The Option Investor Newsletter Tuesday 10-12-99 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) ************************************************************ 10-12-99 High Low Volume Advances Decline DOW 10417.10 - 231.10 10648.80 10417.10 772,437k 853 2,162 Nasdaq 2872.43 - 43.52 2923.32 2869.44 1,004,092k 1,491 2,391 S&P-100 686.24 - 11.52 698.30 685.43 Totals 2,344 4,553 S&P-500 1313.04 - 22.17 1335.77 1311.80 33.9% 66.1% $RUT 424.68 - 5.51 430.46 424.67 $TRAN 2961.49 - 64.53 3026.58 2959.38 VIX 24.60 + 2.55 25.45 22.17 Put/Call Ratio .68 ************************************************************* Look out below! I told you on Sunday it was too good to be true. Everything was coming up roses but the smell was not the same. The market was ripe for a negative event. When the Nasdaq set a new high on Monday and the Dow could only manage a -1.64, our destiny was clear. The negative news swamped the airwaves today starting with the earnings warning by Raytheon. Citing fixed price contract over runs that they would have to pay, the defense and aerospace company really smelled up the markets. Other stocks in the sector included both Boeing (BA) and United Technology (UTX) which are both Dow stocks. Boeing dropped -2.31 and UTX lost -3.44 to start the Dow on its downward slide. The day only got worse from there. The interest rate worries bled over from the bond market and yields flirted with 6.24% putting further pressure on the market. With the Nasdaq up +33% for the year and a rate hike in our future, it was just too much for some investors who tried to beat the rush to the exits. Many must have gotten the Intel news before the fact with over 44 mln shares traded before the market closed. Well more than twice the average daily volume. Oil also contributed to the rate fears again today after soaring for the second day in a row. Rising oil prices contribute to higher inflation as the price is passed on to the consumer in thousands of products. The concerns that OPEC was cheating or would raise output appear to have evaporated. Another fly in the ointment today was the reported military coup in Pakistan. We do not really have any economic impact from the conflict but they are a nuclear power. Nobody wants to have a power struggle over who has the bomb. Still, any uncertainty weighs on the market. The real stinker today was the Intel disaster tonight. Yes, it impacted us today as traders fled tech stocks "just in case" Intel missed it's numbers. But that is unthinkable, right? They did not warn so that means they will make their number, right? Sorry folks! The biggest chip maker in the world took on Amazonian proportions tonight. According to Intel they had a great quarter. Revenue up +8.5%, record shipments and gaining market share (sound like Amazon?) but they were not able to make their estimates. Posting only a $.55 vs the official estimate of $.57 and the whisper number as high as $.62. After all this was the best third quarter in years and Intel was expected to show the results of the booming PC market. The booming market however put Intel into a price crunch. They had lower average selling prices and lower gross margins. They cut the Celeron chips aggressively to garner market share of a PC product where they were not making a reasonable profit. (Sound like Amazon?) Sorry, Intel, you are not considered an Internet stock and real world profit margins apply to you. Enough complaining. They promise to have a great fourth quarter. A lot of good it will do us tomorrow! Intel traded down to $70 in after hours trading from a close of $76.69. In case you haven't looked, the S&P futures for tomorrow are already down -11.00. It is not as bad as it seems because Intel is the third largest company in the S&P at 2.52%. This means that any major change in the price of Intel will directly impact the S&P. What is causing the problem is the dozens of other tech companies that will also be painted with the Intel brush and immediately be suspected of missing their earnings. Their stock prices fall in anticipation and you have a major event. Dell for instance is 1.25%, MSFT 4.36%, IBM 2.09%, CSCO 2.0% and on and on. Pretty soon you have 20% of the S&P on a decline. Some of this will be white washed by morning but the result is not going to be pretty. In after hours Dell lost -1.50, CSCO -1.25, QCOM -4.00, MSFT -1.56. Some of these recovered from these levels but the impact at the open will be the same. Remember, we are almost right at the anniversary of the 1929 October crash, and only a week away from the anniversary of the 1997 October crash. The market psychology is changing. We went from a strongly bull market just last week to a "look out below" mentality. The earnings, except for Intel, are still in the 19% range and we still have hundreds of companies to announce. All of a sudden, it does not matter. It is old news and nothing new is on the horizon except for negative events. The Fed and the European Central Bank are both poised to raise rates. We have Greenspan speaking on the state of the economy on Friday. (An event you dream about after having pizza for supper.) We have the PPI on Friday and CPI next week. We have Retail Sales, Import and Export prices on Thursday. Industrial Production and Capacity Utilization on Friday. I do not see anything good to propel the markets upward do you? And don't forget, Y2K is only 55 trading days away. The Nasdaq also entered a negative formation today by closing below the low of the previous record high day. In theory we should have held above the low to confirm the new high. (In reality it could have just been profit taking from the six day run.) Now put on your rose colored glasses. Surely saner heads will prevail by morning. It was only two cents! And Intel did promise a better fourth quarter. We are also sitting right on significant support at 10400. The next major support is 10200, just an intraday jog away. Analysts were complaining that we never had a serious back to back drop last month to get rid of the rest of the weak holders. Maybe they get their wish on Wednesday. The -231 drop today was the largest drop since May 27th. Put another reflex action on the calendar for tomorrow and you go right back to oversold and right where we were ten days ago. Better yet, just drop Intel for a -$10 loss and let the rest of us go on with business as usual. (I can wish, can't I?) This is a tough call. Do you sell at the open with the idea that 10,000 is only a tick away, or do you hold on for a quick recovery? I wish I had a crystal ball and could tell you what the Dow will be on Friday but I don't. The last piece of hope I will leave you with is this. Friday is expiration Friday and "historically" this provides an upward bias for the week. We are looking at this as an entry point opportunity in several stocks. Dell and GTW will take an immediate drop at the open and maybe more as the week wears on. We are adding both of them as call plays tonight with the idea of target shooting them on weakness. Another sidelight could be Broadvision. We have been criticized for not listing BVSN as a pick as it blazes a trail toward it's 3:1 split. I have repeatedly said we will not list stocks that have had double digit gains on a newsletter day. The option premiums have been inflated so much that they are grossly over priced. BVSN has been adding +$10 a day since Oct 1st. Well if you want to play BVSN, tomorrow is your chance. It was down -$13 intraday today and recovered to finish -5.88 at the close. It will surely dip at the open and provide yet another entry point. Before you spend the night tossing and turning over this opportunity, let me remind you that the Nov-$170 call BDV-KN is $24. (BVSN=$176) (This is not an official play because of the option price) If you are in cash, use caution buying the dip. Wait for a rebound before putting your cash in the trap. I have vivid memories about jumping in at the close after a big multiday decline in Oct-1997 with the idea that "it can't go any lower" and waking up the next morning to the futures lock limit down at -27.00. Trust me, you do not want to go there! If you are not in cash or puts then hold your breath at the open and hope for a quick recovery. Many times, panic selling at the open will be the worst price of the day. Good luck, sell too soon. Jim Brown Editor ************ New feature: ************ Recently we have added several new research analysts whose primary function is to look behind the headlines on major stocks and report the real news and sentiment. Because of article size and newsletter space restrictions we cannot include these research reports in the email version. Please visit the site daily to access these reports. Here are some samples from Monday & Tuesday. Stock News - Monday, October 11, 1999 It's Beginning to Look a Lot Like an Internet Christmas September Retail Sales Presage Strong Holiday Season for eTailers http://www.OptionInvestor.com/stocknews/101199_1.asp Stock News - Monday, October 11, 1999 Telecom Update: Bell South to Bust Qwest Merger? After last week's announcement of the blockbuster MCI WorldCom (WCOM) and Sprint Corp. (FON) merger, rumors ran wild about who's next. http://www.OptionInvestor.com/stocknews/101199_2.asp Stock News - Tuesday, October 12, 1999 Investors flock to online broker services and away from online broker stocks. It's become clear that more and more investors are heading to the Internet to get their trades executed. http://www.OptionInvestor.com/stocknews/101199_3.asp Stock News - Tuesday, October 12, 1999 Ask Jeeves Lands the Deal of its Young Life Yesterday Software giant Microsoft (MSFT) and tiny question answering service Ask Jeeves (ASKJ) announced an eyebrow raising deal. http://www.OptionInvestor.com/stocknews/101199_4.asp