The Option Investor Newsletter Sunday 9-26-99 1 of 7 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com Entire newsletter best viewed in COURIER 10 font for alignment ******************************************************************* MARKET STATS FOR LAST WEEK AND PRIOR WEEKS ******************************************************************* WE 9-24 WE 9-17 WE 9-10 WE 9-3 DOW 10279.33 -524.30 10803.63 -224.80 11028.43 - 50.02 - 11.72 Nasdaq 2740.41 -129.23 2869.64 - 17.32 2886.96 + 43.85 + 84.21 S&P-100 672.80 - 32.16 704.96 - 7.83 712.79 - 1.10 + 5.92 S&P-500 1277.36 - 58.06 1335.42 - 16.23 1351.65 - 5.59 + 8.97 RUT 417.09 - 17.37 434.46 - 6.73 441.19 + 5.22 + 3.52 TRAN 2878.72 -121.07 2999.79 - 91.04 3090.83 - 66.07 - 14.45 VIX 29.54 + 5.32 24.22 + 1.87 22.35 - .96 - 1.82 Put/Call .74 .67 .52 .57 ******************************************************************* Be careful what you wish for, you might get it! On Thursday I said the ideal situation would be another big drop on Friday to clear out the remaining sellers and make buyers feel safe to open new positions. It would have been hard to script the trading day Friday any better. Of course it depends on what side of the table you were on when the market opened but I was happy as new puppy in a house full of kids. We got a little bump right after the open that let traders with open positions to sell into strength. And there must have been a bunch of them because the next two hours were all down hill. After breaking all the way down to 10190 at 11:30, the bullish sentiment gave the few brave buyers still in denial of the sell off a buying opportunity. Those with experience held back with the feeling that there was more to come. There had to be more to come. With G7 this weekend and Greenspan on Monday, there were still holders that wanted out. Right after lunch the real carnage began again. Check out the chart above and observe how much steeper the drop at 1:40 and the recovery at 3:PM were than the morning sell off. Morning holders still had hope, afternoon sellers just wanted out. The afternoon low of 10187 was a strong retest of the morning low and gave us a firm rebound. The second dip was buyable and in retrospect the first dip was also but I think the word "lucky" would apply to them. Are we there yet? Was that a double bottom at 10190 twice today or was it just a coincidence? Does it matter? Analysts are split over reading the technicals at this point. Technically we are in deep trouble. The Dow broke it's 200 day moving average, 10252, but rallied at the close to end back above it at 10279. Too close for comfort. Traders are holding their breath and consoling themselves with the last hope that it didn't "close" under the 200 DMA and therefore they are still clinging to hope that the market will recover. Most traders are still in denial of the facts while technicians just keep checking off the facts. The S&P broke it's 200 DMA at 1301, AND DID NOT RECOVER, closing today at 1277. The S&P danced with the bear today as it dropped below the August low of 1267 but was rescued by the tech rally just before the close. A close below the previous 1267 low would have produced strong sell technical sell signals. The Russell-2000 broke it's 200 DMA of 425 on Thursday AND DID NOT RECOVER, closing today at 417. The Dow Utility Index broke it's 200 DMA on 9/20 at 311 and DID NOT RECOVER closing today at 295. The transports broke their 200 DMA of 3264 back on August 6th and DID NOT RECOVER closing today at 2879. The transports are down over -30% since their high of 3800 in May. Remember the transports are supposed to confirm Dow direction not diverge from it. Bored yet? The advance/decline line, negative again today by a 2:3 margin, is at the lowest level in three years. But you say it has been negative for a long time and the Dow set new highs. True. Historically the advance/decline line peaks 12-18 months before the start of a bear market. Take a look at the chart and you will see the A/D line peaked in April of 1998. Using the outside range of 18 months then October would be the start of a bear market. In reality we could be late to the party already and our start could have been last week. ACTUALLY, if the truth be known, we are already in a bear market. Confused? This is a phenomenon we have reported on before. The recent market highs have been solely on the backs of the large cap stocks. Investors have been reluctant to put money into small cap stocks with Y2K in the headlights. Money in blue chips can be moved to the sidelines much quicker and easier because of the volume and liquidity. Now the real killer. Only 31% of the stocks on the NYSE are above their 200 DMA. Most are down between 25-40% from their 52 week highs. If a bear market is defined as a -20% drop in price then 69% of the market is already in a bear market. The stealth correction as it has been called is being disguised by the money moving into the large caps and holding up the major indexes, S&P, NASDAQ and DOW. Now I know you are confused. Did I get struck by a lightning bolt somewhere between "I am expecting a rebound" and "look out for October." I hope not. I have been calling for a down market by the second week in October for nine months now and anyone reading the letter faithfully will know this. Am I talking out of both sides of my mouth? No, just different time lines. I AM expecting a rally next week. Actually I am praying for a rally next week. After Friday I have a couple hundred contracts of ITM call options and I am expecting a sizeable profit for my efforts. It is very seldom that the market gives us this type of opportunity. Cut to the chase. The Dow is down -524 points for the week. Depending on your outlook the Dow was down at the low Friday -8.5% from the intraday high of 11142 just ten days ago. A huge short term drop that is bound to have at least a small technical bounce. In technical analyst terms the Dow was down -10.5% from the recent high of 11365 on August 24th. Is there a difference? Yes in some circles. The latter number would qualify as a short term correction and signal an OK to go back into the market. Personally it is just words and the market could care less which view you have. The only action/reaction we should care about is a rebound from a -955 point intraday drop in the last ten days. Nothing moves in a straight line and the drop from 11142 has been pretty straight. This chart needs a serious bump to equalize the pressure. The Nasdaq shows a better picture of the double bottom and also shows the danger of a big cap led rally. The Nasdaq Index was holding just under it's recent high of 2880+ until the big cap leaders were hit by the Ballmer bomb on Thursday. The Internets were still up and some with big gains for the week but the Nasdaq dropped -160 intraday on Thr/Fri solely on the big cap slaughter. Indexes do lie. Where do we go from here? I think the Nasdaq will rebound first since tech stocks are the strongest sectors. The Ballmer bomb was just an excuse for profit taking. The real worry here is the Taiwan earthquake impact on the chip/PC sector. If the damage was greater than expected then chips and mother boards will be delayed and there will be a component shortage for the big fall selling season. This will impact earnings outlooks and therefore stock prices. Dell, CPQ, GTW, HWP, AAPL have already tanked on the possibility. The chip sector has already tanked as well but stands a good chance to rally on better than expected damage reports. Even if the Nasdaq rallies back from the drop, the Nasdaq will eventually follow the Dow. What is really important is the Dow. It is amazing how much of our future is tied to the fortunes of just 30 stocks. Where is the Dow going next week? To analyze the Dow you have to analyze the stocks in the Dow. This is one of the reasons we have the "Dow 30" chart link on the website. It is critical to investors to have some idea of Dow direction before putting their hard earned capital at risk. Here is my analysis of the prospects of the Dow stocks next week. This is a quick and dirty snapshot and of course could bear no relation to reality. For the Dow to go up it simply requires the rising stocks to go up more than the declining stocks go down. (I know this seems overly simplistic but bear with me) Dow stocks expected to be basically flat = no material influence. AA - Alcoa CAT - Caterpillar IP - International Paper MCD - McDonalds WMT - Walmart Dow stocks expected to go down. UK - Union carbide (earnings warning) S - Sears (dropping sales) ALD - Allied Signal (Takeover by Honeywell, HON dropping) T - AT&T (increased competition by MCI/Sprint, BEL/VOD, etc) CHV - Chevron (oil sector tanking) KO - Coca Cola (earnings warning) DD - Dupont (rising oil impacting earnings -16 since August) XON - Exxon (oil sector tanking) GM - General Motors ($5 billion judgement in CA. -32 since May) GT - Goodyear (earnings warning) JNJ - Johnson & Johnson (at support but -15 since August) MRK - Merck (flat to down since May -20) MMM - 3M (earnings worries -10 in ten days, could bounce) MO - Phillip Morris (new legal problems - no hope) BA - Boeing (aerospace slowdown) DIS - Disney (trending down since 8/24) Dow stocks expected to go up. AXP - American Express (financials starting to recover) C - Citcorp (financials recovering) EK - Eastman Kodak (flat to up, worst is over, upgraded) GE - General Electric (good upward pattern, close to new high) HWP - Hewlett-Packard (technical rebound from oversold condition) IBM - IBM (bounced off support at $120, technical rebound) JPM - JP Morgan (earnings warning candidate but improving) Possible bounces PG - Proctor Gamble (trending down but possible ST bounce) UTX - United Technology (trending down but possible bounce off $56) So out of 30 Dow stocks only nine are expected to go up and two of those are questionable. Can the seven stronger possibles go up more than the 23 flat to down stocks will drop? If each of the seven went up +5 and the sixteen weak stocks only dropped -3 in the next two days then we would be net -13 dollars. Now each Dow stock is not created equal and a $1 move in each stock will equate to a different move in the average. AXP for instance carries the largest weighting with a 6.72 and Sears is the lightest at 1.481. Our best hope for next week lies in the weighting of the seven stocks most likely to go up. The combined weight of the seven is 34.99. This means that they control 35% of the change in the Dow. Here are some links that explain the Dow in more detail. http://averages.dowjones.com/abtdjia.html
The Option Investor Newsletter 9-26-99 Sunday 2 of 7 ************** TRADERS CORNER ************** Good Decision Lead to More Good Decisions But Bad Decisions can put you on a downward spiral. Contrary to what you might have guessed by the topic of my Thursday column, I was actually having a pretty good week. On each of the first 4 days I made a profit. I played YHOO twice for gains, and SUNW, on which I took a 10% loss. On Thursday afternoon, I was sitting in a student cafeteria in Palo Alto with half of my YHOO position open, having already sold half at 25% earlier in the day. On my qcharts program, I was watching a mildly negative close, when the action started to pick up on the averages. When YHOO started to break down under 180, I sold my remaining calls for a slight profit. Good decision. I also priced OEX 680 Puts, and loaded them into my quote sheet of active option plays. When the averages started rolling over hard, I bought the puts with market orders and got filled at 14.5. I immediately set limit sells at 17 and 20. Good discipline. I went to class. By the time I fired up my wireless modem, I had a fill on the first limit sell. A Email correspondent on our Silicon Valley club said, this is where you should hold for the deep sell off. But I let the OEX Put order fill at 20. Good decision. 25% gain in 35 minutes. I'll take that all day. The DOW was down -220 and the NASDAQ was down -115, but they were creeping back up. I reasoned that even if the averages continued to sell off, this was screaming for a technical bounce, especially on the NASDAQ. I scanned my qcharts radar for good NASDAQ generals to play on the upside. I had 10 minutes to the close. I settled on MSFT. I bought a boatload of MSFT Oct 90 calls at the close. Bad Decision. I bought on impulse, thus violating one of the 10 trading rules. I bought a play that I had not previously put into my play list (OEX puts are always on my list, but I had not yet entered the 680s), thus violating one my personal trading rules: only play the options I have loaded into qcharts during non market hours. By now, you know the rest of the story: MSFT President says tech stocks, including his company, are overvalued. As I sat in a class on valuing stocks, I was horrified as I scrolled through the stories. I spent the rest of the night looking for some sure sign that the market, including MSFT, were headed for a bounce. This turned me from a market agnostic into a pilgrim on the road to worship the Eternal Bull. It hindered my judgment. The next morning, I continued to make mistakes. During amateur hour (mistake one), I bought too many different calls (mistake two), sold the MSFT calls when MSFT gapped down a point, then sold the other calls when those stocks too started going down, thus triggering my stop loss points. Near midday, after confirming the general markets were headed up, after confirming an improving A/D line, and after confirming improvement in the sector, I bought calls on SUNW and IBM, which continued to improve into the close. What's the point of this story? 1) Make your own trading rules and use the ten rules, but then stick to them, despite your emotions. 2) Don't expect stop orders to protect you if your entry/exit discipline is bad. If you do use good entry discipline, then it is probably preferable to have limit sell order in place to catch any upside moves rather than to have stop orders. 