked +0.00 52-week high=$80.13 Analysts Ratings 8-8-6-1-0 52-week low =$28.50 Last earnings 07/99 est= 0.64 actual= 0.69 Next earnings 10-13 est= 0.76 versus= 0.68 Average daily volume = 4.29 mln Chart = http://quote.yahoo.com/q?s=AAPL&d=3m **** VOD - Vodafone AirTouch $216.63 +4.63 (+8.06) Formed earlier this year when the UK's Vodophone group bought AirTouch Communications, Vodafone AirTouch provides international mobile telecommunications services. VOD operates analog and digital cellular network services including voice communications, messaging, paging, and mobile data services. They serve over 28 million mobile phone customers in 23 countries, with over nine million subscribers in the United States and more than six million in the UK. They take on the best, competing with AT&T, BT, and Cable & Wireless. VOD announced a 5:1 split back on July 30th. Since that time shares of the wireless communications provider dropped to challenge its 200-dma near the $180 area in mid August. After making its way back over the $200 are again last week, VOD has dug in, ignoring the negative sentiment in the broader markets and seems to have begun its split run. VOD splits after the close of business October 4th. Technically, today's action helps to confirm the past 3 days move up as VOD made a new 52-week high at $218.06, taking out the previous high made back in late June at $216.44. Volume today was very strong with over 3.0 mln shares exchanging hands. We would expect VOD, to continue its run into early October. Now for the tricky part. VOD closed last Thursday at $201.00 which means VOD has already moved over 7% in the last three sessions. We would look for a pullback as an opportunity to join in on the earnings run. Initial support for VOD is near $210.00. In considering a play assess your risk profile carefully and set your stops accordingly. In the news Vodafone and Bell Atlantic today announced an agreement for Bell Atlantic(BEL) to acquire the U.S. mobile phone network of Vodafone. The deal will create a wireless communications company that will serve 90 percent of the U.S. population. It will unite Bel Atlantic's East Coast network with Vodafone's West Coast network, so their customers will be able to use their wireless phones almost anywhere in the country without having to pay extra "roaming" charges for out of area calls. BUY CALL OCT-210*VOD-JB OI=2134 at $13.00 SL=$10.50 BUY CALL OCT-220 VOD-JD OI=1056 at $ 7.25 SL=$ 5.50 BUY CALL OCT-230 VOD-JF OI=1079 at $ 3.63 SL=$ 1.75 Picked on Sep 21st at $216.63 P/E = 79 Change since picked 0.00 52-week high=$218.06 Analysts Ratings 5-4-2-0-0 52-week low =$ 94.00 Last earnings 06/99 est= N/A actual= N/A Next earnings 09/99 est= N/A versus= N/A Average Daily Volume = 1.27 mln Chart = http://quote.yahoo.com/q?s=VOD&d=3m ************* NEW PUT PLAYS ************* No New Put Plays. ********************** PLAY OF THE DAY - CALL ********************** SUNW - Sun Microsystems $92.56 -2.00 (+3.88 for wk) 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. Sunday's Write Up 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. Tuesday's Write Up Today the bears flexed their muscles showing the bulls how strong they really are. By doing so, the bears managed to wipe out the gains the bulls fought so hard to establish on Friday and Monday. Unfortunately our earnings/split play on SUNW was also influenced by the recent downturn in the markets. After setting another 52-week high yesterday at $94.69 the stock pulled back slightly, which would be expected after today's session. Despite this slight setback, the stock is poised both fundamentally and technically set newer highs in the near-term. With earnings around the corner and split happy investors wanting a piece of the pie, it's the basic economic principle of supply and demand. In addition, don't forget about Daniel Kunstler's Buy rating and 12-month target price of $105 for SUNW. If the broader markets cooperate, we may see these levels sooner than he