The Option Investor Newsletter Tuesday 10-19-99 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) ************************************************************ 10-19-99 High Low Volume Advances Decline DOW 10204.90 + 88.60 10335.40 10117.50 903,951k 1,611 1,401 Nasdaq 2688.18 - 0.97 2729.30 2845.20 1,093,110k 2,124 1,771 S&P-100 660.27 + 3.48 670.16 657.95 Totals 3,735 3,172 S&P-500 1261.32 + 7.19 1279.30 1255.60 54% 46% $RUT 410.93 + 2.03 414.53 408.90 $TRAN 2860.21 + 16.14 2907.76 2845.20 VIX 28.46 - 0.98 28.76 25.85 Put/Call Ratio .50 ************************************************************* Positive CPI and Microsoft beat estimates but don't get out the party hats yet! While most investors breathed a sigh of relief this morning when the CPI came in as expected, the underlying fear is that the road ahead could still be rocky. I know you are sinking back in your chair with that "oh no, not again" feeling but it is better to be careful now. Even if the market continues up tomorrow there is still a good chance the worst is not over yet. The CPI was benign and the markets reacted positively, almost. The Nasdaq jumped off to a big gain but quickly turned ugly again. After dropping well off the highs at the open, the big run over +200 points by the Dow held the Nasdaq in positive territory for some time but the weight of the PC sector was just too much to overcome. Also bonds started selling off around noon as investors realized that the CPI is a lagging indicator from the PPI and next month could be a real problem. As you can see by the charts we had a nice bump today but we do not yet have a trend change. The advance/decline was positive today for its one day in five gulp for fresh air. It was only positive by about +500 stocks but we will take anything we can get. The Dow bounced off the 10300 ceiling and probably set us up for things to come. The close at -131 points off the high of the day was a let down for many traders. As you can see both charts rolled over midday and showed very little energy at the close. The most telling indicator was probably the 88 new highs compared to 730 new lows. The PC sector was led downward by Dell's earnings warning last night. Dell suffered a memory loss after misplacing their just in time delivery model. Dell said that the memory shortage, which was caused by the earthquake in Taiwan, had more than doubled the cost of DRAM memory chips as buyers bid for the available supply. Dell is famous for offering computer systems with huge amounts of memory, much more than you will find on dept store shelves, but the quick change from feast to famine in the chip market has them rethinking their sales plan. They are now offering computers with less memory in an attempt to stretch the available chips. Another factor in the earnings warning is the corresponding jump in component prices. Most other components used also have memory in them as well. Instead of just having the main computer memory chips increase in price, all the components, which also use memory chips as well, also went up in price. While this is expected to be a temporary problem some analysts think this could drag into the next quarter and rob the PC vendors of the vital momentum going into the heavy retail selling season. The major losers today were GTW -4.63, Dell -2.75, MU -5.75, HWP -4.50. The winner here is still IBM which actually finished positive for the day. IBM announced today that they were going to quit selling PC equipment in retail stores and move more into the web strategy. I wonder if the Dell deals have some web consulting buried in there somewhere. Personally I think today was a tremendous buying opportunity for DELL and IBM. Dell traded as low as $37.38 and stopped dead. Strong support exists at $36 but short of another market disaster, Dell will not likely see that price soon. This is Dell's traditional low point before earnings. Investors are currently trading earnings on other stocks and ignoring Dell. After this weeks earnings are over then investors will start moving into stocks, like Dell, that announce in November. (Nov-11th) Secondly, the strong Microsoft earnings after the bell today will give all the PC makers a rebound tomorrow. Dell traded up to almost $40 after the MSFT announcement. IBM has screeched to a dead stop at $106 and holding for the earnings announcement tomorrow afternoon. If IBM turns in a good performance then I think the bleeding is over. They have very low investor expectations after the rest of the sector has been beaten up so bad. This means that a good report will be greeted with a new round of buying. Microsoft announced earnings of $.38 vs $.34 estimated and their CFO actually predicted that they would do better than the current estimates for the fourth quarter. This is very uncharacteristic for MSFT. They normally beat, then warn that the next quarter could be lower than analysts estimates. This constant "holding down" of the future estimates always dampens the outlook to some extent. Investors were jubilant and MSFT traded up over +$4 in after hours trading. All this optimism from MSFT of course depends on PC makers being able to deliver computers. Since that process is in question the MSFT rally tomorrow could be short lived. The CPI, as I mentioned above, is a lagging indicator. The PPI which was so bad last week is the prices "producers" paid for raw materials. The products they are making with those materials have not made their way into consumers hands and when they do the CPI will also jump. The possibility of next months CPI looking like this months PPI is a real worry. The next challenge is the Employment Cost Index Report on Thursday of next week. This is a critical piece of the Feds policy formulation and could be another nail in our coffin. According to the Fed Funds Futures there is a 100% certainty that the Fed will raise rates on Nov-16th. They will have the ECI and the Oct Jobs Report under their belts before they meet but the decision, some say, has already been made. The December FOMC meeting is expected to be a non-event due to Y2K but the February meeting is already a 50/50 bet for another rate hike. This rate worry drove the bonds down again to a yield of 6.35% and killed the brief flight to quality rally. I think when we look back at today it will not be as the start of a fall rally but simply as a relief rally from the beating we have been taking the last two weeks. The Nasdaq Internet leaders rebounded today but there was no energy behind them. A bump at the open and then flat to down the rest of the day. Without the excitement of the Internet stocks the rest of the Nasdaq, with the exception of the biotech stocks, will simply fade away. All the leaders are failing to lead. CSCO, INTC, QCOM, WCOM all faded from the open to close negative or only slightly positive. There is no joy in Mudville after Dell struck out. The new batter, MSFT, came to the plate with two outs and got on base but many of the fans are already leaving the game. Microsoft is carrying a lot of baggage around the bases and could tire before it gets home. The judge in the antitrust case said he could announce a verdict as soon as Friday at 6:30PM. Could be some selling into the rally tomorrow as traders move to the sidelines before the decision. I also read a review that expected traders to move into MSFT because they expected a favorable