The Option Investor Newsletter Thursday 9-30-99 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) ************************************************************ 9-30-99 High Low Volume Advances Decline DOW 10336.90 +123.40 10402.80 10212.80 1,024,370k 1,892 1,172 Nasdaq 2746.16 + 15.89 2765.41 2717.96 1,210,569k 2,169 1,848 S&P-100 672.37 + 8.64 676.75 663.91 Totals 4,061 3,020 S&P-500 1282.71 + 14.34 1291.32 1269.33 57.3% 42.7% $RUT 427.30 + 5.78 427.31 418.49 $TRAN 2909.16 + 16.27 2922.35 2892.33 VIX 26.89 - 1.01 28.82 25.99 Put/Call Ratio .61 ************************************************************* The good news, the month is over, the bad news, the month is over. Did you survive the month of September? This was a tough one but now you can look back on it and say "I am glad it is over." The bad news, October is now upon us and the outlook is very uncertain. The rally this afternoon was very satisfying and expected. It actually gave me a chance to get some fills on puts that I was target shooting. More on that Sunday. September definitely turned out as a "dump the duds" month but many blue chips were thrown out as well. The rally today was a direct result of last minute window dressing by fund managers who wanted to list more winners in their portfolios than losers on their quarterly statements. After trading basically flat for the last two days the starting bell rang at 1:30 this afternoon and the Dow gained +140 points to bounce off 10400. The flurry of activity was focused into recent winners and big names. The Dow failed to hold the highs and slid back to close at 10336, only +36 points above the ceiling from the last two days. After the close the downward drift continued with the S&P futures going immediately into negative territory. Tuesday I said for any rally to hold the Dow would have to trade over 10400 and close over 10350. Close but no cigar. While the rally was nice for the books, it was the biggest gain since Sept 3rd, it has a very good possibility of being a bear trap. The advance/declines was positive for a change but just barely. With Greenspan talking tonight, key economic reports due out tomorrow and the Fed meeting next week there is not a good reason to rush out and buy stocks. Most of the news which drove stocks this week is old news and the key players are all suffering from profit taking. AMZN is old news. AOL is old news. CMGI earnings are old news. Now we have to wait for another week before the October earnings news takes control of the market. Next week will still highlight earnings warnings and set the tone for the real earnings season. The major even next week will be the YHOO earnings and fortunes of the Internet stocks which will be painted by the same brush. Fortunately the 3rd qtr earnings are still expected to be in the +20% range. This is probably what is keeping the market from falling even farther. While nobody can predict the direction of the markets for October, the collective memory of past October crashes is flashing in the rearview mirror for most traders. This fear factor is one of the reasons we are range bound. Traders are still selling into rallies and attempting to raise cash for any buying opportunity to come in the next few weeks. Bargain hunters that may not have been around for some of the past October crashes are continuing to buy the dips. A classic tug of war between the buyers and sellers. How do you win? I would suggest that you consider selling some time. There are four things that can happen when you buy an option. 1.) Stock goes up fast. 2.) Stock goes up slow, 3) Stock is flat, 4) Stock goes down. Only ONE of these options will make you money if you are a Call/Put buyer. When you sell time you win when THREE of those conditions exist. If you buy time you have to be right to win. When you buy time you have to pick the direction, the timing and the movement to win. When you sell time you only have to be close to win. If you are selling calls then you pick a stock that you think will not reach your strike price. That means it can go up slowly, stay flat or go down for you to make a profit. If you sell a $50 call on a $45 stock for $3 then the stock has to close over $53 on expiration day for you to lose. ANY price under $53 and you win. If you bought the call for $3 then the stock would have to move from $45 to over $53 before you can win. (simplified examples) The same holds true for selling puts. You pick a stock that has a good bullish trend, wait for a down day and sell a put out of the money. If you sell a $40 put on a $45 stock for $3 then the stock must drop to less than $37 before you can lose. Remember you use this on a stock that is moving up. A $45 stock moving up must make a major direction change and a major move to close under $37. Why the option lesson today? Friday is option selling Friday. That is the Friday two weeks before expiration. Premiums still have some time value but two weeks is too short for a major direction change on most bullish stocks. Tomorrow is the best day of the month to sell puts. Almost anyone with a margin account can sell naked puts and pocket some almost free money over the next two weeks. I would recommend selling puts instead of calls because of the oversold market conditions. Put premiums are inflated because of the recent drop and the odds of the market moving dramatically lower in the next two weeks are slim. I think 10,000 will offer strong resistance if we go in that direction. Remember that put premiums reflect the expectation that the stock will or will not reach that strike price. The Dell $40 OCT-put DLQ-VH is only $1 because nobody expects Dell to trade under $40. The EGRP $22.50 QGR-VX is only $.88 because $22.50 is strong support and nobody expects it to break the strike. The YHOO $165 put YHV-VM is $4.38 because of the chance YHOO will drop from $175 to $165 in the next two weeks is high. Also the stock price is much higher. The returns may not be the same as a call on AOL but the risk is much smaller. The margin on the Dell Put is about $16 for a $1 profit but it is a 6% profit for two weeks effort. The EGRP Put produces a profit of about 10%. The YHOO play about 7% profit. You decide if this type of play is right for you. I love it and I use some uninvested cash to sell puts every month on this Friday. Check out the Sunday newsletter every week for some great naked put plays. Which way next? Barton Bear(Biggs) was on CNBC tonight with his permanent Dow is going to hell speech. I doubt anybody takes him serious anymore. He was only one of dozens of analysts predicting doom over the last week. They could be right but when everybody lines up on one side of the argument the reverse normally comes true. The bearish sentiment is so thick that a rally must be about to break out. I heard one analyst today that said the advance/decline line had been so bearish for so long that nobody must be left holding stock. His point was that there was now an estimated $2 trillion dollars available to buy stock in money markets and uninvested cash in mutual funds. Everybody is waiting for the bottom. Yes, some of this will wait until after Y2K, but there is still a lot of cash on the sidelines. Don't get me wrong, I am not saying that today was the first day of a record rally. It could be days or weeks before it is safe to go back into the markets. It is up to us as personal funds managers to wait for a green light before opening new positions. If you are a risk taker then buy the next dip. If you would rather be safe than sorry then wait until after the Fed meeting to make your next investment. I had a reader ask me today if we could get another pre-Fed spike like we had in August since the +.25% increase is already priced into the market. I think since it is October and this is the retraction of the third and final rate cut from last fall, the chances are slim. However the very oversold condition of the market makes anything possible. The volume on the NYSE was over 1 billion shares today. I have