3) As Jim says, Sell Too Soon. The real beauty of this approach is that you put cash back into your account more quickly, which protects you from unpredictable market events. Also, by selling too soon, you can remain above the fray, as a market agnostic, ready to move in both directions. My bad decision to buy those MSFT calls on Thursday afternoon turned me from a market agnostic into a dedicated Bull. But the good news is that my personal trading rules -- especially taking 25% profits on half of the position -- are working like a charm. On the whole, I suffered a very slight loss in my option trading capital this week (maybe 2%), and I attribute it to my 25% sell rule. Janar Wasito janar@OptionInvestor.com ************* READERS WRITE ************* Dear Janar; After reading your write-up in Sundays' newsletter I was solely tempted to write you, but figured you get enough gooey responses from other readers that you didn't need anymore from me. However, after reading the newsletter for 9/23 I really felt the need to respond, probably more for my mental therapy than for anything. After a TERRIBLE week last week I was feeling pretty low and stupid. I lost over 1/3 of my portfolio, one option went to expiration with a 0 value! Alas, this loss did not represent a major money loss overall since I've only been trading less than two months, starting out with the funds from a mutual fund of $2500.00. In six weeks of trading I had built this up to over $10,000.00! Not bad would you say.......I was feeling pretty cocky to say the least and invisioning luncheons with Mr. Buffet! Starting two weeks ago the world of option trading decided to bring me back to earth. Since everyone is coining phrases this week, mine comes from the movie Animal House, where the character played by Kevin Bacon is getting spanked in a fraternity ritual and saying, "thank you sir may I have another!". I spent my money on a seminar, but yet ignored advise and made trades on my own new found intuition, not to mention breaking alot of very basic rules for option trading. My optimisim could be related to a blackjack player who splits two face cards with the dealer showing an ace! Well, over last weekend I was feeling pretty humble. I wasn't quite sure how to go forward at first. I then decided to look back and see what was I doing right when things were going so well. Granted, the market had been mixed up during that time, but I realized that I was following a strategy that I was not aware I had developed, but one that you were spelling out for me in your letter! Your baring of your sole, i.e. losses, believe it or not made me feel I wasn't alone and not a complete idiot. Not saying you were, but I mean that my actions weren't totally wrong, just much to aggressive. I needed to refresh and reinforce my basic principles for trading, especially the principle of not getting greedy. For instance......"hey, if 5 contracts netted me $1000.00, then 10 contracts would net me twice as much". This is irregardless that my risk factor has doubled and an unhealthy % of my portfolio is placed on one trade! Also, trading during the first hour......in a word......DON"T!!! Right? What a painful lesson, one I will never forget and one I will never repeat, no matter what the temptation. Also, I see the phrase, "don't try to catch a falling knife" in the newsletter often. Did I listen?.......Noooooooo! I thought, "well, if Jim says sell to soon, maybe I shouldn't buy to late". What an ass backwards theory I just came up with! Another painful lesson. Anyway, this week I'm back in the fray and doing better, much more sound and calculated actions, and doing better for it. Yes the market is screwy right now, but the semi-conductors I hold now I'm comfortable with.......bought them low when the market was going up and they have reasonable good chances of going up some more(really excited about my ADI option, having ADI added to S&P after close). Most importantly, it's the options I didn't buy that has me ahead.......options I put on my radar screen, watching and waiting.....with this monitoring approach instead of jumping in head first has saved me alot of heartache this week. Still watching them thou, maybe some entries tomorrow or Monday. I've become much better at watching trading volume. Thus, I'm a much better trader today than I was 2 weeks ago, but my confidence was boosted by your letters. I enjoy them very much although I must admit your first letters were hard to follow.....your a college student.....law school, but an x-marine and you eat sushi? Just kidding. Your letters are a welcomed addition to the newsletter....I hope your editors recognize this. I don't read everything I see and certainly don't believe everything I read, but will continue to look forward to reading your input. Todays' letter, 9/23 has made me reconsider starting a trading club here in Kansas City. As you said.....just talking to someone of like mind has some good healing effects. My wife cares little about what I'm doing, doesn't want to here about it expect the bottom line, "are you making more than your losing?" She doesn't realize how I sweat blood over some of these trades! When I kicked YHOO butt on Tuesdays' high I wanted to talk about it. ....it was a great trade with all the right moves and I wanted to puff out my chest and talk......but no one there. I do believe I'll look into starting a club again, at least being the ignition for one. Thank you again Janar ( no disrespect intended for calling you by your first name) for your thoughts and sharing of your own strengths and weaknesses, I for one appreciate them. I won't say 'Good Luck' because we shouldn't be hinging on luck, like gamblers which we are not, but I will wish you the best. Sincerely, Tom H. ******************* TRADING CLUB UPDATE ******************* Sunday, September 26, 1999 THE OPTION INVESTOR TRADING CLUBS ARE WHAT YOU NEED TO BECOME A SUCESSFUL INVESTOR!! If you would like to join contact us at Visit@OptionInvestor.com and Organize@OptionInvestor.com. UPDATE FROM SALT LAKE CITY, UT: ****************************** Six persons attended our meeting. Callean presented us with a straddle trade that she is doing on DELL and showed us how she was using some Gamma scalping techniques. Taking some cues from other club meetings as reported in the newsletter, we reviewed several possible straddle plays for the upcoming Earnings season. I used Option Station 2000i to review the Deltas on each trade and then we drew risk profile charts. We looked at CMGI, DELL, MSFT, and YHOO. We finally decided that there might not be enough upside to cover the cost of the straddle for these four trades and that we might want to look at doing spread strategies instead. Ron presented a bull put spread he was looking at for RFMD and Boyd suggested we look at a stock that I didn't have loading into Option Station so we weren't able to figure the Deltas on his suggestion. We meet on the second Thursday of every month and hope to have a better turn out as vacation time is over. It is helpful to read the minutes of other meetings to get ideas that will help us to learn from one another. Thanks to everyone else for sending their information for others to read. Carol Mortensen, Sandy, UT - email@example.com **************** MARKET SENTIMENT **************** Sunday, September 26, 1999 Be Patient? October earnings season is just around the corner! Will the market hold up in time for earnings to rescue us, or will a 4-digit Dow beat us to the punch? With several weeks before the onslaught of earnings, now is a good time to evaluate your portfolio or your potential portfolio. Being prepared going into earnings season is one of the most important things you can do. It is duly important to do your research now and have a game plan in tact for the month! Have your game plan now, that way you avoid the emotional trades that many people do during the earnings run. Some questions you should ask yourself now would include: Do you know when your favorite companies are coming out with their earnings, what they are expecting, the whisper numbers, or their when their competitors are coming out with earnings? How about the sentiment going into their earnings (which Pinnacle will highlight in upcoming issues). There are many things that can affect the outcome of your favorite stock and underlying option, and with the volatility of earnings season, preparation is a must. Those who are prepared for the quarterly earnings run and have a game plan intact can stand to make a very good return on their investments! This last week was not the best of weeks, unless you are an OEX Skybox follower and took advantage of the 2 different put positions we bought into. This last week, we witnessed the bears coming out of the woodwork (surprise, surprise). However, this could prove to be a positive event heading into earnings season. Looking at the OEX, we are seeing support building in the 650-670 range. Rampant speculation is leading to a Pinnacle Index number that is off the charts (22). We would view this area as a good support level, however, this can change very quickly, so we will continue to monitor this number and keep you posted. Overhead resistance is relatively light (up to 700), so to see a nice bounce this week would not be surprising. Another positive sign was that the Volatility Index (VIX) held ground, and bounced off of 32.33 on Friday. This was the range that we have mentioned numerous times (this level held up back in early August, and proved to be a very profitable entry point for all of technology across the board). We continue to view this area for the VIX as major support, however, should it break we would look for 38-39 as the next stop. Also, did anyone notice that the 30-yr bond is back below 6%? That sure didn't get much airtime on CNBC, but it could prove to be a thorn-in-the-side for the bears this upcoming week. Have a good trading week. 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. Interest Rates: The yield on the 30-yr Treasury is below the 6% benchmark, which is a bullish sign for stocks. Mixed Signs: Volatility Index: The VIX is in the danger zone; however, it has shown good support in the past around 32, so should this level hold, it may be a good buying opportunity. BEARISH Signs: Miscellaneous Uncertainty: Y2K, inflation, higher interest rates, slowing corporate earnings, earthquakes, are all leading to an abundance of uncertainty for professionals and investors alike. Market Posture: Many sectors have and continue to trend lower. The bullish sectors have now rolled over, and are on the verge of breaking support. 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 AllState being the latest casualty. Advance/Decline Line: The A/D line continues to be poor and is getting worse. Russell 2000: The RUT continues to break support, and looks to heading lower, which is a poor sign for the overall market. OTM Call Analysis As we move through the October expiration cycle, Pinnacle is tracking the level of call buying (OTM) between 690-780 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 % 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 % 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 690-780) Date Open Interest Change % Alert Friday, September 17 34,361 - Friday, September 24 84,724 +146.5% Market Sentiment at a Glance Friday Indicator (9/24) Pinnacle Index (OEX): Underlying Support (680-700) 1.1 Underlying Support (650-670) 22.6 Put/Call Ratios: CBOE Total P/C Ratio .6 CBOE Equity P/C Ratio .5 OEX P/C Ratio .9 Peak Open Interest (OEX): Puts 640 Calls 700 P/C Ratio .93 Market Volatility Index (VIX): CBOE VIX 29.54 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 Benchmark (9/24) Overhead Resistance (680-700) 1.12 OEX Close 672.80 Underlying Support (650-670) 22.56 Average ratings: Resistance levels 2.0 / Support Levels .5 What the Pinnacle Index is telling us: From a contrarian standpoint, underlying support has explode (650-670) and overhead resistance is light (680-700). Put/Call Ratio Friday Strike/Contracts (9/24) CBOE Total P/C Ratio .61 CBOE Equity P/C Ratio .53 OEX P/C Ratio .90 Peak Open Interest (OEX) Friday Strike/Contracts (9/24) Puts 640 / 7,676 Calls 700 / 10,340 Put/Call Ratio 0.93 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 24, 1999 29.54 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 * ************* 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: *************************************** Dow 10279.33 -524.30 Nasdaq 2740.41 -129.21 $OEX 672.80 32.16 $SPX 1277.36 -32.16 $RUT 417.09 -17.36 $TRAN 2878.72 -121.07 $VIX 29.54 5.32 Calls Week VOD 230.50 21.94 5:1 split is just around the corner YHOO 183.31 20.19 Upgrades added fuel to the momentum ELNK 47.56 7.44 New, merger creates 2nd largest ISP CSCO 69.00 5.50 Appears to be bottomed and turning RNWK 99.63 5.38 New, this one's a buying opportunity EBAY 145.25 5.06 New, participating in the tech rally ITVU 34.25 4.88 New, earnings run cleared for take off SNE 148.94 1.75 Stock price is magnified by the float SUNW 90.19 1.50 Sheer momentum is driving the stock DCLK 116.75 0.50 Penetrated and bounced off its 10-dma QCOM 189.50 -0.44 Announced it would meet or beat earnings INKT 130.00 -1.19 The stock closed at its 10-dma or $130 EMC 69.06 -1.94 It's positioned for a technical bounce GE 118.00 -2.00 Closed above resistance ready to climb CKFR 39.19 -2.44 Dropped, did not recover with sector NTAP 72.50 -2.44 Expecting recovery and higher movement NT 46.94 -2.81 Dropped, the stock is a falling star ADI 56.31 -4.13 The stock was added to the S&P 500 CTXS 62.00 -5.25 Dropped, followed Friday's slaughter Puts DOW 106.88 -8.75 New, materials cost squeezing profits JNJ 90.00 -6.06 Losing ground due to market conditions WPI 29.81 -3.44 New, third quarter will miss forecasts WLP 65.63 -3.13 Nine consecutive losses comes to an end KO 51.13 -2.88 Earnings potential concern lingers LLY 65.19 -1.81 Knocked down for three straight weeks GPS 32.00 -1.63 Losses mount in weak performing market STOCKS ADDED TO THE PICK LIST ***************************** Yes, there are new calls tonight but Jim strongly recommends not opening a new call position until after the FOMC meeting 10/8. See commentary. Calls: ELNK - Earthlink EBAY - Ebay RNWK - Realnetwork ITVU - Intervu Puts: WPI - Watson Pharma DOW - Dow Chemical *************************** 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 CTXS $62.00 (-5.25) Shares of CTXS held up well in this week's rocky market however, what appeared to be an excellent buying opportunity by Thursday ended up foreshadowing Friday's slaughter. CTXS lost $3.31 on strong volume as it slid deep under the 10-dma ($65.09). This was the clincher for us and we're dropping CTXS. We admit this play was a quickie but still the beginning of the week offered prime entry points to catch the stock's dramatic upswing of 4+ points on Wednesday afternoon. However, in all fairness the spoils of this victory go to the bears. (drops continued in section three) **************************** SEE DISCLAIMER IN SECTION ONE ****************************