decision?? A long shot may be the AOL earnings tomorrow. Not a Nasdaq stock but a leading Internet. A possible pinch hitter but I am afraid we will need more than a base hit to save the game. S&P Futures are up +3.00 on the MSFT news but we have a lot of dark before morning. My best guess is a positive open with a fade to negative before the day is over. There is no reason to buy stocks yet. Earnings are here but some are not looking as good as expected. Y2K is cropping up as the scapegoat excuse in places you would not expect. If you are playing earnings runs, then you should be getting out about now. We all know that you don't want to hold over the announcement and after this week more than 750 of the leading companies will have already announced. Who is left to play? Not many that are worth while. So, why buy with all the uncertainty in the market? My point exactly! Pick your entry points carefully and don't buy too soon. Jim Brown Editor ******* Stock News: ******* Dell Computer will be just fine, thank you. By S.P. Brown On Monday night, Dell Computer (DELL), the world's fastest-growing technology company, stunned analysts and investors alike by warning it will miss its earnings target for the third quarter (DELL's third quarter ends October 30th). http://www.OptionInvestor.com/stocknews/101999_1.asp *** SEC Moves to Improve Option Pricing for Investors By Cindy Christ Representatives from the SEC and the nation's four options exchanges are meeting today in Washington to decide how they'll carry out a new order requiring exchanges to link up electronically. http://www.OptionInvestor.com/stocknews/101999_2.asp *** Lagging Sectors Rally on CPI By Cindy Christ Wall Street breathed a sigh of relief today, calmed by benign inflation news. On Tuesday the Department of Labor released a much-anticipated Consumer Price Index report which matched expectations. http://www.OptionInvestor.com/stocknews/101999_3.asp ******* SEMINAR UPDATE ******* By: George Fontanills Dear Jim: I thought I would give you an update on this weekends OIN - OPTIONETICS sold out seminar in Chicago, IL. I really enjoyed meeting the OI students both during the class, the cocktail evening and also during the breaks. We packed the 2 day seminar with 16 hours of new material, live trading and examining the markets with case studies. The OIN people said that they really enjoyed "the how to find trades section" and the case studies on particular stocks. I find it a useful teaching tool to isolate a stock, the option prices and it's news - then allow the class to decide what trades were available and how to enter the trade. It was a hands on live trading and teaching environment. Yesterday was a great day for a live trading seminar. The DOW tested the 10,000 range and the OIN students enjoyed seeing the opportunities emerge with our trading team. My partner, Tom Gentile gave a new "straddle" spread trading section that isolated the step by step methods of how to make money regardless of market direction. We were able to demonstrate some excellent trading opportunities. Some of our predictions, that could have helped pay for the class, during the live trading seminar we noted: 1. Dow - We noted the Dow's strength at the end of the day. I predicted that this was a key indicator that the market going to a rally for the short term. Today it did! 2. PFE- We found straddle in PFE ahead of the earnings report. The earnings report came out today and the stock moved higher. We made 20% in one day. 3. Compaq- We analyzed that the short term outlook for Compaq is still weak, despite the insider President buying 150,000 shares, we thought that this insider buying was a PR move. Our view was that it would not last that the internals are still negative. I stated that Compaq would test and break support. Today it did. 4. LKX - My five minute trading formula spotted LKX which had fallen 30 point on Monday. We looked at the stock and concluded that it was over sold. We constructed a trade that made a move up 5 points today. We also saw the youngest student 12 years old Andrew Potter to whom I awarded a special prize for attending. Andrew asked some good questions and will be a dynamic trader in the future. We encourage young people to attend the seminars and OIN attendees are always welcome to bring their children (no babies please). I read the evaluation sheets on the plane back to my trading office in Boston and noted some for your interest: "The seminar gave an excellent understanding of spread trading. Most people just focus on straight puts and calls" Gerry Bianco "You need to understand options before you actively trade. This course will help you understand how to hedge your risk of trading an options position" Leonard Casper "The most valuable 2 day investment experience in 30 years" Joseph Hartley "This course will save you money. Think of it as an insurance policy protecting you from yourself" James Fortenot "This course taught me how to minimize risk in my investments with excellent return potential. No mutual fund can match this" Ronald G Moore "I feel that the strategies that I learned will help me limit my losses and have more profitable trades more often. I like understanding the risk/reward on each trade. I feel that knowledge will help me pick better trades. Go to the seminar - what you learn will help you make money in the market. What you learn in the class will pay for the class many times over. You get so much information in 2 days." Betty Moles I have 4 days back trading in Boston before the next OIN event. We look forward to meeting the OI students in New Jersey on October 24 & 25. Kind regards George Fontanills FALL SEMINAR SERIES ******************* If you procrastinated scheduling an October seminar then it is time to plan for the two in November. Don't procrastinate any longer. Lack of education is expensive in the options market. You can pay your dues one trade at a time the hard way or "invest" them up front and turn them into an asset. Here are the only fall dates remaining: Oct 24/25 New York Nov 8/9 Miami Nov 14/15 San Francisco For complete details http://www.OptionInvestor.com/seminar/ There is a 100% money back guarantee and you can take a friend for free. What else could you ask for? Jim Brown !!!! George Fontanills and Tom Gentile session dates and times added !!!! 