The Option Investor Newsletter Tuesday 9-28-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com Published three times weekly, Sunday, Tuesday, Thursday evenings. ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 9-28-99 High Low Volume Advances Decline DOW 10275.53 - 27.86 10310.04 10081.13 881,303k 1,096 1,893 Nasdaq 2756.25 - 5.50 2763.75 2694.74 1,103,400k 1,435 2,475 S&P-100 675.46 - 0.05 677.51 659.99 Totals 2,531 4,368 S&P-500 1282.20 - 1.11 1285.39 1256.29 36.6% 63.4% $RUT 418.49 - 3.37 421.86 414.53 $TRAN 2856.98 - 5.47 2882.23 2822.47 VIX 26.97 - 0.30 30.80 26.02 Put/Call Ratio .68 ************************************************************* Abbey Joseph Cohen, Ballmer, Greenspan, Acompora....Goldilocks and three bears. Goldilocks got burned today by the negative market outlook announced by Ralph Acompora today. Ralph the mouth, seized another pivotal market day to try and make a bigger name for himself by announcing hi short term target for the Dow was now 8900-9200. ZAP! The struggling market never had a chance. Ralph said that market internals were breaking down at an alarming rate, a fact we discussed on Sunday, and even though he was bullish long term, his short term outlook was very bearish. The market went into a spin and broke under the 10100 level to 10081 before bargain hunters could stop the slide. Down -218 at 1:30 the recovery came on strong volume and pushed the Dow back into positive territory just before the close. A miraculous recovery in the eyes of some, considering the volume of economic events and a FOMC meeting in the next five days. The spark for the rebound was the expectation for the Bank of Japan to announce a new dollar/Yen program late this afternoon. Sorry! The BOJ announced late in the afternoon that they felt they were doing all that was necessary to inject liquidity into their economy and again called on the G7 to make a move. This may not play well tomorrow. You will recall that no one expected the BOJ to do anything but everyone else was hoping that after the G7 Japan would feel pressure to do something. Looks like it is not going to happen. The downhill slide caused the Dow to again trade under it's 200 DMA but the rebound brought it back to a dead stop right on the line. (10275) The last three weeks has seen the Dow trade in a down trending channel which also tops out at 10300. Again, and I hate to seem like a broken record, but we are at a critical point. In order to break out of this trend the Dow needs to trade over 10400 and close over 10350 tomorrow. Failure to trade over 10400 or even hold over 10300 will doom us to several more days of bungee trading. A close under 10200 tomorrow would be very negative and could bring Ralph's prophecy to pass. If you have graduated from Maalox to Dramamine and are seatbelted firmly into your trading chair then these big swings are perfect for producing trading rallies. Some of the chat rooms today were talking about the big bucks these moves produce. If you are following a specific stock, like QCOM, then you should be familiar with it's trading pattern. A gap down of -$8 at the open on no material news and then a steady rising intraday chart should set off entry point alarms. These -200 point drops cause recent winners to sell off strongly on profit taking but when the market starts rebounding they are sometimes the fastest gainers. QCOM closed positive after the -$8 at the open. If you are a holder and not a trader then don't try this at home. Twice now the market has traded in the -10% correction range and twice it has rebounded. This is good. Today's rebound was much stronger than the Friday event. If traders are convinced that the -10% correction took all the excess out then we could move up from here. The futures are up strong at +3.00 but we have a lot of dark before morning. Remember the bear trap rally on Monday? The strong technical bounce at the open, slowly bleeding off all day as sellers continue to outweigh buyers. Tomorrow could be the same. The advance/decline line is still dropping like a rock with a three declines for every two advances today. The new highs/lows were still very negative with 40 new highs to over 100 new lows. The earnings outlook is still good but we are only half way through the pre-warning season. After the close today Gillette and Safeco both announced earnings warnings. Neither appeared to have any impact on the futures so investors are still not too worried about random warnings. The Internet sector is still hot and may be holding up the Nasdaq. CMGI announced earnings that beat the street last night and said that next year earnings my grow by +300%. This powered CMGI into positive ground again today after a huge gain yesterday. YHOO, which announces next week, continues to show good strength gaining another +3.31 today. YHOO also dropped -$8 intraday and provided yet another entry point for target shooters. Remember, YHOO normally drops AFTER earnings, so don't plan on holding too long. The real Internet superstar continues to be AOL. Up +$28 since 9/21, AOL just refuses to pull back and let us in. We have a policy that we do not recommend stocks that have spiked the day before. AOL has fit that model for five days. Will they continue up? Probably so but the options have so much expectation built in that the premiums are very overvalued. Any future pullback by AOL would immediately subject the call buyer to sudden losses as the premium instantly evaporated. Playing stocks on a rocket run should only be done by very experienced traders. But you say, how can you lose money on a stock that keeps going up? Answer: Nothing keeps going up and the last buyers in will lose their shirts when it finally stops. Buyer beware. The game plan for tomorrow should be packed with caution. Yes, the markets could rebound from here because of the -1000 point drop. Yes, the drop on Friday and the drop today form a classic double bottom. To be a valid DB the days need to be close together. The sell off steep and the second day needs to take out the low from the first day and rebound on heavy volume. All of which happened today. Volume could have been better and traders would have liked to see the Dow finish positive. If we rally at the open and then flat line or trend down the rest of the day then keep out. If we rally at the open and continue moving up during the day with advancers beating decliners by a strong margin then it is probably buyable. Just remember the flood of economic reports and FED meeting next week. There is a better than 50/50 chance that we will be having another Dow 10,000 party soon and they will not be drinking champagne. Be very careful and if you must trade then you must sell too soon. Jim Brown Editor ps: Don't forget about the fall seminar series. You need to register now in order to get the cheap airfares. Here are the fall dates: Oct 17/18 Chicago Oct 24/25 New York Nov 8/9 Miami Nov 14/15 San Francisco For complete details http://www.OptionInvestor.com/seminar/ There is a 100% money back guarantee and you can take a friend for free. What else could you ask for? *************** Market Posture *************** As of Market Close - Tuesday, September 28, 1999 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,500 11,320 10,276 BEARISH 9.23 SPX S&P 500 1,350 1,420 1,282 BEARISH 9.16 OEX S&P 100 675 735 675 BEARISH 9.24 RUT Russell 2000 440 465 418 BEARISH 9.14 NDX NASD 100 2,320 2,380 2,428 BULLISH 9.03 MSH High Tech 1,120 1,180 1,241 BULLISH 9.03 XCI Hardware 1,035 1,050 1,071 BULLISH 8.24 CWX Software 750 800 862 BULLISH 9.03 SOX Semiconductor 480 525 525 Neutral 9.24 NWX Networking 555 585 593 BULLISH 9.17 INX Internet 450 510 486 Neutral 9.24 BIX Banking 690 710 575 BEARISH 7.23 XBD Brokerage 410 440 366 BEARISH 7.23 IUX Insurance 645 660 541 BEARISH 7.23 RLX Retail 915 960 818 BEARISH 7.23 DRG Drug 365 390 343 BEARISH 9.16 HCX Healthcare 