The Option Investor Newsletter 9-26-99 Sunday 3 of 7 *************************** PICKS WE DROPPED THIS WEEK (continued) *************************** Calls CKFR $39.18 (-2.44) The internet sector made a recovery on Friday, recovering from a late day sell-off on Thursday. Checkfree unfortunately did not participate in that recovery. On lower than average volume shares traded as low as $37.88 before bouncing off of the lows of the day to close at $39.18. This was the 2nd consecutive day that the shares had a lack luster day of trading, without any new news the shares have taken a breather. From a technical standpoint, CKFR is also looking weak, after closing the day below the 10-dma at the $39.50 level, our support level had been broken and our stops had been hit. We are recommending closing the play out at these levels, we do not want to take a chance of giving back profits after support levels have been violated. NT $46.94 (-2.81) Despite the positive outlook of NT helping to bring the world up to date on new communication technology, the market has doused our technical star. The chart patterns indicate that the stock is behaving as it did on April 16th, July 20th, and August 30th of this year. What behavior you say? Well in each case NT has dropped below support, usually the 10-dma, and then continued down on a post support dip. After the dip the stock shows only slight recovery and then becomes range-bound until a new trend forms. Considering the market outlook, we're not willing to wait for that new trend. With the last five trading sessions being down for NT, a slight technical bounce is in store but, the outlook is not good for the long run. The momentum indicator has dropped 12% since our pick and this has caused the risk profile to become lower than average for our play intentions. More importantly the underlying sector momentum has dropped 20%, reflecting the turn in the trend due to recent overvaluation comments from Microsoft. Friday the news touted the success of the telecom industry, stating that NT is the only one that has fallen in value from failure to capture the Internet market. Enough said, NT is a drop. Protect your capital for better days. Puts No Dropped Puts this week. STOCK SPLIT CANDIDATES *********************** JDSU - JDS Uniphase QCOM - Qualcom INKT - Inktomi DCLK - DoubleClick RNWK - RealNetworks STOCKS WITH UPCOMING SPLITS **************************** We don't list all splits available, only those we feel may have play possibilities. Symbol - Stock Splits/Date 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: ********************** ADI - Analog Devices Inc. $56.31 (-4.13)(+4.19) See details in sector list Chart = http://quote.yahoo.com/q?s=ADI&d=3m **** DCLK - Doubleclick Inc, $116.75 (+0.50)(+8.50) See details in sector list Chart = http://quote.yahoo.com/q?s=DCLK&d=3m Put play of the day: ******************* DOW - The Dow Chemical Company $106.78 (-8.75) See details in put list Chart = http://quote.yahoo.com/q?s=DOW&d=3m *********** CALLS PLAYS *********** Software *********** INKT - Inktomi Corp. $130.00 (-1.19)(+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. It was two rough trading sessions to end the week for our play on INKT. Thursday's carnage carried into Friday leaving our play in dire straits. We originally picked INKT as a momentum play but due to unforeseen circumstances, our momentum has stalled and reversed for the time being. Despite these grim circumstances the stock managed to close at its support level or $130. At this level we expect the stock to bounce and once again head to higher levels. This would be an entry point if the market direction turns to the upside, which needs to be confirmed prior to placing a trade. Expect more volatile market conditions this week as investors wait for reasons to send the market back into rally mode. The G-7 meeting this weekend will give us indications of what measures will be taken to stabilize the dollar, which has fueled the negativity in the market. Alan Greenspan is the other piece of the puzzle and is scheduled to speak on Monday. Whether he will say something of importance remains to be seen, never the less investors will heed to every word. Use caution with this play and take advantage of the recommended stops for protection, if INKT drops below its support, let your stops end the play. There was no additional news on INKT this weekend that would I influence movement in the stock. BUY CALL OCT-125*QYK-JE OI=1997 at $12.25 SL= 9.50 BUY CALL OCT-130 KYQ-JF OI= 826 at $ 9.25 SL= 6.75 BUY CALL OCT-135 KYQ-JG OI= 161 at $ 7.00 SL= 5.25 BUY CALL NOV-125 QYK-KE OI= 12 at $18.50 SL=15.00 low OI BUY CALL NOV-130 KYQ-KF OI= 73 at $16.13 SL=12.50 low OI Picked on Sep 10th at $128.19 P/E = N/A Change since picked +1.81 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 = 2.08 mln Chart = http://quote.yahoo.com/q?s=INKT&d=3m **** NTAP - Network Appliance Corp. $72.50 (-2.44)(+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. Is NTAP ready for a rebound? After making a new high Monday, NTAP spent the next three days drifting lower. Shares of NTAP gapped down over $1 at the open Friday. Volume in the first hour of trading was a brisk 254K shares. The support area of $69-$70 seem to hold until shortly after 2:00 EST, when traders decided to knock the legs out from underneath the computer networking company. NTAP dropped over $5 per share in less than five minutes. There were no large block orders in that time period, no news or announcements to indicate the drop had any substance, nor was there any real volume supporting the decline. It was probably a bunch of stop losses being triggered at once. If you hadn't been stopped out earlier in the week and you still owned calls going into Friday, we would hope you were stopped out early in the session and didn't get whip-sawed in the afternoon. What's in store for next week? NTAP did close just below its 10-dma at $72.88, on its high of the day at $72.50. We may see one more push to the down side early in the week but at this time would expect NTAP to recover and move higher. We would need to see new buyers enter at these levels and would wait for a bounce confirmed with by solid volume. A bounce in the broader markets to help support the networking sector wouldn't hurt either. Tuesday Network Appliance did introduce NetCache 4.0, their high performance architecture to deliver Internet traffic. NetCache 4.0 is designed to support Network News Transfer Protocol and provides a platform to integrate Microsoft Windows Media Technologies and other emerging Internet protocols natively into NetCache appliance. BUY CALL OCT-65 NJQ-JM OI= 135 at $9.00 SL=$6.75 BUY CALL OCT-70*NJQ-JN OI=1422 at $5.75 SL=$4.00 BUY CALL OCT-75 NJQ-JO OI= 231 at $3.25 SL=$1.75 BUY CALL DEC-70 NJQ-LN OI= 75 at $9.88 SL=$7.50 low OI BUY CALL DEC-75 NJQ-LO OI= 207 at $7.75 SL=$6.00 Picked on Sep 11th at $67.75 P/E = 138 Change since picked +4.75 52 week high=$77.88 Analysts Ratings 6-3-1-0-0 52 week low =$16.00 Last earnings 07/99 est=-0.14 actual= 0.16 surprise +14.3% Next earnings 11-17 est= 0.17 versus=-0.11 Average daily volume = 1.06 mln Chart = http://quote.yahoo.com/q?s=NTAP&d=3m *************** Semi-Conductor *************** ADI - Analog Devices Inc. $56.31 (-4.13)(+4.19) 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. Early on Friday ADI remained unphased by the fact that its being added to the S&P 500 index, while fellow semiconductor stocks continued to slide lead by Lam Research, Vitesse, Micron, and Novellus, all had weak mornings. By the close the PHLX semi- conductor Index had bounced back to positive territory before closing down by only 5.30 points. Standard & Poor's said it plans to add ADI to the index replacing Ameritech, which is being acquired by fellow Baby Bell SBC Communications. In the day's trading session ADI traded almost 1 million shares greater than average volume but in the midst of a confused day on Wall Street only managed to gain 13/16. This week we should continue to see the shares hold up strong, every money manager that manages a S&P 500 Index Fund must add shares of ADI to its portfolio, and judging by the volume on Friday, that process has begun but has not finished. Look for an entry point on Monday if you have not already entered the shares, the first hour of trading should determine market momentum and direction. Look for the volume and moneystream in the shares to pick up substantially this week. With any rebound in the Semiconductor sector, ADI should be the first company to initiate a rally. BUY CALL OCT-55*ADI-JK OI=4340 at $4.38 SL=3.00 BUY CALL OCT-60 ADI-JL OI= 768 at $2.19 SL=1.06 BUY CALL DEC-55 ADI-LK OI= 426 at $7.38 SL=5.88 BUY CALL DEC-60 ADI-LL OI= 448 at $5.13 SL=3.38 Picked on Aug 28th at $51.31 P/E = 65 Change since picked +5.00 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 = 1.09 mln Chart = http://quote.yahoo.com/q?s=ADI&d=3m ******** Hardware ******** CSCO - Cisco Systems $69.00 (-4.50)(+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. Let's face it, CSCO had a crummy week and would otherwise hit the drop list for a severe violation of its 10-dma ($71), which it failed to close above Thursday and Friday. We keep it on the list for 2 reasons. First we think most of the selling is over based on the huge price tumble to $66.69 and $67 with huge volume (capitulation) on two occasions Friday, both followed by strong rebounds. $67 appears to be a really solid bottom. Second, here's one of the agenda items from their DEF 14A filed Friday morning announcing their shareholders meeting to be held November 10, 1999: "To approve a Certificate of Amendment to the Company's Restated Articles of Incorporation to increase the authorized number of shares of Common Stock from 5,400,000,000 to 10,000,000,000". There are 3.22 bln shares outstanding. They could announce a 3:2 split without having to go through this exercise, but that would leave them no currency shares available to make those huge acquisitions (Cerent) requiring a 100 mln shares at a crack. Conversely, they could keep the status quo and still make acquisitions, but have no split. So then, why the agenda item? While part of the reason for the share increase may be for future acquisitions, but a 3:2 split is not out of the question. Historically, the splits have been announced in the $70-$80 range. While we're not making the prediction, we are noting the possibility, despite a few e-mails we've received from people close to CSCO telling us it won't happen because CSCO had a 2:1 split just 4 months ago (CSCO has never split their stock more than once in any calendar year since going public in 1990). We report it, you decide. Earnings are November 9. In the news, CSCO received clearance from the FTC to purchase Cerent, while earlier in the week, they agreed to buy Webline for $325 mln in stock. Webline is a software company that can synchronize multiple users on the same web page. This will allow a customer to be on a web page, open an online voice discussion with a vendor and have the vendor automatically see the same page. ***Traders holding January 2000 strikes need not exit the play. We just don't list them since November strikes are now available.*** BUY CALL OCT-65*CYQ-JM OI=13192 at $5.63 SL=3.75 BUY CALL OCT-70 CYQ-JN OI=37629 at $2.50 SL=1.25 BUY CALL OCT-75 CYQ-JO OI=30722 at $0.81 SL=0.00 High Risk! BUY CALL NOV-70 CYQ-KN OI= 758 at $4.38 SL=2.75 BUY CALL NOV-75 CYQ-KO OI= 2158 at $2.38 SL=1.25 Picked on Sep 19th at $73.50 P/E = 112 Change since picked -4.50 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 = 18.27 mln Chart = http://quote.yahoo.com/q?s=CSCO&d=3m **** EMC - EMC Corporation $69.06 (-1.94)(+0.88) 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. Despite the recent computer hardware downgrades, technology weakness and overvaluation warnings, EMC has faired quite well. Showing resilience after Friday's opening gap down, EMC climbed ahead to close just below our support of $70. This is a very bullish move and confirms the underlying reason for our play. That of momentum and outlook. Remember the Internet is helping EMC forge ahead as the need for storing overwhelming amounts of data become critical. EMC is the preferred source for this need. The Internet's did quite well Friday and for the week as momentum continues to build ahead of earnings. In any case, we are in a good position to take advantage of a technical bounce next week. We could see more gains next week with a market recovery. Do use caution however, as EMC didn't participate in the last hour rebound that some tech stocks had Friday. As stated, outlook and fundamentals are helping lift EMC. It's historical trend and price deviation rank it as above average in safety. Despite the good outlook, we must advise caution in this unpredictable market. We are hoping for a bounce but, a hope is just that. Confirm positive movement in the market and stock before playing. CBS MarketWatch confirmed the PC Hardware resilience on Friday. No confirmed reason however. EMC has qualified the Emulex Fibre Channel host adapter for it's LP8000 NT storage devices. This offers a better operation in the new Fibre Channel technology. BUY CALL OCT-65 EMB-JM OI= 7209 at $5.75 SL=4.25 BUY CALL OCT-70*EMB-JN OI=14326 at $2.81 SL=1.25 BUY CALL NOV-70 EMB-KN OI= 520 at $5.00 SL=3.25 BUY CALL NOV-75 EMB-KO OI= 1060 at $3.00 SL=1.50 Picked on Sept 12th at $68.13 P/E = 78 Change since picked +0.94 52 week high=$75.63 Analysts Ratings 14-9-1-0-0 52 week low =$20.81 Last earnings 07/99 est= 0.24 actual= 0.27 Next earnings 10-19 est= 0.27 versus= 0.19 Average daily volume = 5.5 mln Chart = http://quote.yahoo.com/q?s=EMC&d=3m **** SNE - Sony Corporation $148.94 (+1.75) Sony is one of the world leaders providing electronic equipment such as video, televisions, information and communication devices and other electronic components. In fact you can find Sony's signature on almost any type of electronic device you use. Their world growth and market penetration has allowed them to diversify into a true conglomerate, now with interests in software, finance and insurance. Despite Japan's challenges, the company managed to increase revenues by 1% in the fiscal year ending 3/99. As Japans recover continues, SNE is poised to benefit from the turnaround. We are still promoting SNE as a play, where investors will want to be as the Japanese recovery continues to progress. As stated in Thursday's update, SNE will experience some swings with the market as it trades on the NYSE. Also, given that SNE is so diverse, and involved in the technology sector, it participated in the sell off spurred by Microsoft's comments of overvaluation. The movement in Sony's stock price is magnified due to the float we talked about. It's a supply and demand issue. Supply is limited, so traders can see greater swings in price as volume increases. Volume was very close to double the average for Sony on Friday. Our support is at $150 right now so we are within acceptable limits and consider SNE resting on support at this level (it typically rests right under support). As we are sitting on support, it necessitates caution as we could go one way or the other. The market sold off significantly last week and Friday's end of day trading showed signs of bargain hunters re-entering some plays. SNE however stayed pretty flat through the close of the session. This is both a fundamental and capital rotation play. Keep this in mind and wait for the stock to move positive on volume, indicating investors interest in the Japanese recovery. Topping the news is the 20th anniversary of the Sony Walkman. Sony has introduced four new digital Walkman's that have the memory stick and mini disk. Allowing users to record CD's in short time and play conventional media, the units are setting the trend into the next revolution of digital music. An article stating that music sales have been hurt this last year and SNE has a large stack in this industry. Asia's music sales grew 5% despite the rest of the worlds slumber. Also, exciting news as SNE transitions from providing game console upgrades, to using the broadband technology to get upgrades to users in real time. Sony is a powerhouse and trend setter. Look for this to help them weather the storms. BUY CALL OCT-150*SNE-JJ OI=160 at $5.75 SL=3.75 BUY CALL OCT-155 SNE-JK OI= 90 at $3.75 SL=1.75 BUY CALL OCT-160 SNE-JL OI= 55 at $2.44 SL=1.25 low OI Picked on Sep 23rd at $152.19 P/E = 52 Change since picked -3.25 52 week high=$160.50 Analysts Ratings 0-1-0-0-0 52 week low =$ 60.25 Last earnings 07/99 est= N/A actual= 0.65 Next earnings 10-19 est= N/A versus= N/A Average daily volume = 201 K Chart = http://quote.yahoo.com/q?s=SNE&d=3m **** SUNW - Sun Microsystems $90.19 (+1.50)(+3.00)(P5W +15.19) 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. Let's recap our play. The sheer momentum of the stock's uptrend has carried it forward into earnings season priming it for a profitable run. This driving force and energy further resulted in the recent announcement of another 2:1 stock split. On September 17th, the Board of Directors announced, for the second time this year, that SUNW would split 2:1 on December 7th. Shareholders' approval to increase authorized shares to 3.6 bln is however required, but approval is expected at the Annual Meeting on November 10th. After the split the number of outstanding shares will be approximately 1.56 bln. Overall, SUNW has made tremendous gains this year by more than tripling its share price! In the near-term the earnings announcement is confirmed for October 14th, after the bell. And as a reminder, recall that generally 7 out of 10 stocks tend to decline after an earnings report regardless of the numbers so never hold over the