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 at 5:30 PM, 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 several 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, "Trade 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 Optionetics breakout sessions Oct 29, 3:50P - George Fontanills - How to reduce your trading risk by 90% Oct 30, 8:55A - Tom Gentile - How to make money with Online Trading Oct 30, 3:30P - George Fontanills - Learning the floor traders secrets to making money in any market. Oct 30, 4:45P - George Fontanills - High Profit, Low Risk trading with options Oct 31, 10:10A - Tom Gentile - How to create explosive trades using the Internet (E-Signal) 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 19, 1999 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert DOW Industrials 10,750 11,320 10,205 BEARISH 9.23 SPX S&P 500 1,350 1,420 1,261 BEARISH 9.16 OEX S&P 100 690 725 660 BEARISH 10.15 RUT Russell 2000 440 465 411 BEARISH 9.14 NDX NASD 100 2,320 2,410 2,362 Neutral 10.19 * MSH High Tech 1,120 1,220 1,184 Neutral 10.19 * XCI Hardware 950 1,050 981 Neutral 10.15 CWX Software 750 800 856 BULLISH 9.03 SOX Semiconductor 450 525 483 Neutral 10.19 * NWX Networking 525 600 575 Neutral 10.19 * INX Internet 450 525 488 Neutral 10.15 BIX Banking 690 710 584 BEARISH 7.23 XBD Brokerage 410 440 358 BEARISH 7.23 IUX Insurance 645 660 527 BEARISH 7.23 RLX Retail 915 960 852 BEARISH 7.23 DRG Drug 365 390 382 Neutral 10.19 * HCX Healthcare 720 785 744 Neutral 10.19 * XAL Airline 180 190 147 BEARISH 5.21 OIX Oil & Gas 300 315 290 BEARISH 10.08 Posture Alert A flight to quality was evident today, as big name technology stocks sold-off (TXN, MSFT, INTC) while the Drug and Healthcare sectors each posted 4.50% gains. With their big 2-day run-up, we have upped both sectors to Neutral, and as such, have downgraded Semiconductors, Networking, the NDX, and MSH to Neutral from BULLISH. The only sector remaining BULLISH at the moment continues to be software, and with Microsoft posting great earnings (and representing a large percentage of that index), we would guess that it will remain BULLISH for some time. A detailed description of our Market Posture and its applications can be found at: /members/marketposture *************** Market Sentiment *************** Tuesday, October 19, 1999 Throwing Darts! Tuesday's Consumer Price Index helped spark a strong rally this morning, however, a bond sell-off in the afternoon cut the Dow in half and left the Nasdaq underwater. Does Tuesday's CPI change the sentiment of this market, not really. The sentiment going into today was so negative that a relief rally was due. If you have ever played darts before, all we did was miss one throw, and we have many others waiting! When looking at some sentiment indicators, just about everything we look at points to a potential rally. Put/call ratios are extremely bearish, and sentiment analysis across the board all point to the bears. Yet this market is still above 10K and holding, but the trump card is interest rates. It is almost a given now that the Fed will raise rates once, but the fears are for 2 or more hikes, which is a trend that this market needs to avoid. Bond traders are having visions of 1994, which was one of the worst years in history for the bond market, as the Fed raised rates a half dozen times. This vision needs to be avoided, and will if more economic indicators come out benign, but until then, everyone will try to avoid the potential big down day. So to see continued failed intra-day rallies should not be surprising. Now looking at sentiment on the S&P 100, the bears continue to dominate as well. From a contrarian standpoint, the Pinnacle Index looks very bullish for OEX traders. We now have great support beneath us, and overhead resistance now looks very light. We showed in Sunday's letter that there is a 50% chance that the OEX will rally 35 points in the next two weeks, and we already have 9 and counting, but we will continue to monitor for any changes in this statistic and keep you up-to-date. Investors Intelligence numbers are due out tomorrow, and Pinnacle looks forward to seeing those statistics, and will comment on them Thursday. The Volatility Index closed today at 28.01, and continues to hold the key 32-33 level that we have highlighted many times, and once again, may have proved to be a short-term bottom. Friday's close of 32.06 proved once again to be a great buying opportunity, and we hope many of you took advantage of it, so continue to target shoot, and avoid the flying darts! 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. Mixed Signs: Earnings Season: Earnings season is still early, and we have mixed results so far, with Intel being the negative bellwether for this last week. Volatility Index: The VIX continues to show great support at 32-33, and continues to prove as a good entry point! BEARISH Signs: Interest Rates: The yield on the 30-yr Treasury is breaking new highs, and will need to see a nice rally before stocks can advance. 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. X-Factor: Currently, good news is not rewarded very well, while negative news or even rumors will destroy a stock. We have witnessed this last week with issues such as Lexmark, HI/FN, Abercrombie & Fitch, and Unisys. Russell 2000 & S&P 500: The RUT and SPX are still very weak, with both breaking support levels. OTM Call Analysis As we move closer to the November 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. 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% Please view this in COURIER 10 font for alignment ************************************************* CHANGES THIS WEEK Daily Results Dow 10204.93 96.57 88.65 185.22 Nasdaq 2688.18 -42.68 -0.97 -43.65 $OEX 660.27 5.04 3.48 8.52 $SPX 1261.32 6.72 7.19 13.91 $RUT 410.93 -5.80 2.03 -3.77 $TRAN 2860.21 -20.77 16.14 -4.63 $VIX 28.46 -2.04 -0.98 -3.02 Calls Mon Tue Week AOL 115.25 1.13 5.13 6.25 Dropped, earnings report ADBE 120.94 0.25 3.31 3.56 Going above and beyond RMDY 32.06 1.13 1.94 3.06 New, takeover helps stock KIDE 61.00 0.75 1.13 1.88 It's another 52-week high MACR 53.63 -2.25 2.63 0.38 "Best web support site" QCOM 197.50 -2.81 2.31 -0.50 Bounced, with a 5% return SYMC 38.81 -1.50 0.81 -0.69 Dropped, earnings are here IBM 107.13 -0.88 0.13 -0.75 Hanging on, not giving up NT 50.25 -0.31 -2.13 -2.44 Dropped, ruined by purchase TXN 79.50 1.94 -4.94 -3.00 Dropped, spoiled party VOD 44.44 -0.06 -3.38 -3.44 Dropped, it's a gonner BVSN 158.00 -9.63 5.63 -4.00 Rally due to earnings DELL 38.56 -1.50 -2.81 -4.31 Chip prices hurt margins GTW 46.88 -0.94 -4.63 -5.56 Dropped, so long for now EMLX 121.88 -5.50 -0.63 -6.13 Stock split on the horizon HWP 73.75 -4.50 -4.50 -9.00 Dropped, DELL warning JDSU 116.94 -7.38 -4.31 -11.69 Dropped, it was hit hard Puts EFII 37.50 -9.19 1.19 -8.00 New, forecasts weak sales CNXT 63.63 -4.13 0.25 -3.88 Dropped, earnings report CI 65.81 0.44 -2.56 -2.13 New, two bad sectors VO 37.00 -0.06 -1.69 -1.75 New, heading in a tailspin CB 45.50 -0.94 -0.25 -1.19 New, more earnings warnings CNET 48.88 -2.13 1.13 -1.00 Going to retest its lows CMGI 97.00 -3.50 2.69 -0.81 Technical recovery fizzled KSU 40.00 -1.56 1.81 0.25 There's buying opportunities CBS 43.81 0.69 -0.06 0.63 Will they make the merger? AMZN 76.63 -1.00 2.56 1.56 Managed to hold on for now SLB 57.06 0.38 2.31 2.69 Dropped, not going anywhere 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 10-19-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. 