The Option Investor Newsletter Tuesday 10-5-99 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) ************************************************************ 10-5-99 High Low Volume Advances Decline DOW 10400.59 - 0.64 10509.20 10277.10 958,064k 1,222 1,783 Nasdaq 2799.16 + 3.70 2833.96 2765.37 1,193,256k 1,819 2,096 S&P-100 682.91 + 0.31 690.99 673.61 Totals 3,041 3,879 S&P-500 1301.35 - 3.25 1316.43 1286.44 43.9% 56.1% $RUT 426.01 - 0.60 428.16 423.86 $TRAN 2979.73 + 20.63 3008.20 2956.30 VIX 26.07 + 0.37 27.67 25.43 Put/Call Ratio .54 ************************************************************* Dow -.64, just another boring day in the market! If you just checked the closing stats when you got home tonight then you probably thought it was a really slow day. If you explored further you would have seen a really wild ride for those with open positions. The Dow was up +109 points before the conclusion of the FOMC meeting in anticipation of no rate increase. At 2:15 when the Fed did announce there would not be a rate increase now but they were changing the bias to a tighten stance the market dropped -232 points to a low of 10277. Considering we were over 10500 at the high, it was a substantial drop to support. As you can see by the Dow chart above the 10300 line, which had been upward resistance for us all last week, became support for us today after the Fed reaction sell off. The Nasdaq showed the same trends and bounced off 2765 which had been previous resistance. These are good signs but the market still has some challenges to move upward from here. So why did the market crash when the Fed did just as everyone expected. We view it as a buy the rumor and sell the news event. Yes, most analysts expected the bias change to tighten in formal statements but in their hearts everyone wanted a continuance of the neutral status and a green light to move ahead. The bias change was a reality check for many traders. Too much bullishness clouds your expectations. (I know from experience!) The bias change means that the Fed can pull the trigger on another rate increase at any time. For example, if the jobs report came in too strong on Friday then Greenspan could simply make the rate announcement with no warning. The FOMC tried to blunt this threat by saying in their announcement that a change in the bias to tighten "did not commit them to action in the future." Just changing the bias does not necessarily mean they are planning to raise the rate. Essentially this is like raising a guillotine over the market and daring anyone to put their head in it. Now, without actually raising rates, the Fed has put a cloud of uncertainty over the market. They have taken a position where they can say "we didn't do it" if the market crashes, but they can also take credit if the economy continues to slow. It is a win-win for the Fed and pain in the neck for us. Bond yields spiked up to 6.18% today and every point it moves higher will cause more Y2K cautious investors to consider bonds instead of stock. I know you have heard this before but the next 10 days will be very critical in the market. We are very close to the beginning of the end if the Y2K problem is going to cause a sell off. If it is going to happen it could start anytime. Investors who wanted to get one last earnings cycle under their belt before moving to the sidelines could start selling into the earnings rallies. We are also entering the October Zone. October has not been kind to investors. In 1998 we hit the bottom on Oct-8th after the market was rocked by the Japan crisis. The market then rallied strong from the Oct-8th low of 7472 to 9645 in the first week of January. A whopping +2200 point gain. The market low in Oct-97 was 6970 and occurred on the 28th of the month. We then rallied +1200 points into the first of December when we were hit with another drop. Still, the case in point here is the tendency for October to host short term market bottoms followed by strong rallies into January. This is the RECENT NON-Y2K trend. What will actually happen this year is anybody's guess. Our challenge is to trade any rally while constantly looking for signs of investors moving to the sidelines in time to capitalize from it. There is also a group of analysts that think the Y2K cloud will actually provide an increasing three month wall of worry that will actually fuel the market into solid gains between now and the end of the year. The latter scenario now must carry the additional weight of the possible rate increase. In other news oil prices fell for the second day in a row amid fears that an upcoming meeting of three key oil ministers would cause changes in global oil output. This put pressure on oil stocks again but is a long term plus for the market. High oil causes higher consumer prices on thousands of products and adds to inflation. MCI Worldcom announced today that it would buy Sprint for $115 billion in stock. This would be the largest merger in history but it could be years before it happens, if at all. A government spokesman said it would be anti-competitive and there are sure to be many legal hurdles to the transaction. AAPL announced a new sub-$1000 iMac today to launch their bid into that market. AAPL stock soared +3.36 on the announcement and the news that the Taiwan earthquake damage had been repaired and computers were again shipping. AOL rocketed for a +4.38 gain after announcing a major software upgrade that would allow users to connect in more ways than before. Micron (MU) jumped +5.69 after posting better than expected earnings. Not all news was positive today. Haliburton issued a profit warning and fell -6.06. Dropping oil prices are worse than a Y2K virus to oil service firms. Where to from here? I view the market rebound from the -123 low at 3:10 as a positive sign. The market still wants to go up. There is money on the sidelines that doesn't want to miss any possible rally. Tomorrow should give us a clue to the market direction. Remember, we were very oversold going into this week and some of that pressure was removed with yesterday's +128 gain. We are now starting the fourth quarter and the score is tied to use a football analogy. If we can get to Friday's Jobs Report without a major sell off AND the Jobs Report is not strong enough to trigger the Fed then the weight of the interest rate cloud will lighten. Even though the NYSE finished at a break even the advance/decline reversed its gains from yesterday and turned negative again. Many analysts feel we still have not had a cleansing sell off and are waiting for another big drop before moving back into the market. Obviously no one has the answer. A good plan for entering the market today would be to average your buys. Open only one half or one third of the position you eventually want. As the trade progresses you can decide if you want to hold, or add to it the remaining contracts. If it goes down on a market dip you can enter the rest of your position cheaper and average down. The only worry here is a continuing declining position. Please reevaluate your decision based on current research before entering the rest of the trade. This is a great market for target shooting. The big swings give you opportunities to buy options at 25-50% less than the highs of the day. I target shot CMGI puts on Monday by placing five different orders before the open at different increments below the then current price. I got filled on four of them and one was the low of the day. These big spikes work well on profit stops as well. There is nothing wrong in setting multiple sell stops and taking some profit off the table along the way. Pick your entry points carefully until you are sure of the market direction and sell too soon. Jim Brown Editor ************************************ MONEY SHOW in San Francisco Oct-28/31 ************************************ OptionInvestor.com is a major sponsor and exhibitor at the San Francisco Money Show the last weekend in October. At the Money Show we will be hosting a FREE get acquainted session for our readers. This event will be on Thursday Oct 28th, and will consist of an introduction of the OIN staff and five breakout sessions on various types of option strategies. Refreshments will be served and there will be many gifts for each reader. On hand will be: Jim Brown, Editor Kimo, Asst editor Ray Cummins, Spreads editor Chris Verhaegh, Options 101 and spreads specialist Buzz Lynn, Research Analyst and asst editor Janar Wasito, Traders Corner writer Tom Gentile, Chief Option Strategist, Optionetics George Fontanills, Author, educator, trader Austin Tanner, President, Pinnacle Capital Advisors After the introductions we will breakout into six chalk talk sessions led by the staff. The informal chalk talks were a hit at our Denver seminars and allow the attendees to move around from session to session as the night progresses. The sessions will include: Ray Cummins: Spreads/combos Chris Verhaegh: Covered Calls/Naked puts/Calls on leaps Buzz Lynn: Directional trading with calls/puts Austin Tanner: Skybox/Sentiment Analysis Tom Gentile: Straddles George Fontanills will be signing his new book which comes out on Oct 22nd titled, "Trading Options Online." $!$!$!$!$!$!$!$!$!$!$!$!$!$!$!$!$!$!$!$!$!$!$!$!$!$!$!$!$!