thinks. With the recent downturn in the markets, use the bargain prices for opportunities to place new trades however, confirm the market direction before doing so. BUY CALL OCT-85*SUQ-JQ OI=8899 at $9.50 SL=7.25 BUY CALL OCT-90 SUQ-JR OI=6306 at $6.13 SL=4.25 BUY CALL OCT-95 SUQ-JB OI=3385 at $3.75 SL=2.00 BUY CALL NOV-90 SUQ-KR OI= 540 at $8.75 SL=6.50 BUY CALL NOV-95 SUQ-KB OI= 622 at $4.38 SL=2.50 Picked on Aug 28th at $76.19 P/E = 69 Change since picked +16.38 52 week high=$94.69 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 ************************ COMBOS/SPREADS/STRADDLES ************************ What A Difference A Day Makes.. Monday, September 20 U.S. markets closed with small gains in the slowest session of the year Monday but concerns over the Japanese Yen remain high as economists weigh the effects of new plan to cap its strength against the dollar. The Dow industrial average ended 20 points higher at 10,823 while the Nasdaq composite rose 16 points to to 2,886. In the broader market, declining issues beat advances 1,749 to 1,160 on low volume of 564 million shares on the NYSE. Sunday's new plays (positions/opening prices/strategy): Hewlett Packard HWP OCT115C/OCT90P $2.38 credit strangle Johnson & Johnson JNJ OCT100C/OCT90P $2.43 credit strangle Merrill Lynch MER OCT80C/OCT75P $2.50 credit strangle There was lots of activity in the options for these positions during the morning session but none of the plays were observed at our recommended targets. Those of you that traded into each leg individually should have been able to open with favorable premiums but we will record the initial entries at slightly lower prices. Portfolio plays: Most of the issues in our portfolio moved higher with the broad market rally and the leader was easily Sun Microsystems (SUNW). The stock provided a big boost for the Nasdaq, moving up $5.88 to a new high at $94.56 after the stock split announcement on Friday afternoon. As we said in Sunday's note, this is an issue that we've let get away in the long-term portfolio and hopefully those of you participating on your own have a done a better job managing the LEAPS/CC's position. Moving into Monday's trading, we had a bullish diagonal position (a good thing!) with the long option at $75, almost $20 ITM. The problem was how and when to roll to the next level with our short option (OCT-$80). Trading in the first hour was strong but as the infamous amateur period came to a close, the stock price stalled near $91. That appeared to be a reasonable time to make the adjustment; while the issue was consolidating. By the end of the day, the stock price moved higher again. Not necessarily good for us because we only rolled to the $85 strike (downside protection is our main concern) but at least we have reduced the debit ratio by a small amount ($1). The commodities market was focusing on the meeting on Wednesday of the Organization of Petroleum Exporting Countries (OPEC). The October crude oil future in New York, the market's most active, fell 1.7% to $24.29 a barrel, taking the majority of bullish oil issues with it. Halliburton (HAL) was down almost $3 and one of our positions suffered with the loss. The (long-term) calendar spread (JAN50C/OCT50C) should eventually withstand the slump but right now it is a concern as oil stocks consolidate. Our other oil issue, Occidental Petroleum (OXY) has moved comfortably back to the sold strike at $22.50. Hopefully it will find technical support near that price. Some other interesting moves on issues in the calendar spreads portfolio; Zoltek (ZOLT) fell $0.56 to $8 on the same lack of news (none) that it moved higher on last week and JR Bard (BCR) dropped $1.25 to $48 as the takeover rumors faded to whispers. The BCR position is danger if the stock drops below the recent trading range near $46 and that's where we will make an exit or adjustment, if it becomes necessary. Increased sales of its new router helped Cabletron Systems (CS) post a better-than-expected