announcement. It's not worth the added risk. Volume has been exceptional this week with trading levels reaching 60-65% above normal. The bullish excitement on Monday propelled SUNW upwards to $94.69 to set the latest 52-week high. Support remains firm at $82 but even with the bears flexing their muscles at times this week, SUNW has showed great strength at its recent price not dipping below $88.38 (Friday's open). This is impressive considering the uncertainty of the broad market. SUNW is poised both fundamentally and technically to stretch itself into new territory and old highs could easily be reached with a cooperating broad market. So the current price levels may indeed be a bargain hunter's dream but only time will tell for sure. Especially since next week could prove to be more volatile in front of the upcoming Fed Meeting. If you're one of the riskier players and are in the game, hang onto your hat and sell too soon! And conservative players be forewarned - the ride is likely to be quite turbulent so if you have a weak stomach stay on the sidelines. BUY CALL OCT-85 SUQ-JQ OI=8307 at $7.63 SL=6.00 BUY CALL OCT-90*SUQ-JR OI=7445 at $4.50 SL=2.75 BUY CALL OCT-95 SUQ-JB OI=5188 at $2.38 SL=1.25 BUY CALL NOV-90 SUQ-KR OI= 779 at $7.25 SL=5.50 BUY CALL NOV-95 SUQ-KB OI= 982 at $4.88 SL=3.25 Picked on Aug 28th at $76.19 P/E = 71 Change since picked +14.00 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 = 8.32 mln Chart = http://quote.yahoo.com/q?s=SUNW&d=3m *************** Internet *************** ITVU - InterVU, Inc. $34.25 (+4.88) InterVU gets Internet media from point A to B. InterVU has become the leader in providing this management of streaming technology to their customers. They are able to handle low bands of 28.8 to 100 Kbps, and broad-bands of 300 Kbps and higher. Allowing providers to deliver near television quality at higher bands. The formats are compatible with all the popular players such as RealPlayer and Windows Media Player. As popularity increases in viewing information online, ITVU's market increases. ITVU is in breakout mode! Breakout mode for what you might ask? Well it looks like earnings. It appears that ITVU is developing a pattern of earning runs and the stock is ready to start that move. After being stuck in a trading range, ITVU is breaking out despite the weakening market. Although the stock is still in negative earnings, the pre-curser rise is becoming characteristic. Notice the pattern on June 28th and how it compares to our recent position. Friday's move broke us through resistance at $30. This was due to news of a patent they have received on their audio and video technology. We also got a very strong turn to the positive side on our stochastic and MACD indicators. Considering the lack of market help, we are inclined to think we are in run mode. The short- term trend is also positive as shown on the interval chart on Friday. Prudence dictates we must use caution however in this market. Play this only on the historical run merits and use stops to protect your downside risk. Make sure that the stock holds above $34 and is moving higher on volume. ITVU is a HIGH-RISK SPECULATIVE!! ITVU received it's patent for delivery of large amounts of data of a computer network on Sept. 21st. This is a very positive piece of news that will allow ITVU to protect it's unique storage, organization, and management methods, and protect it's market share now and in the future. BUY CALL OCT-30*QYU-JF OI=403 at $5.63 SL=3.75 BUY CALL OCT-35 QYU-JG OI=196 at $2.50 SL=1.25 BUY CALL OCT-40 QYU-JH OI=232 at $1.13 SL=0.25 Picked on Sep 26th at $34.25 P/E = N/A Change since picked +0.00 52 week high=$82.00 Analysts Ratings 2-3-0-0-0 52 week low =$ 5.75 Last earnings 07/99 est=-0.48 actual=-0.34 Next earnings 10-21 est=-0.52 versus=-0.32 Average daily volume = 260 K Chart = http://quote.yahoo.com/q?s=ITVU&d=3m ******************************* SEE DISCLAIMER IN SECTION ONE
The Option Investor Newsletter 9-26-99 Sunday 4 of 7 *************** CALLS CONTINUED *************** Internet *************** RNWK - RealNetworks, Inc. $99.06 (+5.38) In our increasingly mobile society, convenience is a must, so it is nice when you can turn on your computer and have all the conveniences of TV, Radio, and CD's at your fingertips. RealNetworks is a leader in providing real time streaming media to users over the Internet. Attracting most major broadcasters, RNWK is growing fast as online users download News, Sports, Music, at the rate of 175,000 new users a day. These numbers confirm acceptance of their products and software, that's a 270% increase since 1997. Along with multi-media comes advertising. RNWK is benefiting greatly from it's unique niche and presentation. Up is the key word with RNWK. Upgrades from brokers, up trend in price and increases in the earnings estimates. Friday's weak market looks to have given us a buying opportunity, in anticipation of a few more ups. First, we may see a technical bounce due to last week's sell off in the markets. Although the trend may not be rosy for the market, RNWK should benefit from any bounce provided. Second, it appears that RNWK will provide investors with some positive earnings, which would add to the momentum of an earnings run. Although earnings are not until Oct. 20th, analysts are already positioning themselves for the news with revisions to estimates and upgrades. We don't anticipate an earnings run to start until after the Fed meeting, so this week is mainly due to technical momentum and a possible bounce. Just keep the earnings in mind. On September 3rd, RNWK broke through it's resistance and started a new and current trend. It has been following support nicely and currently support is at $95 from the 10-dma. The stock recovered from it's low Friday and maintained support for most of the session. The last hour showed buying interest as bargain hunters are anticipating the bounce. RNWK experienced a 70% increase in stock price in anticipation of the last earnings report. News, earnings and expectations have powered our RNWK recently. This has allowed RNWK to resist the negative market pressures quite nicely. Even though we are in the up and up with RNWK, use discretion. Do not play until the market and stock bounce is confirmed. As mentioned above, Volpe Brown Whelan upgraded RNWK to a Buy from a Neutral position. RNWK will also offer to users the new music video from the group Nine Inch Nails. This shows a change in attitude towards acceptance of the new technology by the music industry and indicates the direction and potential the online streaming technology has. MP3.com has selected RealNetworks as their preferred source for hearing their MP3 files online. BUY CALL OCT- 95 RNW-JS OI= 661 at $10.63 SL= 7.50 BUY CALL OCT-100*RNW-JT OI=1419 at $ 8.38 SL= 6.50 BUY CALL OCT-105 RNW-JA OI= 207 at $ 6.00 SL= 4.25 BUY CALL NOV-100 RNW-KT OI=1038 at $13.38 SL=10.50 BUY CALL NOV-105 RNW-KA OI= 520 at $11.25 SL= 8.75 Picked on Sep 26th at $99.06 P/E = N/A Change since picked +0.00 52 week high=$131.88 Analysts Ratings 1-13-1-0-0 52 week low =$ 11.06 Last earnings 07/99 est=-0.01 actual= 0.00 Next earnings 10-20 est= 0.04 versus=-0.03 Average daily volume = 1.9 mln Chart = http://quote.yahoo.com/q?s=RNWK&d=3m **** ELNK - EarthLink Inc $47.56 (+7.44) Earthlink provides Internet access and other related services 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. With the recent merger with Mindspring, ELNK and MSPG will be the #2 ISP provider behind AOL. When we say we follow a stock's trend, we're not kidding and that's precisely why we're adding ELNK to our call list this weekend. For the newcomers, ELNK was a recent put play that rapidly reversed direction last week on the news of a definitive merger agreement between EarthLink and MindSpring (MSPG) which will create the 2nd largest ISP company only behind the bellwether, America Online (AOL). Thursday was the "official" release of the joint announcement but stanch hearsay was obviously leaking down the grapevine before the news hit the press. The day before share prices, of both companies mind you, surged. ELNK spiked up $4.69, or 12% and MSPG rose improbable $6.50, or 25% for no other apparent reason. As a result of this abrupt merger agreement, shares prices are likely to continue to rise in the near-term and the added benefit of a leverage play is certainly a bonus. The basic logistics of this merger are as follows. EarthLink and MindSpring will merge into a newly formed public company to be named EarthLink and will trade on the Nasdaq under the symbol "ELNK". Combined they will boast 3+ mln subscribers which is still about 17+ mln short of AOL. Now from a geographical stand point, the merger is optimal since MSPG is based in Atlanta, GA and ELNK is from Pasadena, CA. This stock deal still requires regulatory and stockholders approval. However if it goes through, MSPG shareholders will receive 1 share of the new company for every 1 share of MSPG, but (and this is the clincher) ELNK shareholders will receive 1.615 shares of the new company for every 1 share they presently own. So in terms of the leverage, for every point MSPG moves ELNK will correspondingly move 1.615 points. Keep in mind that leverage is applicable to moves in either direction! Technically bottom support is at $40 and the first barrier of resistance is at the 100-dma ($51.90). After tacking on a substantial $5.19 on Friday you may have to look intraday for an entry unless we get a pullback in an uncertain market. Earnings are also right around the bend, confirmed to report on October 13th after the bell. And in the news, Jeffries & Co blessed the merger agreement on Thursday by starting coverage on ELNK with a Buy rating. By Friday three more analysts joined the party. First Union Capital Markets raised their rating to a Buy from an Outperform and issued a $66 price target. MSDW also upgraded the stock's rating to a Strong Buy from an Outperform and issued their price target at $74. Not to be left out, Sands Brothers reiterated their Buy rating on ELNK. If we choose to take any credence from the latter it appears ELNK should go full-steam ahead. BUY CALL OCT-45*QKL-JI OI=1051 at $5.13 SL=3.50 BUY CALL OCT-50 QKL-JJ OI=1012 at $2.69 SL=1.25 BUY CALL OCT-55 QKL-JK OI= 735 at $1.44 SL=0.75 High Risk! BUY CALL NOV-45 QKL-KI OI= 117 at $7.38 SL=5.75 BUY CALL NOV-50 QKL-KJ OI= 415 at $4.88 SL=3.25 Picked on Sep 26th at $47.56 P/E = N/A Change since picked +0.00 52 week high=$99.37 Analysts Ratings 4-6-2-0-0 52 week low =$29.50 Last earnings 07/99 est=-0.22 actual=-0.21 surprise +4.6% Next earnings 10-13 est=-0.34 versus=-0.04 Average Daily Volume = 1.14 mln Chart = http://quote.yahoo.com/q?s=ELNK&d=3m **** EBAY - eBay, Inc. $146.06 (+5.06) eBay pioneered person-to-person online auctions. Founded in 1995, eBay has developed an efficient and entertaining trading site on the Web that is available 24 hours a day, 7 days a week. eBay has more than 5.6 million registered users. Currently, there are more than 2.5 million items listed for sale. More than 300,000 items are added daily in more than 1,600 categories including: antiques; books, movies and music; coins and stamps; collectibles; computers; dolls and figures; jewelry and gemstones; photo and electronics; pottery and glass; sports memorabilia; and toys. In April 1999, eBay acquired Butterfield & Butterfield, one of the largest auction houses in the world. What was that group of 100 tech companies forming their own on- line consortium that was suppose to compete with eBay?. . .let's see. . .ummm - no matter, traders seem to have forgotten too, or at least relegated it to the back burner for now. Despite a NASDAQ meltdown Thursday and Friday last week, EBAY found support in the $136-$138 all week long. Look for that support level again if things get turbulent. Otherwise, Friday's close was a hot one for the Internet sector. EBAY participated by tacking on $9 in the final hour of trading as volume rushed in signifying big investor interest. EBAY now rests at its 10-dma of $146. We like EBAY at $155 and think it can get there again quickly. At least with the Internet sector, we may have found a bottom, which makes EBAY, along with other Internet biggies including YHOO, AOL, INKT, etc., a prime target for appreciation this coming week. Don't abandon caution though. By nature, this is a volatile play and an earnings run isn't likely until we get closer to the announcement date of October 27 (Zack's). Plus, the downdraft could decide to continue until EVERYBODY gives up. For now, if CMGI delivers good earnings on Monday and YHOO continues its earnings run, it's just plain momentum backed by volume that moves this play. In the news, Prudential initiated coverage with a Strong buy. Merrill Lynch's Internet index (HHH), of which EBAY is 1 of 21 issues, began trading last week. BUY CALL OCT-150*QXB-JJ OI=2802 at $ 9.25 SL= 6.75 BUY CALL OCT-155 QXB-JK OI=1042 at $ 7.25 SL= 5.25 BUY CALL NOV-155 QXB-KK OI= 138 at $14.50 SL=11.50 BUY CALL NOV-160 QXB-KL OI= 33 at $12.88 SL=10.50 low OI BUY CALL NOV-165 QXB-KU OI= 29 at $11.13 SL= 8.75 low OI Picked on Sep 26 at $146.06 P/E = N/A Change since picked +0.00 52 week high=$234.00 Analysts Ratings 5-9-4-0-0 52 week low =$ 8.38 Last earnings 07/99 est= 0.03 actual = 0.03 Next earnings 10-27 est= 0.01 versus = 0.02 Average daily volume = 5.95 mln Chart = http://quote.yahoo.com/q?s=EBAY&d=3m **** DCLK - Doubleclick Inc, $116.75 (+0.50)(+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. Considering the negative action in the broader markets this week, DCLK didn't end the week all that bad. Monday saw shares of the Internet advertising company explode to a high at $125.25 in the first 90 minutes and then begin to fall out of bed making a low at $105.75 right out of the gate Tuesday morning. DCLK managed to recover fairly well the rest of the week despite the comments from Microsoft President, Steve Ballmer concerning the overvaluation of technology stocks and S.G. Cowen and Co. speculating that it could take a couple of months for the semiconductor industry to fully recover from the Taiwan earthquake. Now for the other side, according to Forrester Research, the Internet ad market is about to take off. The Internet Ad Bureau calculates that about $2.8 billion will be spent on Web ads, which means advertisers will spend more on Web ads than outdoor billboards. We tend to believe we will see continued strength in Internet Advertising companies like DCLK and CMGI (CMGI reports earnings on Monday). They will be volatile but should continue to grow. For the week ahead we are looking for shares of DCLK to continue higher, barring any other bombs being dropped on the broader markets. Technically DCLK has penetrated and bounced off its 10-dma for most of the week, which is currently sitting at $111.88. Again we would point out that a play in DCLK is not for everyone, because of the volatility. If you reentered a play keep your stops tight. If you are considering a new play examine your risk profile, consider the volatile nature of DCLK, look for a positive move and choose your entry points carefully. Wednesday Banc of America Securities initiated coverage of DCLK with a Buy rating and a price target of $140. Friday Wit Capital initiated coverage with an Outperform rating. BUY CALL OCT-110 TDU-JB OI= 974 at $12.38 SL=$9.75 BUY CALL OCT-115*TDU-JC OI=1157 at $ 9.38 SL=$7.00 BUY CALL OCT-120 TDU-JD OI=1641 at $ 7.00 SL=$5.25 BUY CALL OCT-125 TDU-JE OI=1296 at $ 5.25 SL=$3.50 Picked on Sep 18th at $116.25 P/E = N/A Change since picked +0.50 52 week high=$176.00 Analysts' ratings 8-7-0-0-0 52 week low =$ 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 = 3.01 mln Chart = http://quote.yahoo.com/q?s=DCLK&d=3m **** YHOO - Yahoo! $183.31 (+20.19)(-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. Earnings - earnings - earnings! In typical YHOO earnings run fashion, this projectile is once again escaping NASDAQ's gravity. All the more impressive is that YHOO did it while most other technology rockets were burning up in on a forced re-entry, partly in thanks to the "overvalued" comments of Microsoft's President, Steve Ballmer. Pure and simple, this is an earnings play with all candles lit. YHOO is scheduled to report earnings after the close on October 6. Analysts' upgrades and comments just added more fuel, particularly those of Henry Blodget of Merrill Lynch who noted to his clients that YHOO remains a core holding in his sector and that he expects YHOO to surprise the current $0.09 consensus estimate, big time once again. Technically in the positive, YHOO volume picked up to 55% over its ADV with a big surge at the close on Friday (generally unheard of), indicating investors' ravenous appetite for this stuff. Keep the euphoria in check though. YHOO is a volatile stock and can have big multiple price swings during the trading day. To boot, the FOMC meeting is the day before earnings, the jitters of which could cause YHOO to sell off early. That's not a prediction, just a possibility. If you're feeling a bit more conservative, you may want to be out of the play by Friday, October 1. With a big run-up last week and another big run-up anticipated this week, the exit may be crowded. We just don't when. You'll have to make you own determination according to your risk profile. Who needs news. . .we've got earnings! Just in case you're interested, YHOO launched its Yahoo! China web site last week with over 20 thousand pages of Chinese content. ***And you think these are expensive. . .we decided not to list the NOV strikes due to extreme inflated valuation. We also don't list $5-odd strike prices since their current volume and thus liquidity will be much lower.