Stock News - Tuesday, October 12, 1999 Calling Up the Internet -Oracle introduces wireless Internet software. Larry Ellison is up for the count. Four years after launching a failed campaign to promote network computing over PCs, the flamboyant chairman and CEO of Oracle Corp. (ORC) is back with a new software program that allows users to access the Internet and conduct e-commerce over wireless phones and other wireless devices. http://www.OptionInvestor.com/stocknews/101199_5.asp ************************************ 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 12, 1999 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,750 11,320 10,417 BEARISH 9.23 SPX S&P 500 1,350 1,420 1,313 BEARISH 9.16 OEX S&P 100 675 735 686 Neutral 10.05 RUT Russell 2000 440 465 425 BEARISH 9.14 NDX NASD 100 2,320 2,380 2,527 BULLISH 9.03 MSH High Tech 1,120 1,180 1,268 BULLISH 9.03 XCI Hardware 1,035 1,050 1,066 BULLISH 8.24 CWX Software 750 800 885 BULLISH 9.03 SOX Semiconductor 470 500 523 BULLISH 10.05 NWX Networking 555 585 625 BULLISH 9.17 INX Internet 450 510 524 BULLISH 10.07 BIX Banking 690 710 595 BEARISH 7.23 XBD Brokerage 410 440 380 BEARISH 7.23 IUX Insurance 645 660 542 BEARISH 7.23 RLX Retail 915 960 889 BEARISH 7.23 DRG Drug 365 390 379 Neutral 10.07 HCX Healthcare 745 785 745 Neutral 10.08 XAL Airline 180 190 148 BEARISH 5.21 OIX Oil & Gas 290 305 287 BEARISH 10.08 Posture Alert Higher interest rates and a falling dollar led to a broad market sell-off Tuesday. Most of technology sold-off in the last one hour, as pressure from the Dow finally caved in on the rest of the market. The loser board was plentiful, and was led by the Internet Index (-3.32%), the Dow (-2.17%), and the NDX (-2.02%). The only winner today was Oil & Gas, which was up marginally after being punished the last two weeks. After the close, semiconductor bellwether Intel missed expectations by 2 cents, but did make positive comments into the next quarter. Either way, look for the SOX to make a big move tomorrow and have a spillover effect on everything else. A detailed description of our Market Posture and its applications can be found at: /members/marketposture *************** Market Sentiment *************** Tuesday, October 12, 1999 In the Danger Zone! Can we give the bond guys another day off? Just when you thought it was getting warm and sunny, a thundershower drops on you from nowhere. That seems to be the feeling after today, as the DOW and the broad market gave back many of the gains of late, thanks to the help of the Treasury market. With the bond market getting Monday off, they came back today with a vengeance, and whacked the 30yr Treasury. The long bond now stands at 6.226%, just off the 52-wk high of 6.272. This is not a good selling point for this market, and for this market to rally higher we need the treasury to hold and rally back. If we see new highs in the bond, we'll feel more down days just like today. To add insult to injury, Intel came out tonight after the close and missed by 2 cents, and was trading down -5 in after-market activity. This was surprising and not helpful for this market; and will probably cause another big drop in the broad market tomorrow. Motorola announced earnings as well, but did come in-line with expectations. However, Motorola's result was the same in after hours, trading down -4. Not exactly a great start to the busy earnings week. The combination of two disappointing earnings, with the fact that the yield on the long bond is getting into dangerous territory, is not a good combination. In case you missed it, John Bollinger turned defensive today on CNBC and suggested that we may be at the end of the current bullish run. In an interesting comparison, he tracked the NASDAQ over the S&P over the past five years. The chart showed a parallel pattern until the Oct 98 low, when the Nasdaq clearly outpace the "quality issues within the S&P 100 by a big margin. He suggested that this might represent a form of a speculative bubble. Next, he referenced the total open interest at the CBOE. He presented a chart that showed the average open interest over the five-year period had stead growth until the last 2 quarters when the average open interest has been jumping exponentially. He is concluding that this may confirm the speculative bubble theory. Not exactly what you want to hear, especially after tonight's earnings. Now let's get back to Intel and Motorola. The only saving grace for these two companies will reside in their conference call with the analysts. Now before you panic, remember that Intel missed last quarter's earnings as well, and like tonight, the stock was trading down in after-hours. However, the conference call last quarter was very positive, and Intel's stock rallied back during the normal trading session the next day and closed up. Take a look at the chart below, and look at the nice gains it made after their last "disappointing" earnings miss. Not to bad! Now, we are not stating that Intel will trade higher tomorrow, but are reminding you not to get too caught up in the CNBC hype. The same hype surrounded Intel last quarter, but all will depend on the conference call. Wall Street always likes to look 6 months down the road, and if they see Intel & Motorola with impressive growth, tonight's after hours trading will be turn out to be meaningless. If their conference calls stink, then tonight's after -hours trading might look like a bargain for sellers wanting out. We already know that the sentiment for these two companies were low, but only time will tell if it was for a good reason. BULLISH Signs: Pessimism on Earnings: We should see a solid third quarter from many companies, yet their stock prices do not reflect this upside potential. Investor Intelligence: As a contrarian indicator, the amount of Bullish investors is at a recent low, and bearish investors is at a recent high. Posture Alert: The Internet Sector (INX) has finally broken resistance, and has joined the four-horsemen (Software, Hardware, Networking, Semiconductors) as BULLISH sectors in our market posture section. Volatility Index: The VIX is below the 25 benchmark and would indicate strength in the broad market. Mixed Signs: Russell 2000 & S&P 500: The RUT and SPX are showing early signs of basing, but have yet to prove that they can hold these levels. Earnings Season: Earnings season is still early, but we should have a stellar earnings performance this month. Yahoo absolutely crushed all expectations, but Intel missed, and Motorola only came in-line. BEARISH Signs: Interest Rates: The yield on the 30-yr Treasury is above the 6% benchmark and nearing the highs of 6.272%. Miscellaneous Uncertainty: Y2K, inflation, higher interest rates, slowing corporate earnings, earthquakes, U.S. Dollar uncertainty, are all leading to an abundance of uncertainty for professionals and investors alike. Advance/Decline Line: The A/D line continues to be poor and is getting worse. 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 680-780) Date Open Interest Change % Alert Friday, September 17 34,361 - Friday, September 24 84,724 +146.5% Friday, October 1 108,460 +215.6% Friday, October 8 125,019 +263.8% Market Sentiment at a Glance Friday Tues Indicator (10/8) (10/12) Alert Pinnacle Index (OEX): Underlying Support (700-720) 4.2 3.6 Underlying Support (670-690) 1.9 2.5 Put/Call Ratios: CBOE Total P/C Ratio .7 .7 CBOE Equity P/C Ratio .5 .6 OEX P/C Ratio 1.2 1.3 Peak Open Interest (OEX): Puts 670 Calls 700 P/C Ratio 2.08 Market Volatility Index (VIX): CBOE VIX 24.53 Investors Intelligence: Bullish 41.00% * Bearish 36.80% * 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 (10/8) (10/12) Overhead Resistance (700-720) 4.18 3.58 OEX Close 698.45 686.24 Underlying Support (670-690) 1.88 2.49 Average ratings: Resistance levels 2.0 / Support Levels .5 What the Pinnacle Index is telling us: Based on 10/12, overhead resistance is firm, and underlying support is picking up. Put/Call Ratio Friday Tues Strike/Contracts (10/8) (10/12) CBOE Total P/C Ratio .69 .69 CBOE Equity P/C Ratio .49 .57 OEX P/C Ratio 1.22 1.32 Peak Open Interest Friday Tues Strike/Contracts (10/8) (10/12) Puts 670 / 20,807 670 / 23,399 Calls 700 / 11,288 700 / 11,235 Put/Call Ratio 1.84 2.08 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 12, 1999 24.53 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 Oct. 6, 1999 41.0 36.8 ****************** DAILY RESULTS LOCATED IN SECTION TWO ****************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at http://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 10-12-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ************* READERS WRITE ************* I have been a subscriber for a little more than a year and have admired your candor and clarity on trading options. I have also envied your success. So the description in last Sunday's (10/10/99) "Jim's Plays" section about your Yahoo put experience was a surprise to me. But more than a surprise, it was a confidence builder. I was impressed that you told us all about your big goofs (more than one, it seems!), even the amount of the loss. Your willingness to be open about a big mistake tells me that you are not trying to fool us or hide your own errors. When I make a good trade its not hard to tell my wife all about it. When I make a bad trade, its always tempting to forget about it before I get home. Thanks for being so open. David Hollrah Houston, Texas (I tell my wife, "don't come knocking if you see my stock droppin" to paraphrase another song. If she walks into my trading office she can tell in a heartbeat if I am up or down and if she should turn around and beat a swift retreat. Wives are like that! Jim) ***** I love "Jim's Play's" column. Since he has