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: **** NT $50.25 -2.13 (-2.44) Nortel has struggled through the beginning of the week following an announcement on Monday to purchase Clarify, a manufacturer of software, for an approximate $2.1 billion. The acquisition is set to close in the first quarter of next year. Nortel has agreed to provide 1.3 shares for every one share and stock option of Clarify. The question is, did Nortel pay too much? Many analysts have questioned the acquisition agreement, being that Clarify had 1998 revenues of only $130 million. Nortel defended its decision by stating that Clarify has a strong financial profile and is a stable company, and therefore, worth the agreed upon price. Needless to say, this news was cause for concern for many investors as Nortel has taken back $2.44 so far this week. Nortel shares were also adversely affected on Tuesday, by the upgrade of their competitor, Lucent, by Warburg Dillon and Read. Nortel has been in a down trend for a week now and really shows no signs of a short-term turnaround. TXN $79.50 -4.94 (-3.00) Who spoiled the party? We had blow-out earnings, strong revenue and with one small downgrade from an analyst, but that's all she wrote. Investors decided to take their profits off the table and TXN broke through strong support on heavy volume. With Dell Computer (DELL) announcing a pre- warning along with various tech sector downgrades, it proved to be too much for our winner. Since TXN announced before the bell, you should have been out on Monday but it still didn't give us the play we wanted when it was originally added. HWP $73.75 -4.50 (-9.00) Remember, great companies run in packs right? Well that works both ways. Dell announced pre-earnings warnings, Micron Technology (MU) got downgraded along with Gateway Inc (GTW), and took HWP down with them. The problem is, HWP broke through strong support at $83 and looks like it will take a breather in the near-term. With no real positive news to prop it up and earnings too far out for a run we have to say goodbye for now on this bell weather tech stock. Hopefully your stops will in place to end this play before the real damage was done. SYMC $38.81 +0.81 (-0.69) As we look forward to the earnings announcement tomorrow in SYMC we expect that they will meet or exceed expectations. First Call estimates are for $0.42 versus last year of $0.19. This should be positive for the stock but as always we are ending ahead of the announcement. So, although we believe this company could breakout over $40, we are exiting the play. We continue to see good news about the company. A new product hit the market this week, "Norton Internet Security". The first product to offer a comprehensive and fully integrated Internet Security and Online Privacy solution. Also strategic partnerships announced with Internet superstore Beyond.com and Fatbrain.com to provide services to there clients. This only makes SYMC a stronger brand name going forward and I am sure we will revisit this one in the near future. But if you look at the majority of stocks reporting stellar earnings this quarter they have sold off big, profit-takers have been relentless in current market conditions. AOL $114.50 +4.38 (+5.51) We're glad we didn't get scared away from this stock last week. AOL tacked on another $5 ahead of its earnings' report tomorrow. We still are anticipating a possible split announcement since the stock soared above historical split prices ($120) during this earnings' run and is still in that proximity. Plus recall there is an upcoming Shareholders' Meeting on October 28th to vote on increasing the number of authorized shares from 1.8 bln to 6 bln. However, we're not going to violate our rule and hold a play over an earnings' announcement. AOL is officially a drop tonight but perhaps you may see it on our list again soon. VOD $44.44 -3.38 (-3.44) At first glance, you might assume that VOD was tarred with a market brush. Unfortunately, VOD failed to win the bid for Britain's #3 wireless carrier, Orange PLC, when it was announced that Orange was in talks to be acquired by Germany's Mannesmann. The perception is that Orange, even though smaller, now has more strength to eat into VOD's market share. Don't get us wrong, Vodafone is still the leader in the business but the market clearly isn't happy with the news. The vote is in on VOD, and investors are voting with their feet; thus we're dropping VOD as a play tonight. GTW $46.63 -4.63 (-5.56) You've probably heard by now that DELL warned that its earnings would be lower than expected thanks to the Taiwanese earthquake a few weeks ago. Of course if DRAM prices are rising for DELL, they must be rising for GTW too - a classic case of guilty by association. Investors didn't wait to find out and left the stock in droves on volume over 2.5 times its ADV. While we think that DELL will recover sooner rather than later, the prospects are not as good for GTW to complete the earnings run; thus we're showing Gateway the door tonight. Earnings are set for Thursday after the close. JDSU $116.94 -4.31 (-11.69) Headlines read...Bandwidth Expander Gets Snapped! Ouch! JDSU was hit hard yesterday. Though mounting an effort at recovery this morning by trading as high as $126.88 in an attempt to get back over support of $125, selling volume picked up in the afternoon, sending shares under $120 with no hope of recovery on 35% greater than average volume. The technicals have definitely turned ugly. The next support level is back at the $112 level. There is no news, other than market related interest rate jitters and an overbought condition for the stock. Hopefully, those in the play made an exit yesterday when the price first went under $125. Needless to say we're dropping the play tonight, but we haven't seen the last of JDSU's light show. Look for it again in the future when things have turned back around. PUTS: *** SLB $57.06 +2.31 (+2.69) It looks like our play of SLB has come to an end today. Due to the lack of expectations for earnings and the lack of run up is most stocks, we have been more aggressive in holding over earnings. But SLB has taught us why that always includes more risk. SLB announced their numbers on Monday and they were right in line with expectations at $0.25. This alone was a non-event but word from SLB that the worst is over relating to oil prices and profits has caused a break in the resistance of the 10-dma at $56. We have been using this moving average as our guide in looking for a bounce down to confirm the play. We were able to make a profitable play last week using this strategy but it is obviously time to let this one go. CNXT $63.63 +0.25 (-3.88) CNXT has given us a chance to make a bit of a profit, prior to their earnings which are due to be released Wednesday after the close. With the broader markets getting a weak relief rally, shares of CNXT, couldn't seem to participate, yet it couldn't continue its recent momentum to downside either. CNXT could be making a bottom in this area, in preparation for a split run. Remember CNXT splits 2:1 on October 29th, with an ex-date of November 1st. With earnings coming out tomorrow and a split coming up, we will let CNXT go as a put play for now but will keep our eye on the semiconductor company for other opportunities. PICK NEWS - CALLS ***** MACR $53.63 +2.63 (+0.38) Finally, the bulls decided to play today, providing the bounce were we all waiting for. As we expected, Monday provided us with some good entry points, hopefully investors took advantage of the situation. Once again, the stock bounced off its support at $50.00 and settled in its comfort zone at $53. With earnings to be announced on October 27, we expect to break above this comfort zone sometime soon. Because inflation feared bears and earnings run bulls continue to play tug-a-war look for more volatile markets in the near-term. Good entry points remain at $50-$51 levels, which is the stocks current support area. If Internet stocks can continue today's rally, look for MACR to break through this point and head to higher highs. In the news, today, MACR was recently recognized as having one of the "Ten Best Web Support Sites of 1999" by the Association of Support Professionals, an international organization dedicated to the advancement of the