745 785 683 BEARISH 9.16 XAL Airline 180 190 134 BEARISH 5.21 OIX Oil & Gas 285 305 288 Neutral 9.16 Posture Alert The tug-of-war continues, with the bears spoiling the party on Monday afternoon, followed by Tuesday's reversal led by the bulls. Lots of volatility and activity, however, very little net result. Tuesday's late day rally was lead by America Online and the Internet sector, which continues to make gains. Oil & Gas, followed by the (very weak) Insurance sector led Tuesday's losers. A detailed description of our Market Posture and its applications can be found at: /members/marketposture *************** Market Sentiment *************** Tuesday, September 28, 1999 Say What? So, one of the biggest bulls on Wall Street revised his Dow forecast downward. Big deal! He sure looked a lot smarter before all the buy programs kicked-in this late afternoon! Can we have an office pool; to see how many days it is before he is back in the news pounding the table for the bulls? Last time he made comments like this, he did a 180-degree reverse 10 days later. Oh well. Many of the leading technology indexes held support, and bounced very nicely, some even off of key benchmark levels. Whether this holds, remains to be seen, but the last two days have been an absolute wash for bulls and bears alike (unless you sold at the top and bought at the bottom). Will we see some follow through tomorrow morning, possibly? Will we see sellers coming into future rallies, absolutely! The way current sentiment appears, the potential of downside reversals invoke a greater reaction than upside reversals. With the Dow and S&P 500 breaking 200-day moving-averages, bulls are a little quicker to lock in any profit they can, not to mention the portfolio manager whose bonus is tied to the performance vs. his/her peers. For those of you who have been following the Volatility Index, you have probably made some nice trades as of late. Last week, the VIX held ground at the 32 level, which it has done numerous times in the past. During today's action, the VIX was up +3.53 intra-day, which is a very big move, especially with no real news event to propel this market lower. The high was 30.80, which of course, presented a very good buying opportunity. Continue to watch the VIX, because it is a non-emotional, excellent trading tool. In terms of the Pinnacle Index for the OEX, the PI number for 650-670 did decrease dramatically during the last two days. However, due to the overwhelming negative sentiment (and still a high PI), we still view this area as excellent support. BULLISH Signs: Investor Intelligence: As a contrarian indicator, the amount of Bullish investors is at a recent low, and bearish investors is at a recent high. Mixed Signs: Volatility Index: The VIX is in the danger zone; however, it has shown good support in the past around 30, then 32-33, so should this level hold, it may be a good buying opportunity. Interest Rates: The yield on the 30-yr Treasury is below the 6% benchmark, which is a bullish sign for stocks. 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 be 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 % Alert Friday, July 16 32,285 - Friday, July 23 62,455 +93.4% Friday, July 30 74,895 +131.9% Friday, Aug. 06 113,258 +250.8% Friday, Aug. 13 117,620 +264.3% September Expiration Cycle OEX OTM Call Analysis (Open Interest September 690-780) Date Open Interest Change % Alert Friday, August 20 41,346 - Friday, August 27 78,026 +88.7% Friday, September 3 104,700 +153.2% Friday, September 10 144,711 +249.9% October Expiration Cycle OEX OTM Call Analysis (Open Interest October 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 Tues Indicator (9/24) (9/28) Pinnacle Index (OEX): Underlying Support (680-700) 1.1 1.4 Underlying Support (650-670) 22.6 8.6 Put/Call Ratios: CBOE Total P/C Ratio .6 .5 CBOE Equity P/C Ratio .5 .5 OEX P/C Ratio .9 1.0 Peak Open Interest (OEX): Puts 640 600 Calls 700 700 P/C Ratio .93 .91 Market Volatility Index (VIX): CBOE VIX 26.97 Investors Intelligence: Bullish 41.50% * Bearish 31.40% * The Power of Sentiment Analysis It has often been said that the crowd is right during the market trends but wrong at both ends. Measuring and evaluating the sentiment of the crowd, therefore, can give savvy option traders a decided edge. OEX Pinnacle Index Friday Tues Benchmark (9/24) (9/28) Overhead Resistance (680-700) 1.12 1.39 OEX Close 672.80 675.46 Underlying Support (650-670) 22.56 8.56 Average ratings: Resistance levels 2.0 / Support Levels .5 What the Pinnacle Index is telling us: From a contrarian standpoint, underlying support has exploded (650-670) and overhead resistance is light (680-700). Put/Call Ratio Friday Tues Strike/Contracts (9/24) (9/28) CBOE Total P/C Ratio .61 .54 CBOE Equity P/C Ratio .53 .46 OEX P/C Ratio .90 .99 Peak Open Interest (OEX) Friday Tues Strike/Contracts (9/24) (9/28) Puts 640 / 7,676 600 / 8,344 Calls 700 / 10,340 700 / 11,650 Put/Call Ratio 0.93 0.91 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 28, 1999 26.97 Investors Intelligence Major Percent Percent Date Turning Point Bullish Bearish October 97 Bottom 22.0 48.3 July 20, 1998 Top 52.0 24.0 October 8, 1998 Bottom 38.5 42.7 January 11, 1999 Top 58.3 30.0 March 4, 1999 Bottom 49.1 32.5 Sept 1, 1999 42.9 31.9 Sept 8, 1999 44.1 30.5 Sept 15, 1999 41.5 31.4 * Please view this in COURIER 10 font for alignment ************************************************* CHANGES THIS WEEK Daily Results Dow 10275.53 24.06-27.86 -3.80 Nasdaq 2756.25 21.34 -5.50 15.84 $OEX 675.46 2.71 -0.05 2.66 $SPX 1282.20 5.95 -1.11 4.84 $RUT 418.49 4.77 -3.37 1.40 $TRAN 2856.98 -16.27 -5.47-21.74 $VIX 26.97 -2.27 -0.30 -2.57 Calls Mon Tue Week QCOM 193.63 3.81 0.31 4.13 Looking to increase shares ITVU 37.38 3.50 -0.38 3.13 Great relative strength SUNW 93.00 3.75 -0.94 2.81 12-month target at $110 XMCM 46.63 1.25 1.38 2.63 New, Internets are strong NOK 90.75 -0.06 2.50 2.44 New, Technical breakout EMC 71.38 1.44 0.88 2.31 Great intraday recovery RNWK 101.13 3.81 -1.75 2.06 Hot sector = hot stock YHOO 184.69 -1.94 3.31 1.38 Final run for earnings GE 118.38 2.00 -1.25 0.75 Dropped, sinking Dow too much SNE 149.25 1.75 -1.44 0.31 Recovering with the Dollar NTAP 72.75 -1.63 1.88 0.25 Waiting for direction ADI 56.31 -0.06 0.06 0.00 Even-steven for the week CSCO 68.38 -0.88 0.25 -0.63 Dropped, unable to rally ELNK 45.31 -2.22 -0.03 -2.25 ISP's are the place to be DCLK 113.88 2.28 -5.16 -2.88 Big intraday swings to play VOD 227.00 -3.50 0.00 -3.50 Final leg of split run INKT 125.06 -4.75 -0.19 -4.94 Dropped, underperforming EBAY 138.00 -7.31 -0.75 -8.06 Walking on thin ice Puts GENZ 45.31 -1.50 -3.69 -5.19 New, technical play LLY 62.94 -2.00 -0.25 -2.25 Broke support at $65 KO 50.75 -0.13 -0.25 -0.38 Dow is hindering a recovery WLP 65.25 -0.06 -0.31 -0.38 Dropped, mission accomplished WPI 29.38 0.00 -0.19 -0.19 Moving with the markets GPS 32.25 0.19 0.06 0.25 Dropped, basing at $32 DD 59.88 -0.31 1.06 0.75 New, sinking with Dow 30 JNJ 91.50 2.00 -0.50 1.50 Will bounce of $90 last?? DOW 108.69 0.94 0.88 1.81 Chemicals looking weak PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** INKT $125.06 -0.19 (-4.94) On Monday, the internets made a run we all expected, clawing their way back to levels established earlier in the month. Unfortunately, our play decided to go against the grain and ended the day in the red. On Friday, the stock closed on its support at $130 where we were expecting a bounce, however it never developed. Instead the stock broke through its support and continued its downward trend, which started back on September 22. During this time period many Investors should have been stopped out of their positions ending the play. Due to the continuing weakness in INKT and its failure to find support, we decided to end the play and concentrate our efforts elsewhere. GE $118.38 -1.25 (+0.75) The bears were just too