mixed feeling whether this was good or not. Normally a rally on strong volume is a good thing but the mood at the close was negative. Some wondered if the volume was from the rats selling into the rally to flee the sinking ship. Tomorrow will tell. Futures are down -2.70 and a lot of dark before morning. I would like to believe the drop to 10081 on Tuesday was the last leg of a double bottom but then I would have to believe in Santa Claus and the Easter Bunny also. Sell too soon. Jim Brown Editor *************** Market Posture *************** As of Market Close - Thursday, September 30, 1999 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert DOW Industrials 10,500 11,320 10,337 BEARISH 9.23 SPX S&P 500 1,350 1,420 1,283 BEARISH 9.16 OEX S&P 100 675 735 672 BEARISH 9.24 RUT Russell 2000 440 465 427 BEARISH 9.14 NDX NASD 100 2,320 2,380 2,408 BULLISH 9.03 MSH High Tech 1,120 1,180 1,232 BULLISH 9.03 XCI Hardware 1,035 1,050 1,054 BULLISH 8.24 CWX Software 750 800 866 BULLISH 9.03 SOX Semiconductor 480 525 499 Neutral 9.24 NWX Networking 555 585 600 BULLISH 9.17 INX Internet 450 510 496 Neutral 9.24 BIX Banking 690 710 584 BEARISH 7.23 XBD Brokerage 410 440 374 BEARISH 7.23 IUX Insurance 645 660 532 BEARISH 7.23 RLX Retail 915 960 826 BEARISH 7.23 DRG Drug 365 390 342 BEARISH 9.16 HCX Healthcare 745 785 685 BEARISH 9.16 XAL Airline 180 190 137 BEARISH 5.21 OIX Oil & Gas 285 305 296 Neutral 9.16 Posture Alert Window-dressing was the name of the game today, as money managers shifted equities around to make their funds look better than their true performance. Semiconductors led the losers with a -3.60% drop, followed by Internet and Brokerage, which were down very slightly. Banking and Retail led the leaders, with gains of 2.50% and 2.05% respectively. A detailed description of our Market Posture and its applications can be found at: /members/marketposture *************** Market Sentiment *************** Thursday, September 30, 1999 Not Going Anywhere? Can we fast-forward to next week already? This alternating trend between the bears & bulls continues, as the bulls won out Tuesday and Thursday, while the bears won Monday and Wednesday. Net result for this week, absolutely nothing. If you have been buying the dips and flipping really quickly, then you have had a fun and profitable week. Otherwise, you've been treading water with all the mutual funds. Sentiment that we have not seen in awhile is that the recent (quality) IPO's are showing good strength. This week has seen numerous IPO's debut with big gains, and some with 100% gains or better such as InterNap Networks & Foundry Networks. What this shows us is that there is big money sitting in money market funds, waiting for the right opportunity. It is only a matter of time before the billions sitting on the sidelines gets put to good use in the general market. Sentiment readings came out yesterday, and bearishness continues to gain strength. According to the Investors Intelligence Survey, the percent of bearish investors is now at a year-to-date high of 32.8%! This bodes extremely well for this market. If you were to combine all the billions of dollars sitting on the sidelines, with the extreme bearish sentiment that currently prevails; what would happen to this market if October's earnings season comes out stellar? One very big market rally! However, continue to be patient, because until some uncertainty is removed from this market (i.e. Fed, earnings, inflation, etc.), the bears won't run for cover. 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 above the 25 benchmark, but has held ground in the low 30's. Interest Rates: The yield on the 30-yr Treasury is above the 6% benchmark, but off the highs of 6.272%. 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 Gillette and Dupont(rumored) being the latest casualties. Advance/Decline Line: The A/D line continues to be poor and is getting worse. Russell 2000 & S&P 500: The RUT and SPX continue 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 Thurs Indicator (9/24) (9/28) (9/30) Alert Pinnacle Index (OEX): Underlying Support (680-700) 1.1 1.4 1.9 Underlying Support (650-670) 22.6 8.6 5.5 Put/Call Ratios: CBOE Total P/C Ratio .6 .5 .6 CBOE Equity P/C Ratio .5 .5 .5 OEX P/C Ratio .9 1.0 1.2 Peak Open Interest (OEX): Puts 640 600 650 Calls 700 700 700 P/C Ratio .93 .91 .84 Market Volatility Index (VIX): CBOE VIX 27.09 Investors Intelligence: Bullish 42.90% * Bearish 32.80% * The Power of Sentiment Analysis It has often been said that the crowd is right during the market trends but wrong at both ends. Measuring and evaluating the sentiment of the crowd, therefore, can give savvy option traders a decided edge. OEX Pinnacle Index Friday Tues Thurs Benchmark (9/24) (9/28) (9/30) Overhead Resistance (680-700) 1.12 1.39 1.87 OEX Close 672.80 675.46 672.37 Underlying Support (650-670) 22.56 8.56 5.54 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 Thurs Strike/Contracts (9/24) (9/28) (9/30) CBOE Total P/C Ratio .61 .54 .63 CBOE Equity P/C Ratio .53 .46 .48 OEX P/C Ratio .90 .99 1.21 Peak Open Interest(OEX) Friday Tues Thurs Strike/Contracts (9/24) (9/28) (9/30) Puts 640 / 7,676 600 / 8,344 650 / 10,088 Calls 700 / 10,340 700 / 11,650 700 / 11,995 Put/Call Ratio 0.93 0.91 0.84 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 27.09 Investors Intelligence Major Percent Percent Date Turning Point Bullish Bearish October 97 Bottom 22.0 48.3 July 20, 1998 Top 52.0 24.0 October 8, 1998 Bottom 38.5 42.7 January 11, 1999 Top 58.3 30.0 March 4, 1999 Bottom 49.1 32.5 January 6, 1999 58.3 30.0 January 13, 1999 60.0 30.0 January 20, 1999 61.7 25.9 January 27, 1999 60.7 28.2 February 3, 1999 60.0 26.7 February 10, 1999 61.7 25.9 February 17, 1999 55.7 28.7 February 24, 1999 54.1 31.5 March 3, 1999 50.9 32.1 March 10, 1999 49.1 32.5 March 17, 1999 52.6 17.6 March 24, 1999 55.9 29.7 March 31, 1999 55.6 31.6 April 07, 1999 56.4 31.6 April 14, 1999 55.9 30.5 April 21, 1999 56.4 30.8 April 28, 1999 56.1 30.7 May 05, 1999 58.1 27.6 May 12, 1999 56.9 31.0 May 19, 1999 60.9 28.7 May 26, 1999 61.6 27.7 June 2, 1999 61.6 27.7 June 10, 1999 58.3 28.7 June 16, 1999 58.8 26.3 June 24, 1999 57.5 26.5 June 30, 1999 55.8 25.7 July 7, 1999 52.6 27.2 July 14, 1999 55.2 26.7 July 21, 1999 54.1 27.9 July 28, 1999 53.6 24.6 Aug 4, 1999 52.2 27.8 Aug 11, 1999 50.0 29.3 Aug 18, 1999 45.8 31.3 Aug 25, 1999 44.5 31.1 Sept 1, 1999 42.9 31.9 Sept 8, 1999 44.1 30.5 Sept 15, 1999 41.5 31.4 Sept 22, 1999 42.9 31.6 Sept 29, 1999 42.9 32.8 Please view this in COURIER 10 font for alignment ************************************************* CHANGES THIS WEEK Daily Results Index Last Mon Tue Wed Thu Week Dow 10336.95 24.06 -27.86 -62.05 123.47 57.62 Nasdaq 2746.16 21.34 -5.50 -25.98 15.89 5.75 $OEX 672.37 2.71 -0.05 -11.73 8.64 -0.43 $SPX 1282.71 5.95 -1.11 -13.83 14.34 5.35 $RUT 427.30 4.77 -3.37 3.03 5.78 10.21 $TRAN 2909.16 -16.27 -5.47 35.91 16.27 30.44 $VIX 26.89 -2.27 -0.30 0.93 -1.01 -2.65 Calls Mon Tue Wed Thu Week VOD 237.75 -3.50 0.00 7.19 3.56 7.25 What a run! AOL 104.06 3.75 8.75 -0.50 -5.19 6.81 New XMCM 49.63 1.25 1.38 -0.50 3.63 5.75 Looks strong RNWK 104.56 3.81 -1.75 -1.00 4.56 5.50 Above support CMVT 94.31 1.88 -2.31 1.12 2.94 3.63 New ITVU 37.13 3.50 -0.38 2.81 -3.06 2.88 Time to buy? SUNW 93.00 3.75 -0.94 -1.44 1.44 2.81 Great day DCLK 119.13 2.28 -5.16 2.56 2.75 2.38 Momentum EMC 71.38 1.44 0.88 -1.13 1.13 2.31 Earnings run NOK 89.88 -0.06 2.50 -1.25 0.38 1.56 Above 10-dma SNE 150.06 1.75 -1.44 -0.94 1.75 1.13 Rebounded QCOM 189.19 3.81 0.31 -5.88 1.44 -0.31 Comeback NTAP 71.63 -1.63 1.88 -0.50 -0.63 -0.88 Dropped YHOO 179.50 -1.94 3.31 -5.38 0.19 -3.81 Ending run ELNK 42.94 -2.22 -0.03 -1.50 -0.88 -4.63 Dropped EBAY 141.06 -7.31 -0.75 1.00 2.06 -5.00 Nasdaq 100 ADI 51.25 -0.06 0.06 -1.19 -3.88 -5.06 Dropped Puts GENZ 45.06 -1.68 -1.50 -3.69 1.44 -1.69 Downhill slide KO 48.25 -0.63 -0.13 -0.25 -1.88 -0.63 Great play JNJ 91.88 0.19 2.00 -0.50 0.19 0.19 Dropped WPI 30.56 0.38 0.00 -0.19 0.81 0.38 Future drift LLY 64.19 