expanded the column and included his insights behind every trade, I have learned so much. One question ---> Could his column become a daily? Good trading, Glen Holman (I am thinking about it but the format may have to be changed-Jim) ***** Thanks!!!! Anyone who has traded for any length of time has more than one story like yours. I certainly do. Had a terrible time with Amzn earlier in the year. My loss won't help you feel any better, but I'm sure you have helped many of us who have had similar episodes. So, never wonder whether you should have shared your losses with us. It is the hardest thing you can do, and in my opinion, increases your credibility. There are plenty of traders who advertise their wins, but you never hear of a loss. What is even more important than learning from our/your mistakes, is the psychological changes that occur, and how we deal or not deal with them. We begin to doubt our abilities, decisions and everything about our trading. It affects our personal relationships, job performance, and a myriad of other small coping abilities. As I learned from early in my trading career: If my wife can tell whether I made or lost money when I walk in the door, then I shouldn't be trading. That is definitely a hard criteria to maintain, (an emotionless trader) but an essential requirement in becoming successful. In the long run, a severe loss can cause a consistently winning trader into a loser, or even worse an ex-trader. The ability to maintain your psyche, is just as important as tech. or fundamental analysis. Thanks for sharing. I'm sure this topic will stimulate more e mail responses than any other. Tim Doucet M.D. (you would not believe how much mail I received - Jim) ***** Jim: I just wanted to thank you for your frank and candid disclosure of the week's Yahoo! trades. I find myself similarly situated, this after just about busting out of trading and taking a month and a half off to try and better my perspective and learn from my erroneous ways. I got back in and had a very successful September, but blew it on a couple of stupid moves, one of which was being SURE that Yahoo! would go south late in the day of its earnings announcement, the other of which was being ABSOLUTELY CERTAIN that since it didn't happen then, that it would on Thursday, so, of course, I held over earnings!! Besides having lost sleep through most of the week and week-end, I'm now REAL $$ shy in my trading account, and I'm also REAL shy about pulling the trigger on any new trades. Nevertheless, your 'fessing up on the Yahoo! trades really helps me think, momentarily, -- (Sorry, please don't take offense, I don't really believe that you are) -- that I'm not the sole AH out here. How come when we read them there are only 10 rules, but when we break 'em it seems like we break 100?????? Thanks. Dan McCarthy (They are only rules when you are telling someone else how to trade. We ignore them because we need more experience!! That is expensive experience!! - Jim) ***** Dear Mr. Brown, I've been a subscriber since Jan. '99 and it is because of your courage to admit mistakes that I have been, and will remain a subscriber. Your Yahoo debacle last week was the kind of disaster every option trader/investor faces sooner or later. Your willingness to share this gut-wrenching experience with your readers is absolutely the secret of your success with OptionInvestor.com. The market teaches us never to assume anything, but we all do assume that events that have occurred 8 out of 10 times will occur again, and then the market corrects our assumptions. The most important thing you can teach us is that you can't be a winner every time. Reed Erskine (Assume - ass = u & me) ***** Jim, Thank you for having the courage and integrity to tell us about your YHOO blunders this past week. I only lost $2K, but am still feeling like quite the bonehead for my own decisions on YHOO puts. This truthfulness is what keeps me as a subscriber, because anyone who claims to win at this game all the time has zero credibility with me. I anxiously await the open on Monday. Friday afternoon when several positions of mine were looking quite nice, I just couldn't shake the feeling that something was amiss. So, I sold too soon. Within the last five minutes I took juicy (for me, they were juicy) profits off the table on both AOL and RNWK. Jerry ***** I really appreciate Jim's candid discussion of YHOO this week. That was more helpful than any 10 'success stories', because knowing enough to have confidence that an error is not being made is a precursor to being ready to go after the home run plays. Thanks, Peter ***** Sunday Oct 10 Once again Jim I feel compelled to reiterate my honest and heartfelt THANK YOU for your Sunday update.By giving so much of your true self to your readers you will receive 10fold back. Yahoo or not! Stacy (Big time short on Yahoo and CMGI!!) ***** Jim, I really appreciated your willingness to share your Yahoo debacle. For the first time in a long time, I read that section THREE TIMES. I couldn't help smiling, not because it was funny, but because it was reassuring to know that even someone with your experience feels like I DO so very OFTEN. This is the kind of input that makes your newsletter worth every penny I pay, and more. Please keep sharing with us, even when the results are less than great. (Hopefully they will not be this bad anytime soon.). Hope to meet you sometime, David Currie Please view this in COURIER 10 font for alignment ************************************************* CHANGES THIS WEEK Daily Results Index Last Mon Tue Week Dow 10417.06 -1.58 -231.12 -232.70 Nasdaq 2872.43 29.38 -43.52 -14.14 $OEX 686.24 -0.69 -11.52 -12.21 $SPX 1313.04 -0.81 -22.17 -22.98 $RUT 424.68 2.48 -5.51 -3.03 $TRAN 2961.49 -55.69 -64.53 -120.22 $VIX 24.60 0.43 2.55 2.98 Calls Mon Tue Week JDSU 133.13 2.19 1.56 3.75 JDSU, still flying high ADBE 118.06 5.38 -1.94 3.44 Intraday new 52-wk high BRCM 122.44 5.44 -2.31 3.13 Dropped, drifting lower HGSI 88.50 3.88 -1.63 2.25 A play for Billy the Kid VOD 51.44 2.13 -0.69 1.44 Still a good sector NT 58.06 -0.19 1.31 1.13 Great news, sore fingers DELL 45.50 0.06 -0.06 0.00 New, PC sales are good XMCM 55.13 -0.88 0.88 0.00 An impressive comeback SNE 155.69 0.50 -1.44 -0.94 Dropped, turning down GTW 51.50 -0.38 -0.63 -0.25 New, one for your radar NOK 98.25 -0.19 -1.06 -1.25 Great relative strength TFSM 45.63 1.13 -2.88 -1.75 Merger rumors cool down QCOM 212.06 8.56 -10.44 -1.88 Looking for solid entry ITVU 42.38 1.00 -3.13 -2.13 Possible re-entry point? SUNW 90.44 0.06 -2.19 -2.13 Dropped, rays dimming VRTY 65.56 0.75 -4.31 -3.56 Dropped, violates 10-dma AXP 145.25 -0.81 -3.63 -4.44 Held support at $145 RNWK 107.31 -4.25 -3.44 -7.69 Dropped, a run cut short DCLK 128.88 -4.13 -3.63 -7.75 Dropped, breaks support AOL 114.00 -0.75 -7.06 -7.81 AOL perches on support Puts YHOO 173.88 -10.75 -7.50 -18.25 Post earnings plunge! CMGI 103.81 -2.88 -5.81 -8.69 New, on spending spree SNDK 54.25 -1.06 -4.69 -5.75 New, look out below!! AMZN 84.94 -0.88 -3.44 -4.31 New, sector play BA 39.63 -0.06 -2.31 -2.38 New, falling from sky WPI 27.75 -0.06 -1.19 -1.25 A case of the blues MOB 95.69 0.94 -0.31 0.63 Mobil slips with market SLB 56.06 1.81 -0.81 1.00 Oil rising to the top? 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: ***** RNWK $107.31 -3.44 (-7.69) The earnings run for RNWK was cut short this week by an overall fear of interest rate hikes, a weak dollar, and sector momentum that fizzled out. Profit- takers stepped up to the plate to take the cash off of the table with the overall market now in consolidation mode, led by the Internet Stocks. For example, today YHOO was down $7.50 and AOL was down over $5. As we reported on Sunday, the last two previous earnings reports greeted the shares of RNWK with a serious sell-off, on April 12th there was a 35 point drop. Well so far it has only dropped about 8 points but we are not waiting around for the rest of the 35. We have seen this damage before and have learned from past history to close out a position of this type and regroup after the momentum returns. Friday RNWK hit a 52-week high at $115.50, that is our current resistance point that was no where to be found this week so far. Although we could see a bounce at these levels, it is not worth the risk with the overall sector being damaged. VRTY $65.56 -4.31 (-3.56) Friday's consolidation period continues and does more then simply slow our momentum. It pretty much kills it. Verity has done more than provide us with a buying opportunity as it suffered a big loss in the market today. VRTY has violated its 10-dma and shows no signs of recovery, closing only pennies above its low of the day. We recommended waiting for a rebound before entering a play and VRTY never presented us with one. With Intel falling short of earnings, we believe its only going to get worse from here in the short-term. DCLK $128.88 -2.31 (-7.75) Our earnings run for DCLK has softened up the past two days. Shares of DCLK have lost $7.75 so far this week. The $130 support level held up pretty well until the final hour of trading today when the broader markets began to deteriorate, so did DCLK. The merger talks concerning DCLK and TFSM have also begun to taper off as well. The one positive from the past two days of trading is the volume has been extremely light averaging just 1.6 mln shares per day. DCLK gave us the opportunity last Friday to take some money off the table and we hope you did just that. DCLK has pulled back over $10 since its intraday high on Friday. If you still have a position in DCLK please move you stops up near today's low as the next major area of support is down near $120. Given the weakness in DCLK the past two days we will drop the Internet advertising company