strong today, shaking investors nerves and adding to the confusion that has been present for quite some time. Shareholders of GE were not excluded as investors continued to sell off shares throughout the day. The stock dipped below its 10-dma at $118, which is a bad technical sign for the stock. $118 should have acted as the support level for GE, but the stock managed to break through with little resistance. Current investors should have been taken out of their positions with today's drop in the stock. Since GE could not hold this support and many investors were stopped out of their positions we decided to end this play and concentrate our efforts elsewhere. CSCO $68.38 +0.25 (-0.63) That does it - another headfake by CSCO. Yes, we realize that the NASDAQ is down 200 points in the last 2 weeks and that CSCO makes up the third largest % of it, right behind INTC and MSFT. However, it just isn't profitable to remain in the play waiting for the reversal. It isn't moving fast enough and looks like its struggling to keep its head above water. After all, this is the 3rd day of trading back under its 10-dma. We could forgive it if the volumes were low, but volume has been rising as the price has been edging down, which isn't a good sign. Thus we're dropping CSCO tonight. PUTS: ***** WLP $65.25 -0.31 (-0.38) Fear is back and taking advantage of the markets once again. The negative momentum of the broader markets should have been great for our put play. Unfortunately, the stock has showed support at $65 and refuses to release its grasp. We have continued this play because of weakness in the stock and the long-term healthcare sector. The sector remains in poor standings however the stock has found firm ground, marking the end of our play. Thanks to current market conditions there are several put plays available, therefore we have decided to drop this play for others with more potential. GPS $32.25 +0.06 (+0.25) Gap seems to have lost its downward momentum amongst too many kind words spoken as of late. Despite Tuesday's moody market, Gap seemed to hold its own throughout the day. We have successfully played Gap at the peaks and valleys and believe it is time for a bit of a climb as our technical indicators point in the direction of a positive trend. Although Gap may drift a bit in days to come, without any news to report, holidays looming just around the bend, and what may be a recovering sector, it is best to step out and play something with more definitive movement. ***************** PICK NEWS - CALLS ***************** ADI $56.31 +0.06 (+0.00) Stocks that are added to the major indexes such as the S&P 500 have to be bought by all the money managers who run these funds, which is the case with ADI as of there recent announcement. So why isn't ADI giving us higher prices? Well, its called uncertainty, a tug of war between buyers and sellers. It did surge on Monday to an intraday high of $59.19 which would have been the time to take a short-term profit. Trailing stops become so important in a market that can be up 100 points one minute and down 100 points the next. Not only was the overall market in a fickle mood, but the PHLX semiconductor index has gone through major intraday swings in the last two days as well, bouncing from 511.00 on the low side, to 533.64 on the high side, only to close right in the middle at 525.21. ADI today rallied off of the lows of the day $54.75, to close up 0.06 at $56.31, flat for the week. You may notice a strong bottom building at $55. If we have reached a bottom in the overall market and the buyers on the street have returned, look for ADI to continue to hold up strong. Today's close could be a buying opportunity, if you were stopped out earlier in the week. SUNW $93.00 -0.94 (+2.81) The bullish excitement propelled SUNW even higher on Monday. The stock set another new high at $94.88 on very strong volume with over 11.34 mln shares being exchanged. CSFB reiterated a Buy rating citing "the company has become the thought and technology leader in the emerging service provider economy". They also raised the 12-month target price on SUNW to $110 and the fiscal 2001 EPS estimates to $2.15 from $2.03 specifying that "Sun's Network Service Provider division should grow by 30 percent - 40 percent over the next two years as the company partners with network equipment providers and helps wireless carriers converge with the Internet". Share prices may also have been influenced by the company's announcement on Monday that there has been a significant rise in sales revenues of Oracle Applications sold via its SUN(TM) platform in the past 12 months with additionally new customers such as Excite@Home, GoTo.com, Living.com, and UPS. Even in today's unnerving market, our momentum play showed strength as it used its 100-dma ($92.24) as a bottom support level before attempting a rebound back towards overhead resistance late afternoon. Trading volume was again about 65% above the norm and this is definitely a good sign. Good news too came from Sanford Bernstein & Co who started new coverage on SUNW with a Market Perform. QCOM $193.63 +0.31 (+4.13) QCOM certainly participated in yesterday's market uptrend gaining $3.82 however, only on less than 50% of its ADV. Volume did pick up a bit today as the stock continued to flirt with its overhead resistance at $199. Good news came after the bell today as Qualcomm announced it would be seeking shareholders' approval to increase the number of authorized shares! According to Julie Cunningham, VP of Investor Relations "February 2000 would be our earliest opportunity to have more shares authorized" considering QCOM just split 2:1 in May. Recall QCOM became a split candidate recently after it soared above the $155 mark. Earnings have now been confirmed for November 2nd. The numbers are expected to meet or beat Streets' estimates and again this was one of the factors which first fired up this momentum play. But five weeks can be a long time in the options market so be careful. Confirm the continued momentum and look for convincing volume before initiating new positions especially ahead of the Fed meeting next week. Also in the news, AG Edwards downgraded QCOM from a Buy to an Accumulate but offered no comment. ***************** CALLS CONTINUED IN SECTION TWO ***************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "subscribe@OptionInvestor.com" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 DISCLAIMER ********** This newsletter is a publication dedicated to the education of options traders. The newsletter is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The newsletter picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. The newsletter staff makes every effort to provide timely information to its subscribers but cannot guarantee specific delivery times due to factors beyond our control.