*** BUY CALL OCT-170 YHV-JN OI=4946 at $19.25 SL=15.00 BUY CALL OCT-180*YHV-JP OI=5399 at $13.25 SL=10.50 BUY CALL OCT-190 YHV-JR OI=5003 at $ 8.75 SL= 6.50 Picked on Sep 14 at $165.19 P/E = 424 Change since picked +18.00 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= 0.11 Next earnings 10-06 est= 0.09 versus= 0.05 Average daily volume = 9.05 mln Chart = http://quote.yahoo.com/q?s=YHOO&d=3m ******* Telecom ******* VOD - Vodafone AirTouch $230.50 (+21.94)(+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. Our split run continues. With the decisively negative tone in the broader markets this week, shares of VOD were able to move higher on their own. As we have mentioned VOD splits 5:1 at the close of business October 4th, for shareholders of record on October 1st. We are looking for VOD to continue higher this week. Volume for the week has been strong averaging 2.1 mln shares in the past 5 sessions. The news this week concerning the future of VOD has been positive as well, which we believe has helped strengthen our split run. Tuesday Bel Atlantic(BEL) and Vodafone announced they had reached an agreement to create a new wireless business, that will serve 90 percent of the U.S. population. The new business will be further strengthened by the addition of the cellular and PCS assets of GTE Corp(GTE), which is expected to complete its merger with Bell Atlantic, sometime in the first quarter of 2000. Investors also seemed to key in on other news concerning VOD and Germany's Mannesmann. Mannesmann said Thursday it will split its telecom and engineering units into two separate companies to improve the company's focus and grow each business. There apparently was speculation that VOD might have been bidding for Mannesmann. The fact that shares of VOD are in tight supply and that institutions are wanting to buy hasn't hurt our split run either. We should remind you that even though we expect VOD to continue higher, and although we doubt that there will be any serious profit-taking, keep your stops close. Initial support for VOD lies between $224-$225 followed by $220. Should we see a pullback, look for opportunities to buy calls once a you see VOD bounce with volume supporting it. If you are considering a new play assess your risk profile and remember you will want to exit the play by Friday or Monday at the latest. BUY CALL OCT-220 VOD-JD OI=1854 at $15.88 SL=$12.25 BUY CALL OCT-230*VOD-JF OI=1656 at $10.00 SL=$ 7.50 BUY CALL OCT-240 VOD-JH OI= 244 at $ 5.75 SL=$ 4.00 Picked on Sep 21st at $216.63 P/E = 83 Change since picked +13.88 52-week high=$234.00 Analysts Ratings 6-3-2-0-0 52-week low =$ 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 = 1.36 mln Chart = http://quote.yahoo.com/q?s=VOD&d=3m **** QCOM - Qualcomm Inc $189.50 (-0.44) Qualcomm develops and manufactures communications technologies and products. It's best known for its CDMA (code division multiple access) technology which is the industry standard for mobile communications. This technology and is used in cellular phones, wireless telephone system equipment, and satellite ground stations. QCOM also provides the trucking industry with a monitoring system call OnmiTRACS and is currently in a joint venture to develop a low-earth-orbit satellite communication system call Globalstar. They are also the #2 supplier of digital cell phones following Nokia. For right now anyway, QCOM is a pure and simple momentum play. The stock first sprung into new territory on September 14th after the company announced it was proactively seeking a buyer for its mobile phone manufacturing unit. Concurrently the company reported that it would meet or beat 4Q estimates - certainly a well timed announcement! All this good news was icing on the cake to shareholders of the best-performing stock in the S&P 500 index this year. Shares of QCOM rose $17.12, or 11% that day alone. Since then the momentum has certainly persevered. The uptrend has also confirmed the stock's place as a split candidate since it soared above $155 and hasn't looked back. Recently QCOM split 2:1 on May 11th and presently doesn't have enough shares authorized for another split. There are only 300 mln authorized and about 161 mln issued, however it'd be easy enough for the Directors to hold a Special Meeting and request shareholders' approval to increase the number of authorized shares. This momentum play could even pick up more speed as it approaches its earnings date expected on October 21st. This date will be confirmed ASAP. We added QCOM on Thursday evening as the stock's pullback provided players with a solid entry point into this high-flying Internet. But be warned this play is not for everyone. QCOM is a HIGH RISK INTERNET play because of its explosive behavior. Shares rose on Friday responding to news that Qualcomm and Lucent entered into an alliance to commercialize wireless network equipment using CDMA technology on Lucent's wireless base-station equipment. This team effort will create faster speeds and increase capacity on network equipment. BUY CALL OCT-185 AAO-JQ OI=1299 at $13.38 SL=10.75 BUY CALL OCT-190*AAO-JR OI=2834 at $10.63 SL= 8.25 BUY CALL OCT-195 AAO-JS OI=1022 at $ 8.38 SL= 6.50 BUY CALL NOV-190 AAO-KR OI= 117 at $18.50 SL=14.50 BUY CALL NOV-195 AAO-KS OI= 74 at $16.13 SL=12.50 low OI Picked on Sep 23rd at $186.63 P/E = 97 Change since picked +2.87 52 week high=$199.00 Analysts Ratings 8-8-2-0-0 52 week low =$ 18.87 Last earnings 06/99 est= 0.63 actual= 0.75 surprise +19.1% Next earnings 10-21 est= 0.88 versus= 0.27 Average daily volume = 8.97 mln Chart = http://quote.yahoo.com/q?s=QCOM&d=3m ************* Miscellaneous ************* GE - General Electric $118.00 (-2.00) 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. Well, our giant conglomerate made it through a rough week of trading. Unfortunately our play was not unscathed but considering the circumstances, managed to hold up quite well. Overshadowing our technical/earnings play has been a weakening dollar and technical breakdowns of the broader markets. Just as GE broke through its resistance at $120 and set new highs for the stock, we were knocked back by these unforeseen circumstances. GE ended the week on the downside, however managed to fight its way back closing at its 10-dma or $118. The stock had a nice surge at the end of the day, which hopefully will carry into next week. This is a good technical sign for the stock indicating support exists at this price level. If the markets cooperate on Monday, $118 may be the entry point were looking for. However, before placing new trades confirm positive direction in the broader markets and GE. With the G-7 meeting this weekend and Mr. Greenspan scheduled to speak on Monday, the conditions are ripe for another volatile week. The stock has still shown potential to outperform the markets on the rally. In the news, on Friday, an article mentioned that earnings warnings from other Dow components (Coca-Cola, Sears, Union Carbide) have unfortunately overshadowed the success of companies like General Electric, which continue to report record profits. In two weeks, GE reports their earnings and we'll see if their comments hold true. On another note, on Friday, an announcement was made that GE Medical Systems, a unit of General Electric said its proposed acquisition of OEC Medical Systems has cleared U.S. antitrust review. Last of all, don't forget about last weeks comments by Merrill Lynch stating that GE could reach $150 by the end of the year. BUY CALL OCT-115*GE-JC OI=3340 at $5.38 SL=3.25 BUY CALL OCT-120 GE-JD OI=8552 at $2.69 SL=1.25 BUY CALL OCT-125 GE-JE OI=6553 at $0.94 SL=0.00 High Risk! BUY CALL NOV-120 GE-KD OI= 574 at $5.00 SL=3.25 BUY CALL NOV-125 GE-KE OI=1182 at $2.88 SL=1.25 Picked on Sep 21st at $119.00 P/E = 39 Change since picked -1.00 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 = 4.40 mln Chart = http://quote.yahoo.com/q?s=GE&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 and start back up. The company management is also doing everything they can to shore up their stock price. The company issues press releases, brokers talk it up, analysts try to put a positive spin on everything. Then of course there is the death knell, the "buy recommendation" simply because the price has dropped to some level that analysts feel attractive again. Buyers who like the stock wait until it appears a bottom has been reached and then jump on it in a feeding frenzy. They may already have a large position and are averaging down. Many factors can stop a free falling stock in mid drop. **** WLP - Wellpoint Health $65.63 (-3.13)(-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. Could last week's market conditions been any better for our put play? Considering the Dow was down 525 points and the Nasdaq 129 points, I think it would be hard to beat. A weakening dollar and technical breakdowns of the Dow were to thank for the markets recent losses. These events added salt to the wounds of an already weak healthcare sector and stock, which shows in its current track record. WLP traded in negative territory for nine consecutive days, but on Friday managed to break the streak by closing the day fractionally higher. Is this the beginning of the end for our play and some kind of sign for current investors that there is hope? We doubt it. The next support level for WLP is $60, which should be obtainable considering current market conditions and the technical weakness of the stock. There are events that may influence our play this week. The G-7 meeting this weekend and Alan Greenspan's scheduled speech on Monday may add fuel to an already volatile market. When placing new trades, wait for intraday spikes in the stock, there should be plenty considering these up coming events. There was no additional news to report this weekend that would account for movement in the stock. BUY PUT OCT-70*WLP-VN OI=177 at $6.00 SL=4.25 BUY PUT OCT-65 WLP-VM OI=422 at $2.94 SL=1.50 Average Daily Volume = 403 K Chart = http://quote.yahoo.com/q?s=WLP&d=3m ******************************* SEE DISCLAIMER IN SECTION ONE
The Option Investor Newsletter 9-26-99 Sunday 5 of 7 **************** PUTS - continued **************** GPS - Gap Stores $32.00 (-1.63)(-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. The losses continue for Gap stock this week under the backdrop of an excessively weak market. We mentioned last week about the big increase in volume on the 35 contracts. That turned out to be the play as you would have doubled them by Wednesday morning. The volume is still coming in fairly strong and we have yet to see Gap bottom out at $30 where the stock has it's next support level. We also had a contradiction among analysts on Thursday that kept GPS active. BancBoston reiterated their Buy rating on GPS based on an attractive price. This started a small rally taking GPS up to $33 when CS First Boston came out with their Hold rating and no further details but it was a poor rating comparable to other retailers they started with a Buy rating. Going forward, we expect more weakness until the sentiment changes. This drifting lower pattern is common among stocks that have lost investor interest. We see more resistance at $33, which is strengthened by the 10-dma. Any trades in GPS should be planned out with good entry and exits for a quick profit. This is not a play with home run potential, barring some dramatic development. So play smart and use your stops in case we get a reversal as we head into the beginning of the holiday shopping season. BUY PUT OCT-40 GPS-VH OI= 413 at $8.25 SL=6.25 BUT PUT OCT-35*GPS-VG OI=5402 at $3.63 SL=1.75 BUY PUT OCT-30 GPS-VF OI=4345 at $0.81 SL=0.00 High Risk! Average Daily Volume = 2.25 mln Chart = http://quote.yahoo.com/q?s=GPS&d=3m **** LLY - Eli Lilly and Company $65.19 (-1.81)(-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. A wild week on Wall Street knocked LLY down for the third straight week. The declines may not have been as pronounced as before but it is common for some attention to turn to more active issues during a decline. Lilly hasn't generated a lot of interest from investors recently as it has been trending lower. We have been successful opening plays off the rebounds and selling at support and we expect this pattern to continue. In the news this week, Goldman Sachs started coverage of Lilly on the Recommended List, which is their highest rating. This may be the reason that the declines weren't as decisive as those of the general markets but the rating had little impact as far as reversing the current trend. Right now we are getting support from $65 and will see more support at $62. If we get a bounce back from the massive selloff in the market, LLY could rally to the 10-dma at $67.25. That would make for a great entry point and stops would be prudent on the other side of the 10-dma, about where the stock would hit $68.25. The sector has been very weak in the past few sessions and we are looking for more of the same to be a catalyst for in our play. Timing of your entry and exit points are the key to a profitable play but an overall downward bias will help us along. BUY PUT OCT-70*LLY-VN OI=2117 at $5.63 SL=3.75 BUY PUT OCT-65 LLY-VM OI=4242 at $2.19 SL=1.00 Average Daily Volume = 2.84 mln Chart = http://quote.yahoo.com/q?s=LLY&d=3m **** JNJ - Johnson and Johnson $90.00 (-6.06)(-3.47) 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. Ballmer and S.G. Cowen, What do these two have to do with our current put play in JNJ. Just when we thought JNJ may be looking for a bottom