from our play list ahead of earnings on Thursday. BRCM $122.44 -2.31 (+2.19) Shares of BRCM have been spinning its wheels for the first two days of the week. After drifting lower for most of the session Monday some buyers did step in, driving the price of BRCM shares over $126. This morning BRCM tried to make its way higher, hitting $128.13 but as the broader markets began their decline BRCM joined in. With the weak earnings in Intel and the decline late today in the price of BRCM stock, we will drop the chip maker from our call list for the time being. If you still have a position in BRCM keep your stops very close as BRCM closed near the $120 level that has provided support in the past. Remember BRCM announces earnings after the close on Thursday. SNE $155.69 -1.44 (+0.50) With the weak outlook for the market Sony is not going to continue for us in the short-term. On Friday Sony (SNE) gapped down to $156.63 and has pretty much traded there since. On Monday it appeared we were going to break out at the end of the day but there was too much selling pressure in the market today and it took Sony with it. Sony opened down $0.50 and the slide continued the rest of the day. Volume was low at only 108k so you could make a case for profit- taking but with the weakness in the market we are not confident it will take on its high set back on Sep 21 at $160.50. Lately Sony has been trading flat and today closed below its 5-dma. We will look for strength before visiting this stock again. SUNW $90.44 -2.19 (-2.13) This momentum turned earnings play has provided us with a wide scope of opportunity to net lucrative profits. SUNW finished with a satisfying record of $14.49, or +19% overall profits since we first picked it on August 28th at $76.19. Earnings are confirmed to report on Thursday, October 14th, after the bell and we do not recommend holding over an earnings' announcement. Plus it's unlikely at this point that SUNW will move up significantly in the next couple of days. Therefore, we decided to drop it tonight. PUTS: ***** No dropped puts today. ***************** PICK NEWS - CALLS ***************** XMCM $55.13 +0.88 (+0.00) Hey, we are Even Steven for the week. Considering the major sell-off today our current situation doesn't look so bad. What makes today's trading sessions more impressive is the comeback made by the stock. After trading as low as $52.50 in early morning trading, XMCM came back, closing the day fractionally higher. This in itself was a feat and demonstrates the actual strength of the stock. Look for this strength to continue as earnings announcements continue to beat expectations within the Internet sector. For investors looking to take advantage of the situation, look for entry points at $52-$53. Both the 200 and 10 day moving averages reside at this level, making a nice base for support. The next resistance level would be $60, but is still a few points away. To protect your gains, you may want to increase your stops as the stock approaches this level. With a little help from the broader markets, lets see if we can break this resistance point. AXP $145.25 -3.63 (-4.44) Well, the bears took control of the markets and raked havoc in most sectors today. AXP couldn't escape the triple digit loss on the Dow, which held most stocks for a loss. Despite the slight setback this afternoon, one good sign was AXP held support at $145. Many times investors set limits to buy stocks at even prices, which would explain the stocks ability to hold at this point. The next real support area for AXP is the 10-dma or $142. This price would be a good entry point for investors placing new trades. The biggest factors' influencing our play are going to be movements in the bond market and investors perceptions of future interest rates moves. With additional economic data (PPI) being released on Friday, investors remain worried about future rate hikes. Working in our favor, however, is the continued release of good earnings reports by various companies (except INTC). AXP announces their earnings on October 25th, which is less than two weeks away, see if we can muster an earnings run before then. NOK $98.25 -1.06 (-1.25) We finally have a solid entry point for Nokia! Nokia has had a rather mellow start to the week trading down slightly, with lighter than average volume. As we mentioned on Sunday, we were expecting to see a brief consolidation period for Nokia before continuing its upward trend. We believe that is what we are seeing now and look for Nokia to finish this pullback before again picking up the pace. Nokia has shown good relative strength despite the market and seems to be maintaining support right around $98. Earnings are set to be announced one week from Thursday. We have all heard the saying "choose your friends wisely", and following this advice seems to be working quite well for Nokia. On Monday, Nokia announced plans to begin working with IBM in the race to combine wireless technology with e-commerce and Internet access. Today, Intel announced plans to team up with Nokia to make television set top-boxes which will provide access to the Net. Nokia also released information pertaining to the testing of their WAP products with Mitsubishi Electronics. NT $58.13 +1.38 (+1.13) Another new 52-week high! Nortel continues to set new highs, have big volume and the news it needs to keep it going. Nortel had a great Tuesday in spite of the market and was trying to set new support just above Monday's high, right around $58. If you are playing NT, it is imperative that you exercise caution. With Intel falling just short of earnings estimates and Motorola meeting theirs yet falling short of the whisper, NT could have a rough day in the market on Wednesday. However, NT has nothing but good news of its own and therefore should have the momentum to keep it moving. Whoever has been writing the press releases for Nortel Networks is probably spending their evenings with their fingers on ice. The good news just keeps on coming for Nortel, who has been been taking advantage of the Telecom '99 conference, rubbing elbows and signing deals. Today, Nortel finalized a contract with Colt Telecom to design, supply, install and support of Colt's pan- European network, a deal first announced in May. LambdaNet Communications announced that they have awarded Nortel a $100 million contract to build a high speed optical network. ITVU $42.38 -3.13 (-2.13) Before the sell-off began in the shares of ITVU this week, the stock traded as high as $46.88 which was up over 12 points from our recommended price about two weeks ago. As reported in Sunday's newsletter we were expecting momentum to continue in the shares, because of the bullish indicator's that were firmly in place from Friday's activity. A positive breakout, followed by higher highs is very bullish. This scenario remained in place, but only on Monday. So what happened today? Why the sell-off? Well the profit-takers stepped up to the plate as interest rate fears resurfaced in the overall market. The sell-off was lead by the tech stocks. With ITVU tight trailing stops were a must and you might have been stopped out on today's pullback. If you were stopped out, look for a recovery in the shares at current levels for a possible re-entry point. The stock closed down over 3 points on strictly profit-taking. We believe the technical bullish scenario remains in tact, and today's dip has provided another buying opportunity. With the earnings report just around the corner on Oct. 28th we are looking for another leg up before then. Before entering any new plays make sure to confirm that the momentum to the upside has resumed. Remember the breakout to the upside is strictly based on momentum. Short- term support is around the $42 level, with resistance at $45.81. TFSM $45.63 -2.88 (-1.75) Well the rumors concerning the merger between TFSM and DCLK have lightened up this week. We don't know if the rumored merger will take place or not. After starting the day out lower yesterday, TFSM tried to regain the strength from late last week. Traders pushed the price up to equal Friday's high at $49.50 only to see it fall back late in the day. Actually with the lack of any news concerning the merger or any new rumors, shares of TFSM have held up pretty well. As we mentioned Sunday the latest move up in in the price of TFSM has been primarily speculative and driven by rumors. If there is no announcement about a merger or further rumors on the street, we would look for shares of TFSM to fall back to support levels near $40. We would be cautious about opening a new play in TFSM as it did close near its low of the day. Volume the past two days has been better than normal, averaging 885K. If you didn't get stopped out Monday or today keep your stops close as there may be more of a move to the downside. However if we get new rumors shares of TFSM could take off like a rocket so keep your eye on this one. ADBE $118.06 -1.94 (+3.44) Investor enthusiasm for ADBE was evident as the stock advanced $5.38 yesterday while flirting with last week's highs. The strong downdraft on the Nasdaq today had little affect on ADBE. Yes it gave back $1.94 in the last hour of trading, but not before setting another 52-week record at $122. On both days volume was moderate as ADBE maintained this higher price level. Near-term support is at $114 and $115 with the 10-dma ($115.39) in the same proximity. There's only about two weeks left in this momentum/split play. ADBE will split 2:1 after the close on Tuesday, October 26th. In the news, Adobe announced it extended the company's Professional Publishing Platform with an editorial application, InCopy (TM) and also, the unveiling of the newest version of its photo-editing software, PhotoDeluxe Home Edition 4.0 for