$ VERY IMPORTANT - Because we need to know how many people are going to attend we need you to register before the event. It is FREE and you will receive several free gifts as well but YOU MUST REGISTER BELOW IF YOU ARE COMING. http://www.OptionInvestor.com/sfms $!$!$!$!$!$!$!$!$!$!$!$!$!$!$!$!$!$!$!$!$!$!$!$!$!$!$!$!$!$ During the Money Show there are dozens of breakout sessions taught by many different speakers representing many different firms. OptionInvestor.com will be presenting eleven of these and Optionetics presents several more. OIN Money Show breakout sessions: During the next three days the OIN staff will host eleven breakout sessions. Oct 29, 5:05PM Jim Brown - Maximizing Returns with Options Oct 30, 10:10A Ray Cummins - Calendar Spreads, Covered Calls, Zero Cost leaps Oct 30, 1:40P Ray Cummins - Covered Calls, Naked Puts, Triple the S&P Safely Oct 31, 8:55A Buzz Lynn - 15 Things Every Option Trader Should Know Oct 31, 10:10 James Brown - Investing on the Internet, Tools, Who, Where, How Oct 31, 1:40P James Brown - Beginners Guide to Trading Hot Internet Stocks Oct 31, 1:40P Chris Verhaegh - Spreads Strategies for Income, Speculation and Hedging Oct 31, 2:35P Chris Verhaegh - Option Pricing, Overvalued, Undervalued, no value. Oct 31, 2:35P Buzz Lynn - Trading, Entry Point, Exit Point, Get to the Point no time yet - Buzz Lynn - Options on Stock Splits no time yet - Chris Verhaegh - Charting, the Key to Technical Analysis Tom Gentile and George Fontanills will also be doing breakout sessions but I do not have the info yet. If you live in California or just want to get away for the weekend then click here for more info. http://www.intershow.com/moneyshow/sfhome.htm Click here to register - it is free! http://www.OptionInvestor.com/sfms *************** Market Posture *************** As of Market Close - Tuesday, October 5, 1999 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,500 11,320 10,401 BEARISH 9.23 SPX S&P 500 1,350 1,420 1,301 BEARISH 9.16 OEX S&P 100 675 735 683 Neutral 10.05 * RUT Russell 2000 440 465 426 BEARISH 9.14 NDX NASD 100 2,320 2,380 2,472 BULLISH 9.03 MSH High Tech 1,120 1,180 1,277 BULLISH 9.03 XCI Hardware 1,035 1,050 1,080 BULLISH 8.24 CWX Software 750 800 888 BULLISH 9.03 SOX Semiconductor 480 525 549 BULLISH 10.05 * NWX Networking 555 585 609 BULLISH 9.17 INX Internet 450 510 503 Neutral 9.24 BIX Banking 690 710 596 BEARISH 7.23 XBD Brokerage 410 440 385 BEARISH 7.23 IUX Insurance 645 660 537 BEARISH 7.23 RLX Retail 915 960 858 BEARISH 7.23 DRG Drug 365 390 357 BEARISH 9.16 HCX Healthcare 745 785 711 BEARISH 9.16 XAL Airline 180 190 145 BEARISH 5.21 OIX Oil & Gas 285 305 286 Neutral 9.16 Posture Alert Buy-the-rumor, sell-the-news mentality was in full effect today, as the broad market sold off after the Fed made their announcement to leave rates alone, yet change their neutral bias to a tightening bias. Leaders today included the Semiconductors (+3.20%), Internet (+2.02%), and Software. On the downside, Oil & Gas lost another -2.31% on the heels of a negative warning from Halliburton Co. With Tuesday's actions, we have upped Semiconductors to BULLISH from it's brief Neutral stint, and the S&P 100 to Neutral from Bearish. A detailed description of our Market Posture and its applications can be found at: /members/marketposture *************** Market Sentiment *************** Tuesday, October 5, 1999 Partly Cloudy with a Chance of Rain? So the Fed finally made their appearance before us and gave us the good news of no rate hike, yet change their neutral bias to a tightening bias. This was the news that was expected, and the buy the rumor, sell the news mentality took over. This happened extremely quickly as the Dow retraced over 200 points in a short period of time, before late-day buyers stepped in (most likely short covering) to make the day a non-event. What does this mean for you, the investor? For you golfers out there, you know the feeling of having a tee-time set up with your 3 best friends, several weeks out, at a prestigious club (or like us, 3 friends, all call in sick to work, and head to the nearest hackers course). You then arrive and hear the Thunderstorms in the background, and being the optimist, you state that it will blow over shortly and you jump in your golf cart. Sometimes you end up wet and frustrated, and other times you get lucky and everything blows over (usually the former happens). What this means for the market? Well, perception of interest rates and inflation represent a very large part of this market is terms of sentiment analysis. Granted, the news that came out today was expected, but what this tells us is that a thunderstorm cloud continues to hang over our head, and will do so for every economic indicator (or blurb from any Fed-head to Ballmerspan) until their next meeting. Wall Street doesn't like uncertainty, and because of this bias, we are certain that uncertainty will increase, which will only help fuel this zigzag direction in the market. The one big thing going for this market in the near term is the start of earnings season, which can definitely lift this market. However, it is a double edge sword. We want earnings to be great! However, if earnings are too good, the Fed may spoil the party with future rate-hikes, so uncertainty can actually increase with too good an earnings season. Wall Street always looks six months ahead, and if the crystal ball gazers see several rate hikes coming, this earnings season could be trading range bound. Some stocks/options will have sunny skies ahead, and many others will end up wet, some weeks will rally, and others will fall, so choose carefully, and bring your umbrella just in case. 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. Earnings Season: Earnings season is still early, but we should have a stellar earnings performance this month. Micron Tech has already beat, and Yahoo is on deck. Mixed Signs: Volatility Index: The VIX is above the 25 benchmark, but has held ground in the low 30's. 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. Interest Rates: The yield on the 30-yr Treasury is above the 6% benchmark and nearing the highs of 6.272%. 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 look 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% Friday, October 01 108,460 +215.6% Market Sentiment at a Glance Friday Tues Indicator (10/1) (10/5) Pinnacle Index (OEX): Underlying Support (680-700) 1.9 2.0 Underlying Support (650-670) 5.5 5.4 Put/Call Ratios: CBOE Total P/C Ratio .7 .7 CBOE Equity P/C Ratio .6 .4 OEX P/C Ratio .9 .9 Peak Open Interest (OEX): Puts 650 650 Calls 700 700 P/C Ratio .87 .94 Market Volatility Index (VIX): CBOE VIX 26.07 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 Benchmark (10/1) (10/5) Overhead Resistance (680-700) 1.90 2.00 OEX Close 670.31 682.91 Underlying Support (650-670) 5.51 5.42 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 (10/1) (10/5) CBOE Total P/C Ratio .69 .68 CBOE Equity P/C Ratio .56 .41 OEX P/C Ratio .93 .94 Peak Open Interest (OEX) Friday Tues Strike/Contracts (10/1) (10/5) Puts 650 / 10,550 650 / 11,137 Calls 700 / 12,141 700 / 12,606 Put/Call Ratio 0.87 .88 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 October 5, 1999 26.07 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 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 Week Dow 10400.59 128.23 -0.64 127.59 Nasdaq 2799.64 59.12 3.67 62.79 $OEX 682.99 12.29 0.39 12.68 $SPX 1301.43 5.45 -3.17 2.28 $RUT 426.00 3.08 -0.61 2.47 $TRAN 2979.73 90.76 20.63 111.39 $VIX 26.07 0.00 0.37 0.37 Calls Mon Tue Week DCLK 123.56 0.38 8.81 9.19 Broke through resistance QCOM 194.75 3.03 4.91 7.94 Participated in the rally BRCM 120.25 4.56 3.19 7.75 New, earnings play NOK 97.00 4.56 3.19 7.75 Nokia hits new 6-week high VRTY 69.50 3.44 2.69 6.13 Looks like a traders dream SUNW 97.81 4.53 1.28 5.81 Reached a new 52-week high AOL 113.50 1.25 4.38 5.63 Great looking earnings run AEOS 54.31 2.68 1.88 4.56 Retail stocks back to life CMVT 98.00 4.06 -0.31 3.75 Shareholder meeting ahead EMC 76.00 3.62 -0.50 3.13 Well above its support LCOS 56.50 -1.28 4.25 2.97 Lycos has winning session ADBE 114.69 4.63 -3.13 1.50 New, 2:1 split play XMCM 51.50 1.31 -0.38 0.94 Looking for a breakout TFSM 41.25 -1.25 1.88 0.63 Watch for profit-taking SNE 155.63 0.31 -0.19 0.13 A tiger on the prowl ITVU 39.25 0.50 -0.75 -0.25 Signs of gaining momentum RNWK 103.00 -0.44 -2.81 -3.25 Slowing down for a buy? GMST 69.38 -7.44 -6.81 -14.25 Dropped, TV Guide turn-off Puts GENZ 32.94 0.41 -10.06 -9.66 Under hail of downgrades KO 47.94 -1.50 0.38 -1.13 Has no definitive support WPI 28.88 -0.06 -1.06 -1.13 Hits another 52-week low PSIX 33.88 -2.63 1.75 -0.88 Still below 10-dma EXDS 68.44 -2.81 2.13 -0.69 Shares below support level YHOO 173.31 2.13 -4.25 2.13 Look for earnings on Weds. IBM 122.00 2.13 2.13 4.25 Dropped, too much good news! 