earlier in the week, we had Microsoft President, Steve Ballmer and S.G. Cowen and Co. release their opinions concerning the overall valuation of technology stocks and the recovery of the tech sector following the Taiwan earthquake. Those comments sent the major indices into a tail spin and took shares of JNJ along with them. Again we thought will JNJ try to find a bottom? Apparently not, shares of the drug maker slid another $1.13 to close at $90.00 per share. What's in store for JNJ this week? Technically the sector is very weak and industry giants Pfizer, Amgen, and Merck all look sick as well. There does appear to be some support for JNJ in the $89-$90 area and we could certainly see a bounce as the 10-dma is up at $95.11. JNJ closed Friday under its 200-dma at $91.29 on volume of over 3.2 mln shares, which is better than average. We will stick with our play on JNJ and allow the market to dictate our next move. The next area of support for JNJ is in the $87-$88 area. If you are in a play on JNJ move your stops down. If you are considering a new play remember JNJ is now in an area of support and could bounce or try to find a bottom. If we do get a bounce followed by weakness would view that as an opportunity to buy puts. As always assess your risk profile and confirm market direction prior to enter a new play. BUY PUT OCT-100 JNJ-VT OI= 979 at $10.13 SL=7.75 BUY PUT OCT- 95 JNJ-VS*OI=2157 at $ 5.63 SL=4.00 BUY PUT OCT- 90 JNJ-VR OI=1614 at $ 2.50 SL=1.25 Average Daily Volume = 2.15 mln Chart = http://quote.yahoo.com/q?s=JNJ&d=3m **** KO - Coca Cola, Inc. $51.13 (-2.88) Anybody not know what Coca-Cola is or does? Good. But just in case you've been in a cave for the last 100 years, they are the world's largest manufacturer of soft drinks including Coke, Diet Coke, Cherry Coke, Mr. Pibb and Sprite. They also own the brand name called Birds Eye, who produces that frozen juice concentrate in your freezer. One day didn't change this play much but it gave us a $0.25 better buying opportunity. We summed up the play in a Reuters comment from Thursday: "Beverage industry analysts said investors were concerned about the Atlanta-based company's earnings potential in 2000 and unit case volume numbers that have failed to bounce back after the contamination episodes. The company saw unit case volume and concentrate volume sales figures slump in the first two quarters of 1999 from the effects of the contamination crisis and depressed global economies, as well as increased marketing expense." They use these numbers to anticipate sales, which aren't looking to good right now. Though the price has been under pressure lately, we think KO still has more to fall thanks to its high P/E of 40, relative to its peers. It still trades just pennies above its 52-week low and violated every moving average, from its 10-dma to its 200-dma. KO has problems of its own that even a rising market can't solve. Though KO may hang out in this range for a bit, the overall technical trend is down. Wait for downward direction in the stock (or the first downgrade) to take a position. BUY PUT OCT-55*KO-VK OI=5853 at $4.25 SL=2.75 BUY PUT OCT-50 KO-VJ OI=5181 at $1.13 SL=0.00 High Risk! BUY PUT NOV-55 KO-WK OI=6887 at $4.88 SL=3.25 BUY PUT NOV-50 KO-WJ OI=6639 at $1.94 SL=1.00 Average daily volume = 3.70 mln Chart = http://quote.yahoo.com/q?s=KO&d=3m **** DOW - The Dow Chemical Company $106.78 (-8.75) It is a plastic world, thanks in part to Dow Chemical. A world leader in the production of plastics, chemicals, hydrocarbons, and herbicides and pesticides, Dow is the #2 US chemical company after Dupont. Dow also is the world's #1 maker of caustic soda, chlorine, ethylene, polyethylene and polystyrene, which are used to process chemicals, treat water and refine petroleum. Dow has entered the fast growing markets for polypropylene and polyethylene terephthalate, used by the automotive and packaging industries. Dow has sold noncore pharmaceutical, consumer and engineering operations to focus on its chemical line and the biotechnology market. Dow is buying Union Carbide. The shares of Dow Chemical Co. fell after it was said that rising costs for petroleum-based raw material would hurt Q3 earnings. Shares of Dow fell 3 15/16, or 3.5 percent, to $106.78. Union Carbide shares fell 2 5/16, or 4.2 percent, to 53 11/16. Dow last month agreed to buy Union Carbide for $11.6 billion in stock and debt. Late yesterday it was reported that rising prices for raw materials such as ethane are squeezing profit. "This appears to be a problem for the whole chemical industry, at least in the short term," said Brian Eisenbarth, an analyst at Collins & Co. who rates the shares a hold." Prices for oil and natural-gas derivatives jumped as much as 55% during the quarter. Oil is more expensive after OPEC decided to cut output, while natural-gas prices rose as utilities burned more to make electricity for air conditioning needed during an unusually hot summer across much of the U.S. "Usually companies can pass on the cost increases in the form of higher selling prices, but the increases haven't been able to keep up with cost," said Eisenbarth. Technically speaking the shares are breaking to the downside with no short-term support in sight until the $101.50 level. At current levels the shares are just beginning to slip and now looks like a good entry point. We don't expect a turnaround anytime soon, but we always recommend using a stop loss to be safe. BUY PUT OCT-110*DOW-VB OI=115 at $5.25 SL=3.50 BUY PUT OCT-105 DOW-VA OI= 62 at $2.69 SL=1.38 low OI Average Daily Volume = 985 K Chart = http://quote.yahoo.com/q?s=DOW&d=3m **** WPI - Watson Pharmaceuticals, Inc. $39.56 (-3.44) Watson Pharmaceuticals makes generic and branded drugs, which focus on niche pharmaceuticals. It offers generic versions of brand-name products such as cardiovascular drugs Lopressor and Inderal, Analgesics Vicodin and Lortab, and asthma drugs Proventil and Ventolin. Watson's branded drugs are focused primarily in dermatology (acne drugs), women's health for use as contraceptives and hormone regulators, and neuropsychiatry (epilepsy drugs), but it also makes antihypertensives Dilacor (the company's top seller) and Microzide. Watson has grown its branded business through acquisitions and plans further expansion via joint ventures. It owns half of Somerset Pharmaceuticals and ANCIRC Pharmaceuticals. Watson Pharmaceuticals Inc., recently said third-quarter profit will miss forecasts after a court order barred the generic drug maker from distributing copyright protected educational materials with its new smoking-cessation gum. The company will miss estimates by 6 cents to 7 cents a share, said Watson spokesman Jim Byers. Watson was expected to earn 45 cents, the average estimate of nine analysts surveyed by First Call Corp. Watson was sued by SmithKline Beecham Plc for copyright infringement after it unveiled a generic equivalent of SmithKline's popular non-prescription Nicorette gum. SmithKline claims the user guide and audio cassette included with Watson's gum infringes on its copyright. The court ruled in favor of SmithKline, and Watson must stop selling the gum with a guide or tape that is similar to SmithKline's. Furthermore Watson must recall products it had already shipped. This may cost Watson as much as $10 million in lost sales and expenses. Well, the stock has performed just as bad as this case sounds for Watson and is now trading at a 52- week low, and getting weaker as it approaches the 200-dma, levels it has not seen since late 1998. A downward trend is in full gear and the risk reward for a put play is definitely in our favor with current market conditions. Any bounce up to the 10-dma at $32 would be buyable or go with the momentum as WPI is hitting new lows. Use stops to protect against a market rebound. BUY PUT OCT-30 WPI-VF OI= 26 at $1.69 SL=0.88 low OI BUY PUT OCT-35 WPI-VG OI= 268 at $5.50 SL=3.75 BUY PUT NOV-30 WPI-WF OI= 718 at $2.50 SL=1.25 BUY PUT NOV-35*WPI-KG OI=2096 at $6.00 SL=4.25 Average Daily Volume = 908 K Chart = http://quote.yahoo.com/q?s=WPI&d=3m ************************ SPREADS/STRADDLES/COMBOS ************************ Looking For The Bottom.. Friday, September 23 U.S. equity markets continued their downward spiral Friday as investors searched for signs of direction and a new trading range. The Dow Jones industrial average was down 39 points to 10,279 while the Nasdaq composite index fell 9 points to 2,740. Market breadth was poor as declining stocks outpaced advancing issues 1,815 to 1,136 on active volume of 870 million shares. The long bond was up 9/32 with a yield of 5.97%. Thursday's new plays (positions/opening prices/strategy): Sprint FON NOV40C/NOV40P $39.12 debit covered-combo Republic Bank RNB OCT50C/OCT50P $49.19 debit covered-combo The best we can say about our two new plays is that they appear to be favorable positions. They both opened higher on positive news announcements and neither play was available anywhere near our suggested entry prices. FON moved higher after a new report disclosed that they have been discussing a possible merger with MCI Worldcom (WCOM). The Wall Street Journal said that Sprint has held discussions with a handful of telecom companies, but negotiations with MCI WorldCom have picked up recently and are expected to continue. The stock finished $3 higher on the news. Republic Bank opened higher after an announcement late Thursday that an internal report into the $1.5 billion financial scandal suggested the company's alleged fraud was limited and should not prevent the takeover by HSBC Holdings. The report concludes Republic became embroiled in the alleged securities fraud only because of a rogue individual and there is little chance of a material claim against it by the companies that lost money. In any case, RNB opened significantly higher and never faltered. We will monitor the plays for performance but there were no new positions opened. Portfolio plays: The big concern for most investors is where will the correction finally end. Will we see another rally before the Y2K menace or should they simply exit and wait for the new year. Analysts are busy looking for new support areas in the S&P 500 and the Dow but most agree that there is further downside ahead. Optimists believe the recent sell-off is a necessary step before the next true upward move can begin. Only time can expose the true nature of the current volatile market. One indication that investors may be battening-down the hatches is today's activity in precious metals. The Philadelphia Stock Exchange's gold and silver index gained over 3% as money moved from equities to commodities. Our new gold (hedge) position in Newmont mining benefitted from the rally and the play is now $1 ITM after only one week. That's a 50% profit in just a few days. The majority of the spreads portfolio is performing as well as could be expected, based on the recent slump. Most of our short term calendar spreads are well within the expected range. Plays on Bell Atlantic (BEL), 3Com Corp (COMS), Peoplesoft (PSFT) and Occidental Petroleum (OXY) are holding comfortably at the sold strikes. General Dynamics (GD) is close but not beyond hope and Zoltek (ZOLT) our speculation play, is skirting the edge of the profit zone near $8. CR Bard (BCR) is difficult to judge as it tested $46 successfully and the overall play is only down $0.38. The only position we have closed recently is Halliburton (HAL) and that was simply to protect previous profits (a $2 credit). The debit spreads portfolio is in reasonable shape considering that most of the plays in it are bullish. Positions closed for profit this week included 3Com Corp (COMS) and Microchip (MCHP). Some of the issues that we are watching closely: Hambricht and Quist (HQ), Qwest (QWST), and Unify (UNFY). One of the readers request plays; Electronics for Imaging (EFII), also requires a daily check as it is struggling to remain above water at $56. Our three credit strangles are a unique group and as we said when we offered the plays, they are positioned to the downside in expectation of a bearish market. The object was to provide a favorable entry point to own these issues if the puts were ever assigned. Earlier this week, they could have been closed for favorable profits but now they are all near break-even. The one issue that worries us is Johnson & Johnson (JNJ), as it is now at the bottom of a recent trading range and could slide much further if it breaks below that range. The long-term portfolio has probably suffered the worst of the sell-off but most of the positions are still within rescue. The large declines in the broad market are evident in Biogen (BGEN), Johnson & Johnson (JNJ), Medtronics (MEDT), Motorola (MOT), Solectron (SLR) and Exxon (XON). Cabletron (CS), General Motors (GM) and Polaroid (PRD) endured minor corrections while Computer Associates (CA) and Sun Micro (SUN) appear to have avoided the carnage completely. The most difficult problem we face as long term investors (LEAPS) is deciding when to fold-up the tent and move on to new plays. In this case, all of the issues are large, well-established companies with excellent institutional interest and they will rebound quickly when the market recovers. In the interim, it's very important to monitor the individual technical characteristics of each issue and decide for yourself which way to adjust the position near the end of the expiration period. Occasionally there will be such a compelling change in character that you will need to roll up or down long before the short option expires. The laws of option pricing dictate that time value is highest in the at-the-money (ATM) option. Time value decreases as the strike prices move in and/or out of the money (ITM or OTM) and strike prices deep in and/or out of the money have the lowest time value of all options. That is why the most theoretically correct technique in a calendar spread is to sell ATM options, where the most premium exists. Good Luck! Questions & comments on spreads/combos to ray@OptionInvestor.com ***************************** 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. Continued in section six ************** SEE DISCLAIMER IN SECTION ONE **************