Windows, which includes a new 3D capability. AOL $115.50 -7.06 (-7.81) Profit-taking was in full-swing today as interest rate concerns once again plagued the tech stocks. Even AOL wasn't impenetrable. In a steady descent on weak volume, the stock lost over $7 of its recently acquired gains. So now AOL is perched on its near-term support of $115 just above the 10-dma ($113.92). Firm support is still at $109 but any decline to this level should raise red flags. Earnings are just around the bend confirmed for October 20th, after the bell. Recall this earnings play took on a twist when it reached historical split-levels above $120 and thus presented the possibility of a split announcement around earnings. We still have our fingers crossed. There is a scheduled Shareholders' Meeting on October 28th to vote to increase the number of authorized shares to 1.8 bln to 6 bln. In the news AOL and the Seagram Companies (VO) have signed a cross marketing deal to install AOL kiosks at Universal's Islands of Adventure theme park in Florida offering AOL demonstrations and direct links to two of the Universal Web sites. QCOM $212.06 -10.44 (-1.88) QCOM set another record high on Monday at $224.69 after the company announced it would use a portion of its $1.4 bln in cash to invest in companies that would speed the further acceptance of its CDMA technology. This news event certainly gave a jolt to this already strong momentum run and QCOM tacked on $8.56 to close at $222.50. AG Edwards wasn't as hot on the stock and downgraded QCOM to a Maintain Position from an Accumulate. Today QCOM succumbed to heavy profit-taking amid the interest rate worries of investors. Consequently the stock suffered a $10.44 set-back, but only after it ironically peaked at yesterday's closing price level ($222.50). Tomorrow's uncertain market may offer solid entry points into this HIGH RISK and VOLATILE INTERNET play. Remember there's still time for this momentum play to run right up to its earnings' date confirmed for November 2nd, after the bell. JDSU $133.13 +1.56 (+3.75) Bucking a strong NASDAQ headwind today, JDSU flew onward. While the price movement has been good for our option price, we haven't been able to target shoot this one anywhere under $130 (yesterday's opening price) since we picked it Sunday, making a profitable entry difficult. Even with an ascending price, volume is down substantially since last week. And though support inched up to $132 even in today's turbulence, resistance was found at $135. In short, the trading range is getting a bit narrow and tapering volume is preventing more strong moves up. It's time to watch the downside and set those stops at $130. JDSU still provides a critical product in the photonic revolution, making for a strong long-term hold. But for the play, everything will have to in our favor (strong A/D line, market/sector/stock moving up) and volume must swell again as the issue moves over $135. Or for you risk tolerant types, stick to target shooting in the $125 range. Don't try to force a play on a flat stock. As we're fond of saying, missed money is better than lost money. If you keep track, earnings are tentatively scheduled for October 28 after the close. Remember the 2:1 split on December 29 too. VOD $51.44 -0.69 (+1.44) Sporting a nice $2 gain as NASDAQ set a new record yesterday, telecom issues, including VOD, led the way. While fighting today's downdraft the sector fared much better than others, but VOD still gave back a part of Monday's gain. After 4 "up" days in a row, which tacked 13% on VOD's price, a little profit-taking isn't out of line. Technical indicators are still deep in the positive zone and volumes are still far above the ADV (thanks to the 5:1 split last week) but have been falling since. Be a bit cautious if volume tapers off. It may signal that the big recent move is near an end. Short-term support is at $49.50; resistance is at $53. Despite the split, VOD still likes to gap at the open, so how do you know when it's safe to get in? You never know for sure, but you can increase your odds by looking for a little volume and price surge in the last 15 minutes of trading to see what the pros are doing. The spikes are generally from the "buy on close" orders, and are roughly indicative of where they think the price will move. Of course, confirm market direction first. HGSI $88.50 -1.63 (+2.25) Yesterday, support was at $85; today at $88, despite stiff market opposition. While yesterday's close over $90 was near the top of the trading range, today HGSI finished just $0.50 off the low, yet significantly above yesterday's reported low of $81, also its 10-dma. New support seems to be $84-$85. Frankly, the market has a strong chance of temporarily heading south for a couple of days, thanks to Intel and interest rate fears rubbing off on everything around it. With that in mind, set those stops to protect any profits you have or (for you daredevils) target shoot at support ($84). Volume is down and there is no news. Because of the volatility of this issue, the high spreads on bid/ask, and the thin OI, this play is for gunslingers only. ***************************** SEE DISCLAIMER IN SECTION ONE
The Option Investor Newsletter Tuesday 10-12-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. **************** PICK NEWS - PUTS **************** SLB $56.06 -0.81 (+1.00) An upgrade for SLB on Monday may have helped the stock temporarily but the upgrade may be helping us with a good entry point. The upgrade came from First Union who changed their rating from a Buy to a Strong Buy. Lehman analysts also upgraded oil services stocks on Monday but did not mention SLB specifically. Oil prices (which are probably the real catalyst) have risen both days this week. This is to be expected from the 6-day drop it had endured. The question now is can oil continue to rise? With a lot of mis-information floating around relative to OPEC's resolve in maintaining their production quotas, it is difficult to determine the fundamentals to this commodity. What we do know is that the 10-dma sits at $58.50 and should be resistance. In fact, SLB ran in to a bit of resistance at $58 today as well. These levels should be considered for entry points. We will have oil inventories released on Wednesday which should add further direction to oil prices. We expect prices to roll over again but caution is advised due to all the uncertainty. YHOO $173.88 -7.50 (-18.25) Profit-takers took center stage today, closing the markets on a lower note. Yahoo investors were in the same boat, selling shares, producing nice profits for our puts. Our post earnings play is working like a charm now that YHOO has rolled over. It took a couple trading sessions before it kicked into gear but now it's in full swing. Profit-taking on the broader markets was icing on the cake, adding fuel to the declining stock. YHOO, with little resistance, fell though its 10-dma at $179 and is heading for the next support level at $168. If history is any indication of the future, the stock should have no trouble breaking this level as well. When placing new trades, watch for slight intraday spikes in the stock. The last few trading sessions Yahoo has closed near its low, leaving little room for bargain hunters. The stocks downward momentum should continue, especially if the broader markets head south. Protect profits by decreasing the recommended stops proportionally to movements in the stock. WPI $27.75 -1.19 (-1.25) After getting a technical bounce on Friday of last week, this week the shares of WPI continued the downtrend. The shares opened the week at the $29 level and as of today traded to a low of $27.63, before closing slightly off of the days lows at $27.75. There has been no recent news on the company since they reported back on Sep 13th that their earnings to be announced on 11/04 would be 6 or 7 cents lower than expectations. That same day they received a downgrade from "Brown Brothers"-(long term Neutral). The shares have been depressed every since. At these levels we look for the downtrend to continue, and remain consistent to the downside below the $30 level. The volume has been rather light in the recent trading sessions, so keep your trailing stops tight if you enter a short position. MOB $95.69 -0.31 (+0.63) It pays to be a little patient! Mobil started the week on the upside as oil prices rebounded a little from last weeks slump. Today looked stronger until the market turned and Mobil went with it. You should of got a good entry in the afternoon but it is not too late to move in tomorrow on continued weakness. Mobil pushed up to a high today of $97.06 testing short-term resistance only to fall back down and closed below its 10-dma. With the weakness in the markets, Mobil (MOB) should start its downward test of the 200-dma at $93.65 and continue to its next support at $90. ************** NEW CALL PLAYS ************** DELL - Dell Computer Corp $45.50 -0.06 (+0.00 for the week) Dell Computer is the world's #1 direct-sale computer vendor and one of the world's top PC makers. Therefore it's understandable that the company designs, develops, manufactures, markets, services, and supports a variety of computer systems including desktops, notebooks, workstations, network servers, and storage products. Dell's clients include the government, corporations, the medical and education industries, as well as the individual consumer. Founder Michael Dell is still the CEO and maintains a 14% stake in the company. This is the play for Dell. We're expecting the Nasdaq to tank tomorrow as a result of Intel, the mother of all chipmakers, missing earnings by 0.02 cents and thus, creating bargain buying in the hardware sector. Intel was down over $7 in after hours trading, but did state in their report