0.94 -2.00 -0.25 0.31 0.94 Good entry DD 60.50 0.00 -0.31 1.06 0.63 1.38 What a day! DOW 113.63 3.50 0.94 0.88 1.44 3.50 Dropped 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: ***** ADI $51.25 -3.88 (-5.06) ADI this week traded as high as $59.19 riding the wave of being a new upcoming addition to the S&P 500. But even that kind of news could not support the stock in a semi- conductor sector that chose this week to sell-off substantially. The PHLX semi-conductor index started the week sitting at 514.85, four trading days later it sits at 499.07. Stocks in the sector have taken a major beating. For example Micron Technologies is down 14.25 points and the week isn't finished yet. On Tuesday it was recommended that trailing stops be put in place to protect your profits in your ADI position, we hope that advice was followed, especially when the shares broke through the support point at the $55 level that had held up so well in trading sessions of the past. This sell-off in the shares was clearly an across the board sector repositioning of assets and going forward we will do the same and reposition our money at these current levels. The short-term rally has now ceased and other opportunities look much more attractive at this time. NTAP $71.63 -0.63 (-0.88) After bouncing off support at $69.50 late in the day Tuesday, shares of NTAP continued to climb to $75.63 in the first two hours of trading Wednesday. Apparently the ascent to higher prices was not meant to be as the sellers stepped in pushing NTAP back to close down $0.50 for Wednesday's session. Today with the strength in the broader markets, whether it was "window dressing" or not, NTAP couldn't get out of its own way, as shares of the computer networks company drifted lower for most of the day. Since last Friday NTAP has spent most of its time south of its 10-dma. Even industry leader Cisco Systems has seen a bit of a pullback and as of today hasn't been able to pull itself out of the doldrums either. We will continue to keep our eye on NTAP and the networking sector but for now there are better opportunities elsewhere. ELNK $42.94 -0.88 (-4.63) This leverage/merger play came to a grinding halt today. There was no mistaking the words of Bill Burnham, General Partner of Softbank's venture capital firm, Softbank Capital Partners. EarthLink, MindSpring, and other ISP's are simply "over-valued"! He believes the future truly holds free Internet access and that companies will solely "rely on revenue from advertising and e-commerce". Even AOL shares fell on the comments. Technically ELNK is perched on its 10-dma ($42.93) and recall that just on Tuesday it received a Strong Buy rating from Scott & Stringfellow. However with the upcoming Fed Meeting and this recent news event afflicting the stock today, we reconsidered that its too risky to keep ELNK on our call list. PUTS: ***** DOW $113.63 +3.50 (+6.75) After it was reported last week that rising costs of petroleum-based raw material would hurt third quarter earnings, DOW has come back with an enormous amount of rebuilding news that the market seems to be buying. On Tuesday we reported that the company came out with a press release announcing its progress and challenges in balancing economic growth with environmental integrity and social responsibility. Today the Dow Chemical company announced that it has launched a corporate-wide program to incorporate the "Six Sigma" methodology into all of its businesses, as part of its Phase II transformation strategy. With the help of third quarter window dressing, this stock has now powered its way through the 10-dma that was at the $110-$111 levels. If you did not close your puts at this point, the time is now to move on. Although we believe that it is very possible that we will be revisiting this stock in the near future as the comeback does not seem to have legs to it, we will let it go for now. ************************* DROPS CONTINUED IN SECTION TWO ************************* FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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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 Thursday 9-30-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ************************ DROPS - PUTS - CONTINUED FROM SECTION 1 ************************ JNJ $91.88 +0.19 (+1.88) With the oversold conditions in the drug sector, many of the companies seem to be consolidating and trying to find a bottom. At this point, the $90 area has proven to be solid support for JNJ. After Tuesday bounce, we decided to give JNJ one more chance to continue its slide to lower levels. Although JNJ didn't really exhibit any signs of renewed strength it didn't fall either. There still has been no news to change the near term outlook for the JNJ or the industry as a whole, however it appears as the most of the recent declines may be over and we are entering a period of consolidation. JNJ is a stock that moves in cycles and this could be the bottom before the up cycle. So we are dropping JNJ and will look elsewhere for other opportunities. ******************* TRADERS CORNER ******************* Cash Sun Tzu, the ancient Chinese military philospher, said that the wise general knows how to use both normal and special forces. He meant: in a week like this, stay in cash. Normal forces, like the Army, represents your long term stock portfolio. Special forces, like a Marine Expeditionary Unit floating around on amphibious ships, represents options. You want to use the special forces, which are capable of gaining alot of ground quickly, when you are very confident of the situation. You do not want to expose these highly specialized assets to undue risks. My trades are a good example of why you want to stay in cash in a week like this. I started the week on a high note and went downhill from there. I had IBM and QCOM calls which I sold shortly after the open on Monday. 25% gain on those positions; 10% gain for my portfolio. Later that day, I got into an OEX put position, but was stopped out due to a bad entry. On Tuesday, I again entered a OEX put position, but was again stopped out due to a bad entry. Later Tuesday, I played the rebound from a double bottom with IBM and QCOM calls. I was up at the close on those open positions. Wednesday opened with negative news on IBM (Merrill dropped it from the top 10 tech list), and the stock gapped down, which caused my stop alert to trigger. Another loss. Shortly after that, QCOM hit my stop and I sold that position too. I added insult to injury by buying more calls, since I had convinced myself that the market was rebounding. More losses, as those contracts too hit their stops before the end of the day. Overall, 25% loss on my portfolio for the week. The lone bright spot this week was in my core stock portfolio: AMZN jumped on news about ZShops. This was one week better left to the Army. The good news is that I know when to quit and watch for better battlefield conditions, such as after the Fed meeting next week. The Marines made their name by amphibious landings at places like Iwo Jima and Saipan in carefully calculated invasions. But between those landings, they spent months in Australia, doing exercises, relaxing, and resting. By contrast, the Marines were misused in Vietnam because they were subjected to continuous operations which kept units in the field for months at a time. Since the end of August, my trading portfolio bears more resemblance to a Vietnam era unit beat up by too many plays, too many uncertain risks, too many hunches on too many CPI reports, etc, etc. At least until early next week, I am going on a trading halt. I'll use the time to make a list of stocks with earnings in mid October, options I want to play, and prices that I want to target shoot. I'll live to fight another day, and when I do, I'll come out swinging. Janar Wasito janar@OptionInvestor.com ***************** PICK NEWS - CALLS ***************** XMCM $49.63 +3.63 (+5.75) Its been a tough week for Internet stocks which have been