The Option Investor Newsletter Tuesday 9-28-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ***************************** PICK NEWS - CALLS - CONTINUED ***************************** ELNK $45.31 -0.03 (-2.25) ELNK pulled back yesterday after making a valiant effort at the open to break through opposition at the 100-dma ($51.53). However even with the downdraft yesterday it sustained a level above $44 which may be evolving as new support. Today's performance seems to confirm that yes, there may have been a little profit- taking and but certainly not a signal to exit. Technically ELNK is above its 10-dma ($42.49) and today's volume dissipated to 669 K indicating there was not a long-line of sellers looking to dump the stock. Also in the news today, Scott & Stringfellow stepped up to the plate for ELNK and started new coverage on the stock with a Strong Buy rating. This week will be treacherous ahead of the Fed meeting so think twice before beginning any new plays. If you do, keep stops in place and expect lots of volatility. SNE $149.25 -1.44 (+0.31) In a reaction to the market fight and flight response today, Sony lost some ground. With renewed concerns of interest rate fears and the market "officially in correction mode briefly" according to Bloomberg reports, we continued down below our 10-dma of $151. But SNE holding just below the 10-dma is common if you look at the trends from the past six months. Japan is slowly starting to improve however, as the Nikkei has gained for the last two days to close above 17,000. The dollar gaining ground on the yen has also helped to support SNE. Also the Japanese have decided to drop their fixed commission structure on security trades as of October 1st. This in hopes of attracting a greater amount of Japanese savings into securities. Currently only 10% of Japanese savings are in stocks and this move should help attract capital to the market, thus helping Sony. A report on the trend of new imaging technologies bodes well for SNE. Citing the increased sales in digital camera's and Sony's success in this area, analysts anticipate the performance and market share to continue. We are watching the $146 level to hold on the dips. Any move below this support should signal your stops to take you out. RNWK $101.13 -1.75 (+2.06) Thank goodness for some computer buy programs today. That's what saved the markets from a continued slide and allowed RNWK to finish the day above the 10-dma support of $98. What will help us with RNWK, is the fundamental reasons for our play. Good earnings outlook, momentum, trend, and it is a prime candidate for a stock split announcement. RNWK continues to hold it's chart pattern nicely, despite negative pressures from the market. RNWK last split 2:1 in May. Currently RNWK is a candidate for another split above $90 and with more than enough shares authorized, we could see another 2:1 announcement around earnings. Be cautious through the next week as we approach the Oct 5th Fed meeting. After this, we should see some strength and start an earnings run, market willing. Projections for RNWK, and the earnings outlook in general, are better than normal for October. This should be the catalyst for our play. Josepthal and Lyons initiated coverage of RNWK today with a Buy rating. EMusic is also being very helpful to RNWK, by offering free software and music to allow users to experience the benefits of online digital music. This will help boost RNWK's sales. Tread lightly now, as the market fell below the 200-dma, a bearish sign. But RNWK looks strong and should forge ahead given the right conditions. EMC $71.38 +0.88 (+2.31) EMC has been one of the stocks defying the odds lately. Given the tremendous pressure that the market and analysts have given us with computer hardware warnings, EMC continues to show strength. Investors used the weakness of today's drop to buy the dip at EMC's low of $68.38 and EMC shot up over $3.00 from the low. The demand and potential for EMC's storage solutions are phenomenal considering the Internet growth potential. EMC shows a very historical pattern of providing investors with a great earnings run starting two weeks prior to the date. Considering estimates of $0.27/share vs.$0.19 , we should expect this trend to continue and expect the run to start full swing next week. Recent news indicates companies continuing to use EMC as solutions for their storage needs and the Data General purchase continues to acquire confidence of EMC's market penetration ability. We feel there is a buying level at the 10-dma of $70.50 but use caution. In this market enviromment, you have to plan your entry and exit points carefully. ITVU $37.38 -0.38 (+3.13) The market had a major panic attack today, as investors worried about inflation and interest rates. ITVU investors appeared to sense that this was an over reaction and, in anticipation of it's historical earnings run, remained relatively quiet. It's reaction kept our trend momentum alive as we got a positive 12/20/6 momentum break out. ITVU should a strong swimmer given our earnings play momentum however, when a market acts as the current, even the strongest swimmers fatigue during time. Since the market gave us an extremely bearish signal today with a drop below the 200-dma, and an official 10% correction for a short period, investors must be extremely careful. Many analysts are expecting the Dow to break below 10,000 by Friday. This means stops must be in place to protect profits and capital and you must monitor ITVU closely to detect the turn. ITVU was noted as the leader in streaming technology in an article stating that Psainc has selected them to deliver the media information to it's web site PSAZZ.com, for e-commerce travel. ITVU has the potential and is at a good position to buy for the run, but be sure to confirm a positive direction in the market and the stock before playing. NTAP $72.75 +1.88 (+0.25) After Friday's blowout to the downside NTAP seems to be looking for a direction to go. The past two days have seen NTAP basically trade sideways. Volume has been anemic, averaging less than 350K each day. Besides the tone in the broader markets, what makes NTAP difficult to trade at times is the lack of conviction supporting the moves in the stock. No one wants to buy or sell. For some types of traders this kind of action provides great opportunities to trade off intraday support and resistance levels. For our purposes we would wait to see a solid move accompanied by volume before entering a new play. We may not see such a move until after Monday's FOMC meeting. NTAP has been holding up as well as others in its industry. With the recovery in the broader markets this afternoon, some may be tempted to jump in with both feet if we see a bounce continue in the next day or two. Our thought would be to keep your eye on NTAP but stay in cash until we see some new buying develop. NTAP continues to trade below its 10-dma at $73.56, which suggests there may be more profit- taking to come as well. Be patient, as a missed opportunity is better than a loss of capital any day. DCLK $113.88 -5.15 (-2.88) Since joining are call list on September 19th, DCLK has been stuck in a $10 trading range, between $110-$120. Monday DCLK started out on fire looking like it was off to the races, making a high at $121.50 in the first hour of the session. In a pattern similar to last week traders decided to take their profits and shares of DCLK began to slide. Today DCLK continued to drop back to the $110.25 before a few buyers stepped up to the plate. DCLK is another stock that is looking or waiting to find a direction. Technically DCLK did manage close just above its 10-dma which stands at $113.54. Even though shares of DCLK do seem to be consolidating in a $10 range, at this time we would still look for the Internet advertising company to break out to the upside. Patience will be the key, as we need to see fresh buying enter the market. Earnings are scheduled to be released October 8th,(not confirmed) and we could begin to see an earnings run at any time. At this time cautious investors may want to keep your powder dry and have patience, until we see some conviction develop one way or the other. Nevertheless, a $10 range can be extremely profitable to trade if you are comfortable with more risk. VOD $227.00 +0.00 (-3.50) We have just a few more days for VOD to run before its split. Again VOD splits on Monday, for owners of record on Friday, October 1st. That means for our purposes we only have until Friday to profit from a split run. After starting the week off attempting to make its way higher shares of VOD hit $231.56 and promptly rolled over. No real profit- taking, just no conviction. As we mentioned Sunday, the area of support was at $225 where VOD has created a strong bottom. We saw the broader markets recover late in the session today which could carry over into Wednesday. If it does, it may provide us with an opportunity