The Option Investor Newsletter 9-26-99 Sunday 6 of 7 ******************* DEBIT STRADDLES (summary continued) ******************* 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 ******* SPREADS ******* More requests for straddles this week so we only have two spread plays, both based on recent bullish speculation and favorable option premiums. **** SBUX - Starbucks $23.88 *** Cheap Speculation *** Starbucks Coffee Company is the leading retailer, roaster and brand of specialty coffee in the world. In addition to its more than 2,400 retail locations around the globe, Starbucks sells whole bean coffees through its specialty sales group, direct response business, supermarkets and online at www.starbucks.com. Starbucks also produces and sells bottled Frappuccino coffee drinks and a line of premium ice creams through its joint venture partnerships and offers a line of innovative premium teas produced by its wholly-owned subsidiary, Tazo Tea Company. Last month, Starbucks posted an 8% increase in same-store sales compared to a year ago. Total sales during the month rose 25% to $135 million. An industry analyst supplemented the news with a report that the company's core business is strong and noted the stock is almost 50% off its yearly high since investors learned of the planned Internet venture. They thought it would derail the core business. The analyst disagreed and now estimates the 1999 earnings at $0.54. He also initiated coverage with a "buy" rating. Goldman Sachs followed the trend last week and raised Starbucks to the recommended list causing a new influx of buyers. Volume picked up modestly in call options and a small disparity exists in the front-month positions for those who agree with a bullish outlook. PLAY (speculative - bullish/debit spread): BUY CALL OCT-22.50 SQX-JX OI=1764 A=$2.12 SELL CALL OCT-23.75 SQX-JU OI=301 B=$1.31 INITIAL NET DEBIT TARGET=$0.69 ROI(max)=82% B/E=$23.19 Chart = http://quote.yahoo.com/q?s=SBUX&d=3m **** VYTL - Viatel Inc $26.19 *** Bottom Fishing *** Viatel is a facilities-based, integrated provider of telecom services for a variety of users including individual consumers, businesses and carriers in more than 230 countries worldwide. The company provides high-speed, high-capacity and high-quality bandwidth to companies, carriers and Internet service providers. Viatel's market focus is Western Europe and North America. They are a licensed provider of telecom services all over Europe. It currently operates the largest pan-European broadband network, with international gateways in New York and England and has a direct sales force in 12 Western European cities; and indirect sales outlets in more than 180 locations throughout Europe. The most significant news recently is Viatel's announcement that they will purchase Destia Communications for about $1 billion in stock and assumed debt, uniting two independent international long-distance carriers. Both companies offer long-distance, data service, calling cards, prepaid cards and other services to small and midsize business and some residential customers. Destia has a strong retail and customer base while Viatel is well established in its network. The tax-free merger is expected to boost earnings and help reduce costs for both companies. Goldman Sachs also likes this merger and they started coverage of both telecommunications companies, adding Destia and Viatel to its recommended list. This may have caused some of the recent speculation in VYTL's options. If you like this issue in the short-term, there is a small disparity in the OTM call options. We will use a bullish calendar spread to minimize any possible losses and there are also some favorable (long-term) diagonal spreads for those who can risk more capital. PLAY (aggressive - bullish/calendar spread): BUY CALL NOV-30 VQL-KF OI=20 A=$2.75 SELL CALL OCT-30 VQL-JF OI=600 B=$1.68 INITIAL NET DEBIT TARGET=$0.93 TARGET ROI=25% Chart = http://quote.yahoo.com/q?s=VYTL&d=3m ********** STRADDLES ********** A radical week for the market and yet most of the straddles are still clamoring to their recent trading ranges. Some of them have broken through support (WMB and PD) or changed character, but for now we are still waiting for the first winner in the group. Here are the current positions: Long-term (probability) plays: Stock Pick Last Position Debit Value AMES $31.63 $30.31 JAN30C/30P $8.88 $8.12 AVI $22.81 $20.44 DEC22C/22P $4.38 $4.12 CAL $36.43 $32.44 MAR35C/35P $8.62 $7.75 DLJ $50.13 $39.94 JAN50C/50P $13.25 $13.25 WMB $40.75 $35.81 JAN40C/40P $8.12 $7.75 Short-term (Optionetics) plays: Stock Pick Last Position Debit Value EGRP $22.43 $22.50 JAN22C/22P $9.12 $8.43 GM $65.06 $62.75 JAN65C/65P $10.00 $9.62 LCOS $44.43 $46.94 JAN45C/45P $15.75 $15.75 PD $58.00 $54.56 JAN60C/60P $9.38 $9.88 UNH $60.93 $58.50 DEC60C/60P $10.50 $9.88 With the incredible market volatility this week, we are still finding a relatively small number of higher priced candidates that meet our minimum straddle requirements. However, Tom Gentile from the Optionetics group has provided us with two plays and we have also have a couple of low cost probability-based speculation positions. Tom is the strategy instructor for the OIN's fall seminar schedule and he invites you to come learn all about Optionetics trading methods. These wealth building seminars are two day sessions designed to help investors learn powerful trading techniques to help maximize returns on investment strategies. Learn more at: http://www.OptionInvestor.com/seminar **** XON - Exxon $74.81 Exxon's principal business is energy, involving the exploration for and the production of crude oil and natural gas in over 100 countries worldwide. Exxon manufactures, transports, and sells crude oil, natural gas, and other petroleum products. Exxon's chemical division is engaged in the exploration, mining, and selling of basic petrochemicals, including olefins & aromatics, and is a leading supplier of specialty rubbers and of additives for fuels and lubricants. Exxon also has interests in electric power generation facilities. Forecasting the price of crude oil is pure speculation and with favorable option premiums, this continues to be an excellent straddle candidate. PLAY (conservative - neutral/debit straddle): BUY CALL JAN-75 XON-AO OI=534 A=$4.75 BUY PUT JAN-75 XON-MO OI=1042 A=$4.75 INITIAL NET DEBIT TARGET=$9.25-$9.38 Chart = http://quote.yahoo.com/q?s=XON&d=3m **** UK - Union Carbide $52.69 Union Carbide is a worldwide chemicals company with advanced process technologies and global chemical production facilities. Dow Chemicals (DOW) and Union Carbide (UK) recently agreed to a definitive merger agreement combining two of the industry's most technologically advanced global companies, with overall annual revenues of about $24 billion. The combined company will operate in 168 countries, employ about 49,000 people and rank number 50 on the Fortune 500. Union Carbide said Wednesday it has called a special meeting of shareholders for 12/1/99 to vote on the merger. Salomon Smith Barney also said recently that analyst PJ Juvekar cut the 1999 earnings estimate for Union Carbide. Salomon cut the earnings per share estimate after UK cautioned that high prices for raw materials prices would decrease revenues. PLAY (conservative - bearish/debit straddle): BUY CALL JAN-50 UK-AJ OI=313 A=$5.62 BUY PUT JAN-55 UK-MJ OI=516 A=$5.00 INITIAL NET DEBIT TARGET=$10.38-$10.50 Note: You can play bullish or bearish straddle position by purchasing both options at $50 or $55. Chart = http://quote.yahoo.com/q?s=UK&d=3m ***************** Probability Plays ***************** These stocks have previously demonstrated the ability to move to a profitable position in the required amount of time. The options are undervalued and each underlying issue has at least a brief history of movements through a sufficient range to justify the overall risk/reward of the play. **** MYL - Mylan Laboratories $18.63 Mylan Laboratories is engaged in the development, manufacturing, marketing & distribution of generic & proprietary pharmaceutical and wound care products. Subsidiary Mylan Pharmaceuticals is recognized as one of the leaders in the generic pharmaceutical industry. Warburg Dillon Read recently downgraded Mylan to "hold" from "strong buy". Analyst Andrew Forman lowered his target price for the drug maker to $24 from $35 based on legal costs from a law suit with Pfizer and the possible delay in the launch of the cardiovascular drug Procardia. He also says R&D expenses may be higher than previous estimates. Sound like things could go either way for this issue but we will position ourselves slightly towards a bullish outlook. PLAY (conservative - bullish/debit straddle): BUY CALL APR-17.50 MYL-DW OI=44 A=$3.12 BUY PUT APR-17.50 MYL-PW OI=69 A=$1.62 INITIAL NET DEBIT TARGET=$4.50-$4.56 Target ROI=50% Chart = http://quote.yahoo.com/q?s=MYL&d=3m **** ALT - Allegheny Teledyne $16.44 Allegheny Teledyne is a group of technology-based manufacturing businesses with significant concentration in specialty metals, complemented by aerospace and electronics, industrial and other consumer products. The company operates in 4 business segments; specialty metals, aerospace and electronics, industrial and consumer products. Allegheny Teledyne shares slipped recently after the maker of specialty metals said it won't meet analysts' estimates for third-quarter earnings due to a rise in the cost of nickel and weakness in the oil and gas markets. The stock fell to a 52-week low last week after the company said third-quarter earnings will be significantly lower than the year-ago profit of $0.33. They expect to report third-quarter results on October 27. This will be interesting for sure. PLAY (speculative - neutral/debit strangle): BUY CALL APR-17.50 ALT-DW OI=18 A=$1.50 BUY PUT APR-15.00 ALT-PC OI=0 A=$1.12 INITIAL NET DEBIT TARGET=$2.43-2.50 TARGET ROI=50% Chart = http://quote.yahoo.com/q?s=ALT&d=3m ************** Dow Transports ************** With the price of oil at an all-time high and the airlines at recent lows, this play a has an excellent probability of success. FDX - Federal Express $35.19 Federal Express and its network of six independent operating companies include the largest and most powerful express network in the world (FedEx). The second largest business-to-business small package ground service in North America (RPS). The largest surface expedited service in the world (Roberts Express) and the leading LTL carrier in the western United States (Viking Freight). They also own two innovative logistics and warehouse management order fulfillment firms; Caliber Logistics and Caliber Technology. Transportation stocks such as FDX, parent of the world's largest air express shipper Federal Express, have been hit hard by rising fuel costs. Shares of FDX were pummeled again recently after it reported earnings that came in $0.02 below estimates. Fuel prices are now expected to take more than $150 million out of operating income in fiscal 2000 and if lower domestic growth continues, the earnings for Q2 and fiscal 2000 could fall further below analysts' estimates. Forecasts and ratings are being adjusted regularly and it appears that Fed-Ex shareholders are in for serious turbulence. PLAY (conservative - neutral/debit straddle): BUY CALL APR-35 FDX-DG OI=558 A=$5.50 BUY PUT APR-35 FDX-PG OI=399 A=$4.38 INITIAL NET DEBIT TARGET=$8.62 TARGET ROI=50% Chart = http://quote.yahoo.com/q?s=FDX&d=3m **************** Index Options **************** If you think the Dow has finally exited its trading range and can can remain volatile for the next few weeks, this short-term play might suit your style. DJX - Dow Jones Industrial Average 102.79 This is the best known index of stocks in the United States. It contains 30 issues that trade on the New York Stock Exchange. The Dow, as it is called, is a fundamental barometer of how shares of the largest companies in America are performing. Find out about all the current news and events that are affecting the major indexes in the daily market wrap on the home page at: http://dev.OptionInvestor.com/marketwrap/index.asp PLAY (very aggressive - neutral/debit straddle): BUY CALL NOV-102 DJV-KX OI=141 A=$4.75 BUY PUT NOV-102 DJV-WX OI=492 A=$3.62 INITIAL NET DEBIT TARGET=$8.12-$8.25 TARGET ROI=10% Chart = http://quote.yahoo.com/q?s=DJX&d=3m ********** SEE DISCLAIMER IN SECTION ONE **********
The Option Investor Newsletter 9-26-99 Sunday 7 of 7 ************* COVERED CALLS ************* Technical Indicators Explained.. We continue our discussion of technical analysis terms and the basic indicators that can help you determine market direction. Advances vs. Declines (A/D) This is a measure of the number of stocks that have advanced in price and the number that have declined in price within a given time span. The A/D is generally expressed as a ratio and it can help indicate the general direction of the market; when a higher number of stocks advance rather than decline on a single trading day, the market is thought to be bullish. The A/D will function best as a confirming indicator and it is often used with other types of analysis as a guide to the trend of the overall market. It is also used occasionally for specific stock/industry groups. The most common way to display A/D data is with a chart showing the cumulative difference between the advances and the declines on the NYSE. The period can be one week, one month, or any other common time frame but since it is best used to identify new or developing trends, it must be relative to the positions in your portfolio. Compare the A/D chart with that of the DJIA. If the Dow is moving higher but the A/D line is flat or dropping, that is a negative signal and may indicate a future slump. Watch for new highs and lows on the A/D chart. Near market peaks, the A/D line will generally top-out and begin a gradual decline before the overall market. As with all technical indicators, make sure that it confirms other signals. Overbought and Oversold This calculation is also based on stocks advancing or declining. When an excessive number of issues have advanced, the market is said to be overbought. When an excessive number of issues have declined, it's said to be oversold. If the overall market is in an overbought condition, that's usually a sign that euphoria has overwhelmed investors and it may be time to stop buying, perhaps even start taking profits. When the market is oversold and the indices appear to have declined to a relatively low point in the cycle, you may want to start buying again, as the risk will be lower in most bullish positions. More on technical indicators (this week, market cycles) in the Naked-Puts section.. SUMMARY OF PREVIOUS PICKS ***** Stock Price Last Mon Strike Opt Profit ROI Monthly Sym Picked Price Price Bid /Loss ROI BRKT 15.88 15.13 OCT 15.00 2.25 *$ 1.37 10.1% 6.2% TALK 12.00 11.94 OCT 10.00 2.50 *$ 0.50 5.3% 5.7% BNBN 18.38 18.25 OCT 17.50 1.75 *$ 0.87 5.2% 5.7% ASMI 8.44 8.13 OCT 7.50 1.31 *$ 0.37 5.2% 5.6% DCTM 17.13 21.00 OCT 15.00 3.00 *$ 0.87 6.2% 5.4% NMSS 13.81 14.19 OCT 12.50 1.88 *$ 0.57 4.8% 5.2% OIL 13.19 12.81 OCT 12.50 1.38 *$ 0.69 5.8% 5.1% COMS 25.69 27.25 OCT 25.00 2.50 *$ 1.81 7.8% 4.8% NRES 25.69 24.91 OCT 22.50 4.13 *$ 0.94 4.4% 4.7% HELX 34.25 31.88 OCT 30.00 5.50 *$ 1.25 4.3% 4.7% CIEN 39.75 38.34 OCT 35.00 6.13 *$ 1.38 4.1% 3.6% PLCM 45.88 42.50 OCT 40.00 7.13 *$ 1.25 3.2% 3.5% CS 18.06 16.63 OCT 17.50 2.00 $ 0.57 3.5% 3.1% RDRT 5.88 4.75 OCT 5.00 1.31 $ 0.18 3.9% 2.4% SOFN 26.25 21.38 OCT 22.50 5.00 $ 0.13 0.6% 0.5% MOGN 13.13 11.44 OCT 12.50 1.63 $ -0.06 -0.5% 0.0% HTCH 31.00 28.00 OCT 30.00 2.75 $ -0.25 -0.9% 0.0% ENER 13.88 11.06 OCT 12.50 2.31 $ -0.51 -4.4% 0.0% PCTL 5.69 4.06 OCT 5.00 1.19 $ -0.44 -9.8% 0.0% NTMV 7.19 5.50 OCT 7.50 1.00 $ -0.69 -11.1% 0.0% NVDA 26.00 18.00 OCT 25.00 3.38 $ -4.62 -20.4% 0.0% * = Stock price is above the sold price (called-away). Comments/Observations: A great pick this week, Aerial Communications (AERL) was unplayable as they announced a merger with VoiceStream prior to the open on Monday. Picturetel (PCTL) and Netmoves (NTMV) are still open with excellent premiums available in January or April (for rolling forward) but if PCTL breaks $4.00 on a closing basis, you may consider exiting the play. Nvidia (NVDA) is at a key moment, taking a beating (no news) with the market and the current support may be its last stand. The October $25 call could be bought-back and the position rolled forward or exited on a technical bounce. Computer Task Group (TSK) was closed this week as the technical picture continued to weaken. Energy Conversion (ENER) has moved into a support area with BOP remaining strong. Hutchinson (HTCH) gapped down today but held at support, possibly forming a hammer bottom. MGI pharm's (MOGN) up-trend is still intact. Sofnet (SOFN) is still in a lateral consolidation but be wary of a new downside resolution. It is worrisome that ReadRite (RDRT) continues toward the August low (earthquake - no chips to make boxes and no need for drives?) while Cabletron (CS) just appears to be in a post-earnings dip. 