technical support profession. KIDE $61.00 +1.13 (+1.88) KIDE hit another 52-week high on Monday, traded down to $55.63 and made a bit of an afternoon recovery, closing at $59.88. It looked as though KIDE was going to continue on with its momentum today as KIDE opened strongly, trading as high as $63.63. KIDE then made a sharp retreat, taking a bounce at $60 before picking up the pace a bit and making another bounce, holding support at $60. It looks as though KIDE has set new resistance at $63, so with this tight range we're in, finding an entry point becomes a bit more challenging. We recommend waiting for a confirmation of continuing positive momentum with a breakthrough of the $63 resistance before entering a new play. KIDE has established solid support right around $57.50. Should KIDE dip below this level, it is probably time to use your stop losses and jump ship. Today, Toymax (TMAX) announced that they will begin distributing various Pokemon products such as Poke Gum and Pokemon gummy fruit treats, all licensed through KIDE. BVSN $158.00 +5.63 (-4.00) BVSN pulled back to our support area yesterday and then managed a nice bounce today prior to earnings being released after the close. We considered BVSN for a split run as the stock splits 2:1 October 26th. As we mentioned this weekend the earnings announcement could be the key to our play. BVSN reported earnings of $0.16 cents a share, beating analysts estimates by $0.03, and clobbering last year's earnings which were $0.07. Revenues came in at $29.8 mln compared to $13.4 mln in 1998. This should clear the way for our split play to continue. The Internet index did pick up just under 3% in today's action. The broader markets did get a bit of a bounce but struggled to hold the gains which came on a benign CPI number. Barring any bombshells we would look for shares of BVSN to continue higher into next week's split. If you entered a position in BVSN on today's bounce set your stops accordingly as BVSN can be a volatile stock. If you are considering a play in BVSN, watch the open tomorrow. If we get a gap up in the first hour, wait for a pullback as an opportunity to buy calls. DELL $38.50 -2.81 (-4.31) Shares of DELL went reeling after the company announced yesterday that 3Q profit margins would be hurt due to a 25% spike in chip prices. Presently no figures are available for the expected shortfall or how it will affect EPS numbers. On the analyst front CSFB cut 3Q estimates to 0.17 from 0.20 and ABD AMRO also cut its estimates to 0.18 from 0.20 to reflect the rise in chip components; however both maintained their stock ratings. Robertson Stephens and Hambrecht & Quist also maintained their ratings after the news. Today however Bear Sterns cut DELL to an Attractive from Buy, but offered no comment. Nonetheless we're keeping DELL on our call list as a technical/earnings play. Technically the stock has strong support at $38 - take a look at a six-month chart for visual confirmation - it bottomed there on August 7th, topped at that point on June 20th, and had also bottomed around $38 on May 5th. Historically, buyers seem to step in at this level. We see too much upside versus downside here. Worst case scenario is a dip to $34. Remember, the company is expected to report earnings on November 11th. QCOM $198.00 +2.31 (-0.50) Yesterday our earnings' run candidate followed along with the rest of the Internet sector and sold off a couple of dollars, but today it participated in the morning rally hitting a daily high of $205.69 - a $10, or 5% advance from yesterday's close! This achievement corroborates that QCOM is likely to rebound once again with a stronger market. One opposing factor that should be noted is that QCOM did close below the 10-dma ($203.61) and in relation to this play this is technically not a good sign. On the flip side, if you chose to use this level as an entry point there is time for ample recovery. Earnings are still two weeks away confirmed for November 2nd, after the bell. In the news, Oracle (ORCL) announced they chose Qualcomm's Smartphone as a key platform for its Customer Relationship Management (CRM) mobile sales and service applications. ADBE $120.94 +3.31 (+3.56) The momentum behind ADBE just keeps pushing it up to new heights. Today the share prices reached $122.94 on average trading volume to set another new 52-week high! ADBE remains above its 10-dma ($117.24) and near-term support is even lower at $115. But remember there's not much time left to get in on this play. Next Tuesday, October 26th ADBE will split 2:1 and OIN never recommends holding over a split date because the risk is too high for a post-split decline. In the news this week, Adobe announced it has aligned itself with Virtualis, a hosting company with powerful e- commerce and site management tools, to further enhance its new Website exclusively designed for Web builders. IBM $107.13 +0.13 (-0.75) IBM is still not ready to give up. We were faced with the overall uncertainty in the markets, CPI and the warning coming out of Dell. Despite all of this, the stock has held up reasonably well. On Monday, the stock did retest last Thursday's low of $104.69, before rebounding to close at $107. This is important because last Thursday (14th) established a turnaround for the stock from its steep decline. On Tuesday, the stock held its own despite the Dell warning. Strong support built between $106-107 since Oct 13th. It could be poised to scream up from here unless earnings disappoint on Wednesday (after-market). Key will be the hardware numbers, which are expected to decline. It was an analyst warning regarding the slip in revenues that precipitated the stock's decline originally. The upside is that the company is expected to report higher overall 3rd quarter numbers due to strong sales growth in their software and service divisions. These numbers are expected to make up for the computer sales decline. The company announced (Tuesday) that they are going to temporarily halt most US retail sales of consumer PC's and concentrate on Internet sales, until they can identify a profitable retail model. This should aleve investor concerns regarding losses stemming from plunging PC prices. Additionally, they announced an alliance to team with Cisco to deliver business software over the Internet (web hosting services). Look at overall market direction tomorrow before entering a trade in anticipation of the numbers. The better trade might be to wait for the numbers to come out and try to purchase on any pullback on Thursday. Strength at that point will probably push the stock up through its 200-dma of $109 (very positive technical indicator). Retest will occur at the 10-dma of $110.75. (Editor's note: This is a rule breaking scenario by holding over earnings but we have been impressed with IBM's relative strength and support this last week. Cautious investors should wait until Thursday to open new plays) EMLX $121.88 -0.63 (-6.13) Holding steady in a storm of earnings warnings and downgrades. Emulex will be sending out ballots for approval of their upcoming stock split on Oct. 22 so this should put upward pressure on the stock in anticipation of shareholder approval. EMLX just split its stock 2:1 on 8/31 and is ready to do it again in less than two months! Even with poor performance in the tech sector, EMLX held its ground today on twice the normal volume. We expect