second-quarter profit Monday. The company said earnings rose to $12.5 million, or $0.07 a share. CS was expected to earn $0.06 cents so the report was favorable but the stock still dropped to the $19 range. Now that the news is history, it will be interesting to see where the stock price goes from here; will the overwhelming force be public sentiment (bullish) or technicals (neutral to bearish). Our current spread position is fairly safe with the sold option at $17.50. Tuesday, September 21 U.S. markets crumbled Tuesday on increasing concerns of a record trade deficit and the yen's increased pressure on the dollar. The Dow ended down 225 points at 10,598 and the Nasdaq index dropped 65 points to 2,821, a day after closing within just one point of an all-time high. In the broader market, declining issues beat advances 2,350 to 679 on moderate volume of 785 million shares on the NYSE. The 30-year U.S. Treasury bond was down 8/32, with the yield rising to 6.09%. Portfolio plays: A terrible day around the globe as earthquakes in the far east, hurricanes in the gulf, increasing concerns about the weakening dollar, the growing trade deficit and softening earnings reports all conspired to bring the stock market to its knees. Most of our positions fared no better and the majority of the portfolio was crimson red at the end of the session. There were few stocks that gained ground today and they appeared to be mainly small-cap issues. Some of our stand-outs were: IDTC Corp (IDTC), which gained $1 at the close despite being lower in the morning session; Unify (UNFY), another $1 gainer and now $10 ITM on the bullish debit spread, Network Associates (NETA) which moved up $0.68 to a previous resistance area near $20 and Bell Atlantic (BEL), which moved comfortably up to the sold strike at $65, after more news on the deal with Vodaphone (VOD). Bell and Britain's Vodafone agreed Tuesday to create a joint venture that will offer seamless wireless-phone service across the entire U.S. market and launch the entity against market leader AT&T. The new venture will become the largest wireless service in the country. Our list of losers was long, distinguished and far too great to cover in the short time before today's research must begin. Those that concerned us the most (in the short-term) were Tut Systems (TUTS), Hambricht and Quist (HQ) and Philip Morris (MO). All of these positions should be monitored for early exits in the event of further downside movement. In our long-term portfolio, there were a number of big losers but the most significant moves were probably Cabletron (CS), Halliburton (HAL) and Exxon (XON). CS was down over $2 during the day after a downgrade by AG Edwards in the wake of a post earnings sell-off. Lets hope the buyers return in earnest before the stock falls to its old range near $15. XON and HAL have us worried because of the recent slump in oil issues and the key moment appears to be approaching for that group as a whole. In the past few months, it has rallied when the broad market fell, but that no longer appears to be the case. It will be interesting to see how the trend moves from here with the OSX closing just above its long-term (150 dma) moving average. Summary Of Monthly Positions: This month we decided to close the majority of our older plays to reduce the workload in tracking the portfolio. Keep in mind that many of the more profitable spreads have been open for months and the positive returns are based on premium accumulated in a series of trades occurring throughout the life of the position. ********************** CREDIT SPREAD SUMMARY ********************** Stock Pick Last Position Credit Cost G/L Status LIPO $23.31 $8.63 SEP30C/27C $0.25 $0.00 $0.25 Closed RX $28.19 $25.50 SEP35C/32C $0.68 $0.00 $0.68 Closed Credit spreads are profitable if both positions remain OTM until expiration. The cost-to-close price can be used to compare the initial opening credit to the current spread value. *************************** CALENDAR SPREAD