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 by Return Not Called Stock Price Mon Strike Option Opt Open Cost RC RNC Sym Price Symbol Bid Intr Basis DUSA 14.50 OCT 12.50 QDU JV 2.75 440 11.75 6.4% 6.4% GETY 24.50 OCT 22.50 QGT JX 3.25 1262 21.25 5.9% 5.9% CCBL 32.88 OCT 25.00 LQE JE 8.88 500 24.00 4.2% 4.2% GCTI 40.38 OCT 35.00 QHF JG 6.38 621 34.00 2.9% 2.9% ASDV 25.50 OCT 22.50 QDV JX 3.63 108 21.87 2.9% 2.9% EGHT 5.00 NOV 5.00 EDQ KA 0.88 513 4.12 21.4% 21.4% COOL 8.53 NOV 7.50 QOO KU 1.88 106 6.65 12.8% 12.8% NEM 23.25 NOV 22.50 NEM KX 2.25 1025 21.00 7.1% 7.1% Company Descriptions ASDV - Aspect Development $25.50 *** Showing Strength *** Aspect Development is the global leader in e-Business solutions for Inbound Supply Chain Management. Aspect's solutions reduce product cost and operations expense and speed new product introduction by providing strategic decision support for product development, procurement, and operations to companies in all industries. Aspect has been recognized as one of the fastest- growing American companies in FORTUNE Magazine's annual survey of public companies. Aspect's technicals continue to improve and we favor the cost basis below the July high. OCT 22.50 QDV JX Bid=3.63 OI=108 CB=21.87 RC=2.9% RNC=2.9% Chart = http://quote.yahoo.com/q?s=ASDV&d=3m **** CCBL - C-COR.net Corporation $32.88 *** Deep ITM Play *** C-COR.net, founded over 45 years ago, designs and manufactures robust, high-quality network distribution products for two-way hybrid fiber/coax (HFC) networks. C-Core, which just completed a merger with Silicon Valley Communications, jumped in price when they announced that it has completed initial delivery of its new mini-fiber nodes to AT&T for deployment in the Salt Lake City trial of AT&T's LightWire(TM) Neighborhood Broadband System. OCT 25.00 LQE JE Bid=8.88 OI=500 CB=24.00 RC=4.2% RNC=4.2% Chart = http://quote.yahoo.com/q?s=CCBL&d=3m **** DUSA - Dusa Pharmaceutical $14.50 *** A New Drug *** DUSA is a company engaged primarily in the development of photodynamic therapy & photodetection, utilizing Levulan, the company's brand of 5-aminolevulinic acid, for various medical indications. DUSA'S key achievement of the second quarter was the receipt of an "Approvable" letter from the FDA concerning their NDA for Levulan Photodynamic Therapy in the treatment of Actinic Keratoses of the face and scalp. We favor a cost basis near support as DUSA consolidates from a recent new high. OCT 12.50 QDU JV Bid=2.75 OI=440 CB=11.75 RC=6.4% RNC=6.4% Chart = http://quote.yahoo.com/q?s=DUSA&d=3m **** GCTI - Genesys Telecommunication $40.38 *** New High *** GCTI is a provider of enterprise-wide platform and application software enabling organizations to integrate critical business information and computing resources with telephony and other telecommunications media. Genesys closed at an all-time high Friday on heavy volume. Posting record revenues last quarter, GCTI has been in a strong Stage II climb as traders speculate on future earnings. Contracts, partnerships, new products, up in a down market, Hmmm... OCT 35.00 QHF JG Bid=6.38 OI=621 CB=34.00 RC=2.9% RNC=2.9% Chart = http://quote.yahoo.com/q?s=GCTI&d=3m **** GETY - Getty Images, Inc. $24.50 *** Number One! *** Getty Images, with over 30 million photographs and more than 15,000 hours of film, is the leading e-commerce provider of imagery. They use extensive web-technology expertise to create E-commerce enabled sites that allow customers to quickly and easily access and purchase images. With the purchase of Kodak's Image Bank, Getty will double their inventory of images and of film footage, not to mention revenue. The stock jumped on the news, moving to a new September high. OCT 22.50 QGT JX Bid=3.25 OI=1262 CB=21.25 RC=5.9% RNC=5.9% Chart = http://quote.yahoo.com/q?s=GETY&d=3m **** COOL - Cyberian Outpost, Inc. $8.53 *** Stage I *** Cyberian Outpost is a global Internet retailer of computer hardware, software and accessories to the consumer and small office/home office marketplace. COOL just posted 2Q earnings beating estimates though posting a loss. Revenues increased over a 100% as sales more than doubled. This fall, Cyberian plans to launch the Internet store Tweeter@Outpost.com and was upgraded Thursday. NOV 7.50 QOO KU Bid=1.88 OI=106 CB=6.65 RC=12.8% RNC=12.8% Chart = http://quote.yahoo.com/q?s=COOL&d=3m **** EGHT - 8x8, Inc. $5.00 *** Speculation *** 8x8 designs, develops and markets highly integrated video communication semiconductors and associated software to OEMs of video communication systems. 8x8 moved up sharply in August after announcing it is teaming up with AG Communication, a subsidiary of Lucent, to provide an end-to-end IP Centrex solution. On Tuesday, 8x8 jumped again after announcing that it has linked its internal IP test network to the PacketCable "virtual" test network managed by CableLabs. That was quickly followed by an upgrade on Thursday. We favor the cost basis near the September low as the long term outlook improves. NOV 5.00 EDQ KA Bid=0.88 OI=513 CB=4.12 RC=21.4% RNC=21.4% Chart = http://quote.yahoo.com/q?s=EGHT&d=3m **** NEM - Newmont Mining Corp $23.25 *** Hedge Play *** 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. With the market now testing recent downside support, the outlook is grim for stocks and favorable for precious metals. Gold and gold stocks are gaining attention since gold traded intraday above $270 on Friday, showing strength in the face of the recent London auction. We like this relatively low ROI play on NEM, which was upgraded on Thursday, concentrating on downside protection, as gold is becoming overextended. NOV 22.50 NEM KX Bid=2.25 OI=1025 CB=21.00 RC=7.1% RNC=7.1% Chart = http://quote.yahoo.com/q?s=NEM&d=3m NAKED PUT SECTION ***************** Market Signals.. Analysts use many different technical indicators to generate signals when specific buy or sell parameters are met. Cycle analysis; the study of historically repetitive rhythms in price action, can also be helpful in initiating technical trades. The stock market historically moves in identifiable cycles. To be a successful investor, you must be able to determine the current phase of activity. Historical bottoms or cyclic lows are the most common signals that analysts attempt to uncover. These downside support areas are more reliable and take longer to develop than the cyclic highs. Using a long-term, monthly chart of the DOW, it is relatively easy to spot the current four year rhythm. The most recent bottoms occurred in 1990, 1994 & 1998. The big question is where will the next one occur. In any type of long-term technical analysis, it is important to understand that market cycles usually precede economic cycles. The many facets of our economy that determine the overall financial health of the nation are anticipated by the emotion of the market. Any study that compares key historical events with the movement of a major index will demonstrate how war, recession, or a presidential election can influence the current cycle. It is very important to be familiar with the common investment indicators used to determine the overall movement of the market and apply this knowledge as a practical part of your trading strategy. Here are some timing strategies that work well with cycle analysis. KEY REVERSALS: A daily price range with a high that is above the previous day's high and a low that is below the previous day's low. Often referred to as an 'outside trading range' day. Most analysts agree that a close above previous day's final price is a bullish signal. If this type of price action occurs during a bottom in the cycle, a reversal is likely in progress. DIVERGENCE; Buy and sell signals are often developed using oscillators such as RSI, MACD, Stochastic, and other types of momentum indicators. Divergence signals often occur at cyclic turning points. An example might be when an issue makes a substantial move then has a small short-term reaction, which is followed by a new low or high for the trend. The last price appears to perpetuate the overall trend but the actual outcome is often a major reversal. CHANNELS; These patterns, including multiple bottoms and tops, define markets that are established in trading ranges. They can make it easier to observe rhythms and establish opening prices more effectively. For example, a bullish trading signal will be apparent when an issue breaks-out above the high of a recent channel while a cyclic low is occurring. There are many other useful indicators and the successful trader will learn how to utilize every available tool and resource to gain an accurate sense of the current market cycle. Good Luck! SUMMARY OF PREVIOUS PICKS ***** Stock Price Last Mon Strike Opt Profit ROI Monthly Sym Picked Price Price Bid /Loss ROI NVX 7.19 8.00 OCT 5.00 0.38 *$ 0.38 21.0% 18.2% DUSA 15.50 14.38 OCT 12.50 0.88 *$ 0.88 21.6% 16.0% ENMD 23.50 21.69 OCT 20.00 0.81 *$ 0.81 12.1% 13.1% CYBX 18.69 16.06 OCT 15.00 0.69 *$ 0.69 15.4% 11.4% ASPT 15.44 15.50 OCT 12.50 0.38 *$ 0.38 10.5% 11.4% HELX 31.00 31.88 OCT 25.00 0.94 *$ 0.94 12.8% 11.1% MYGN 11.88 17.00 OCT 10.00 0.50 *$ 0.50 14.8% 11.0% IDTC 23.38 23.19 OCT 17.50 0.63 *$ 0.63 11.9% 10.3% REV 24.81 21.69 OCT 17.50 0.50 *$ 0.50 9.2% 9.9% CS 18.06 16.63 OCT 15.00 0.50 *$ 0.50 10.7% 9.3% AFCI 20.06 20.06 OCT 17.50 0.50 *$ 0.50 8.4% 9.1% NETA 20.00 20.13 OCT 17.50 0.50 *$ 0.50 8.3% 9.1% CEPH 20.44 17.63 OCT 17.50 0.44 *$ 0.44 7.8% 8.4% HLTH 34.94 39.75 OCT 25.00 0.69 *$ 0.69 9.0% 7.8% ORTL 18.88 16.00 OCT 15.00 0.44 *$ 0.44 10.5% 7.8% PRTL 23.06 18.63 OCT 17.50 0.50 *$ 0.50 9.8% 7.3% MK 10.81 10.25 OCT 10.00 0.31 *$ 0.31 8.1% 7.0% USWB 28.50 29.38 OCT 22.50 0.50 *$ 0.50 8.1% 7.0% INTU 103.00 94.06 OCT 85.00 1.31 *$ 1.31 5.3% 5.8% HELX 30.25 31.88 OCT 22.50 0.50 *$ 0.50 7.6% 5.7% PR 22.88 23.06 OCT 20.00 0.31 *$ 0.31 4.7% 5.1% KING 32.81 37.63 OCT 25.00 0.44 *$ 0.44 6.3% 4.7% CIEN 39.75 38.34 OCT 30.00 0.44 *$ 0.44 5.2% 4.6% * = Stock price is above the sold strike price (option expires). Comments/Observations: Most of this month's plays remain fairly deep ITM though Intuit (INTU) did approach the sold strike with the one-two punch of the market tanking and INTU's CEO resigning. CEPH, CYBX, ORTL, and PRTL are correcting and should be monitored as little help can be expected from the overall market. 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 COOL 8.53 OCT 7.50 QOO VU 0.38 354 7.13 13.6% TALK 12.00 OCT 10.00 QQK VB 0.38 2039 9.62 11.9% SUPG 21.44 OCT 17.50 UQG VW 0.50 25 17.00 9.7% CY 26.50 OCT 22.50 CY VX 0.44 146 22.06 6.3% GCTI 40.38 OCT 30.00 QHF VF 0.44 0 29.56 5.2% CSE 49.25 OCT 45.00 CSE VI 0.75 4665 44.25 4.6% AFFX 100.50 OCT 75.00 FIQ VO 0.75 28 74.25 3.6% AMAT 78.94 OCT 65.00 ANQ VM 0.56 3809 64.44 3.1% Company Descriptions AFFX - Affymetrix $100.50 *** Blue "Chip" Play *** Affymetrix is recognized as a worldwide leader in the field of DNA chip technology. The company has developed and intends to establish its GeneChip system as the platform of choice for acquiring, analyzing and managing complex genetic information in order to improve the diagnosis, monitoring and treatment of disease. A recent downturn in the market has produced favorable put premiums for those who would consider owning this issue (or being paid for trying). OCT 75.00 FIQ VO Bid=0.75 OI=28 CB=74.25 OI=3.6% Chart = http://quote.yahoo.com/q?s=AFFX&d=3m **** AMAT - Applied Materials $78.94 *** Own This One *** Applied Material manufactures, markets & services semiconductor wafer fabrication equipment & related spare parts. The company's worldwide customers include both companies which manufacture semiconductor devices for use in their own products and others which manufacture semiconductor devices for sale to the industry. The impact of the recent earthquake in Taiwan on chip makers was over-estimated and now it appears to be fairly minimal. Demand for more-sophisticated data communications such as wireless equipment will continue to fuel future profits for semiconductor makers. OCT 65.00 ANQ VM Bid=0.56 OI=3809 CB=64.44 ROI=3.1% Chart = http://quote.yahoo.com/q?s=AMAT&d=3m **** COOL - Cyberian Outpost, Inc. $8.53 *** Stage I *** Cyberian Outpost is a global Internet retailer of computer hardware, software and accessories to the consumer and small office/home office marketplace. COOL just posted 2Q earnings beating estimates though posting a loss. Revenues increased over a 100% as sales more than doubled. This fall, Cyberian plans to launch the Internet store Tweeter@Outpost.com and was upgraded Thursday. OCT 7.50 QOO VU Bid=0.38 OI=354 CB=7.13 ROI=13.6% Chart = http://quote.yahoo.com/q?s=COOL&d=3m **** CSE - Case Corp $49.25 *** Merger Date Approaching *** Case Corporation is a leading worldwide designer, manufacture and distributor of agricultural and construction equipment, and offers a broad array of financial products and services. The proposed merger between Case and New Holland is expected to close in the fourth quarter of this year pending regulatory approval. Case shareholders will receive $55 per share in cash. Together, they will create a $12 billion entity that will reach more farm and construction equipment customers that any other company in the world. OCT 45.00 CSE VI Bid=0.75 OI=4665 CB=44.25 ROI=4.6% Chart = http://quote.yahoo.com/q?s=CSE&d=3m **** CY - Cypress Semiconductor $26.50 *** New IPO *** Cypress Semiconductor designs, develops, and manufactures a broad range of high-performance integrated circuits. The company sells to the networking, military, computer, telecommunications, and instrumentation application markets. CY is up partly because of their interest in QuickLogic, which recently filed to offer 6.6 million shares, including Cypress' stake, at $8 to $10 a share. Cypress is expected to earn up to $33 million and will own more than half a million shares after the offering. A solid company regardless, with earnings forecast to double in the next year. OCT 22.50 CY VX Bid=0.44 OI=146 CB=22.06 ROI=6.3% Chart = http://quote.yahoo.com/q?s=CY&d=3m **** GCTI - Genesys Telecommunication $40.38 *** New High *** GCTI is a provider of enterprise-wide platform and application software enabling organizations to integrate critical business information and computing resources with telephony and other telecommunications media. Genesys closed at an all-time high Friday on heavy volume. Posting record revenues last quarter, GCTI has been in a strong Stage II climb as traders speculate on future earnings. Contracts, partnerships, new products, up in a down market, Hmmm... OCT 30.00 QHF VF Bid=0.44 OI=0 CB=29.56 ROI=5.2% Chart = http://quote.yahoo.com/q?s=GCTI&d=3m **** SUPG - SuperGen $21.44 *** Own This One *** SuperGen is a pharmaceutical company dedicated to developing products intended to treat life-threatening diseases; cancer and blood cell disorders, and other serious conditions such as obesity. SuperGen is developing its portfolio of anticancer drugs through the development of its generic, proprietary and Extra-TM- products. Share values spiked after analysts started coverage on the sector and they recently completed $8 million of private placement to a group of institutional investors. Nice technicals on this issue with support near the cost basis. OCT 17.50 UQG VW Bid=0.50 OI=25 CB=17.00 ROI=9.7% Chart = http://quote.yahoo.com/q?s=SUPG&d=3m **** TALK - Talk.com $12.00 *** Still Waiting - Wondering *** 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 VB Bid=0.38 OI=2039 CB=9.62 ROI=11.9% 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. 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