EMLX to hold move up from here as the vote gets closer. Keep you stops in place and be defensive. Strong support is at $120 and resistance is at $137. PICK NEWS - PUTS ***** CNET $48.88 +1.13 (-1.00) Today's early morning buying spree quickly sold off after afternoon interest rate fears resurfaced. The rumor mill started churning about mid-day, when it was reported that interest rates would be raised in Europe. This shot any possible rally in the bond market in the foot and had some of the high flying internet stocks running for cover. CNET traded today as high as $52 today, before the rally ran out of steam and it is said that the CPI number was not good enough to stop the Fed from raising interest rates at the next FOMC meeting in November. This buying spree in CNET was on lower than average volume and was not strong enough to push the technicals above its 10-dma which sits at the $55 level. With no new news to report, CNET has been comfortably trading with the up and down momentum of the overall sector. Going forward we remain bearish on the stock and it should retest short-term lows at the $45.63 level. Resistance is at $52.50 CMGI $97.00 +2.69 (-0.81) Investors pushed up the Internet sector across the board after the government reported consumer price hikes in September were in line with expectations, giving the market less reason to fear the nation's economy may be slowing. That was the gist of the morning's trading session that saw the Dow up over 200 points and the Nasdaq up 40 points. The afternoon presented us with a whole different picture, as it was reported that there would be an interest rate hike soon to come in Europe, also there was even a rumor that the Fed would raise interest rates 50 basis points. It was proven later that this definitely was not true, but strictly fantasy. But by this time the bond market was closing and the traders had already traded on the knee jerk reaction to the rumor. This quickly moved over to the stock market. Stocks like CMGI, that hit an intra-day high of $99.13, closed well off of the highs at $97. CMGI's technical recovery fizzled out, trading on lower than average volume, which leads us to believe this stock has not finished the downtrend yet. We continue to look for lower prices. Support is still present at the $96 level. Resistance near the $100 level and again at the $103 level. Until we see this support broken to the upside we will remain bearish. KSU $40.00 +1.81 (+0.25) Helped by Monday's sell-off by the broader markets, KSU fell to even lower levels. This was short-lived however, as the broader markets and KSU rebounded today, thanks to benign CPI numbers. Even though the markets showed some strength today, it's obvious that reservations still exist among investors. Despite this slight stall, KSU should head to lower ground as contention between its mutual fund group and parent company continue to worry its investors. When placing new trades, watch for slight spikes in the stock. The nearest resistance level is $45 and fluctuations should allow for some buying opportunities. Like always, prior to placing new trades, confirm market direction. KSU shows support at $35, which is reachable if the bearish market conditions persist. There was no additional news at this time that would alter our play. CBS $43.81 -0.06 (+0.63) In the past two days we've seen the bounce we mention last weekend. We were looking for $45-$46 to be the area of resistance and then a decline from there. Today CBS hit $44.50 just after the first hour of trading primarily on the strength of the rally in the broader markets. Just like the major indices CBS couldn't hold the advances. Today's action may have given us a very good entry point for our put play. We could see more off a bounce but at this time the intraday charts are beginning to look weak again. there has been very little company or industry news to move shares of the media giant. Yesterday King World Productions said it would postpone its shareholder vote on its plan to merge with CBS until Nov 1st. This is the 4th postponement since Viacom agreed to acquire CBS. CBS and King World agreed to merge six months ago in a stock swap then valued at 2.5 billion. The postponement is to allow King World to revise and distribute a supplement to its proxy statement to include information on the $37 billion merger between Viacom and CBS. If you entered a play today keep the previously mentioned resistance levels in mind and set your stops accordingly. AMZN $76.63 +2.56 (+1.56) Despite the interest rate sensitive sector spending most of the day cowering in the corner, AMZN finished strong. It managed to hold it together today too, following relatively benign CPI numbers prior to this morning's opening. Given the lack of recovery today on the NASDAQ coupled with the lack of movement in interest rates tells us that there may be more room to fall. Technically, there doesn't appear to be any upside, given the weak finish off today's high ($78.25). With any further sector weakness (and we suspect there will be some as we're are not convinced the market is on the path to recovery), AMZN could keep moving south. Let us throw some caution here too. Yesterday AMZN found strong support at $71 on 3 occasions. Milder support is at $76. If it penetrates $71, the next stop is $66. If it holds at the $75-$77 level, we'd be inclined to think AMZN has found a bottom (although we're not recommending you load up on calls either). If it moves up over $78 with any strength at all, that may be the time to exit the play. A bounce back south of $78 could make a good entry. Again, this is an Internet play subject to high volatility. Check your emotions at the door and plan your trade before you enter. NEW CALL PLAYS **** RMDY - Remedy Corp. $32.06 +1.94 (+3.06) Remedy is the leading provider of adaptable enterprise applications and the fastest solution deployments available for IT Service Management, Customer Relationship Management and Employee Workplace Automation. (They make customer service software) The average Remedy customer enjoys complete implementation in about 45 days, as opposed to one year for competing products. Over 7,600 customer sites in over 70 countries have deployed Remedy-based applications, making Remedy the #2 enterprise applications vendor worldwide. Remedy, its partners and its customers can quickly adapt the robust out-of-the-box functionality of Remedy solutions as business requirements change. This lets organizations establish a competitive advantage by responding rapidly -- and cost- effectively -- to opportunities. This is a short-term, "guilty by association" (in a good way) play. RMDY experienced some big volume, trading 2.5 times its ADV yesterday, and more than twice the ADV today, sending the price up 7% so far this week. Adding a tastier flavor to this cake, Northern Telecom announced today they would buy RMDY's competitor, Clarify (CLFY), which sent CLFY through the roof. Of course, that helped RMDY with its gain today too. How 'bout icing for that cake? OK. Earnings are tentatively scheduled for release Monday, October 25, after the close (confirmed). Technically, the indicators have turned positive (even over the last few days), as RMDY set a new high 52-week high today on heavy volume. The only resistance is $32.50, its intra-day high; support is $28. Wait until the completion of amatuer hour