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: ***** GMST $69.38 -6.81 (-14.25) Gemstar was having a great day yesterday until about 1:20 EST when trading was halted. At that time Gemstar had gained $4.06 for the day, trading at $87.68. Less than one hour later they announced they were going to acquire TV Guide. How about that for a twist in the plot from the weekend write up. By the end of the day shares of GMST had dropped to a low of $73.75 and finished the session down $7.44 at $76.19. Today it only got worse as GMST continued to fall. Apparently investors didn't think the deal with TV Guide was quite as good as Gemstar did. It's a deal for about $9.2 Billion in stock and DEBT, which will supposedly strengthen Gemstar's position in the race to provide electronic program guides. In the long run it may prove to be a solid acquisition, but it sure put a crimp in a good call play, so we will stand aside and let GMST go for now. PUTS: ***** IBM $122.00 +2.13 (+4.25) Lately, there is no such thing as bad news for IBM. IBM broke out above its 10-dma and looks as though it wants to keep on going with a market recovery. On Monday, IBM announced that they had, once again, broken the world record for data storage by 75% from their previous record, set just five months ago. IBM also broke the record for transaction processing performance with its RS/6000 S80 Server on Tuesday. Due to a potential recovery in the tech sector and ahead of earnings, it is time to bid this play farewell. 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 10-5-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ******************* TRADERS CORNER ******************* Protecting and Managing your Stock Portfolio with Options In these times of investing, volatility seems to be king. Investors of Internet stocks can agree with this. Can you imagine buying a high flying Internet stock last spring, only to see it move drastically against you. Or what if you had purchased stock a few years ago on a company such as CMGI, only to see it double or triple in value, and then take a dive? It's a tough thing to swallow, which leave many investors on the sidelines. Is there any way that we can still invest in these aggressive growth stocks, while limiting the risk? When most investors hear the word "Options", they think of risk, risk, and more risk. Yet, most people don't look any deeper into what an option can really do. Hedge funds are basically a portfolio of securities and derivatives that are hedged with either very positive or negative correlated products. An option is the truest form of a hedge against its underlying security, when positioned right. In fact, anyone with some knowledge on options can greatly reduce the risk on their own portfolio. Let's look at a few option strategies specifically designed to hedge directional risk. LONG PUT HEDGE - Here is a simple strategy that can be used to protect your long stock position from a drop in the market. Example: 100 shares of AOL have climbed from $100 to $150 per share during the year. The trader can buy puts as protection AOL December 150 put @ 20 =$2000 Therefore $2000 of put insurance protects the position until December. Not bad, and if the stock were to continue to rise, the position can still be profitable. The only problem here is the cost of the long put. COVERED CALL HEDGE - Using a short call, the trader can offset the position by taking in premium against the owned stock. Using the same example of AOL above, the trader decides to sell the AOL December 150 call for 20. In this case, the trader collects 20 points of premium as a hedge against his long stock position. This will help protect the losses to a limited degree if the stock should drop. The best case scenario is that the stock price either remains the same or rises to expiration. The big problem here is that covered calls only protect against limited amount of downside action. If the stock were to take a big dive, The trade could still lose a substantial amount of money. PROTECTIVE COLLAR STRATEGY - The classic collar strategy gives investors a cost free hedge to protect profitable stock positions. The basic strategy consists of combining the two strategies above. By buying the at-the-money puts as above and selling the at-the-money calls at the same time, the trade will pay for itself generally. This accomplishes the need for protection on the downside but also allows for continued profit up to the strike price of the call sold. Using our AOL example above, we would take our 100 shares of AOL at 150 and use the collar strategy like this; buy AOL December 150 put @ 20 =$2000 and sell the AOL December 150 call for 20. The calls that were sold pay for the puts and completely hedge the stock for any downside move. The only negative of a collar strategy is the profits are limited if the stock continues up. APPRECIATING COLLAR STRATEGY - This strategy can be used to take advantage of volatile stocks in which the at-the-money call premiums are higher than the at-the-money put premiums. The strategy is exactly like the protective collar strategy above, but by selling calls that have higher premiums than the puts bought, the trader will net a credit on the trade. This credit is pure profit, similar to an arbitrage. Let's look at the example above once again, but in this case after buying the put and selling the call, you receive a net credit of 4 points on the trade. If AOL rose to 200, the puts would expire worthless, and the calls would be assigned. This would close out the stock position leaving the trader with the original 4 points. If the stock were to drop to 100, the calls would expire worthless and the trader would merely have to exercise his put option to cover the falling stock. Once again, after the position is closed out, a profit of 4 points would remain. Problems do crop up with arbitrage collar trades. One problem is that often the credit received may be too small for the trader to realize a reasonable profit after commissions. Another may be finding these volatility skews in calls and puts. These are some things to consider. Whatever you decide to do, you should always consult a certified financial planner to see if this type of strategy is right for you. Tom Gentile Chief Options Strategist Optionetics ***************** PICK NEWS - CALLS ***************** AEOS $54.31 +1.88 (+4.56) In the midst of the quarterly retail sales numbers, the retail stocks have come back to life. Today, after the close, AEOS announced that total sales had increased 60.6%, and that September same store sales increased 34.2% compared to the corresponding five week period last year. With the Fed not raising interest rates today, and investors anticipating that same store sales numbers would be above estimates, the stocks in the sector are surging higher. Today after the street was disappointed by the Fed shifting to an interest rate tightening bias, the shares of AEOS held up very well, as others sold off. The stock remained steady all day, even hitting a new 52-week high intraday at $55.06, before settling in to close just off of the highs of the day at $54.31. From a technical standpoint the shares remain very strong, trading on above average volume and great momentum. Look for the retail stocks to remain strong overall as we approach the holiday season and the same store sales numbers continue to come out. If you entered into a position this week, you should have a nice profit, use trailing stops to protect it. Enter a new position at these levels after you have confirmed the continuation of the upward trend. LCOS $56.50 +4.25 (+5.53) Internet stocks overall turned in a winning session today, even though the Fed's decision on interest rates leans towards further rate hikes. LCOS the fastest growing Internet portal, was not phased today and continued the uptrend. Analyst are saying that leading Net companies that are profitable, will hold value better than ones that have profitability goals in the future. LCOS, ahead of its earnings to be announced on 11/18, continues to come out with very positive news. Today they announced a new alliance with FamilyWonder.com, that will allow the companies to jointly develop content for consumers and Home & Family Web Guides and key sections of Lycos online shopping destinations. Also Lycos Ventures completed strategic investments in three companies: LifeMinders.com, Conducent and Fogdog Sports. These investments are an ongoing process by LCOS to provide more content to the Lycos Network of Web sites. This news and an overall good session in the sector today had the shares trading as high as $58.19, before settling in too close at $56.50. Going forward we believe that LCOS has just begun to breakout, but if you entered into a new position at the beginning of the week, use trailing stops to protect current profits, if you haven't already taken profits. Look for the positive news to continue Support is currently at $54 from today's intraday low. NOK $97.00 +3.19 (+7.75) Nokia had a great day, setting a new six week high and trading up to $97.13. Nokia participated in the mid-day, post interest rate announcement sell off but moved upward toward the end of the trading day. The European telecom companies were helped along by the MCI Worldcom Sprint merger announcement this morning, but Nokia has had plenty of good news of its own to keep it going strong. In a recent Infonetics study, the jointly developed Virtual Private Network Solution of Nokia and Checkpoint Software, was named the worldwide market share leader in the dedicated VPN Hardware market. Nokia has also proved they are nothing if not versatile by sponsoring four up and coming fashion designers in an approaching Paris Fashion Week where the theme of a modern lifestyle and individuality will be appropriately accented with mobile phones. With such a big move so far this week, entry points will be tough. The 10-dma