that PC demand overall still remains strong. So our goal is to target shoot Dell at $40 and then catch a ride up when the market recovers after a few days of struggling. Also, earnings for the company are about a month away expected on November 11th (not yet confirmed) and should be in-line with analysts' expectations. The wild card here is the degree in which the market will fall tomorrow. DELL has lots of support at different levels between $38-$44. For risk-tolerant investors, you may want to target shoot an entry point. Otherwise, wait until we list options below. Dell is expected to sign a five-year, $8.5 bln supply pact with South Korea's Samsung by this Friday for thin-film-transistor (TFT) liquid crystal displays (LCD) to insure against future display supply shortages. This is an important investment deal because Dell's "just in time" manufacturing style on one hand reduces operating costs yet is hit hard when supplies are limited. As part of this deal, Dell will also invest in $220 mln in convertible bonds (conversion set at 30% premium to last Friday's closing price). In other news, CEO Michael Dell sold 4 mln shares of his company stock on September 13th and 14th for $47.77 raising about $190.3 mln. Shares have fallen about 4.6% since that time. But keep in mind this insider selling isn't unusual and DELL has had lots of profits to take off the table in recent years. ***NO OPTIONS LISTED YET*** Picked on Sep 12th at $45.50 P/E = 59 Change since picked +0.00 52 week high=$55.00 Analysts Ratings 13-13-5-0-0 52 week low =$24.25 Last earnings 07/99 est= 0.17 actual= 0.19 surprise +11.8% Next earnings 11-11 est= 0.20 versus= 0.14 Average daily volume = 25.70 mln Chart = http://quote.yahoo.com/q?s=DELL&d=3m **** GTW - Gateway Computer $51.50 -0.63 (-0.25 this wk) When you are #2, you try harder (or so went the Avis commercial of 20 years ago). Now it's Gateway's turn to pick up the slogan. They are the #2 direct merchant of PC's (no middlemen) behind Dell. Founder, Ted Waitt and company have become extremely creative in getting PC's into the hands' of consumers in order to jumpstart sales and close the gap. They have added brick and mortar stores as a place for consumers to test-drive equipment before buying and are pioneers in the "cheap PC/free Internet" revolution. While they've dropped the "2000" from their name, they still use Holstein cow spotted boxes. (Ted says it was a coin toss between the family dog and the cow... ...Sparky lost). First of all, we are not putting this play up for readers to execute tomorrow but you should keep it on your radar screen. Here's the deal: We think Intel will dig a big crater, which will affect the market over the next couple days and take its customers with it. We expect GTW to take a short-term hit. The good news is that GTW reports earnings on October 21 and we should get an earnings run, especially since GTW has in the past surprised substantially to the upside. Here's the plan: DON'T BUY GTW AT CURRENT PRICES! Wait for the market to inflict its damage before taking a position. GTW has strong support at the $41-$44 range, but it may not get there - maybe more like $47-$48. Watch the movement over the next day or two to pick an entry according to your risk profile. Our job as traders is to wait patiently for GTW to come to us. There is still time, so don't rush it. We have purposely left out strike prices out until the dust settles. By all means, choose your own at will. The news is Intel earnings. GTW is fundamentally sound, but won't escape the vortex until investors decouple from the bad news and begin to focus on GTW earnings. ***NO OPTIONS LISTED YET*** Picked on Oct 12 at $151.50 P/E = 42 Change since picked +0.00 52 week high=$54.75 Analysts Ratings 12-7-2-1-0 52 week low =$21.25 Last earnings 07/99 est= 0.20 actual = 0.48 surprise +140% Next earnings 10-21 est= 0.28 versus = 0.28 Average daily volume = 2.19 mln Chart = http://quote.yahoo.com/q?s=GTW&d=3m ************* NEW PUT PLAYS ************* CMGI - CMGI, Inc. $103.81 -5.81 (-8.69) CMGI is one of the chief architects of the Internet. What began as a direct marketing firm has become a prolific investor in the future of the Internet. CMGI's venture capital are @Ventures, a savvy trend-spotter boasting a portfolio with stakes in more than 40 Internet companies (including Lycos and Raging Bull). It also owns 83% of search engine AltaVista. CMGI's Internet Group includes a string of majority-owned companies (including Engage Technologies, Planet Direct) and offers services such as Web hosting. About 80% of CMGI's revenue comes from fulfillment and mailing list services. Last Friday CMGI capped off a great week ending slightly down to close at $112.50, up over 12 points for the week. This week has been a different story. The Internet stocks slipped as a whole, amid profit-takers stepping up to the plate after last weeks run. As for CMGI, we can link the sell-off to a combination of sector weakness and the announcement that CMGI will be putting $100 million into an ad-campaign that is going to last over a year. This campaign will be a promotion of its Alta Vista search Engine prior to taking it public. This little spending spree could take away from earnings. Going into the trading week, the technical picture looked promising to the upside with a move above the $115 level for bulls and to the downside, support levels were sitting near the $106 level. That level has now been broken. The shares now sit at $103.81, with support now sitting first at $100 followed by support at $95. We believe CMGI is going to test current support levels in the present market conditions. Going forward, if interest rate fears persist, we expect the selling to continue in the high flying stocks like CMGI. Confirm the positive momentum and direction in the overall sector before taking a position. BUY PUT NOV-110 GCB-WB OI=414 at $11.25 SL=9.00 BUY PUT NOV-105*GCB-WA OI=334 at $ 8.63 SL=6.63 Average Daily Volume = 4.9 mln Chart = http://quote.yahoo.com/q?s=CMGI&d=3m **** SNDK - Sandisk Corp $54.25 -4.69 (-$5.75 this week) Sandisk designs, manufactures and markets flash memory data storage products for industrial, communications, highly portable computing and consumer electronics. The company's products include removable and embedded memory cards for such products as Eastman Kodak's digital cameras and mobile communication devices made by Nokia and Siemens. Look out below! As Intel goes, so does just about everything else (in techs) with it! Sandisk is looking ready to sell off even more in the face of Intel missing their earnings numbers. Today ,even before the Intel news, SNDK got a head start. From the open the intraday chart shows a perfect slide to the downside with a kicker at the end as if the support stopped and the cliff began. Sandisk dropped -$17.25 on 9/23 due to the Taiwan earthquake but could not rally back and continued to drop as the news played out. On Oct 4th, SNDK hit support at $53.13 and bounced off with a nice climb to resistance of $70 only to reverse course and retest its support today closing right on it. Now with the Intel news, Sandisk will be continue to slide and we feel it will find new support at the $50 level. Volume today was average which indicates moderate selling and not panic selling so we would consider this a momentum play based on news. Remember, good news lasts two to three days while bad news can last one week to months. Lets not get too excited about the potential drop as the news is only sector related and not a direct hit on Sandisk. Should you decide to play this one keep your stops tight and stay defensive. Not recommended for those who cannot watch this one intraday as it could turn on a dime with any recovery in the market or sector. BUY PUT NOV-60*SWQ-WL OI=55 at $10.13 SL=8.00 BUY PUT NOV-55 SWQ-WK OI= 8 at $ 7.13 SL=5.00 low OI Average daily volume = 5.75k Chart = http://finance.yahoo.com/q?s=SNDK&d=3m **** BA - Boeing $39.63 -2.31 (-2.38 for week) Boeing is the world's largest maker of commercial jets and the #1 aerospace company. Boeing's commercial aircraft include the 767 and 747 as well as the 737 - the best-selling jetliner in aviation history. The company's military aircraft include the F/A-18 Hornet strike fighter, the F-15E Eagle fighter- bomber, the C-17 Globemaster III transport, and the AH-64D Apache Longbow helicopter. Boeing's space operations include communications satellites, Delta rockets, and the Space Shuttle. Boeing also is the prime contractor for the International Space Station. Boeing investors are becoming impatient as they wait for the company to announce the latest quarterly earnings. Many investors have anticipated the moment and left for the exits by selling their positions. The last few trading sessions provide proof that investors are not willing to hold the stock through the earnings announcement. Thursday is the big day Boeing investors are waiting for. The company is still trying to recover form a half-billion dollar loss in the fourth quarter in 1997, which ushered in its first full-year loss in 50 years. Adding to these problems is trouble within the industry. Raytheon, one of Boeings competitors, announced that profit margins were shrinking from 15% to 12%. This isn't a good sign BA, because a portion of their business consists of that similar to Raytheon. For these reasons we have decided to add BA as a put play. Thursday, analysts are looking for earnings of 48 per share. However, we anticipate once the announcement is made there will be little support for this falling stock. With the Dow having triple digit losses today and BA being a component of the index, we expect BA to follow today's trend to even lower levels. When placing trades, look for slight spikes in the