the leaders in the market. Despite this leadership, like other sectors, internets have had a difficult time maintaining their rally mode status. Xoom.com has a similar history, however, the stock has managed to break through it 10-dma at $46.50 showing technical strength in the stock. The next resistance level for XMCM is its 200-dma or $50, which is just around the corner. If Internet stocks maintain today's momentum into Friday look for the stock to reach this level. Today's market run was impressive but expect similar volatile conditions in the near-term. The Federal Reserve is meeting next week and it remains questionable whether they will raise interest rates. There will be plenty of entry points available for those investors looking to place new trades. The stock has been trading between $44 and $49 the past few sessions. A good entry point within this range would be the 10-dma or $46.50. Remember, confirm the overall market direction before placing these trades. There was no news to report at this time. NOK $89.88 +0.38 (+1.56) Nokia opened solidly at $90.00 this morning and traded as high as $90.25 before settling into a mid-day lull, trading as low as $88.81. Nokia rallied late day to close at $89.88. Our short term technical indicators point to a positive moving average trend. This is due to NOK's ability to hold above the 10-dma which is at $88.75. Notice today's bounce was right at that level. Nokia plans to unveil a number of new features at the upcoming Telecom '99 event, which will be held from October 10-17 in Geneva, Switzerland. Nokia is known as the world's leader in cellular phones and has stated that by 2003, they are expecting to have over 1 billion mobile subscribers. Use caution in this market! SNE $150.06 +1.75 (+1.13) Sony has been a stock without direction this week. Staying very range bound just below our 10-dma of $151 due to the markets move on the Yen gaining versus the Dollar. We did get a late day rebound, as the Dollar did firm today giving us some confidence in our play strategy. The Yen has been at a three and a half year high as of last Wednesday and investors have been looking for signs from Japan to curb the rise. Japan has been very non committal however, and yesterday the Dollar fell another full point to $105.74, continuing the trend down. This condition causes Sony's products to cost the American consumer more and curbs sales. What we are hoping to see soon is a commitment from Japan to improve their monetary policy to curb the Yen's rise, therefore a rise in the dollar, a positive market, and a rotation of capital to Japan. These conditions will be fuel to spark SNE to trend higher. We may not see this combination until after next Tuesday, so use patience and caution in your decisions. On the lighter side, SNE issued license to six companies to help manufacture the new memory stick, to be used in PC's, camera's, etc. commencing the fabrication of the new technology. Finally, did you like the show "Matrix"? Apparently most people did! SNE just shipped 1.5 million copies making it the most successful DVD release thus far. Wait for a confirmed turn in SNE's stock price before playing. RNWK $104.56 +4.56 (+5.50) Real Networks gave us a big tail today. Characteristic of most species with big tails, is the fact that they are strong and RNWK showed it's strength today as it battled back from a potentially dangerous dip to $95 on news of intense competition from Microsoft. Microsoft announced that they have teamed with thirty five companies in order to compete in the streaming media delivery market. A formidable opponent to say the least. MSFT has reason to be hard on RNWK, since they lost Rob Glasser, a former Microsoft employee to RNWK who is now the CEO with a lot of MSFT knowledge. The fact that RNWK climbed to remain above our support of $100, is a very bullish indicator. Investors are expecting continued good earnings, and as we mentioned in Tuesday's update, a possible split announcement. All this because they have a "significant head start" in the streaming market against competitor Microsoft as per spokesman Jay Wampold and are looking to be in the black as far as earnings. Tails on a candlestick chart are indications of strength, showing the buyers out powering sellers to keep the price up. The company confirmed release of it's earnings this quarter after the market close on Oct. 19th. Today's strength, and fact that we are 13 days away from the announcement, put's us in a prime spot for an earnings run. EMC $71.38 +1.13 (+2.31) EMC was slow out of the starting gate today but, as the session wore on, and investor confidence rose from the group of favorable economic data, EMC gained steam. A company spokesman today confirmed that the estimated earnings release will be October 20th, before the market opens. Given this information and a positive market direction, we expect the run into earnings to begin any time. I wouldn't expect any dramatic gains until after the Fed meeting, but today's economic news helps our situation substantially. Analysts are setting EMC's target price at $82, and with a whisper number on the street for earnings of $0.31 versus an estimate of $0.27, we can expect a good run to occur. Today's close puts us slightly above our 10-dma support of $71.00. Jim Seymour with CBS MarketWatch listed EMC as a stock to play. Remember Jim's caution before the Fed meeting, and confirm a rise in the stock price and market before playing. Use trailing stops to protect against market surprises. ITVU $37.13 -3.06 (+2.88) Even on a sunny day, it rains somewhere in the world. Today while the market shined on us because of better than expected GDP revision, a little rain fell on ITVU. So why the dip today? Well investor relations for InterVu had no comment, and said that the industry is so volatile that they view it as customary and not out of the normal range in price. After Wednesday's gain, we can't complain. We are still in profitable range. ITVU did confirm that their earnings release will be on October 28th, at 2 p.m. Pacific time. Since they're streaming experts, it will be broadcast on the Web, as well as a conference call. Look at the chart, especially the April earnings run. Very volatile! Considering that we are still 20 days away from the announcement, it is early in the run. Consider today as investors protecting those recent gains. The consensus earnings estimate for ITVU is ($0.53), the whisper on the street is ($0.38). If the street proves right, this would be close to a 40% surprise. Good reason for some investor confidence. Along with this confidence, ITVU is one of the 35 who have teamed with Microsoft to expand the delivery of broadband media. We hit $40.88 on Wednesday which made for some great profits. After today's consolidation, look for momentum to return with volume before opening new plays. VOD $237.75 +3.56 (+7.25) Shares of VOD finally kicked into gear the past two days. After gapping up $3.00 at the open on Wednesday, VOD traded made a high of $236 in the first 90 minutes before settling in to the familiar sideways pattern for the balance of the session. The buying continued today into the close as VOD topped out at $239.25 in the last 30 minutes before closing at 237.75. Since being selected to our list on Sep 21, at $216.63, VOD has provided us with several great opportunities to climb on board its split run. Besides the 5:1 stock split investors are anxiously awaiting the release of Vodafone's third quarter subscriber numbers which are due out Monday. Analysts are expecting a record 2.7 million new subscriptions worldwide, compared to their previous best of 2.5 million in Q4 of 1998. If you haven't taken you profits from the VOD run keep your stops close, as we would suggest liquidating any open positions by the close of business tomorrow. But for you dare-devils, we could possibly see a phenomenon where investors have been waiting to own VOD and buyers are anxiously waiting in the shadows. It's your call to stay aboard but