is all the way down at $90.50. Today's bounce was at $94 which also is showing support from yesterday and could be considered for an entry for investors expecting a pullback. DCLK $123.56 +8.81 (+9.18 )Just when it looked like DCLK may be turning over it finally broke through the $120 level that had been providing solid resistance for the last two weeks. Honestly after Monday's session it was beginning to appear as though DoubleClick was starting to roll over and turn south. Today even Allen Greenspan and company couldn't hold DCLK back. DCLK gained $8.81 on good volume of 5.5 mln shares. The advance today could be the beginning of a nice earnings run. DCLK is scheduled to release earnings October 14th. Technically if this breakout is for real it will need to stay above the $120 level on a closing basis. With the strength DCLK showed today we do believe that it will continue higher. Many of the stocks in the Internet sector were able to shrug off the FOMC meeting and announcement of a bias toward tightening. DCLK announced today it had signed a three-year license agreement with MERANT (MRNT) to use its PVCS software configuration management solutions. This agreement allows DCLK to reinforce its development processes to support the company's explosive growth for the next several years. Whatever the reason for the advance in shares of DCLK keep your stops close. If you are considering a new play in DCLK, confirm not only market direction but the support levels we mentioned above and remember DCLK can be a volatile play. TFSM $41.25 +1.88 (+0.63) We aren't disappointed in the action in TFSM the past two days as it has managed to gain $0.63 for the week. There are still rumors in the market place and on the Street as to who will come courting 24/7 Media. Will it be CMGI or DoubleClick for a potential buyout or merger. Shares of TFSM did trade down to $38.75 on Monday, and if you bought the bounce late in the day or this morning we would suggest keeping your stops close as profit-taking can occur at any time. We do look for shares of TFSM to continue higher over the short- term, but remember it gained over 18% in two days last week and some of those folks may want to put some money in the bank. We are not trying to scare anyone who might have taken a position in TFSM, rather make you aware of the importance of using stops. With the FOMC meeting out of the way, investors can now go back to either concentrating on earnings or being scared of how Mr. Greenspan will interpret every bit of news that comes our way in the coming weeks. With the FED not raising interest rates, but adjusting their bias to tightening it could keep the markets on edge. If you are considering a new play in TFSM look for a positive move with solid volume. XMCM $51.50 -0.38 (+0.94) Rally mode came to halt today as the Federal Reserve announced its position to possibly increase rates in the future. Unfortunately, this announcement caused XMCM to close in negative territory. The reason the movement on XMCM has stalled slightly is the two resistance points the stock has had to conquer. The first resistance point was the $50, which has been broken. The second was the 200-dma at $52, which was recently established. The stock is currently at this level and trying to overcome this hold as well. With the help of bargain shoppers, let's see if we can break this level as well. When placing new trades, wait for a convincing breakthrough of $52 or a pullback to $50. This level should act as a support level for future trading. With investors once again unnerved by the Fed, prepare for more volatile market conditions in the near-term. There was no recent news to report that would influence our play. CMVT $98.00 -0.31 (+3.75) A bias to tighten interest rates was just a little too much for this bulldozer. The negative news released by the Federal Reserve closed CMVT on a lower note however, not before setting a new 52-week intraday high. Investors remain bullish knowing that the shareholder meeting is just three days away on October 8. At this meeting they will vote to authorize the increase of common shares from 100 million to 300 million. We are playing this stock as a split candidate and expect the results of the vote soon after the meeting. Historically, split announcements have a tendency to propel stock prices, which we're hoping will be the case for CMVT. The technical strength of the stock helps support our views that CMVT is a viable split candidate. The stock is trading near its highs and shows little signs of weakness. Take advantage of the small drops in the stock as buying opportunities. With investors shaken by today's announcement look for more volatile trading in the short-term. Lets see if bargain shoppers can get the markets back to levels prior to the Fed announcement. AOL $113.63 +4.50 (+6.75) If AOL keeps up this momentum it's conceivable the share price could reach historical split levels ($120) by its earnings' date on October 20th. There is a Shareholders' Meeting scheduled for October 28th to vote to increase the number of authorized shares from 1.8 bln to 6 bln so there is certainly the possibility of a split announcement. On Monday AOL announced a 5-year alliance worth $200 mln with Sabre's Travelocity.com (TSG) who will be the exclusive reservations engine on AOL sites. Speaking of deals..could there be one brewing with ExciteAtHome? Mum's the word officially, but many analysts believe such talks are inevitable. Any glimmer of hope for AOL to strike a deal for High-speed Internet access with cable operators will likely have a positive impact on the stock. Today investors welcomed the debut of the company's new software, AOL 5.0 which is expected to be a driving force in this fall's membership growth. For example, new features such as an interactive calendar and digital photo services which can be downloaded to a variety of portable devices prompted Steve Case, chairman and CEO of AOL, to predict that the new user interface "will lead the interactive medium's next wave of growth and create a bridge from the PC to other interactive devices as we move into a more connected society". As a result AOL shot up over 4%, or $4.50 on strong volume of 22.83 mln shares being traded. The bulls ruled this game today as near-term resistance ($113.50) was shattered when the stock peaked at $114.06 by mid-afternoon. New support may be forming in the $103 to $106 range. Wait for a pullback or target shoot for an entry into this earnings' play. SUNW $97.81 +1.28 (+5.81) SUNW performed very well today. With trading volume heavy at over 50% its norm, SUNW broke through its stubborn resistance at $95. The stock not only broke through this significant level, but also set yet another new 52-week high at $99.44. Take a look at a one-month chart and it's evident that this breakthrough is certainly notable - every other time (since Sep 20th) SUNW has tagged this level it's pulled back to firm support at $91 which is just below the 10-dma (now at $93.10). The tightening bias by Greenspan has shed even more uncertainty over the market so be careful. There's only 7 trading days left for this momentum/earnings run so time is also working against us. Earnings are confirmed for October 14th, after the bell and we rarely recommend ever holding over an announcement as the risk of a decline is too high. In the news yesterday, the company announced it's the first in the industry to offer a sub-$2000 64-bit UNIX workstation and has reduced the price of its Ultra(TM)5 workstation to $1995. Today SUNW and Cisco Systems (CSCO) announced they entered into a marketing alliance to provide their new "unified communications solution" to communication service providers. The comprehensive service solution will offer clients consolidated e-mail, voice mail, and fax service in their networks. To add to the basket of positive ratings SUNW received last week, CSFB today reiterated a Buy rating and issued a 12-month target price of $110. QCOM $194.75 +4.91 (+7.94) Despite the tightening bias the Internets continued to rally today and QCOM didn't stay on the sidelines. It's gained almost $8 over the past two days, representing a 4.23% increase so far this week. Volume still remains below normal, but the momentum on this play remains intact. The daily spreads have narrowed somewhat making it more difficult to target shoot an entry into the play, but certainly not impossible. Remember QCOM is facing near-term opposition at $199, the 52-week record set on September 23rd, so there could potentially be another pullback off this level. Earnings are confirmed for November 2nd, after the bell. SNE $155.63 -0.19 (+0.13) Sony shares act much like a tiger on the prowl. It waits and waits, and then sneaks up for the pounce. On Monday we got a pounce as the stock gapped open, and continued higher for an hour on the news the Japanese "tankan" report came in with positive news. The report showed the best confidence in twelve years. Good news for the Japanese economy. After amateur hour however, SNE commenced it's consolidation round ahead of the FOMC meeting. The pattern continued today, as the stock waits to pounce on its next news item. Look for the consolidation to continue, possibly to the 10-dma of $152. Any strength in the dollar should help SNE. It has gained ground against the Yen recently, but