SUMMARY *************************** Stock Pick Last Position Debit Value G/L Status BCR $51.25 $48.75 JAN55C/OCT55C $1.93 $1.75 $0.19 Open BEL $64.13 $64.50 APR65C/OCT65C $4.25 $4.50 $0.25 Open BHI $33.50 $32.19 OCT35C/SEP35C $0.12 $1.12 $1.00 Closed CLTR $30.68 $18.63 OCT25P/SEP25P $0.62 $1.38 $0.75 Closed COMS $25.81 $27.56 OCT25C/SEP25C ($1.00) $0.88 $1.88 Closed EMC $62.31 $71.00 OCT65C/SEP65C ($0.88) $2.00 $2.88 Closed FON $51.00 $50.56 OCT55C/SEP55C $2.38 $3.12 $0.75 Closed IP $53.56 $51.06 OCT55C/SEP55C $0.38 $1.00 $0.62 Closed MNTR $23.38 $26.75 OCT25C $1.81 $3.75 $1.93 Closed NOVL $27.25 $22.19 NOV30C/SEP30C $1.00 $0.75 ($0.25) Closed PGEX $22.88 $17.56 OCT25C/SEP25C $0.68 $0.93 $0.25 Closed RAD $23.38 $17.88 OCT25C/SEP25C $0.38 $0.38 $0.00 Closed RNBO $13.38 $14.88 OCT15C/SEP15C $0.68 $0.50 ($0.18) Closed UCL $44.38 $40.56 OCT45C/SEP45C ($2.25) $0.75 $3.00 Closed ZOLT $7.68 $8.50 APR7C/OCT7C $1.06 $0.88 ($0.19) Open LONG-TERM POSITIONS CATP $17.00 $13.56 MAR20C/SEP20C $2.50 $1.88 ($0.62) Closed CD $19.93 $19.13 JAN20C/SEP20C ($0.75) $1.25 $2.00 Closed COMS $25.31 $27.56 JAN27C/OCT27C $1.00 $2.00 $1.00 Open CPQ $24.62 $23.75 JAN25C/SEP25C $0.12 $2.50 $2.38 Closed DD $71.25 $62.06 JAN70C/SEP70C ($0.50) $3.75 $4.25 Closed GD $67.31 $61.44 FEB70C/OCT65C $1.75 $1.38 ($0.38) Open HAL $47.69 $47.50 JAN50C/OCT50C ($0.12) $2.62 $2.75 Open IGL $18.55 $16.44 JAN20C/SEP20C $1.00 $0.75 ($0.25) Closed LEH $57.93 $54.69 JAN60C/SEP60C ($6.50) $5.75 $12.25 Closed OXY $21.69 $23.13 JAN22C/OCT22C $0.62 $1.38 $0.75 Open PG $100.50 $101.13 JAN100/S100C ($3.75) $0.00 $3.75 Closed PSFT $16.19 $17.19 JAN17C/OCT17C ($0.06) $1.50 $1.43 Open RSLC $20.81 $18.06 JAN22C/SEP22C $3.00 $3.00 $0.00 Closed SGP $53.88 $50.25 JAN55C/SEP55C $2.25 $3.50 $1.25 Closed UAL $65.38 $66.75 JAN65C/SEP65C $1.88 $5.00 $3.12 Closed UCL $43.00 $40.56 JAN45C/SEP45C $2.25 $2.62 $0.38 Closed UCL $40.06 $40.56 JAN40C/SEP40C $1.50 $2.50 $1.00 Closed YEAR-2001 LEAPS BGEN $83.81 $86.44 JAN90/OCT90C $15.88 $15.00 ($0.88) Open CA $53.56 $57.38 JAN60/OCT60C $8.62 $11.12 $2.50 Open CS $16.80 $19.75 JAN15/OCT17C $4.12 $5.00 $0.88 Open GM $71.68 $65.06 JAN75/OCT70C $8.50 $6.62 ($1.88) Open GM $71.68 $65.06 JAN75/OCT70C $5.75 $6.62 $0.88 Open JNJ $95.68 $96.06 JAN100/O100C $8.38 $11.50 $2.88 Open LTD $45.68 $37.81 JAN50/OCT40C $4.50 $2.12 ($2.38) Open MO $38.68 $35.94 JAN35/OCT40C $6.38 $5.50 ($0.88) Open MOT $100.00 $89.63 J105/OCT100C $14.25 $12.25 ($2.00) Open MDT $78.81 $77.75 JAN75/OCT75C $11.00 $11.00 $0.00 Open PRD $25.37 $27.94 JAN25/OCT30C $7.50 $7.12 ($0.38) Open SLR $71.25 $74.63 JAN70/OCT70C $10.88 $13.88 $3.00 Open SUNW $71.75 $90.13 JAN75/OCT80C $11.75 $14.00 $2.25 Open XON $81.94 $79.88 JAN85/OCT85C $9.12 $8.38 ($0.75) Open * New LEAPS/Covered-Calls plays are generally not profitable for at least two strike periods. The calendar (or time spread) is profitable if the value of the position exceeds the initial debit (or cost-basis) at the end of the expiration period for the long position. However, because we track the plays based on the current closing cost/value, the gains for time spreads will rarely be reflected until the play closes. Each month, as we sell a new option against the long position, the net cost should decline or the position value should increase. ************************ DIAGONAL SPREAD SUMMARY ************************ Stock Pick Last Position Debit Value G/L Status ATHM $43.38 $38.38 OCT52C/SEP50C $1.12 $1.00 ($0.12) Closed CHIR $29.38 $35.94 OCT25C/SEP30C $3.38 $4.88 $1.50 Closed CS $16.80 $19.75 OCT15C/SEP17C $2.06 $2.50 $0.43 Closed CSCO $65.25 $71.31 OCT55C/SEP65C $7.12 $10.00 $3.88 Closed CSCO $56.50 $71.31 OCT57C/SEP65C $2.25 $7.50 $5.25 Closed DISH $72.50 $96.88 DEC65C/SEP75C $8.12 $10.00 $1.88 Closed DISH $72.50 $96.88 DEC65C/SEP75C $9.38 $10.00 $0.62 Closed HAL $31.00 $47.50 JAN30C/SEP50C $10.50 $19.75 $9.25 Closed HD $58.43 $67.25 JAN60C/SEP65C $2.12 $7.75 $5.62 Closed INTC $63.88 $84.75 OCT65C/SEP75C $8.50 $10.00 $1.50 Closed JNJ $86.63 $96.06 