to join in on the last few days of the split run. We would urge caution here as well. Pick your points carefully and remember you will want to be out by the close of business on Friday. YHOO $184.69 +3.31 (+1.38) How's your neck? Suffering from a case of whiplash? YHOO reached as low as $175 yesterday and touched $178 today but it's darn hard to find a bottom on this for a good entry. The answer seems to be "at any level that is $6 below its high of the day". Remember YHOO is on an earnings run, in which they are expected to report $0.09 per share next Tuesday, October 6, the day after the FOMC meeting. Of course, we never encourage that you hold a position over earnings, especially when it's preceded by the possibility of an interest rate hike. You may want to consider taking your profits off the table by the close on Friday to protect them from the uncertainty leading up to the event. Frankly, we recommend caution opening positions this week, but if you must, at least buy the dips in the mid-$170 range, as there is some support there. YHOO continues to remain well above its 10-dma, even on the dips. EBAY $138.00 -0.75 (-8.06) Almost a candidate for the bone yard tonight, EBAY had a miraculous recovery today along with the rest of the Internet sector, as it bounced off $132 and $135 on 2 occasions throughout the trading day. By the way, this was a clear violation of the $136-$138 support we'd referred to on Sunday, which makes this play suspect. EBAY closed on the thin gray line today at $138, leaving us a bit edgy on this one. Our reason for keeping it tonight is not to convince you to play it, but to convince you to keep it on the radar screen for another day or two. Why? We think that with YHOO running into earnings following CMGI's super performance in the earnings department last night, EBAY will move in sympathy. But if the market has other plans for these three, just move on to the next play. Let's see what happens tomorrow and Thursday. It could be up, market willing. Just don't get sucked in thinking another dip was just as buyable as the last. That hasn't been the case for two weeks. **************** PICK NEWS - PUTS **************** LLY $62.94 -0.25 (-2.25) With support at $65 out of the way, it was an easy journey to the next support at $62. This is exactly what we were looking for and the overall weak bias in the market has helped us achieve our goal. LLY bounced off right $62 as expected and if you closed your position, you did so with a nice profit. There was no recent news to drive LLY lower as it is part of the panic selling that has gripped the markets lately. Now it is time to decide if LLY has the momentum to mount even further losses. Tuesday's rebound in the broad markets was impressive and will likely carry over to Wednesday. At this point, we would expect LLY to come back with the markets so tighten your stops or look for an exit point. The rebound could drive Lilly back to new resistance at $64.50-65.00. Fortunately for us, LLY's 5-dma has been strong resistance for two weeks and it rests at $64.61. Friday, LLY turned up at the end of the day as the market rallied. Yet there was no follow through on Monday. Next stop could be $60.56, the recent low in mid August. Today's intraday action could be a repeat. If LLY closes above the 5 or 10-dma then we will re-evaluate our play for a new entry point or a drop. Keep your eyes open to sector or company news to potentially influence our play. DOW $108.69 +0.00 (+1.81) The shares of Dow Chemical have bounced back slightly in the last two trading days, it sold off in the morning today with the rest of the market to trade as low as $107. As the selling pressure diminished, DOW recovered to close the day +$0.88. In the news today the company came out with a press release announcing its progress and challenges in balancing economic growth with environmental integrity and social responsibility-known as the "triple bottom line". This was reported to be a courageous effort but was unlikely to affect today's share price. Going forward, technically DOW remains weak, trading well below the 200-dma near $110.00. With petroleum prices remaining high and Q3 earnings expected to be below expectations, this should keep the pressure on the shares and continue the downtrend in current market conditions. A break above the 200-dma would trigger a short covering. WPI $29.38 -0.19 (-0.19) In a confusing day on Wall Street the shares of Watson Pharmaceuticals Inc continued the downtrend, dropping to another 52-week low of $28, before rebounding off to close the day at $29.38, down only $0.19. The strength in the shares was probably due to program buying in the overall market and should continue the downtrend going forward. The company has recently reported that third-quarter profit will miss forecasts by 6 or 7 cents per share. The company is due to report on 11/04, which is a little over a month away. We expect the shares to continue to drift to lower lows ahead of the earnings report. If the shares trade to below the $27 level, this should trigger additional weakness in WPI. Cautious players may want to wait for a bounce off the 10-dma at $31 but it remains to be seen if the market can recover to that level. JNJ $91.50 -0.50 (+1.50) JNJ gave us the bounce we mentioned Sunday. Technically JNJ is probably still oversold, but we will stay with our put play until the market tells us different. The 10-dma is sitting at $93.75 and we would need to see a close over that area with some strength or volume supporting it. As of now it's simply not there. There has been no news for the industry or for JNJ itself that would lead us to believe that the decline in the drug industry is over. Even with the bounce in the broader markets yesterday, shares of JNJ only gained $2 on volume of 2.9 mln shares. It appeared as though it was more "short-covering" rather than new buyers coming into the market. If you are in a play on JNJ, you should keep your stops tight as JNJ could continue its bounce if we see the recovery in the broader markets continue for a day or two. We do believe at this time that any bounce in JNJ will be short lived and will provide us with opportunities to buy puts again. KO $50.75 -0.25 (-0.38) And the descent continues. Let's recap from the original write-up the reason for the play. "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." This is a KO problem, not a market problem and Gillette just joined the ranks of flagging revenue giants after today's close. These two could rub off on each other, taking them both down. Even so, support based on OI for KO is at $50, so use caution if opening this play. Today would have been a great day to enter the play - it was textbook perfect. . .until the end of the day when the market reversed course. Even KO can fake us out. Yes, this is a conservative play, but if you are even more conservative, wait for the fall below $49.50 with conviction before entering a new play ************** NEW CALL PLAYS ************** NOK - Nokia $90.75 +2.50 (+2.44 this week) Nokia is a supplier of telecommunication systems and equipment and works to develop, manufacture and deliver operator driven infrastructure solutions and end-user driven mobile phones. Nokia dominates the GSM and the TDMA markets and is touted as the technological leader in cellular phones. Nokia is also known as the swiftest and the strongest, unveiling new phones every 12 months versus the industry standard of 18 months and was voted the 11th most valuable brand name in the world, atop such notables as BMW and American Express. Nokia looks particularly attractive as of late as it has consistently made higher lows since Friday and has been steadily moving up against the market. As the fickle Tuesday market rallied late day, Nokia was a forerunner with volume surging in the final hour. The long-time resistance at $90 was broken in