and indication of heavy volume before entering a play. Of course, you'll want to confirm that the market is moving in the right direction too. It's better to miss a play than get top ticked on an entry, only to see the rice fall with the market. No news. Just an earnings run and a juicy premium on a strong competitor. BUY CALL NOV-25 LRQ-KE OI= 45 at $7.88 SL=5.25 BUY CALL NOV-30*LRQ-KF OI=326 at $4.25 SL=2.75 BUY CALL NOV-35 LRQ-KG OI= 8 at $1.88 SL=0.75 low OI Picked on Oct 19th at $32.06 P/E = 43 Change since picked +0.00 52-week high=$32.50 Analysts Ratings 5-1-1-0-0 52-week low =$ 8.50 Last earnings 07/99 est=0.19 actual=0.21 surprise = 10.5% Next earnings 10-25 est=0.23 versus=0.21 Average Daily Volume = 386 K Chart = http://quote.yahoo.com/q?s=RMDY&d=3m NEW PUT PLAYS ****** CB - The Chubb Corporation $45.50 -0.25 (-1.19) Chubb is best known for comprehensive homeowners insurance for the demographic that owns yachts. Chubb Corporation also offers property/casualty insurance to midsized companies. Products include niche coverage and specialty lines. Chubb has exited the life and health insurance markets to concentrate on its property/casualty business; the company also sold its Bellemead real estate operations. In 1998 Chubb moved into the reinsurance market with the founding of Chubb Re. It expanded its executive protection business by buying Chubb Executive Risk. Another earnings warning has taken control, forcing its shareholders to jump or sink with the ship. This is the case for our latest put play on Chubb Corp. Friday, CB announced that it expects to report third-quarter earnings in the range of $0.40 to $0.45 per share primarily as a result of catastrophe losses from Hurricane Floyd. Analysts were estimating earnings of $.53 for the quarter, which disappointed shareholders. In addition, underwriting losses from its standard commercial business continued to have an adverse effect on earnings. Just to show how bad the situation is, in the third quarter of 1998, Chubb earned $.90 per share. By looking at a graph of the stock, problems for the company started way before the earnings warning. Apparently investors were aware of problems back in June, when CB took it first steps toward lower territory. Since then, the stock has been on a steady downward trend to its current price at $45.50. When placing trades look for entry points during intraday spikes, which should be plentiful considering the current market conditions. The nearest resistance level is at $48, or the 10-dma for the stock. This would be a good entry point if the stock can take this large of a swing. If the stock looks like its heading south however, go with the flow and buy your puts. The next support level for Chubb is at $44 or the stocks 52-week low. With a little help from the latest earnings warning, lets see if CB can set even lower lows. BUY PUT NOV-50*CB-WJ OI=238 at $5.00 SL=3.25 BUY PUT NOV-45 CB-WI OI=184 at $2.00 SL=1.00 Average Daily Volume = 700 K Chart = http://quote.yahoo.com/q?s=CB&d=3m **** EFII - Electronics for Imaging $37.50 +1.19 (-8.00 this week) Electronics for Imaging designs and markets solutions for color desktop publishing. They create hardware to software systems that link computer networks to the printers. EFII is the proud parent of the Fiery Servers and boasts the best performing most affordable products to support color and black and white printing on a variety of peripheral devices. Though EFII announced better than expected Q3 earnings last Tuesday, they also announced scaled back sales projections for the next year. On the day of the announcement, EFII shares lost $5.50 and have lost an additional $10.94 since, with no signs of discontinuing this downward momentum. EFII has established a bit of a pattern; making a fairly substantial drop, leveling for a bit and then dropping some more. We see today's brief rally as a good point of entry. EFII continues to trade well below it's 10, 50 and 200-dma. The next support level is a weak $35 which we expect to be an easy breakthrough for EFII since they have provided investors with a rather bleak Q4 forecast and overall weakness in sales heading into next year. Another strike against EFII is that one of EFII's biggest customers, Xerox (XRX) reported a drop in Q3 profits of 11%, sending XRX stock plummeting $10.25 the day of the warning announcement and an additional $3.63 the day of the actual earnings report. XRX stated that they expect it to take three quarters for recovery. EFII was also affected adversely by fellow office equipment manufacturer, Lexmark (LXK), who didn't meet analyst's earnings hopes on Monday and lost a whopping $28 per share. BUY PUT NOV-45*EFQ-WI OI=88 at $8.88 SL=6.50 BUY PUT NOV-40 EFQ-WH OI=89 at $5.25 SL=3.25 Average Daily Volume = 790 K Chart = http://quote.yahoo.com/q?s=EFII&d=3m NEW PUTS PLAY'S CONTINUED IN SECTION THREE ************ SEE DISCLAIMER IN SECTION ONE
The Option Investor Newsletter Tuesday 10-19-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. NEW PUT PLAYS CONTINUED FROM SECTION TWO ************ VO - Seagram Company LTD $37.00 -1.69 (-0.75 for the week) Seagram is a Canadian company made up of two primary business segments: drinks and entertainment. Seagram produces and markets distilled spirits, wines, coolers, beers, and mixers in over 190 countries and territories. Through its Universal Studios, VO produces and distributes recorded music, home entertainment videos & television, and motion pictures. Seagram also operates theme parks and retail stores. This consumer stock took a beating last week losing 13% of its share price. The stock's descending momentum continued even today amid a promising market environment, thus we decided to add it as a put play and ride the wave. From a technical point of view, VO violated its 200-dma long ago on September 21st when it slip under the $50 mark. More recently it left its near-term support of $43 and is making a direct descent towards $30.06, its 52-week low. As the trading sessions pass and VO tailspins lower, volume is consecutively increasing in strength from its ADV of about 941K to today's level of 1.5 mln shares exchanging hands. This indicates heavy selling and a bearish sentiment. As a cautious trader you'll want to confirm downward movement again tomorrow before opening a new position. Earnings are still a couple weeks away expected on November 3rd. In the news last week, Universal Pictures extended its commitment to United International Pictures for an additional 5 years beyond 2001 to allow time to create a more cost-effective method of managing its international distribution organizations. BUY PUT NOV-45*VO-WI OI=289 at $6.13 SL=4.50 BUY PUT NOV-40 VO-WH OI= 43 at $3.75 SL=2.25 BUY PUT NOV-35 VO-WG OI= 0 at $0.00 SL=0.00 **NEW STRIKE** Average Daily Volume = 941 K Chart = http://quote.yahoo.com/q?s=VO&D=3m **** CI - Cigna Corp. $65.81 -2.56 (-2.13 this week) Cigna provides insurance and financial services throughout the world. Some of their main products include group life and healthcare, managed care products, individual life and health, annuities, and property & casualty insurance. Its primary segment is health care, which accounts for about half of their premiums. In January 1999, Cigna sold some of its property and casualty business to ACE Limited. Healthcare and Insurance, two weak sectors in the midst of a bearish