we will exit the play before the weekend to avoid a post-split depression. DCLK $119.13 +2.75 (+2.38) Well at least the trading range has narrowed. After climbing to a high of $121 Wednesday morning, shares of DCLK fell back into a $5 trading range for the balance of yesterday and today. DCLK tried this morning to continue its ascent to higher highs only to fall back one more time. DCLK announced yesterday it had added 7 new Websites to its shopping and services program. They included Travelcity.com, Comedy Central, A&E, The History Channel, New York Daily News, National Review, and Netzip. DCLK also announced Wednesday it had signed an agreement with Internet Stock News. We are staying with DCLK, as it did appear to be picking up a bit of momentum in the last half hour of trading today. After bouncing off $116.25, the volume picked up as the price began to climb near the upper end of the trading range for the past two days. We do believe that DCLK will eventually break out of its range bound pattern and continue higher. We would urge extreme caution in considering a new play in DCLK, until it proves it can break through its overhead resistance in the $120-$121 area and hold it. In the mean time keep your stops close and let the market tell us what our next move should be. SUNW $93.00 +1.44 (+2.81) Wednesday was another great day at the market for SUNW. It peaked first thing at $95.75 setting another 52-week record high before profit-takers came in to take some cash off the table. The stock held up well, never slipping under $91.38. Certainly the Strong Buy reiteration by MSDW offered support. They also issued a price target of $125 and raised Year 2000 estimates to $1.83 from $1.75. Ironically SUNW took back today exactly what it gave up yesterday ($1.44). Trading volume remains very strong with levels still about 65% above normal. So far this week, support seems firm at $91 just below the 10- dma ($92.05) In the news, the company announced the earthquake in Taiwan shouldn't have any impact on its supply chain and thereby not affect sales. Also on September 29th, Sun Microsystems announced they broke their own TPC-C world record for online transaction processing. The TPC-C benchmark is an industry-standard test designed to measure systems' online transaction processing capacity under controlled conditions. The new record of 135,461 transactions per minute beats SUNW's previous record by over 17%. Even though this play continues to provide players with lots of profit opportunity proceed with caution ahead of the FOMC Meeting. Earnings are confirmed for October 14th, after the bell and so far it appears the momentum may continue to carry it towards to this date. QCOM $189.19 +1.44 (-0.31) QCOM took a good whipping out behind the shed yesterday shaking off $5.88. But the stock came back today showing lots of spunk. It succeeded in reaching a daily high of $194.13 before settling for a small gain. Trading volume is still a bit sluggish at about 50% of its ADV however, this hasn't hurt the profit opportunities. For instance, the daily spreads this week have been as wide as 10 points offering a variety of entries to target shoot into this momentum play. Now be careful of using stops on such a volatile Internet stock. It's very easy to get kicked out of the game unintentionally and lose possible gains. This play really needs your undivided attention to take full advantage of its potentiality. In the news today, Qualcomm announced that they are reviewing their investment in Metrosvyaz of Russia since Leap Wireless International withdrew its support due to "serious financial irregularities". QCOM has approximately $50 mln (net book value) in relation to this venture. Bottom-line is that they may have to take a one-time write down in the fourth fiscal quarter of 1999. Still the company reported it expects to meet or beat 4Q analyst consensus at $0.88 p/s. The earnings' date has been confirmed for November 2nd, after the bell. YHOO $179.50 +0.19 (-3.81) While fund managers were shopping for end of the quarter window dressing today, Yahoo! apparently was not on their "buy" lists. Volume has been on a sequential decline since last Friday to the point where YHOO traded just 63% of its ADV today. It looks like investor sentiment toward piling into YHOO for its earnings announcement on October 6th has ended. Similarly, you can be pretty sure that the exit is going to get crowded as that day approaches, especially since the FOMC meeting precedes it on October 5. The Fed meeting alone will cause jitters in interest rate sensitive stocks. Also, given a stock's propensity to fall after an earnings announcement, you should plan a prior exit of the position. As you know, we never recommend holding over earnings. Since Monday and Tuesday aren't shaping up to be positive days (FOMC, YHOO earnings) for YHOO, you may want to plan to exit tomorrow. We'll likely close the play in Sunday's letter. EBAY $141.06 +2.06 (-5.00) Despite noticeable volume most likely related to window dressing in today's market, Internet stock volumes were light to average, signaling that they were not likely dressing any fund managers' windows. EBAY was no exception, trading just 95% of its ADV. Last night though, it was announced that EBAY would join the NASDAQ 100 on October 6, which should have sparked some buying activity. It means that index fund managers will eventually have to add it to their portfolios to accurately reflect the index. It's a forced accumulation, which will drive up the volume, and thus the price, a bit. Perhaps we'll see the volume pick up after the FOMC meeting when investors won't likely feel as skittish about a rate hike. Historical support is still in the $136-$138 range, a point that looks buyable so long as it bounces off and doesn't drop through. Technically, the 10-dma of $141 has been providing some resistance for the last week but the price is edging up nonetheless. As a friendly reminder, this is a volatile Internet issue and not for regular anti-acid users. If your risk profile is only slightly more conservative than a "Flying Wallenda", you may want sit out this technically critical and interest rate sensitive period of the market while waiting for direction. Earnings are scheduled for release on October 26 after the close. **************** PICK NEWS - PUTS **************** KO $48.25 -0.63 (-2.88) Yes, it's the real thing, and just the thing for a great put play. While KO struggled for recovery today, the last hour of trading fired the strategic silver bullet, as selling volume increased drastically, sending the price down $1.56 from its high of the day. This was an apparent attempt by a fund manager or two to "hide the body" so KO doesn't have to show up on the funds' roster. We note again 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." We got a great entry yesterday afternoon as the price fell below $49.50 and the volume began to increase. While the long term prospects don't look good for KO, we implore you to use caution at this point, since window dressing isn't going to be a factor again until next quarter, which may cause the selling volume to shrink. In the short term, major selling may be over, which may cause the descent to slow or stabilize. From a historical perspective, the selling volume isn't likely to remain this high forever. To enter the play, you may want to wait for a technical bounce with failure at the $49-$49.50 level. You have to go all the way back to 1996 for a lower price. Earnings aren't until "the third week of October, probably Wednesday or Thursday". That's the best KO could tell us when we called them. GENZ $45.06 -1.69 (-5.44) We still have no idea what started this downhill slide, but we sure like the slope. Technically, every moving average has violated to the downside. The 10-dma can't even keep up with the rate of descent. The pattern seems to be fall, up slightly, fall more, up slightly, fall more, every time setting a lower low. The next support is at $40. A good entry