this surge. It looks like the breakout investors have been anticipating in this strong sector. Assuming this isn't yet another bear-trap rally in the broad markets, Nokia has some room to move with the next support at $100. Look for a strong opening on Wednesday in NOK to confirm the breakout but if NOK drifts back below $90 and shows signs of staying range- bound, you will want to exercise caution. On Tuesday, Nokia announced numerous enhancements to its IP Telephony portfolio thus improving scalability, resiliency and functionality. IPRelay is a two-way personal gateway network that will allow a connection from the IP network to the Public Switched Network (PTSN) or an existing private branch exchange. This will work to address the issues concerning geographic and high user requirements. BUY CALL OCT-85*NAY-JQ OI=2698 at $6.88 SL=5.25 BUY CALL OCT-90 NAY-JR OI=8485 at $3.50 SL=1.50 BUY CALL OCT-95 NAY-JS OI=3413 at $1.31 SL=0.50 BUY CALL NOV-90 NAY-KR OI=1281 at $6.50 SL=4.75 BUY CALL NOV-95 NAY-KS OI= 92 at $4.25 SL=2.50 low OI Picked Sep 28th at $90.75 P/E = N/A Change since picked +0.00 52 week high=99.37 Analyst Ratings 13-9-0-0-0 52 week low =29.53 Last earnings 07/99 est= 0.51 actual= 0.51 Next earnings 10/21 est= 0.51 versus= 0.44 Average Daily Volume = 2.80 mln Chart = http://quote.yahoo.com/q?s=NOK&d=3m **** XMCM - Xoom Inc. $46.50 +1.38 (+2.63 for wk) Xoom is a rapidly growing Internet-based direct marketing company that offers its 10 million subscribers a variety of free services, including e-mail, chat rooms, auctions, and homepages. In return, Xoom.com sends advertisements, retail offers, and newsletters to its members via e-mail. The offers include proprietary and third-party products such as computer software, consumer electronics, and DVDs. The company, which generates sales primarily from advertising and electronic commerce, is merging with several of NBC's Internet operations as well as NBC and CNET's jointly owned Snap.com portal services. While the bears were having their way with most stocks, our latest call play, XMCM, decided to go the opposite direction and finish the day on a higher note. Like many of its Internet counterparts, XMCM rallied leading the markets back to respectable levels. Because of its recent performance under negative market conditions, we decided to add XMCM as a call play. The stock held its support at $35.63 on September 16 and has been a rampage ever since. We expect this upward momentum to continue as the stock continues to break though key resistance point. XMCM recently broke through its 50-dma at $40 and closed at its 10-dma at $46.50. If the internets continue there rally tomorrow, look for XMCM to be a participant. The next resistance level for the stock is $50, which is just a few points away. Watch for dips in the stock as entry points, current volatility in the markets should supply these opportunities. Because this sector has been so volatile lately, it's a good idea to use the recommended stops for protection. In the news, last week, BancBoston Robertson Stephens eMarketing analyst Lowell J. Singer reiterated his Buy rating on Xoom.com. Other than this there has been little on the stock to effect its movement. BUY CALL OCT-40 XQM-JH OI-267 at $7.75 SL=5.75 BUY CALL OCT-45*XQM-JI OI=536 at $4.25 SL=2.50 BUY CALL OCT-50 XQM-JJ OI=300 at $1.94 SL=0.75 BUY CALL NOV-45 XQM-KI OI= 15 at $6.88 SL=4.75 low OI BUY CALL NOV-50 XQM-KJ OI= 35 at $4.63 SL=2.75 low OI Picked on Sep 27th at $46.50 P/E = NA Change since picked +0.00 52-week high=$98.50 Analysts Ratings 1-3-1-0-0 52-week low =$21.13 Last earnings 07/99 est= -0.16 actual= -0.16 Next earnings 10-20 est= -0.43 versus= -0.44 Average Daily Volume = 669 K Chart = http://quote.yahoo.com/q?s=XMCM&d=3m ************* NEW PUT PLAYS ************* DD - DuPont $59.88 +1.06 (+0.75) DuPont is a leader of global industrial companies that produce and engineer products such as pharmaceuticals, chemicals, high performance materials, and agriculturals. Some of their products include Teflon, Dacron and Lycra. The company is mainly focused in the life sciences area and its work includes the finding of treatment for the H.I.V virus. It is the number one chemical firm in the U.S. The company operates globally through some 20 strategic business units. A trend is developing among the Cyclicals, especially the Chemical sector, and that trend is down. The recent weakness in the Dow has investors running for cover and they won't likely reappear until we hit support at 10,000 on the Dow. Even then it is likely that we will have a tug-of-war between buyers, who believe in the upcoming earnings strength, and the sellers, who see a bear market ahead of Y2K. This has taken its toll on certain sectors, one of which is the Chemical group. You may remember the huge run-up we had from March to May. It left analysts scratching their collective heads since there was no fundamental reason for the rise. But that is why they call them Cyclicals. Anyway, this group is now paying the price as investors are in selling mode. We like DD after the break of support at $60 which occurred on Monday. Today's late day rebound gave lift to Dupont but left it right at resistance. This is a level we are looking to open new plays. There is resistance at $60 followed by more resistance from the 10-dma at $61. The downside on the other hand shows weakness. There is support at $57.50 (weak support) followed by support at $55 (stronger support). We want to see DD confirm the bounce off $60 before opening new plays but an overall weak market should keep the pressure on DD in the short-term. BUY PUT OCT-65*DD-VM OI=5789 at $5.63 SL=3.75 BUY PUT OCT-60 DD-VL OI=8109 at $2.00 SL=1.00 BUY PUT OCT-55 DD-VK OI= 814 at $0.75 SL=0.00 Average Daily Volume = 5.58 mln Chart = http://quote.yahoo.com/q?s=DD&d=3m **** GENZ- Genzyme Corp. $45.31 -3.69 (-5.19 this wk) Genzyme Corp has one of the largest and most diverse gene therapy programs in the world. The company began its gene therapy program in 1991 to develop treatments for cystic fibrosis. Since then, Genzyme's gene therapy efforts have expanded to target cardiovascular disease, cancer, and lysosomal storage disorders. The company's gene therapy researchers have achieved a number of important scientific and regulatory "firsts" in gene therapy studies and vector development and have designed more than 200 viral and lipid vectors for use in experiments. We wish we knew exactly what started the decline but we don't. All we know is that GENZ has been on a steady descent to the basement from $60 since about September 13, and there isn't any support until it reaches $40. That's a historical level, not technical. Technically, the chart is drastically negative with all moving average support (from the 10-dma to the 200-dma) pierced long ago. Volume, one of our favorite indicators, has been slightly above the ADV of 1.1 mln shares during this period. However today, for the first time in 9 trading days, GENZ traded less than 1 mln shares. Volume is drying up while the price is falling. Armed with this knowledge, it appears that there is a lack of buyers, not a preponderance of sellers, which caused GENZ to close at its low of the day. This explains why GENZ was falling all day and experienced no late turnaround, unlike the rest of the market (not a good sign). We would expect this trend to continue. Just be aware that any good news from the market or the company could quickly turn the play around. Our goal is to catch GENZ for a short-term momentum ride as it drifts lower with the markets. There's been no news since last Tuesday, nor can we find any corresponding news that would explain the decline beginning about 2 weeks ago. ***We do not list the EGW root symbol since those strikes also include a component of a previous spin-off. Make sure you confirm the symbol with your broker before playing.*** BUY PUT OCT-50*GZQ-VJ OI=184 at $5.63 SL=4.00 BUY PUT OCT-45 GZQ-VI OI=227 at $2.13 SL=1.00 BUY PUT NOV-50 GZQ-WJ OI=175 at $6.75 SL=5.00 BUY PUT NOV-45 GZQ-WI OI= 30 at $3.63 SL=2.00 Average daily volume = 1.16 mln Chart = http://quote.yahoo.com/q?s=GENZ&d=3m ***************************** SEE DISCLAIMER IN SECTION ONE