JAN85C/SEP95C $4.38 $12.50 $8.12 Closed MER $97.00 $71.94 JAN100/SEP80C $1.38 $1.50 $0.12 Closed MOT $83.00 $89.63 JAN85C/SEP90C $2.00 $9.75 $7.75 Closed NSM $12.56 $34.94 NOV15C/SEP30C $7.75 $15.00 $7.25 Closed RIGS $20.50 $18.19 NOV15C/OCT20C $2.00 $4.25 $2.25 Closed RSLC $20.81 $18.06 OCT20C/SEP22C $2.25 $2.00 ($0.25) Closed SEPR $99.63 $73.38 JAN100/SEP80C $10.25 $4.00 ($6.25) Closed SLR $69.56 $74.63 OCT60C/SEP70C $6.38 $10.25 $3.88 Closed SUNW $47.25 $90.13 JAN50C/OCT80C $0.50 $28.00 $27.50 Closed TOM $35.56 $31.06 JAN35C/SEP40C ($0.25) $2.00 $1.75 Closed WCOM $74.25 $78.88 JAN75C/SEP85C $2.50 $8.75 $6.25 Closed The diagonal spread is profitable if the value of the position exceeds the initial debit (or cost-basis) at the expiration of the long position. However, because we track the plays based on the current closing cost/value, the gains for diagonal spreads will rarely be reflected until the play closes. Each month, as we sell a new option against the long position, the net cost should decline or the position value should increase. ************* DEBIT SPREADS ************* Stock Pick Last Position Debit Value G/L Status BNBN $18.00 $18.25 OCT15C/17C $1.75 $1.62 ($0.12) Open CHV $95.06 $93.06 SEP80C/90C $9.00 $10.00 $1.00 Closed COMS $27.06 $27.56 OC17C/22/25C $5.50 $6.00 $0.50 Open COOL $13.50 $8.25 SEP10CC/S10P $8.50 $8.25 ($0.25) Closed CSE $49.31 $49.56 OCT45CC/45P $43.50 $44.00 $0.50 Open DO $36.12 $37.94 SEP35CC/S35P $32.88 $35.00 $2.12 Closed HAL $50.56 $47.50 SEP40C/45C $4.00 $5.00 $1.00 Closed HQ $42.25 $41.13 NOV25C/40C $11.50 $11.75 $0.25 Open HQ $42.25 $41.13 SEP35C/40C $4.00 $5.00 $1.00 Closed JPM $122.94 $122.94 SEP140P/130P $8.00 $10.00 $2.00 Closed MCHP $52.32 $59.69 OCT35C/45C $8.31 $9.00 $0.68 Open MO $38.68 $35.94 OCT32C/37C $4.00 $3.00 ($1.00) Open NE $22.00 $25.44 SEP17C/20C $1.87 $2.50 $0.62 Closed NMR $32.00 $37.13 SEP25C/30C $3.12 $5.00 $1.88 Closed QWST $30.00 $29.94 OCT22C/27C $3.00 $2.88 ($0.12) Open RX $27.81 $25.50 SEP35P/30P $3.43 $5.00 $1.56 Closed SEE $60.68 $54.81 OCT70P/65P $3.50 $4.50 $1.00 Open TUTS $29.75 $27.75 OCT22C/25C $2.06 $1.56 ($0.50) Open UNFY $19.88 $24.13 OCT12C/17C $4.12 $4.12 $0.00 Open USWB $23.31 $29.44 SEP17C/22C $4.12 $5.00 $0.88 Closed READER'S REQUEST PLAYS QCOM $183.75 $189.00 JAN140C/J150C $7.25 $8.00 $0.75 Open CNXT $71.25 $79.19 OCT60C/SEP70C $9.00 $10.00 $1.00 Closed EFII $61.60 $59.44 OCT45C/OCT55C $8.12 $7.88 ($0.25) Open INTU $91.06 $103.00 OCT70C/OCT80C $8.50 $10.00 $1.50 Closed * Many of these positions were closed early to protect profits or prevent (limit) potential losses. A debit-spread is profitable if the value of the position exceeds the initial cost of the spread when the play is closed. However, because we track plays based on the current cost/value, potential gains may not be reflected until both positions are closed. *************** DEBIT STRADDLES *************** Stock Pick Last Position Debit Value G/L Status ALLC $22.50 $20.94 NOV22C $0.50 $0.50 $0.00 Open ESPI $10.00 $8.00 MAR10C/MAR10P $4.81 $4.12 ($0.68) Open STRADDLE - COMBINATIONS BRCM $111.87 $113.50 NOV135C/140C $1.38 $1.00 ($0.38) Open BRCM $111.87 $113.50 NOV90P/85P $1.38 $1.00 ($0.38) Open DCLK $74.50 $114.78 OCT90C/OCT97C $2.00 $5.75 $3.75 Open DCLK $74.70 $114.78 OCT60P/OCT52P $2.00 $0.00 ($2.00) Open * The combination positions will generally not reflect a profit (even when they have moved as expected) until expiration. A debit-straddle is profitable when the value of the position exceeds the initial cost of the spread. ****************************************************************** Note: We trade the "paper" portfolio just as we would trade in our personal account and the ongoing narrative is a service we provide to help novice traders understand how various positions might be opened and closed. It is not intended as a substitute for your own trading techniques nor does it replace your duty to manage the positions in your portfolio. We post a list of the current plays once a month (after