today's Fed bias grounded it back to $106.50. The company announced today the release of it's new GY series of tape drives. Giving customers high speed and capacity drives to handle today's information needs. The death of Sony's founder Akio Morita was felt as the world morns the death of a charismatic and diplomatic leader. He died of pneumonia at the age of 78. As SNE approaches support, look for a positive market, and upward movement in the stock before playing. Set stops as the market appears jittery after the Fed bias to tighten. RNWK $103.00 -2.81 (-3.25) Slowing down for a buy? RNWK has slowly given back it's recent gains, as the stock is consolidating back to support. This move is reflective of the markets sentiments on the Fed's bias toward tightening. Currently at $102, our 10-dma, this support could offer an entry point. Analysts were cited on Bloomberg as expecting the market retreat to continue into tomorrow, due to the Fed's change in posture. After that however, most market watchers see stocks at a "good buy" and this should lead us higher into earnings announcements. We still expect RNWK to do well into it's earnings date scheduled for Oct. 19th, after the market close. Because of it's potential as a stock split candidate, any market rebound should help propel RNWK higher. An article in CBS market watch cited RNWK as being one of the prime sources for providing "promotional songs" on the net. The trend is definitely toward more use of broadband and streaming technology in advertising and presentation on the Internet. RNWK should participate well in this trend despite the increased competition from MSFT, Juno, and AOL. Verify an upward trend in the market and a positive move in the stock before initiating any new plays. Use stops to protect against a sudden October sell off. EMC $76.00 -0.50 (+3.13) EMC has been paralleling the market for the last two days, as it trended up quite steadily to a new 52-week high of $78. A look at a five minute daily chart shows the similarities in trend to the NASDAQ and S&P. EMC dropped with the Fed announcement to adopt a tighter bias toward the economy but recovered from it's low, as did the markets also. EMC's movement today show's investor interest and strength in the stock, as it remained well above it's support of $72, and invited buyers on the dip. Although we remain bullish into earnings on Oct 20th before the open, be cautious and expect the market to consolidate a bit more due to the Fed news, before heading higher into the earnings run. Today David Takata of Gruntal and Co discussed the outlook for the Technology sector, and termed it exciting and unpredictable. He did list EMC as one of the stocks to follow with good potential due to the Internet craze. Protect your profits with stops and confirm a positive market and stock direction before playing. ITVU $39.25 -0.75 (+0.25) ITVU is showing signs of gaining momentum in it's trend. Monday's move at the open, with a $2 spike, helped to fuel our trend line on the 10-dma and widen our MACD. Also considering the Fed's change today, and ITVU's ability to react to news, we held up very well only dropping $0.75. ITVU is poised well to participate in it's earnings run to be announced on October 28th. Look for a breakout over $40 based on historical earnings runs and be cautious of the pre-announcement dip that occurs right at the date. ITVU partnered with Dr.Drew.com to provide the Internet with Web casts of the popular health and life styles show. ITVU also expanded it's customer base in an alliance with BRS media which brings radio to the Internet. ITVU continues to position itself to capture the expanding streaming market. We could experience some market pullback, as a flow over from today's sell-off. Use caution and protect your profits with stops. We expect a recovery to occur late Wednesday to Thursday as buyers rush in to get bargains. Confirm market direction and stock strength before starting any new plays. VRTY $69.50 +2.69 (-0.75) VRTY is turning out to be a traders dream. As most stocks fluctuated on the Fed's news today, VRTY remained stable and committed. Stable and committed in maintaining it's gain today and thereby adding strength to our momentum, by increasing the gap on our MACD, and maintaining our trend line in advance mode. Although VRTY's profit-taking on Monday did not take us all the way to our support of $65, it did give us a good buying opportunity, showing a distinct turn around off of it's low Monday of $66.75. It is also following the support nicely, offering investors buying opportunities at every dip close to the 10-dma since the inception of it's new trend on Sept 9th. Today Internet software analyst Greg Vogel, said that VRTY is positioned as one of the companies to participate very successfully in the e-commerce revolution that is taking place. Be cautious going into the market volatility tomorrow and protect your profits. **************** PICK NEWS - PUTS **************** GENZ $32.94 -10.06 (-9.65) Let the downgrades begin! GENZ has come unglued this week under a barrage of downgrades. The sell-off really starting gaining steam right at the time the markets turned on Tuesday with the FOMC verdict. This quick and sharp reaction to the tightening bias adopted by the Fed really took its toll on GENZ. In an obvious panic situation among investors, GENZ hit $30.75, down $12.25 before rebounding. The profit potential on this play if you had open positions was incredible to say the least. The bonus to this drop was that GENZ slowly slipped through $40 giving you a chance to jump on board. The reasoning for the drop is the multiple downgrades that hit GENZ this week. On Monday, it was CS First Boston and Prudential issuing comments and on Tuesday it was Raymond James, Cowen and ING Barrings who came out against the stock. ING was biggest bear in the bunch as they dropped GENZ from a Strong Buy to a Hold. The problems stem from the pipeline drugs, which aren't living up to the hopes of analysts. Choosing entry points at this point will be tough. With a drop of this magnitude it is common to see a bounce. Therefore tighten up your stops to preserve your profits. Apparently the insider selling that we have talked about has proved to be a leading indicator in this case. Support and resistance will be tough to call with this volatility and if you are new to options, this may not be the play for you. Expect lots more volatility and protect your gains. KO $47.94 +0.38 (-1.13) Coke managed to have a positive day with big volume despite a weak global demand and continued currency issues. A series of setbacks, including the massive European product recall in June, has left Coke standing on wobbly legs and a pending earnings shortfall. It has been noted that by being up front in regards to the possible Q3 earnings, Coke has avoided a potential earnings surprise plummet. On Tuesday, A.G. Edwards upgraded Coke from Maintain to Buy with a target price of $75 by year-end. KO still remains under the 10-dma at $49.75. Coke hasn't not been above the 10-dma all month. This could be considered for an entry point and with KO being so far below other major averages, we don't see any definitive support lines. Remember to exercise caution and use your stops if you are playing Coke. WPI $28.88 -1.06 (-1.13) In another confusing day on Wall Street, with a lot of stocks up in the morning before the FOMC announcement, only to sell-off after the announcement, WPI remained steady as she goes...DOWN!!. Dropping to another 52-week low of $27.81, before rebounding somewhat to close the day at $28.88. An interesting development today was the volume. The volume in the shares picked up substantially, trading well above the average number of shares. This increase in volume could be due to the uncertainty that a FOMC meeting brings, but with that said, the shares did not buck the downtrend. This keeps us in a bearish position going forward. Those that are holding current put positions, tighten your trailing stops to protect profits. Look for WPI to confirm the downtrend when entering a new position. EXDS $68.44 +2.19 (-0.75) The shares of EXDS have been on a roller coaster ride in the last two days as we suspected. Starting this trading week at $69.18, and then on Monday trading as low as $65.00 before bouncing back to close the day at $66.31. The lows of yesterday's trading session in the shares could have provided a nice profit-taking situation. Today, backed by the news that EXDS and ORCL would team up to sell database and business management software online, the shares bounced back to close up over two points on the day at $68.44. We believe that this price surge intraday was due to some new money coming into the shares after the news, as well as investors covering there short positions. With the uncertainty back into the market now that the Fed has spoken, we believe the shares will remain in a short-term decline and return to the previous days lows. We will remain in this position as long as the shares remain below current resistance levels at $70. Current holders of put positions should keep stops tight, just in case the downtrend is broken behind strong volume and momentum. PSIX $33.88 +1.75 (-0.87) Yesterday PSIX played out perfectly as it descended lower on strong volume shedding another $2.63. Today the market took PSIX on a topsy-turvy ride amidst triple trading-volume levels. It's likely the comment by Senior e-commerce analyst Rick Juarez of BBRS heavily influenced today's performance. He reiterated a Buy rating citing that he expects solid 3Q earnings with revenues $1-2 mln on the upside and that "in the wake of recent weakness in the stock, which has created, in our view, an attractive entry opportunity in the leader of value-added IP-centric access". We're keeping PSIX on our put list because one-day doesn't make a trend and ultimately, the rally didn't sustain upwards of $36.38 and then swiftly reversed. The stock's freefall was nipped in the bud only by the closing bell. Technically the MACD and MOM are still in negative mode and PSIX is well below the 200-dma ($42.60), a tell-tale indicator it violated on September 23rd. The company's earnings report is expected on October 25th (to be confirmed). ********************************************* PICK NEWS - PUTS - CONTINUED IN SECTION THREE ********************************************* SEE DISCLAIMER IN SECTION ONE *****************************