The Option Investor Newsletter Tuesday 9-28-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ********** PLAY OF THE DAY ********** YHOO - Yahoo! $184.69 +3.31 (+1.38)(+20.19)(-7.38) 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. Sunday's Write Up 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. Tuesday's Write Up How's your neck? Suffering from a case of whiplash? YHOO reached as low as $175 yesterday and touched $178 today but it's darn hard to find a bottom on this for a good entry. The answer seems to be "at any level that is $6 below its high of the day". Remember YHOO is on an earnings run, in which they are expected to report $0.09 per share next Tuesday, October 6, the day after the FOMC meeting. Of course, we never encourage that you hold a position over earnings, especially when it's preceded by the possibility of an interest rate hike. You may want to consider taking your profits off the table by the close on Friday to protect them from the uncertainty leading up to the event. Frankly, we recommend caution opening positions this week, but if you must, at least buy the dips in the mid-$170 range, as there is some support there. YHOO continues to remain well above its 10-dma, even on the dips. BUY CALL OCT-170 YHV-JN OI=5532 at $20.25 SL=16.00 BUY CALL OCT-180*YHV-JP OI=5804 at $13.63 SL=11.00 BUY CALL OCT-190 YHV-JR OI=5598 at $ 9.00 SL= 6.75 Picked on Sep 14 at $165.19 P/E = 684 Change since picked +19.50 52 week high=$244.00 Analysts Ratings 9-17-5-0-0 52 week low =$ 48.75 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 ************************ COMBOS\SPREADS\STRADDLES ************************ Eureka! We've Hit The Motherlode! *********** MARKET RECAP *********** Monday, September 27 Equity markets rebounded Monday as investors searched for relief from over-valuation, upward pressure on interest rates and the declining dollar. The Dow industrial average rose 24 points to 10,303 while the Nasdaq composite gained 21 points to 2761. The S&P 500 stock index rose 6 points to 1283. Advances led declines 1,753 to 1,238 on volume of 776 million shares ands the 30-year treasury bond was down 20/32, pushing the yield higher to 6.02%. Sunday's new plays (positions/opening prices/strategy): Starbucks SBUX OCT22C/OCT23C $0.75 debit bull-call Viatel VYTL NOV30C/OCT30C $0.93 debit calendar Starbucks opened lower and traded down throughout most of the day. The target entry price should have been available when the stock fell below $23 but we were not watching the quotes at that time. We did observe a $0.75 debit during the morning session. Viatel was a strange position as it opened with significantly lower prices on the short side than those we received from the server on Friday. The CBOE was having difficulty last week and that may have been the source of our erroneous data. Regardless, the stock price assisted us in the play, falling more than enough to allow an entry at the target debit. The position traded as low as $0.75 during the session. Portfolio plays: The market struck gold Monday with the commodity surging higher after European central banks said they would restrict sales of bullion for the next five years. The Philadelphia Exchange's gold and silver index was up 21% and gold stocks rocketed on the news. Newmont Mining (NEM) jumped almost $5 to $27.75 and Barrick (ABX) romped $4 to $24.12. Both of our new bullish positions traded at favorable returns near maximum profit and they should be closed to protect gains and limit potential losses. The credit strangles were the focus of our attention again as the market ballooned in morning trading. Hewlett Packard (HWP) was the best of the group in the first few hours, up $2.12 with the position trading at $1.50 to close; an $0.88 profit for one week. Johnson & Johnson (JNJ) also came on strong in the rally, up $2.68 from a recent bottom near $90. Those of you who don't want to own the stock should have taken the easy $0.56 profit. Merrill Lynch was the worst of the three with only a $0.50 gain during the market rally, but the position was easily closed for $1.88 debit; a $0.62 profit. Successful traders always consider an early exit, regardless of the type of play, when the market offers a favorable return. All of these plays have offered at least a 25% return, twice in the first week of trading. In our group of smaller issues, Bell Atlantic (BEL) and 3Com corp (COMS) both made favorable moves and the calendar spreads on those issues are playing out nicely. Hambrecht and Quist (HQ) rebounded $2 to its old range above $40 and Unify (UNFY) halted its recent plunge with a $0.75 gain. UNFY and Tuts Systems (TUTS) have been incredibly volatile as of late and those are two positions that we will watch closely (exiting early if necessary) to prevent any losses. One of our old straddles; Allied Capital (ALLC), made a solid rebound today. The remaining position (NOV-$22C) was sold for $0.88 to close the play for a small profit. Motorola (MOT) was the big mover in our long-term portfolio, up $5 to a midday high near $89. This is an excellent opportunity to roll the play down but wait for the short term recovery to fade before making any adjustments. Watch for new signs of "selling into strength" before considering a move. Many of our long-term issues rallied with the market and you might consider using this rebound to roll-down on some of those plays. LEAPS/CC's positions that we are adjusting lower include General Motors (GM), Philip Morris (MO), Polaroid (PRD) and Exxon (XON). Tuesday, September 28 Blue chip stocks continued to decline Tuesday, recovering from steep midday lows only after buying from short sellers reduced losses in the last hour of trading. The Dow industrials fell 27 points to 10,275 while the Nasdaq composite index gave up only a small loss to 2756. Decliners led advancers on the NYSE by 1,893 to 1,096 on heavy volume of 877 million shares with new lows outpacing new highs 302 to 31. The 30-year U.S. Treasury bond fell nearly a full point, pushing the yield up to 6.09%. Portfolio plays: Hambrecht & Quist (HQ) was a big winner today as Chase Manhattan (CMB), the nation's second biggest bank, said it will buy the San Francisco-based firm for $1.35 billion to extend its reach in the lucrative investment banking business. Our bullish debit spread was easily closed for $14.50 credit, a $3 profit on the position. Starbucks (SBUX) was another big mover in the small-cap group, up almost $3 to $26 and moving comfortably above the sold strike in our new bullish debit position. Bell Atlantic (BEL) broke above recent resistance after declaring a $0.38 (quarterly) dividend. This issue is one to watch as the sold strike is at $65 and we don't want to let a profitable calendar spread get away. Viatel (VYTL) also made a nice recovery, climbing almost $1 to end just above $25. There may be hope for that one yet. Motorola (MOT) continued its recovery today, up $3 at midday to $89. A roll-down to the $95 strike provided a $1 credit against the cost basis but beware of jumping the gun as the stock has yet to show signs of a failed rally. Medtronics (MDT) appears to be holding nicely after its recent 2-for-1 split. The stock traded comfortably near $35 even with the market volatility of the past two days. Biogen (BGEN) is also showing signs of life, climbing to a high near $82 and closing on a bullish note. Questions & comments on spreads/combos to ray@OptionInvestor.com ********* NEW PLAYS ********* These new "Reader's Request" plays are based on the current price or trading range of the underlying issue