stock. $40 is the 200-dma for the stock, which would be a good entry point for this play. The next support level is a $33, giving a few points to ride the stock down. Lets see if we can break this support as easily as the last. BUY PUT NOV-45*BA-WI OI=3855 at $5.88 SL=3.75 BUY PUT NOV-40 BA-WH OI=3845 at $2.25 SL=1.00 BUY PUT NOV-35 BA-WG OI= 882 at $0.56 SL=0.00 High Risk! Average Daily Volume = 900 K Chart = http://quote.yahoo.com/q?s=BA&d=3m **** AMZN - Amazon.com $84.94 -3.44 (-4.31 this wk) Amazon.com comprises the Internet's #1 music, #1 video, and #1 book retailer. Amazon.com opened its virtual doors on the World Wide Web in July 1995 and today offers Earth's biggest selection with online auctions, toys, electronics, free electronic greeting cards and more than 4.7 million book, music-CDs, video, DVD, and computer-game titles. Amazon.com seeks to be the world's most customer-centric company, where people can find and discover anything they may want to buy online. As part of its efforts to provide the best shopping experience for customers, Amazon.com provides secure credit- card payment, personalized recommendations, streamlined ordering through 1-Click technology, and hassle-free auction bidding with Bid-Click. Now, if they could just turn a profit! It used to be "as goes GM, so goes the country". Now it's "as goes YHOO, so goes the Internet sector". YHOO took a $10 nosedive yesterday following blow out earnings last week. It was only a matter of time before other issues, including AMZN came to the same party. It doesn't help that a jittery bond market can also sway this interest-rate-sensitive issue just waiting to get nailed by Greenspan's passing car. In short, the Internets are on the move. It won't help either that Intel's earnings will cast a long shadow in the technology market over the next few days. The good news is that AMZN will report earnings on Oct 28th. Thus we may see an earnings run after the hand-wringing and despair runs its course. But until then we have a good put play opportunity. Support is at $75. Technically speaking, we are in the positive, but RSI just gave the sell signal. Volume, though a little low compared to the ADV, should step up tomorrow in the down direction, drafting behind Intel. This play should be good for only a few days as a result. Buy this one on any strength in tomorrow's action. Or don't buy it all if your stomach doesn't like roller coasters. It is volatile, making it an inherently risky play. No news that will move the price...just a bad report from Intel and sector weakness. BUY PUT NOV-85*YQN-WQ OI=1077 at $8.25 SL=6.25 BUY PUT NOV-80 YQN-WP OI=1552 at $5.88 SL=4.00 Average daily volume = 12.14 mln Chart = http://quote.yahoo.com/q?s=AMZN&d=3m ********************* PLAY OF THE DAY - PUT ********************* YHOO - Yahoo! $173.88 -7.50 (-18.25 for wk) Yahoo! Inc. is a global Internet media company that offers a branded network of comprehensive information, communication and shopping services to 80 million users worldwide. As the first online navigational guide to the Web, YHOO is the leading guide in terms of traffic, advertising, household and business user reach and is one of the most recognized brands associated with the Internet. The company's global Web network includes 19 World properties. Yahoo has offices in Europe, the Asia Pacific, South America, Canada and the United States and is headquartered in Santa Clara. Sunday's Write Up Friday was a good day for the markets as most stocks closed the week on a higher note. However, mixed unemployment numbers created confusion among investors most of the day. Yahoo investors were no exception, the stock traded lower for most of the day but managed a small rally to close the session on the upside. Since Wednesday, when Yahoo posted better than expected earnings, investors have been rewarded by the recent run-up in the stock. Our plan is to take advantage of the post earnings depression that usually follows an earnings announcement. However, strong market conditions have slowed the progress of our put play. The stock shows resistance at $192, which is where Yahoo closed on Friday. If the broader markets lose their momentum, Yahoo investors will be quick to close their positions, taking profits. The stocks nearest support level is the 10-dma at $183, look for the stock to approach this level during a sell-off. Like always, confirm negative direction from the stock prior to placing new trades. Even though we feel the stock will turn, as a word of caution, we recommend using the provided stops. Tuesday's Write Up Profit-takers took center stage today, closing the markets on a lower note. Yahoo investors were in the same boat, selling shares, producing nice profits for our puts. Our post earnings play is working like a charm now that YHOO has rolled over. It took a couple trading sessions before it kicked into gear but now it's in full swing. Profit-taking on the broader markets was icing on the cake, adding fuel to the declining stock. YHOO, with little resistance, fell though its 10-dma at $179 and is heading for the next support level at $168. If history is any indication of the future, the stock should have no trouble breaking this level as well. When placing new trades, watch for slight intraday spikes in the stock. The last few trading sessions Yahoo has closed near its low, leaving little room for bargain hunters. The stocks downward momentum should continue, especially if the broader markets head south. Protect profits by decreasing the recommended stops proportionally to movements in the stock. BUY PUT NOV-175*YHV-WO OI-1243 at $13.13 SL=10.25 BUY PUT NOV-170 YHV-WN OI-2056 at $10.63 SL= 8.00 BUY PUT NOV-165 YHV-WM OI=1621 at $ 8.50 SL= 6.25 Average daily volume = 9.05 mln Chart = http://quote.yahoo.com/q?s=YHOO&d=3m ************ See Disclaimer in section one ************
The Option Investor Newsletter Tuesday 10-12-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ************************ COMBOS/SPREADS/STRADDLES ************************ Investors Flee On Earnings Fears.. Monday, October 11 The markets were mixed on Monday as the Nasdaq rocketed to new record highs Monday, spurred by rallies in Internet stocks. The Dow Jones average ended at 10,648 while the Nasdaq index jumped 29 points to 2,915. In the broader market, declining issues led advances 1,564 to 1,364 on light volume of 656 million shares on the NYSE. Sunday's new plays (positions/opening prices/strategy): Sapient SAPE OCT100C/OCT95C $0.62 debit bear-call Zoran ZRAN OCT30C/OCT25C $0.68 debit bear-call JDS Uniphase JDSU NOV100C/NOV110C $8.93 debit bull-call Our new plays were a mixed lot on Monday morning as two of them were bumped from the list in the first few moments of trading. Comerica (CMA) opened lower and the option premiums on the sold position were gone immediately, more likely a case of misquoted options then a move in the underlying. Regardless, the play was unavailable. Fastenal (FAST) was a great pick but the stock fell almost $3 before the open, preventing us from entering the play at a potentially profitable debit. Sapient (SAPE) was much more cooperative, allowing an easy entry at the target and trading as high as $0.88 during the day. Zoran (ZRAN) was lower during the morning session and the suggested price was not available. The highest credit observed was $0.68. JDS Uniphase (JDSU) paused in the first few minutes of trading, just long enough to salvage a reasonable entry at $8.93 debit. Portfolio plays: Yahoo! (YHOO) was our main focus for the session, falling over $10 after the recent post-earnings rally. The credit spread is now safely OTM and should expire profitably at the end of the week. Our favorite calendar spread position, Bell Atlantic (BEL) moved down to the sold (short) strike, falling $1.12 to close just above $65. We are expecting BEL to trade in a fairly small range through Friday. Legato (LGTO) made a nice move, climbing over $2 to the sold position at $50. The new volatility spread is already trading at a 75% profit, in only one week. Consider closing that play to protect gains and limit future losses. One of our smaller issues, Zoltek (ZOLT) has moved back near the sold strike at $7.50 and should offer an excellent opportunity for the roll-out to November options. The rest of the portfolio was rather dull but there was bullish activity in some of our recently slumping issues. Gemstar (GMST), IDT corporation (IDTC) and Network Associates (NETA) made solid gains with the technology stocks. Long-term positions, Motorola (MOT) and Solectron (SLR) also had favorable moves in a week of upcoming earnings reports. Tuesday, October 12 U.S. stocks fell sharply Tuesday as fears of unrealistic earnings expectations drove selling to a frenzy. The Dow Jones industrial average ended down 231 points at 10,417 and the Nasdaq composite lost 43 points to close at 2,872, a day after a new record high. In the broader market, declining issues outnumbered advances 21 to 8 on moderate volume of 772 million shares on the NYSE. The 30-year Treasury bond fell 16/32, boosting the yield to 6.23%. Portfolio plays: Blue-chip stocks fell lower today on negative expectations for upcoming earnings reports and concerns about interest rates in Europe and the United States. Our long-term portfolio suffered a ruthless blow when a warning by Raytheon, one of the largest aerospace and defense companies, said that earnings this year and next would fall short of expectations. The news caused many of the institutional investors to punish stocks in that sector and trading in Raytheon stock was halted. General Dynamics (GD) was down almost $5 to $58 and while our January calendar spread will eventually recover some of the loss, many GD shareholders may not. Another