The Option Investor Newsletter Tuesday 10-5-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ********************************************* PICK NEWS - PUTS - CONTINUED FROM SECTION TWO ********************************************* YHOO $173.31 +2.13 (-2.13) Is Yahoo's earnings run over? If Monday's trading session was any indication the answer would be yes. The stock fell over four points despite a very bullish day for the broader markets. Today was a different story as investors pushed the stock higher managing to recoup most of Monday's losses. We have one trading day left until the big announcement, Yahoo will report their earnings after market close on Wednesday. If history is any indication of the future, this will be the stocks turning point and our bearish position will be at full force. However, remain cautious until Wednesday, Yahoo has one more day and investors may try to rally the stock once again. For new trades, watch for failed rallies, this should be a good sign that the stock is about to turn. With broader markets shaken by today's announcement on interest rates, prepare for more volatile market conditions. To bring you up to date with the most recent news, Yahoo announced today it has launched a number of new features, a new design and content to its popular Internet shopping service, Yahoo! Shopping making online shopping quicker, easier and more convenient for consumers. Here are the put contracts to help in your preparation. Remember, conservative traders will want to wait until after earnings to avoid the possibility of a split announcement or other positive surprises. BUY PUT OCT-175 YHV-VO OI=2799 at $10.38 SL= 7.75 BUY PUT OCT-170*YHV-VN OI=3503 at $ 7.75 SL= 5.75 BUY PUT OCT-165 YHV-VM OI=2221 at $ 6.00 SL= 4.25 BUY PUT NOV-170 YHV-WN OI= 768 at $15.25 SL=11.75 ************** NEW CALL PLAYS ************** BRCM - Broadcom $120.25 +3.19 (+7.75 this week) They have established strategic relationships with some key equipment manufacturers, including 3com, Cisco Systems, General Instrument, Motorola, and Nortel Networks just to mention a few. Broadcom makes semiconductors used in broadband (high- speed) data and video transmission products. They control the market for cable modems and digital set-top boxes. Their chips are also used in products for Ethernet networking, digital broadcast satellite, and digital subscriber line markets. Located in Irvine, California, Broadcom primarily competes with Conexant Systems, Lucent and Texas Instruments. The semiconductor industry has managed to find a little strength the past three sessions. BRCM has bounced nicely off its recent lows. The recent sell-off in the chip makers industry seems to have been primarily based on the Taiwan earthquake. Some analysts believe the sell-off was over done while others are viewing the setback as a buying opportunity. We tend to believe it may have created some wonderful buying opportunities. We are basically looking at BRCM for an earnings play. BRCM is scheduled to release earnings October 14th after the close. Analysts are expecting BRCM earnings to come in at $0.21, compared to just $0.09 last year. And traders seem upbeat about Micron's earnings surprise from Monday. Investors are somewhat shrugging off Alan Greenspan and the FOMC meeting today, driving the price of BRCM shares up over $3.00 on the session on better than average volume of 2.1 mln shares. We believe the short-term outlook for BRCM is up and we have a chance for a quick earnings play. In considering a new play in BRCM, recognize that this play is not necessarily for everyone, due to the price and volatility. Look for a positive move in the major indices, the semiconductor industry and BRCM. Also check the volume prior to entering a new play in BRCM. Remember it will be a fairly short play as earnings are less than 9 days away. In the news Kaufman Brothers initiated new coverage Friday with a Buy rating and a price target of $140, while Needham and company raised its rating from a Hold to a Buy with a 6-12 month projection of $128. One other interesting rating came out yesterday from Donald Cunningham at Gilmour & Associates as the analyst rated BRCM as a Sell. You can bet the company doesn't give him the time of day after that call. BUY CALL OCT-115 RDZ-JC OI=875 at $8.00 SL=6.25 BUY CALL OCT-120*RDZ-JD OI=974 at $5.00 SL=3.25 BUY CALL OCT-125 RDZ-JE OI=577 at $2.94 SL=1.50 Picked on Oct 5th at $120.25 P/E = 308 Change since picked +0.00 52-week high=$149.50 Analysts Ratings 6-12-0-0-0 52-week low =$ 29.00 Last earnings 06/99 est= 0.16 actual= 0.19 Next earnings 10-14 est= 0.21 versus= 0.09 Average Daily Volume =1.84 mln Chart = http://quote.yahoo.com/q?s=BRCM&d=3m **** ADBE - Adobe Systems Inc $114.69 -3.13 (+1.50 for the week) Adobe Systems is the 4th largest US-based personal software company world-wide and are a leading provider desktop publishing software for the Internet. They generate annual revenues approaching $1 bln with three products Photoshop, Illustrator, and PageMaker making up almost 60% of the sales. Clients include graphic designers, professional publishers, other business users, and of course the average consumer. This stock is coming off better-than-expected earnings from September 16th and has an upcoming 2:1 stock split. The sheer momentum from that point carried ADBE closer to its split date on October 23rd. Now it's really kicking into gear as the date fast approaches and the Internet sector shows more strength. Both yesterday and today the stock set new highs with the latest 52-week record at $121.94 breaking through the near-term resistance of $114.69. Support remains solid at $110. This is a simple split play, but it's still an Internet so expect volatility. In the news last week, four different firms put in a word for ADBE last Thursday. Bear Stearns reiterated an Attractive rating while Merrill Lynch reiterated their Near-term Accumulate and Long-term Buy ratings. Prudential upgraded ADBE to an Accumulate from a Hold and issued a 12-18 month price target of $127. And as a result of an Analyst Meeting last Wednesday, Hambrecht & Quist reiterated a Buy rating and issued a 12-month target price of $130 while also raising Year 2000 estimates to $3.65 from $3.55. BUY CALL OCT-110*AEQ-JB OI=722 at $ 7.00 SL=5.25 BUY CALL OCT-115 AEQ-JC OI=647 at $ 4.25 SL=2.75 BUY CALL OCT-120 AEQ-JZ OI=267 at $ 2.13 SL=1.00 BUY CALL NOV-120 AEQ-KZ OI= 95 at $ 6.88 SL=5.25 Picked on Oct 5th at $114.69 P/E = 40 Change since picked +0.00 52 week high=$121.94 Analysts Ratings 2-6-6-0-0 52 week low =$ 30.00 Last earnings 08/99 est= 0.73 actual= 0.80 surprise +9.6% Next earnings 12-16 est= 0.83 versus= 0.76 Average daily volume = 969 K Chart = http://quote.yahoo.com/q?s=ADBE&d=3m ************* NEW PUT PLAYS ************* No new put plays today. ********** PLAY OF THE DAY ********** EMC - EMC Corporation $76.00 -0.50 (+3.13 for week) At times, we all need someone to back us up. Well EMC makes it their business to back us up. They focus solely on providing the world with leading solutions on information storage and retrieval systems. They are literally the world leaders in this area on every platform. Because of their focus and dedication, they have obtained significant customers in banking, telecommunications, airline, manufacturing, Internet and other industries where the management of massive information is critical. There's a good chance that your information is handled by an EMC system somewhere. They're managed well also with a 52% return in net income. Sunday's Write Up EMC is an earnings run candidate, that has been consolidating while the market sinks. This has hindered the play somewhat but we are still seeing a very good trend emerge. Friday we saw some light as the stock is attempting a break out. Since midday on Thursday we have gone nowhere but up. Resistance at $72 had been holding us down but Friday we broke through and ended right near the high for the day. Volume was average as can be expected before an FOMC meeting and our next target for resistance is the 52-week high at $75.63. We don't expect to see this until after the FOMC meeting, but if the Fed doesn't kill the market, we should be off on the earnings run. Remember that storage is the