expiration) and the summary is a reasonable representation of the positions that we offered during the month. We do NOT make any claims about the performance of the section because there are just too many ways that each individual play could be opened and closed. Questions & comments on spreads/combos to ray@OptionInvestor.com ****************** NEW COMBOS ****************** The price of gold jumped $6.00 today on the dollar's weakness and heavy demand for the precious metal at a European auction. Stocks in this group also rallied and with the recent requests for plays on Gold issues, I decided to search for some simple debit spreads on the most popular stocks. I found two favorable plays with small premium disparities that will allow us to open very conservative positions at a discount. We favor the recent technical change of character in the gold market and both of these issues may benefit from the expected Y2K rally near the end of the year. **** NEM - Newmont Mining $21.81 Newmont Mining is engaged, directly and through its subsidiaries and affiliates, in the production and development of gold, the exploration for gold and the acquisition of other gold properties worldwide. Newmont Mining produces gold from operations in Nevada and California, as well as in Peru, Indonesia and the Republic of Uzbekistan. With the market now testing recent downside support and the fact that investors have completely exhausted any short-term excuses for upside buying, the outlook is grim for equities and favorable for precious metals. The bond market and the recent technologies activity (overbought) both support the idea that any short-term rallies will fade and fail. Most of the institutional and mutual fund managers are using the recent highs solely for the purpose of selling, regardless of any favorable news or the fundamental (long-term) outlook. Some experts suggest that higher equity and real estate prices are preludes to greater credit created purchasing power along with higher future goods prices, the risk of which is just what gold investment is all about. The 30% rise in world investment demand for gold in the second quarter is the evidence of this trend and the interest in the commodity is expected to continue. PLAY (conservative - bullish/debit spread): BUY CALL DEC-17.50 NEM-LW OI=323 A=$5.25 SELL CALL DEC-22.50 NEM-LX OI=6818 B=$2.12 INITIAL NET DEBIT TARGET=$2.93 ROI(max)=$70% B/E=$20.43 Chart = http://quote.yahoo.com/q?s=NEM&d=3m **** ABX - Barrick Gold $19.81 Barrick Gold Corporation is a leading international gold producer with low-cost mines in North and South America. They have ten producing mines in the United States, Canada and Chile; two mines under development and they are developing the large scale Pascua Project in Chile. This issue also reflects the new change of character on stocks in this group as interest increases in gold and other precious metals. Two recent bottoms near $17 should protect the downside of this position and rally above the current resistance at $20 should allow the play to be closed early for a favorable return. PLAY (very conservative - bullish/debit spread): BUY CALL JAN-12.50 ABX-AV OI=536 A=$7.62 SELL CALL JAN-20.00 ABX-AD OI=17273 B=$2.06 INITIAL NET DEBIT TARGET=$5.38 ROI(max)=40% B/E=$17.88 Chart = http://quote.yahoo.com/q?s=ABX&d=3m ********* STRADDLES ********* A whole new group of straddle plays to choose from (courtesy of Tom Gentile at Optionetics) and many of them offered favorable entry points during Monday's session. E*trade (EGRP) appeared to be the most popular position but General Motors (GM) and United Healthcare (UNH) also had a few contracts. Some of you entered the new plays at better-than-suggested prices even though most of the opening targets were just out of reach. In the summary, we will record the initial cost of each position; based on a simultaneous order and quotes from our data source (Interquote). Sunday's new plays (positions/prices/strategy): E*trade Group EGRP JAN22C/JAN22P $9.12 General Motors GM JAN65C/JAN65P $10.00 Lycos LCOS JAN45C/JAN45P $15.75 Phelps Dodge PD JAN60C/JAN60P $9.38 United Health UNH DEC60C/JAN60P $10.50 These new plays are based on Tom's (Optionetics) approach to debit straddles. Please review his entry and exit strategies to maximize profits and limit losses on these positions. Another winner from Tom's group was the recent Apple (APPL) straddle; 8/27/99 - Apple Computer (AAPL) OCT65C/OCT65P Straddle at $10.00 debit Apple tanked on the heels of its Monday earnings warning. The Mac maker says it expects net income to be about $35 million less than a year ago. Apple blames the earnings on a shortage of G4 processors from Motorola. Last Friday the stock closed out at $77.75. The Straddle was priced at $12.75. Selling the calls for $12.75 and holding the puts (which were worthless) not only put a 27.5% return in the traders pocket, but the big down-draft on AAPL today has also caused the puts to gain new ground as well. Reader Mailbag: We also had a question from one of the readers on the subject of new candidates for plays; where and how we find them. Most of the new positions for my sections come from news articles on options activity/volume, volatility searches/scans, proprietary software programs that provide premium disparity algorithms and research from other professionals in our field. Most of the straddle candidates are based on current implied vs historical volatility and these lists can be found on a number of sites and various software programs. Probability calculators and charting programs are also helpful in sorting through the large number of possible issues to identify undervalued options and make assumptions about future movements in the underlying security. Profitable debit straddles are relatively simple to uncover and there are three rules to identifying favorable conditions for a straddle purchase. First, the trader should select options that are undervalued (cheap). Next, the underlying security must have the potential to move (high or low) enough to make the straddle profitable. Finally, the underlying stock should have a history of multiple movements through a sufficient range in the required amount of time to justify the overall risk/reward of the position. There are many sources of information on the Internet and one of the best ways to find new candidates is to follow the mainstream activity. News articles on extremes in option trading volume and volatility are listed at many sites (Yahoo, Street.com, and CBS Marketwatch are some examples) and the major exchanges; The CBOE, PHLX, and AMEX all have excellent resources for historical and statistical option pricing. Last weeks comments on Liposome (LIPO) for example, were based on a play that we had been following in another section (profitable spread position the previous week). While monitoring the current trading activities and the changes in implied volatility for new plays, we saw that traders were starting to weight the downside of the position heavily. A review of one of our favorite websites for volatility estimates (not mentioned but well known) revealed that another professional trader was also considering the issue. When you find a play that appears to have all the attributes of a favorable position and another distinguished expert has also listed it as a candidate, it probably has a good chance of being profitable. The key is to use all the sources available to find these candidates and participate when they meet your standards for risk versus reward. Note: As a professional courtesy, we did not formally list the Liposome (LIPO) play; it was previously published in one of the complimentary newsletters that we receive from another service. That doesn't mean you shouldn't take advantage of the knowledge for your own benefit; there are no patents or copyright laws on option plays (that I know of anyway). Good Luck! ************ See Disclaimer in section one
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