will likely occur when the price rises to $46 then falls back, but wait for the downward bounce to be sure. The drug stocks actually exhibited some strength today, which may rub off on the biotech sector in the not too distant future, especially if the market takes off, the stock gets an upgrade, or the company reports some good news. Just make sure negative market conditions are in your favor before starting the play. Maybe tomorrow or Monday in front of the FOMC meeting? Earnings are not until October 21, according to Zack's, and thus not yet a factor. DD $60.50 +0.00 (+1.38) What a day for Dupont! Dupont traded right around $61 throughout the day but experienced a big late day sell-off, bringing the volume up to approximately 5 million and sending it downward to close at $60.50. As we all know it is the time of year for "window dressing" and Dupont was certainly not excluded from the fun. This may have been the main reason for the rebound today. Dupont continues to be burdened with a large negative divergence from its 50-dma and we see further downside. The stock again closed below the 10-dma at $60.75 despite trading above it during the day. Therefore, we expect a continuation of Dupont's downtrend as today's rally was probably a bear trap. We expect DD to retest the lows from Tuesday at $58 again soon. LLY $64.19 +0.94 (-1.00) Right on schedule is our put play of Eli Lilly. You may recall from Tuesday's update that we were looking to exit the play and let Lilly rebound back to the resistance at $65. LLY has co-operated and we are looking for the next entry point. But we have some reason to fear that the resistance may not last. This is because Schroder & Co. came out today and started coverage on 5 Drug stocks. They gave LLY the lower of the 2 ratings at Outperform but the comments spurred the gains you saw in the stock and sector today. The other concern is the market which had a nice move up today. But $65 resistance is strengthened by the 10-dma and has not folded under the buying pressure. This is the determining factor in our play. As long as LLY remains below this level, it is a good entry point. We expect today's window dressing rally to subside and LLY should head right back to $62. This is just what we got late in the day right after LLY hit $65 and rolled over. Keep your stops set right above the 10-dma. WPI $30.56 +0.38 (+1.00) Today the Market had a nice short-term turn around, rallying to close the day over 100 Dow points. This action was due to the end of the quarter window dressing by money managers, as well as an oversold technical bounce. But even this was not enough to rally the shares of WPI above our cover point at $32. The high of the day hit $31.13 before bouncing back down to settle at current levels $30.56 on very low volume. As we have recently reported WPI is expecting to miss the earnings estimate by 6 or 7 cents per share due to report on 11/04. Going forward, although the shares have bounced off of the recent lows of the year, we expect WPI to continue to drift lower in the trading days to come, looking for an additional entry point on the confirmed bounce off the 10-dma at $30.75. Always remaining cautious, just in case the downtrend is broken, we will stop out the play on any sustained rally over the 10-dma. ************** NEW CALL PLAYS ************** CMVT - Comverse Technology Inc. $94.31 +2.94 (+3.63) Comverse Technology makes enhanced telecommunications systems and is the third-largest firm in the voice mail market. Its TRILOGUE Infinity and Access NP product lines supply voice and fax messaging, automated personal assistant, and call answering services. TRILOGUE is marketed to telecom network operators and gives multiple telephone users access to integrated digital information and messaging services. Comverse's AUDIODISK and ULTRA lines are communications monitoring systems used by police and surveillance agencies, correctional institutions, emergency 911 services, financial institutions and tele-marketers. We actually ended the day on the upside, anyone watching the market lately would realize what a rarity it is. Our newest call play, CMVT, participated in the rally and is going to be one to watch in near future. One reason why we chose this play was due to an annual shareholders meeting that is scheduled for October 8th. One of the items on the agenda is to vote to authorize the increase of common shares from 100 million to 300 million. We have seen in the past what type of euphoria can be brought about by such an event. The reason why this action can drive a stock higher is because shareholders anticipate a forthcoming stock split. An recent example of this situation is BroadVision. Today during its annual shareholder meeting, BVSN announced that its Board of Directors approved a 3-1 stock split. The stock was up $11.13 on the news as investors bought shares hoping to get a piece of the pie. Technically speaking, CMVT looks very strong. The stock is trading well above its moving averages and is poised to make a run at its 52-week at $97.63. When placing new trades, watch for slight pullbacks on the stock. A good entry point would be its 10-dma at $91.00 if the stock retreats this far. If the stock continues into higher regions, go with the flow and enjoy the ride. There was little news to report this week. One good announcement came from Oscar Gruss & Son which initiated coverage on Comverse Technology with a Buy rating and a 12 month price target of $111. BUY CALL OCT- 90 CQV-JR OI=1187 at $6.38 SL=4.25 BUY CALL OCT- 95*CQV-JS OI= 804 at $3.38 SL=1.00 BUY CALL OCT-100 CQV-JT OI= 81 at $0.69 SL=0.00 BUY CALL NOV- 90 CQV-KR OI- 55 at $7.63 SL=5.75 BUY CALL NOV- 95 CQV-KS OI= 21 at $5.63 SL=3.75 Picked on Sep 30th at $94.31 P/E = 47 Change since picked +0.00 52-week high=$97.63 Analysts Ratings 9-3-0-0-0 52-week low =$19.58 Last earnings 08/99 est= 0.52 actual= 0.52 Next earnings 11-30 est= 0.52 versus= 0.41 Average Daily Volume = 929 K Chart = http://quote.yahoo.com/q?s=CMVT&d=3m ********** NEW CALL PLAYS CONTINUED IN SECTION THREE ********** SEE DISCLAIMER IN SECTION ONE
The Option Investor Newsletter Thursday 9-30-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ******************** NEW CALL PLAYS - CONTINUED FROM SECTION TWO ******************** AOL - America Online Inc $104.25 -5.00 (+6.75 for the week) AOL is the world's #1 provider of online services with over 17 million subscribers. It's acquisitions in 1998 and 1999 have given the company a 60% market share and diversity. CompuServe, an online service geared more to professionals, added its 2 million users to the AOL portfolio in 1998. This year AOL brought the Web navigator, Netscape, to its organization and is also using DIRECTV to launch an interactive TV service. The recent announcement of a proposed merger between EarthLink (ELNK) and MindSpring (MSPG) and the new wave of companies offering free Internet access is certainly heating up the competition for AOL. Let's keep it simple. AOL is an earnings' play. The stock has been moving full-speed ahead since Friday revving up for 3Q earnings expected on October 18th (to be confirmed). Granted news events are influencing the stock's movement but they are not the basis for this play. For instance last Friday AOL jumped up $10 in response to Microsoft's (MSFT) action to raise its access rates to match AOL's. For months investors have been exiting ISP stocks because of very strong competition with free ISP services and this bold move by MSFT gave strong confirmation for the pay ISP business model. Other news events that accelerated AOL's climb last week were the positive analyst ratings. Jefferies & Co started coverage with a Buy rating on September 23rd and the following day Brokerage William Blair upgraded AOL from a Long-term Buy to a Strong Buy. That same day a dissenting vote did come from Raymond James who downgraded the stock from a Buy to an Accumulate, yet it obviously was overlooked by investors. Since last Friday AOL advanced $11.75, or 