hot spot among computer hardware lately so investors could bid the stock up in anticipation. The strength and momentum are encouraging on EMC. Despite the negative comments on HP and DELL Friday, EMC held up well, trending higher throughout the day. Currently support lies at the 10-dma at $71.50. This could be a good entry point if we get there but make sure we bounce with volume before buying. As mentioned in Thursday's update, the company confirmed the earnings date as being 10-20 before the market open. Price- wise, EMC is in split range however the company would need authorization from shareholders to make it happen. Place stops on your existing positions, as the FOMC meeting on Tuesday will cause uncertainty as to interest rate direction. The PC and hardware industry has been under some pressure due to recent earnings warnings and downgrades from Hewlett Packard and Dell. Erik Gustafson cited EMC as one of the places for fund managers to be, indicating our societies transition from the industrial phase to the information phase. The report indicated that these fund managers are currently moving back into EMC, as these types of stocks are ones that held up mutual funds third quarter results. Tuesday's Write Up EMC has been paralleling the market for the last two days, as it trended up quite steadily to a new 52-week high of $78. A look at a five minute daily chart shows the similarities in trend to the NASDAQ and S&P. EMC dropped with the Fed announcement to adopt a tighter bias toward the economy but recovered from it's low, as did the markets also. EMC's movement today show's investor interest and strength in the stock, as it remained well above it's support of $72, and invited buyers on the dip. Although we remain bullish into earnings on Oct 20th before the open, be cautious and expect the market to consolidate a bit more due to the Fed news, before heading higher into the earnings run. Today David Takata of Gruntal and Co discussed the outlook for the Technology sector, and termed it exciting and unpredictable. He did list EMC as one of the stocks to follow with good potential due to the Internet craze. Protect your profits with stops and confirm a positive market and stock direction before playing. BUY CALL OCT-65 EMB-JM OI= 7185 at $11.38 SL=8.75 BUY CALL OCT-70*EMB-JN OI=14729 at $ 6.63 SL=4.25 BUY CALL OCT-75 EMB-JO OI= 8209 at $ 3.00 SL=1.50 BUY CALL NOV-70 EMB-KN OI= 1349 at $ 9.00 SL=6.75 BUY CALL NOV-75 EMB-KO OI= 2271 at $ 6.00 SL=4.25 Picked on Sep 12th at $68.13 P/E = 78 Change since picked +7.88 52 week high=$76.50 Analysts Ratings 14-9-1-0-0 52 week low =$20.81 Last earnings 07/99 est= 0.24 actual= 0.27 Next earnings 10-19 est= 0.27 versus= 0.19 (whisper=$0.31) Average daily volume = 5.4 mln ************************ COMBOS/SPREADS/STRADDLES ************************ Markets Rally Then Fade As New Worries Surface.. Monday, October 4 U.S. markets moved higher a day ahead of the Federal Reserve's key interest-rate meeting, on news of telecom and technology mergers. The Dow Jones industrial average ended up 128 points at 10,401 and the Nasdaq composite jumped 58 points to 2,795. The S&P 500 index gained 22 points to 1,304. In the broader market, advances led declines 1,759 to 1,243 on active volume of 795 million shares on the New York Stock Exchange. In the bond market, the 30-year U.S. Treasury bond rose 17/32 with the yield falling to 6.09%. Sunday's new plays (positions/opening prices/strategy): Gemstar GMST NOV62C/NOV70C $6.00 debit bull-call Dell Computer DELL NOV55P/NOV45P $8.00 debit bear-put Yahoo! YHOO OCT210C/200C $1.00 credit bear-call Allied Waste AW MAR12C/NOV12C $1.12 debit calendar Our most exciting play of the day was definitely Gemstar. The stock traded in a small range early in the session and started moving up with the broad market rally. Everything looked great until the announcement of a $9.2 billion merger with TV Guide. The stock dropped almost $8 to $76 on the news and everyone is curious about the future financial affect of the deal. Analysts will be all over this new agreement so be prepared for upgrades and downgrades, new earnings estimates and price targets. Dell moved lower for most of the morning but rebounded to close up $0.75 for the day. Our target entry was easily achieved in the afternoon session. Yahoo! was our next candidate and it didn't disappoint. YHOO moved higher at the open, allowing for entry prices as high as $1.12 credit for the suggested position. It fell lower at midday and recovered at the close to finish down $4. Tomorrow should be just as exciting. Allied Waste traded higher in the morning session but also fell near the close. Our new calendar spread was available at the recommended entry price. Portfolio plays: The Federal Reserve's policy-making group meets tomorrow to decide whether to raise interest rates for a third time this year. Analysts are speculating that the Fed will not raise the borrowing rate, based on the slump in the Dow, which is down about 10% from its August high. Today's decline in bond interest rates was favorable for banking and financial stocks. They were among the strongest Dow components and one of our bullish (credit-spread) issues, American Express (AXP) was up over $6 to $137. Merrill Lynch (MER), another portfolio play, also moved up $3 with the brokerage group. There was lots of activity in our calendar spreads portfolio and most of the excitement was based on merger speculation in the telecommunications industry. The industry's biggest long distance phone companies were in the news and stock in Sprint (FON) moved up $3 on reports it was entertaining rival bids from MCI WorldCom and BellSouth. Bell Atlantic (BEL) was also affected by the news, climbing over $3 to a new high at $69. As we said last week, BEL was on the verge of a break-out and remained at the top of our list for adjustments. Our neutral calendar spread is short at $65 and this change of character will put the position in jeopardy unless it remains below $70. The roll-up to the $70 strike will require additional capital, currently about $1.50 debit, but it would increase the upside profit range to coincide with a bullish technical outlook for the stock. We will watch this one closely for any indication of future direction before making the final move. 3Com Corp (COMS) was our other candidate for adjustment (from last week) and today it rallied again, climbing over $1 in the morning to the $30 range. The position pricing was favorable for a move to the higher strike and our current debit, after the transition to a NOV-$30 call is $1.38. Viatel (VYTL) also rebounded today, climbing with the broad market rally to just over $28. Our current short option is safely OTM at $30 and the play is now profitable with a $1.38 credit. Even C.R Bard (BCR) performed well, giving back in some of those big gains made on Friday. Now our sold option is well above the current stock price. Let's hope it stays in a small range for the next two weeks. Most of our bullish debit issues moved higher during the day. Quest (QWST) climbed almost $3 dollars on the telecom activity, moving to a recent high near $33. Our bullish debit spread is now comfortably ITM and you should consider closing the spread near maximum profit. Barnesandnoble.com (BNBN) is safely ITM and now has a $2.38 credit available for an early exit. Tuts Systems (TUTS), Unify (UNFY), and IDT Corporation (IDTC) all rebounded with the small-cap technology sector and appear to have a reasonable chance of a profitable outcome. Starbucks (SBUX) and Network Associates (NETA) have us worried as they failed to make an upward move even in today's bullish market. A sell-off after the interest rate announcement will affect these issues and we suggest you close any that are profitable to protect gains and limit losses. All of our long-term positions benefited from today's bullish activity. Motorola (MOT) and Sun Microsystems (SUNW) were the big winners but issues such as General Motors (GM), Solectron (SLR) and Computer Associates (CA) also participated in the rally. Even Polaroid (PRD) joined in the fun. Biogen (BGEN) has been looking bearish as of late and the small pre-earnings rally may be just the time to roll-forward with some insurance for any future downside moves. A credit of $2 is now available for the roll-out to a NOV-$90 position, the lowest strike that is available for next month. Exxon was our only loser in this category, down $1.56 to $73. Tuesday, October 5 Industry leading stocks were mixed Tuesday after the Fed moved closer to tightening rates in the future. The Dow ended almost unchanged at 10,400 after falling from an early 100-point gain on news of the committees decision. The Nasdaq composite index was up 3 points to 2,799 while the S&P 500 index fell 3 points to 1,301. In the broader market, decliners led advancers 1,783 to 1,222 on active volume of 954 million shares on the NYSE. The benchmark 30-year U.S. Treasury bond fell 1-9/32 while the yield rose to 6.18%. Portfolio plays: The markets survived the FOMC interest rate announcement with a moderate amount of selling. Helping to fuel a rally ahead of the Fed's decision were a slew of company upgrades and some favorable earnings reports from industry leaders. Despite the decision by the Fed, many investors were focused on positive company news rather