issue that continued downward today was Yahoo! (YHOO). The stock price fell another $7 today, allowing traders to lock-in profits in the short-term bearish credit spread. Zoran (ZRAN) was quite active, moving in a $4 range that brought for panic and joy, depending on which time of the day you viewed the stock price. In the morning, it started lower then moved up to the high of the day by noon, only to fall back $2 at closing. We will watch this one tomorrow for any signs of a new rally or sustained recovery. One of our other recently troublesome plays, C.R. Bard (BCR), fell back nicely today, settling in the low $50 range for a solid 50% profit in the neutral calendar spread. Our other (older and now bullish) position is struggling near the break-even price, but that was due to some inept trading and not the activity of the underlying issue. Today was the report date for Motorola (MOT) and with the recent rally, the LEAPS/CC's play was a good candidate for roll-out to November. A $2.75 credit was available for a move to the NOV-$95 options. After the session, MOT reported third-quarter profits in line with expectations and exceeded year-ago performance on growth in its digital wireless-phone operations. Third-quarter earnings were $332 million, or $0.53 per share, compared with $40 million, or $0.07 a year-ago. It will be interesting to see how investors react to the report in the weeks ahead. The majority of the portfolio was red (negative) but this is to be expected after some of the recent technology rallies and the inflated expectations of a major earnings week. We hope that the market will find a happy medium in the next few days and provide some short-term stability for the few remaining adjustments that need to be made as we approach the October expiration date. Questions & comments on spreads/combos to ray@OptionInvestor.com ********** NEW PLAYS ********** PMCS - PMC Sierra $88.62 *** Earnings Play *** PMC-Sierra develops and markets high-performance semiconductor system solutions for advanced communications industries. Their products are used in broadband communications infrastructures and high bandwidth networks. The company is a leading supplier in the communications infrastructure and networking markets and also provides fast ethernet integrated circuits to the networking markets. PMC Sierra's marketing strategy involves maintaining close relationships with its customers and designing cutting-edge technology to meet their needs. They market their products through manufacturers' representatives and all of their products are manufactured by independent foundries and chip assemblers. Their wafers are outsourced to companies such as Taiwan Semiconductor Manufacturing, the focus of much attention over the past few weeks. PMCS reports on Thursday and some analysts suspect that earnings will not be favorable because of the Taiwanese earthquake. The consensus estimate is $0.24 per share and the whisper number is $0.28. The stock has traded in a choppy consolidating trend since the earthquake as it struggles to retain recent gains. New fears about the company missing earnings and the battering of HIFN (down $50 on a reduction of orders by Lucent) will keep investors from running this one up in the short-term. Tomorrow may provide a technical bounce that drives traders into the cheap OTM call options, thus increasing the credit in this position. PLAY (aggressive - bearish/credit spread): BUY CALL OCT-105 SQL-JT OI=643 A=$1.06 SELL CALL OCT-100 SQL-JE OI=972 B=$1.62 INITIAL NET CREDIT TARGET=$0.62 ROI=14% (3 days) Chart = http://quote.yahoo.com/q?s=PMCS&d=3m *************** TECHNICALS ONLY *************** These plays are based on the current price or trading range of the underlying issue and the recent technical history or trend. The probability of profit from these positions is also higher than other plays in the same strategy. Current news and market sentiment will have an effect on these positions so review each play individually and make your own decision about the future outcome of the stock price. **** LGE - LG & E Energy Corporation $22.69 *** Rangebound? *** LG&E Energy is a regulated electric and gas public utility that engages in the generation, transmission, distribution, and sale of electric energy and the storage, distribution and sale of natural gas in Louisville and adjacent areas in Kentucky. Their operations of Energy Systems' subsidiaries are located throughout the United States and also include investments in other parts of the world. This play is simply based on the historical price of the stock and recent volatility (option premiums) in that sector. The long term outlook is neutral and the generous time frame provides a favorable profit potential with relatively low risk. PLAY (conservative - neutral/calendar spread): BUY CALL MAR-22.50 LGE-CX OI=3 A=$3.12 SELL CALL NOV-22.50 LGE-KX OI=576 B=$1.75 INITIAL NET DEBIT TARGET=$1.25 ROI TARGET=50% Chart = http://quote.yahoo.com/q?s=LGE&d=3m **** WFC - Wells Fargo $41.69 *** Up And Down, Up And Down *** Wells Fargo is a diversified financial services company providing banking, insurance, investments, mortgage and consumer finance through stores and other distribution channels across North America. They provide personal, responsive service by connecting customers to essential financial services 24 hours a day, by ATM, phone or personal computer, as well as through a growing network of traditional and supermarket branches. Options activity has been higher than normal in rumored partners Wells Fargo and Comerica (CMA) and since we couldn't get in on the Comerica play, we decided to try the opposing position. If WFC decides to buy CMA, which we don't think will happen anytime soon, the stock would probably make a significant move. We will protect to the downside and hope for little or no action outside of its current range, in this long-term position. PLAY (conservative - bearish/diagonal spread): BUY PUT JAN-42 WFC-MY OI=169 A=$3.25 SELL PUT NOV-40 WFC-WH OI=302 B=$1.21 INITIAL NET DEBIT TARGET=$1.88 TARGET ROI=50% Chart = http://quote.yahoo.com/q?s=WFC&d=3m ********* STRADDLES ********* The straddles section has been rather quiet for the past few days as the majority of our broad market issues have again moved into range-bound trends. The short-term resistance for the transport sector appears to have been tested on Monday and with the recent rally, our two airline straddles achieved profitable exit prices. Fedex (FDX) traded at $12.50 credit and US Air (U) moved up near $10.75 credit on Monday, both offering 25% returns for less than one month; US Air provided that return in one week. Some of our other issues haven't fared as well as we would prefer but overall the section is performing better than expected. Our new position for this week (from Sunday's edition): Hartford Insurance HIG MAR40C/MAR40P $7.31 debit straddle Strategies: Recently, I have received a few questions regarding Tom Gentile's method (Optionetics) for straddle positions. Here is a summary of the characteristics of his plays and some hints on how (and when) to exit each position. Straddles are designed to take advantage of both a rising and falling market. The strategy is initiated when both a call and a put at the same strike price are bought with the same expiration date. The Straddle buyer expects the combined price of his call and put to rise over the time frame he holds the trade. To make a profit, the Straddle buyer would need to sell his straddle at a higher price than he originally paid for it. The prices of Straddles rise 2 ways. First, the underlying asset could make a big move that is greater than the price of the entire straddle, forcing it to gain value. Second, the Straddle can gain value by higher demand of the actual strike prices held. This means that the prices of both the call and put increase in value because of more buyers than sellers. This is called a volatility increase. The risk of holding a straddle is that time decay will set in causing the price of the straddle to drop in value. We have a 3 part system that we use in determining markets that have breakout potential for good straddle buys. The 3 criteria that we use are: 1. Market consolidation - We scan optionable stocks and look for markets which appear to be consolidating. Market consolidation occurs when buyers and sellers come to the same agreement on price for a particular stock, which results in less violent moves over time. This gives the chart a look of a wedge or pennant formation. These wedges, while they are hard to predict exactly which way the market is going to break out to, will normally break out one way or another, which is great for straddle traders. 2. Cheap option premiums - We search for the cheapest option premiums by looking at implied volatility lows relative to their high and low ranges over time. The great thing about buying options premiums when the implied volatility is lower is that you are further reducing your time risk over the life of the trade. Once this is determined, we merge this information with the rule 1 above to further filter the stocks down. 3. Impending News - This can be anything from an earnings report to a government report, depending on the straddle play. After filtering stocks with those straddle criteria, we find the few stocks that meet our low risk / high return strategy. Our Exit Strategy: If the Straddle gains a profit of 50% or more, OR, exit 3 days after the earnings report is released, whichever comes first. Keep in mind that by exiting this way, we still retain most of the premium on the straddle if we are wrong and the market does not move. Good Luck! ***************************** SEE DISCLAIMER IN SECTION ONE
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