12% that is until today's trading. You would have expected the upward momentum to continue in today's rising market, but a negative news event has ironically blessed us with an entry point into this play. According to Bill Burnam, a general partner of Softbank's venture capital firm, Softbank Capital Partners, he believes that ISP's like AOL, ELNK, and MSPG are all "over-valued" and that in the future these companies will "rely on revenue from advertising and e-commerce" and not from charging customers for Internet access. So that explains part of AOL's degradation today. Also it's likely some profit- taking was in order after the recent run up. Near-term overhead resistance is at $113.50, a daily high hit yesterday afternoon and support remains firm in the $87 to $90 range. In other news today, AOL announced that over 11 mln of its subscribers now shop online. This figure is double from what it was in June 1998. BUY CALL OCT-100*AOO-JT OI=27678 at $ 7.75 SL=6.00 BUY CALL OCT-105 AOO-JA OI=25134 at $ 4.88 SL=3.25 BUY CALL OCT-110 AOO-JB OI=21697 at $ 2.88 SL=1.50 BUY CALL NOV-105 AOO-KA OI= 4235 at $ 9.50 SL=7.25 BUY CALL NOV-110 AOO-KB OI= 5914 at $ 7.38 SL=5.75 Picked on Sep 30th at $104.25 P/E = 178 Change since picked +0.00 52 week high=$175.50 Analysts Ratings 23-16-3-1-0 52 week low =$ 20.62 Last earnings 06/99 est= 0.11 actual= 0.13 surprise +18.2% Next earnings 10-18 est= 0.13 versus= 0.05 Average Daily Volume = 19.2 mln Chart = http://quote.yahoo.com/q?s=AOL&d=3m ************* NEW PUT PLAYS ************* No new put plays today. ********** PLAY OF THE DAY ********** GENZ - Genzyme Corp. $45.06 -1.69 (-5.44 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. Tuesday's Write Up 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. Thursday's Write Up We still have no idea what started this downhill slide, but we sure like the slope. Technically, every moving average has violated to the downside. The 10-dma can't even keep up with the rate of descent. The pattern seems to be fall, up slightly, fall more, up slightly, fall more, every time setting a lower low. The next support is at $40. A good entry will likely occur when the price rises to $46 then falls back, but wait for the downward bounce to be sure. The drug stocks actually exhibited some strength today, which may rub off on the biotech sector in the not too distant future, especially if the market takes off, the stock gets an upgrade, or the company reports some good news. Just make sure negative market conditions are in your favor before starting the play. Maybe tomorrow or Monday in front of the FOMC meeting? Earnings are not until October 21, according to Zack's, and thus not yet a factor. BUY PUT OCT-50*GZQ-VJ OI=367 at $4.75 SL=2.75 BUY PUT OCT-45 GZQ-VI OI=227 at $2.13 SL=1.00 BUY PUT NOV-50 GZQ-WJ OI=190 at $5.88 SL=4.25 BUY PUT NOV-45 GZQ-WI OI= 56 at $3.63 SL=2.00 Average daily volume = 1.16 mln Chart = http://quote.yahoo.com/q?s=GENZ&d=3m ************************ COMBOS/SPREADS/STRADDLES ************************ MARKET RECAP ************************ The Calm Before The Storm? Wednesday, September 29 U.S. stocks closed lower Wednesday, as profit warnings and the upcoming meeting of Federal Reserve policymakers kept investors on the sidelines. The Dow industrials closed 62 points lower at at 10,213 and the Nasdaq index was down 26 points to 2,730. The S&P 500 index closed off 13 points at 1,268, below a recent key technical level. The 30-year U.S. Treasury bond was down 17/32 to yield 6.12%. Tuesday's new plays (positions/opening prices/strategy): CMG Inc CMGI NOV85C/NOV95C $6.50 debit bull-call American Express AXP OCT120P/O125P $0.75 credit bull-put Philips Elect. PHG OCT80P/OCT85P $0.56 credit bull-put C.R. Bard BCR JAN50C/OCT50C $1.93 debit calendar CMGI was our first opportunity to participate in the new plays and it gave us about 30 minutes of direction-less movement to open the position. The suggested target of $6.50 was available. Philips Electronics moved in much the same manner (nowhere) but the difference was that it remained basically at its starting point for most of the day. The target may have been achievable as the bid/ask quote was $0.50 for much of the session but we will record the entry slightly lower at $0.56. American Express was a bit more exiting, opening down almost $2. The position moved quickly to our recommended target and actually traded as high as $0.88 during the day. C.R. Bard was the last of our new plays, and it proved to be a good opportunity, opening right at our target debit and remaining there for most of the morning. In the afternoon, the disparity faded and our position moved closer to profit without any help from the underlying issue. Portfolio plays: Wednesday's market activity offered little hope as buyers were noticeably absent from most of the well-known big-cap issues. All of the investing world is now awaiting the interest rate and inflation outlook from the Tuesday meeting of the Federal Reserve's policy-setting committee. The FOMC will consider the question of whether another interest rate increase would be an appropriate step to moderate U.S. economic growth. Not much news in the overall sense today but there were some nice moves in the smaller issues. 3Com Corp (COMS) rallied to a recent resistance area near $29 and this position has become our focus as a close near $30 should signal a new trading range. Bell Atlantic (BEL) also demonstrated some break-out potential today but it fell back in the afternoon, settling near our sold strike at $65. The upper level of the trading range appears to be at $69 and that is also near the limit of our profit range in the calendar spread. Keep a close watch on that one. Viatel (VYTL) is recovering somewhat with another bullish move up to $27. Our sold strike in this volatility spread is at $30 so we still have some distance to go before profits will start to appear. One of the stocks in our long-term section, Computer Associates (CA) is starting to make a move. The stock climbed $2 higher to $59 on solid volume and it appears the move might continue back to the recent highs near our sold strike at $60. Thursday, September 30 The effects of quarterly "window dressing" pushed U.S. equities higher and blue-chip issues registered the biggest gains of the day. The Dow Jones industrial average rose 123 points to 10,336 while the Nasdaq composite moved up 16 points to 2,746. Market breadth was better than usual as advancing issues outnumbered decliners 1,892 to 1,172, on heavy volume of 1 billion shares. The 30-year U.S. Treasury bond rose 1-3/32, pushing the yield down to 6.05%. Portfolio plays: The big market news today was the decline in economic growth during the second quarter, to its slowest pace in four years; but increasing August home sales suggest it may be regaining upward momentum. The newest economic reports are expected to be the key data that Fed policy-makers will examine in their meeting next Tuesday on interest-rate strategy. Most of well known analysts are convinced the U.S. central bank will keep rates steady for the remainder of the year. Bell Atlantic (BEL) made another run at a new high but fell back near the close as buyers took profits from today's rally. The calendar spread position at $65 is comfortably profitable but an upside break-out could spell disaster so keep this one at the top of your quote list. The new play on C.R. Bard (BCR) offered some excellent disparities in the front month option premiums and with the stock holding ground near $47, we have decided to recover some of the lost potential in our previous (OTM) spread. The position; JAN55C/OCT55C, was adjusted down to the $50 strike for October, netting a $0.75 credit. This is a bold move but it will bring our play back to profitability if BCR can remain below $50 for two weeks. Viatel (VYTL) just keeps right on trucking and our newest calendar spread is now in a profitable position, only four days into the play. As the issue approaches $30, watch for a favorable