than the future economic outlook. One of the big events today was the news that MCI WorldCom (WCOM) would buy Sprint (FON) for $115 billion in stock and assumed debt. The new company will be called MCI WorldCom, and should have about 30% of the $90 billion long-distance market, certainly a formidable rival to industry leader AT&T. The move affected all of the stocks in that group including our plays on Bell Atlantic (BEL) and Qwest (QWST). BEL was previously a candidate for upward adjustment but fell almost $4 on the news. QWST had been up almost $2 during the day but retraced its bullish movement near the end of the session. There were some excellent moves in our long-term portfolio. Cabletron Systems (CS), Polaroid (PRD) and The Limited (LTD) all bounced back from recent declines. General Motors (GM) also continued higher while Computer Associates (CA) fought its way back to $61; slightly above our sold option in the LEAPS/CC's play. Sun Microsystems (SUNW) continues to amaze with its climb to the heavens and I not sure that anyone can say exactly when or where it will end. Micron Technology (MU), one of our (bullish) credit spreads was up another $5.68 to $8 after it reported that quarterly losses were far less than the Street analysts were expecting. The spread was very conservative with the sold strike at $50. Gemstar (GMST) dropped another $6 today even after an upgrade by Lehman Brothers. The brokerage raised its price target for GMST to $150 and commented that Monday's proposed acquisition of TV Guide is a major strategic positive. That may be true in the long run but it won't placate unhappy investors in the interim. I have no idea what will eventually occur with this issue and thus you will have to make your own decision about the future of the stock and the probability of recovery before the November expiration. Questions & comments on spreads/combos to ray@OptionInvestor.com ********** NEW PLAYS ********** I had a few requests this week for longer-term plays. Here are some low-cost, conservative positions on issues with excellent potential and recent signs of technical consolidation. GBLX - Global Crossing $25.19 *** Where To From Here? *** Global Crossing is the world's first independent global provider of state-of-the-art Internet and long distance telecommunications facilities and related services utilizing a network of undersea and terrestrial digital fiber optic cable systems. The company is the first to offer "one-stop shopping" for customers to multiple destinations worldwide. Currently, they operate as a "carriers' carrier", providing tiered pricing and segmented products to licensed providers of international telecommunications services. In late September, Global Crossing completed its $10 billion acquisition of Frontier (FRO) in a deal that will help link the company's worldwide fiber optic network. The new company now has an complete end-to-end global fiber-optic network connecting all the major cities on five continents, with $2-billion in combined contract backlog, and one of the largest web hosting operations in the world along with a slew of next generation services on the cutting edge of the telecommunications industry. Hmmm.. The key is to use all that glorious potential in a new telecom market that is ruled by giants. Only time will tell if this small independent company can compete (or benefit from) behemoths like MCI Worldcom and AT&T or if they will join forces with smaller, well established corporations such as BellSouth (BLS) and Bell Atlantic (BEL). We do like they way investors are starting to accumulate this issue at the recent low prices. PLAY (conservative - bullish/debit spread): BUY CALL JAN-17.50 QGV-AW OI=686 A=$8.62 SELL CALL JAN-22.50 QGV-AE OI=6050 B=$3.75 INITIAL NET DEBIT TARGET=$4.62 ROI(max)=62% B/E=$22.12 Chart = http://quote.yahoo.com/q?s=GBLX&d=3m **** EGRP - E*Trade Group $24.94 *** Finding A Bottom? *** E*Trade is a leading provider of cost-effective, secure online discount brokerage services. E*Trade offers automated order placement, portfolio tracking and related market information and news on the Internet, and through online service providers CompuServe and America Online, as well as direct modem access, touch-tone telephone and interactive television. E*Trade has been ranked as the #1 online brokerage by Gomez Advisors, Lafferty Information and Research Group, PC Magazine and Smart Computing magazine. Now the company plans to expand its global presence by launching branded web sites in the top 20 financial markets worldwide, and has now taken a key step toward becoming the first online global trading network with a recently completed acquisition of TIR Holdings. E*Trade also recently announced a global strategy to develop powerful, proprietary tools that enable individual investors to manage their personal finances more effectively. Together with Confluent (a new subsidiary), E*Trade will create a new innovative online product; the Personal Financial Information Manager, that will be available through the E*Trade web site. E*Trades Personal Financial Information Manager will enable investors to develop a personal command center for managing and tracking important financial events. Users will be able to automatically track specific corporate events, including earnings announcements, stock splits & dividend declarations based on their personal portfolios. Investors will also have the ability to organize personal financial information and transactions such as automated deposits, bill presentment and payment and automatic investing plans. We favor the recent technical base near $22 and the increase in buying pressure. The long time frame and excellent option premiums will allow plenty of opportunity to reduce the cost basis after the new year begins. Upside profit potential for a bullish break-out is also favorable. PLAY (conservative - bullish/diagonal spread): BUY CALL APR-25 QGR-DE OI=9932 A=$6.88 SELL CALL JAN-30 QGR-AF OI=3353 B=$3.12 INITIAL NET DEBIT TARGET=$3.50 TARGET ROI=50% Chart = http://quote.yahoo.com/q?s=EGRP&d=3m **** LGTO - Legato Systems $45.44 *** Cheap Speculation *** Legato develops, markets and supports network storage management software products for heterogeneous client and server computing environments. LGTO sells its products through both its direct sales force and through well-known manufactures such as Banyan, Compaq, Data General, NEC, Siemens, Silicon Graphics, and Sun Microsystems. This position is based on favorable option premiums and a solid technical history. The issue has recovered after testing support levels earlier in the week and should be able to sustain a small share price growth over the next two months. The stock achieved a 52-week high (near $50) in early September and will eventually test that range again. The risk/reward outlook for the spread offers an excellent opportunity for low-cost speculation. PLAY (conservative - bullish/calendar spread): BUY CALL DEC-50 EQN-LJ OI=357 A=$4.12 SELL CALL NOV-50 EQN-KJ OI=21 B=$3.25 INITIAL NET DEBIT TARGET=$0.75 TARGET ROI=50% Chart = http://quote.yahoo.com/q?s=LGTO&d=3m ************ STRADDLES ************ Monday, October 4 Our new positions, Allstate (ALL) and U.S. Air (U) both jumped-up at the open and remained higher for most of the day. Allstate was the first to succumb to sellers and it ended the session exactly where it began. The suggested debit was available on that issue. US Air was quite a different story. It moved higher in the first few minutes and never looked back. The position may have been available to those opened the sides individually but the lowest simultaneous order was near $8.12. Here are the new positions: Allstate ALL APR25C/APR25P $5.50 debit U.S. Air U MAY25C/MAY25P $8.12 debit Portfolio plays: Many of our straddles were active during the first two days of this week's inflation and news-driven market. Volatility and volume continues to dominate trading and Tuesday's session was very intense for most investors. Technology issues moved to the extremes and it was hard to guess where they would end the day. One of the best performing stocks was Lycos (LCOS) and Tuesday's move gave us a new winner in the straddles portfolio. The debit straddle traded at $19 credit during the session and that may be just the beginning with the new technical trend (bullish) of the issue. Federal Express (FDX) continues to recover on lower crude oil prices and the slumping transport sector may finally be in a rebound mode. The overall credit for the position was near $11.50 at the highs of the day, a $1.75 profit for two weeks. Another recovering issue is Ames Department Stores (AMES) and the credit for the January straddle traded as high as $9.50 during the day. This one appears to be changing character quickly so you should consider the possibility of an early exit on the bearish option. Donaldson, Lufkin and Jenrette (DLJ) started to recover slightly on Monday and we made note of the price of the bearish position for future reference. It traded as high as $12.50, but that was not enough to pay for the entire straddle, as we intended to do originally. Williams Company (WMB) also continues to recover but a new test will occur at the $40 resistance level. Good Luck! ************ See Disclaimer in section one ************
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