and the recent technical history or trend. Current news and market sentiment will have an effect on these positions so review each play individually and make your own decision about the future outcome of the stock. **** CMGI - CMGI Inc. $97.93 *** Reader's Request *** CMGI develops and integrates advanced Internet, interactive, and database management technologies. The company delivers creative products and services that will both generate and profit from direct marketing opportunities on the Internet. Late Monday the Internet venture capital firm announced favorable fourth-quarter earnings that easily beat analysts' expectations. In a conference call, chief executive David Wetherell said the company expects sharply higher revenue in the coming year and industry experts say this giant will grow to be the major player in the Internet revolution. We cover this issue extensively in the main section of the OIN and today's breakout (through a recent resistance level) on solid volume may put it back on our "calls" candidate list. PLAY (aggressive - bullish debit spread): BUY CALL NOV-85 QGW-KQ OI=186 A=$18.12 SELL CALL NOV-95 QGW-KS OI=295 B=$11.62 INITIAL NET DEBIT TARGET=$6.25 ROI(max)=60% B/E=$91.25 Chart = http://quote.yahoo.com/q?s=CMGI&d=3m **** AXP - American Express $135.81 *** Reader's Request *** American Express is engaged in the business of providing travel related services, financial advisory services and international banking services throughout the world. They provide a variety of products and services, including the American Express Card and other stored value products, business expense management products and services, corporate and consumer travel products and services, magazine publishing, and merchant transaction processing, point of sale and back office products and services. AXP is another company that makes regular appearances in the "calls" section of the OIN. It's very well-known with lots of coverage by major analysts. The most recent outlook is bullish with ratings of "near-term accumulate" and "long-term buy". The company's large, flexible marketing, expense and reserve budgets should continue to drive earnings growth of 13%-15% for the next few years. The company also recently announced some new Internet initiatives and enhanced product lines to improve its position in E-commerce. We favor the current technical trend and a small price disparity exists in the OTM put options for those who agree with a bullish outlook. PLAY (conservative - bullish/credit spread): BUY PUT OCT-120 AXP-VD OI=1309 A=$0.75 SELL PUT OCT-125 AXP-VE OI=2239 B=$1.38 INITIAL NET CREDIT TARGET=$0.75 ROI=17% Chart = http://quote.yahoo.com/q?s=AXP&d=3m **** PHG - Philips Electronics $100.69 *** Reader's Request *** Koninklijke Philips Electronics of the Netherlands is one of the world's biggest electronics companies. It is a global leader in color television sets, lighting, electric shavers, color picture tubes for televisions and monitors, and one-chip TV products. The company is also active in other industries such as lighting and consumer electronics, appliances, semiconductors, medical systems, business electronics, and IT services. Philips is by far the leader in this industry with lots of news and announcements about future products. Our position is based on the recent technical history and a favorable probability of profit. This is an extremely active issue with volatility skews in both directions but we favor the bullish outlook with a cost basis well below the recent lows. PLAY (conservative - bullish/credit spread): BUY PUT OCT-80 HPZ-VP OI=34 A=$0.31 SELL PUT OCT-80 HPZ-VQ OI=29 B=$0.81 INITIAL NET CREDIT TARGET=0.62 ROI=14% Chart = http://quote.yahoo.com/q?s=PHG&d=3m **** BCR - C.R. Bard $46.50 *** Another Try! *** C.R. Bard is engaged in the design, manufacture, packaging, distribution and sale of medical, surgical, diagnostic and patient care devices. Hospitals, physicians and nursing homes purchase approximately 90% of the company's products, most of which are used once and discarded. C.R. Bard is also a leading multinational developer, manufacturer and marketer of health care products. A few weeks ago, we ran a bullish (calendar) position on this issue, and watched the stock fall to recent lows with the broad market sell-off. The company has been rumored as a takeover candidate in the past and with the recent increased merger activity, the OTM call options are active again. Here is a new favorable (neutral) position for those who like to speculate. PLAY (aggressive - bullish/calendar spread): BUY CALL JAN-50 BCR-AJ OI=55 A=$4.00 SELL CALL OCT-50 BCR-JJ OI=735 B=$1.88 INITIAL NET DEBIT TARGET=$2.00 TARGET ROI=50% Chart = http://quote.yahoo.com/q?s=BCR&d=3m ************ STRADDLES ************ Another new group of straddle plays to choose from (two of them courtesy of Tom Gentile at Optionetics) and most of the positions offered favorable entry points during Monday's session. Allegheny Teledyne (ALT), Federal Express (FDX) and Exxon (XON) appeared to be the most popular plays. Again this week, we noticed that some of the positions were opened at better-than-suggested prices even though many of the opening targets were slightly out of reach. In the tracking summary, we record the initial cost of each position based on a simultaneous order and observed quotes (throughout the day) from our data source (Interquote). Sunday's new plays (positions/prices): Allegheny Teledyne ALT APR17C/APR15P $2.50 debit Dow Jones Industrials DJX NOV102C/N102P $8.12 debit Federal Express FDX APR35C/APR35P $9.75 debit Mylan Laboratories MYL APR17C/APR17P $4.56 debit These new plays are based on Tom's (Optionetics) approach to debit straddles. Please review his entry and exit strategies to maximize profits and limit losses on these positions. New Optionetics plays (positions/prices): Union Carbide UK JAN50C/JAN55P $10.50 debit Exxon XON JAN75C/JAN75P $9.25 debit The market rally on Monday did little to help the rest of our straddle plays, some of which were collapsing to the downside. The problem with this type of recovery (and the range bound trend it produces) is that the potential for a future breakout is reduced and the cycling trend continues to erode premium in our positions. At some point, you will have to make a judgment about closing the play, possibly trading against the straddle to avoid losing time value (and potential). That is why it is very important to monitor your plays on a daily basis, looking for changes in technical character so you can adjust your exit strategy (when necessary) to fit changes in the outlook of the underlying issue. One of the first candidates for profit appears to be Donaldson, Lufkin and Jenrette (DLJ). The straddle closed Tuesday at $14 credit, a $0.75 profit for the entire position. We expect to close the put side of the position when it exceeds the overall cost basis for the play and will make a determination about the call option (hold or sell) at that time. The technical outlook of the underlying stock will also be evaluated to help in our final decision. In other news, the $2 billion merger between copper companies Asarco (AR) and Cyprus Amax Minerals (CYM) edged closer to collapse on Tuesday when both of the companies postponed a key shareholder vote on the deal. Asarco and Cyprus are the targets of a hostile takeover bid from Phelps Dodge (PD). One of our older straddles issues; Espire Communications (ESPI) is now one to watch as it is finally making a move out of its old trading range near $8. The (MAR-$10) straddle was observed near break-even today as the stock price fell below $7. We plan to close the bearish portion of the position when it pays for the entire play, leaving our (MAR-$10) call option (free) to profit from any long-term recovery. ************ See Disclaimer in section one ************
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