exit opportunity. Three of our slumping (bullish) issues; Qwest (QWST), Tuts Systems (TUTS) ands Unify (UNFY) all made nice rebounds in today's market. The QWST and UNFY spreads are now profitable and you should consider closing those plays to protect gains and prevent potential losses. Starbucks (SBX) appears to be consolidating near $25 and we hope it remains at that level for the next two weeks. Computer Associates (CA) continued its recent rally, up $2 to September highs near $60. Our sold strike is now slightly ITM and a new upside break-out is possible. Keep a close watch on that one. On the downside, Biogen (BGEN) and Cabletron (CS) slid further, even as the market rebounded. BGEN now appears to be headed for new lows and it's certainly a candidate for downside adjustment. CS should successfully test support near $15 and we will wait for the outcome of that activity before making any decisions about the long-term position. Questions & comments on spreads/combos to ray@OptionInvestor.com ********* NEW PLAYS ********* MU - Micron Technology $66.50 *** Another Big Down Day! *** Micron Technology and its subsidiaries principally design, develop, manufacture and market semiconductor memory products, personal computers and custom complex printed circuit board, memory module and system level assemblies. The company's chip and memory operations focus on the design, manufacture and marketing of semiconductor memory components primarily for use in PCs. Their primary semiconductor products are dynamic random access memory (DRAM) components. Shares of semiconductor makers tumbled again today as investors worried about the potential impact from a nuclear accident in Japan and a drop in memory chip prices. Japan's worst nuclear accident in history occurred at a Japanese uranium processing plant about 90 miles northeast of Tokyo. Analysts and traders were already worried about the impact on chip and PC makers of the Taiwanese earthquake last week and now this accident just makes it worse. Information from company reports around the manufacturing area were favorable and most of the industry appears unaffected by the nuclear incident. It seems that this newest activity was just a catalyst for further profit taking and most analysts expect a rebound to occur some time next week. In any case, Micron at $50 seems extremely speculative, even for the most pessimistic traders. PLAY (conservative - bullish/credit spread): BUY PUT OCT-47.50 MU-VW OI=507 A=$0.56 SELL PUT OCT-50.00 MU-VJ OI=3767 B=$0.81 INITIAL NET CREDIT TARGET=$0.31 ROI=14% (two weeks) Note: Friday's volatile activity may produce a better net-credit and experienced traders might consider legging-into the position to take advantage of any further downside movement. Chart = http://quote.yahoo.com/q?s=MU&d=3m **** MUEI - Micron Electronics $10.50 ** Cheap Speculation *** Micron Electronics is a recognized industry leader and direct vendor known for its award-winning products and services. The company develops, manufactures and markets high-performance, competitively-priced computing solutions to consumers, small businesses, commercial, and public sector buyers. Shares of Micron electronics have fallen recently despite a strong earnings report released earlier this week primarily due to concerns over earnings from its personal computer sales. Micron made $0.14 a share during the fourth quarter, which blew away consensus analysts' estimates, but its growth came from a memory chip business segment. The company's PC sales actually declined in the quarter and gross margins fell to 17% from 21%. Micron Electronics has a small, yet very profitable memory business in SpecTek. SpecTek semiconductor markets various grades of memory products under its brand name. CIBC World Markets increased its quarterly estimates for Micron based on strong earnings from the SpecTek unit. One analyst said that higher DRAM chip prices were the reason why their new division had a stellar quarter; gross margins were up to a four year quarterly high. The stock price has found support near $10 in the past and with the low cost of this position, it has a reasonably high probability of success, as long as the stock can remain near (or above) the $10 range. PLAY (conservative - bullish/calendar spread): BUY CALL APR-12.50 MQU-DV OI=107 A=$1.50 SELL CALL NOV-12.50 MQU-KX OI=205 B=$0.38 INITIAL NET DEBIT TARGET=$1.00 TARGET ROI=50% Chart = http://quote.yahoo.com/q?s=MUEI&d=3m ********* STRADDLES ********* Great news for the straddles section as we have a big winner in one of the short-term (Optionetics) positions. United Healthcare (UNH) dropped over $12 during the session amid reports that trial lawyers are preparing a slew of class-action lawsuits on behalf of managed-care patients. Such lawsuits could hurt a companies' ability to control health costs because managed health-care such as HMOs are a form of insurance and insurers limit their coverage of doctors, hospitals, and procedures in order to hold down costs. Regardless of the outcome, the straddle traded at $13.00 credit, a $2.50 profit from the initial play. If you feel that today's reaction is overdone, you might consider selling just the bearish side of the play (for a nice profit)and holding the call option for a rebound. Other issues that are performing well include Allegheny Teledyne (ALT), hitting a high of $17.50 today as more news of the planned spin-off of their Aerospace and Electronics segment became public. That issue will probably recover after the earnings warning has passed so we are going to watch for technical indications of a bullish change in character. Federal Express (FDX) has been on a rebound since the day we opened the position and on Tuesday, the straddle traded at $10.50 credit, a small profit ($0.75) for one week. The stock appears to be recovering on news that FDX Corp., operator of Federal Express, is planning to buy back 15 million shares (about 5%) of its stock. Union Carbide (UK) is also moving up nicely after a successful test of recent lows near $52. With the profit warnings out of the way, this issue will continue to rebound as long as the DOW holds its ground. The problem is that a significant resistance area resides near the current price at $57. Lycos (LCOS) has also moved quietly out of an old trading range near $45 and is now heading for the top of a (long-term) channel near $53. The recent boost in secondary Internet stocks may help this one. Copper company Phelps Dodge (PD) finally agreed to a take-over of Cyprus Amax Minerals (CYM) for $1.8 billion, terminating its month long hostile buy-out effort and the merger pact between Cyprus and Asarco (AR). In setting the friendly transaction, Phelps Dodge increased its hostile offer by about $65 million in cash. Based on Thursday's stock prices for Phelps Dodge, the deal values Cyprus at $19.82 a share. This may adversely affect the future volatility of the stock but we will wait a few days before making any judgment. One of our more speculative positions; Williams Companies (WMB), has just started to demonstrate signs of a significant change in character, with a $2.44 rally on Monday. A series of new articles came out on Tuesday with a large debt offering leading the group. The company is planning to sell $1.25 billion in 10-year notes and $425 million in eight-year notes, using use the proceeds to develop a network eventually expected to consist of 33,120 miles of fiber optic cable. Williams is also expected to raise several hundred million dollars in a new initial public offering of 29.6 million shares. The Wall Street debut of Williams Communications Group (WCG) is expected to have excellent demand and analysts appear to favor its aggressive growth strategy. The planned IPO should be priced at $21 to $23 on Thursday night and that should give another boost to the recovering parent stock. Look for some "New Plays" in Sunday's edition. ************ See Disclaimer in section one ************
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