market. Unfortunately for CI, they have their feet stuck in both areas and their stock price is paying the price. Despite last Thursday's coverage initiation from Lehman Bros at Outperform, the stock continues to decline. This chart is a painful one to look at if you have been holding on to shares of Cigna. The stock was at $85 before word came that the same lawyers that fought the Tobacco industry were in the midst of joining against the healthcare organizations. CI now sits near $65. After trying to base at $68, CI has given way to the sellers and looks to be starting a new down trend. CI closed at the day-low also which is yet another bearish sign. We don't support again until $60. Resistance is the 10-dma at $69.75 but that may be wishful thinking at this point. Barring some major news announcement to reverse the trend, you may want to consider an intraday spike for an entry point. Earnings are set for Nov 01 (unconfirmed) so keep your eye on this play for any hint of a run. More likely though will be more bad news stemming from the report. BUY PUT NOV-70 CI-WN OI=25 at $0.00 SL=0.00 wait for more vol BUY PUT NOV-65*CI-WM OI=10 at $2.38 SL=1.25 low OI Average Daily Volume = 918 K Chart = http://quote.yahoo.com/q?s=CI&d=3m PLAY OF THE DAY ********** ADBE - Adobe Systems Inc $120.94 +3.31(+3.56)(P2W+3.00) 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. Sundays' Write Up Please visit the website to read the more indepth Sunday Write Up. Tuesday's Write Up The momentum behind ADBE just keeps pushing it up to new heights. Today the share prices reached $122.94 on average trading volume to set another new 52-week high! ADBE remains above its 10-dma ($117.24) and near-term support is even lower at $115. But remember there's not much time left to get in on this play. Next Tuesday, October 26th ADBE will split 2:1 and OIN never recommends holding over a split date because the risk is too high for a post-split decline. In the news this week, Adobe announced it has aligned itself with Virtualis, a hosting company with powerful e-commerce and site management tools, to further enhance its new Website exclusively designed for Web builders. BUY CALL NOV-110 AEQ-KB OI= 397 at $14.63 SL=11.25 BUY CALL NOV-120*AEQ-KZ OI= 725 at $ 8.38 SL= 6.25 BUY CALL NOV-125 AEQ-KX OI= 431 at $ 6.00 SL= 4.25 Picked on Oct 5th at $114.69 P/E = 39 Change since picked +6.25 52-week high=$122.00 Analysts Ratings 1-8-4-0-0 52-week low =$ 33.88 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 = 1.03 mln Chart = http://quote.yahoo.com/q?s=ADBE&d=3m ************************ COMBOS/SPREADS/STRADDLES ************************ Dow Issues Shine As Technology Stocks Slump.. Monday, October 18 Blue chip stocks rebounded Monday as brave investors returned to speculate after last week's market sell-off. The Dow industrials ended up 96 points at 10,116 after a loss of 267 points Friday. Inflation news continued to plague technology stocks and pushed the Nasdaq composite index down 42 points to 2,689. The S&P 500 index rose 6 points to 1,254. In the broader market, decliners beat advancers 1,942 to 1,095 on active volume of 802 million share on the NYSE. Sunday's new plays (positions/opening prices/strategy): Twinlabs TWLB FEB10C/FEB12C $0.75 debit bull-call Visx VISX NOV95C/NOV90C $0.38 credit bear-call The Limited LTD NOV50P/NOV45P $4.00 debit bear-put Broadcom BRCM NOV150C/N140C $0.88 credit bear-call Broadcom BRCM NOV85P/NOV95P $1.25 credit bull-put VISX was our first candidate but unfortunately, it started moving lower after the first few minutes of the session. The target was unavailable and the highest price we observed was not good enough to justify the risk. All of the remaining plays offered favorable entry opportunities. The bearish position on LTD was observed at $0.06 above our target debit at various times throughout the day. The speculation play on TWLB was easily opened at the suggested price. BRCM was the most active candidate with a few 10 contract positions observed near the recommended entry credit. The stock fell significantly towards the end of the session but we did not observe a higher price with the move. Portfolio plays: The blue-chip market rebounded today after being rattled by Fed Chairman Alan Greenspan's remarks late last week that investors should beware of the risk of an overpriced stock market. Nasdaq issues were not quite as popular as traders awaited the release of Tuesday's Consumer Price Index for September. Many technology stocks are more susceptible to higher interest rates and the CPI will give analysts of good idea of where the economy is heading. Most economists are expecting the index to show a 0.4% increase but stronger-than-anticipated figures would provide the Fed with another reason to increase rates when it meets in November. The big worry is that a rise interest rates would drive equities to new lows for the year. There wasn't much to be happy about in the activities of stocks today. Most of our portfolio plays fell lower with the slumping technology issues. There were some bright spots in the long-term debit spreads and LEAPS/CC's sections as a few stocks found new spirit and speculative buying in the broad blue-chip recovery. Many traders decided it was good day to watch from the sidelines and wait for the next economic report to determine the fate of the market. Tuesday, October 19 Blue-chip stocks moved higher Tuesday as investors applauded the latest reports of corporate earnings. The Dow closed 88 points higher at 10,204 after soaring more than 200 points earlier in the day. The Nasdaq composite index fell slightly to 2,688 after rising nearly 50 points and the S&P 500 index rose 8 points to 1,261. In the broader market, advancing issues led declines 16 to 14 on active trading of 903 million shares on the NYSE. The 30-year U.S. Treasury bond was down 9/32 with the yield rising to 6.34%. Portfolio plays: The big portfolio news today was the announcement by DELL that a higher-than-expected surge in the price of memory chips will likely hurt its third-quarter earnings. The announcement late Monday sent their shares tumbling almost $4 by midday and our short-term bearish spread was easily closed for $9.50; a $1.50 profit in two weeks. A few other technology issues fell on the news but overall the sector enjoyed a day of relief. One of our newest hi-tech positions that continues to fall from recent highs is JDS Uniphase (JDSU). On Monday, they announced the acquisition of Ramar Corporation, a developer of lithium niobate-based integrated optical components. Investors must not have liked the news as the stock traded $5 lower during the day. Bell Atlantic (BEL) was another issue that moved lower, falling $1.43 as investors left the stock for the earnings report due on Wednesday. Our April-2000 calendar spread has performed well but we don't want to sacrifice profits on a post-earnings drop. Gemstar (GMST) is languishing just above our sold strike at the $70 strike and while we favor the stock in the long-term, we can't decide where it's going right now. Hopefully the NASDAQ will get back in gear and bring some of these complacent issues to life. Some of you may have noticed the rally in VISX today. The stock price vaulted higher after an upgrade from a Robertson Stephens Senior Medical Device and Medical Technology Analyst. The rating on VISX was raised to a "Strong Buy" based on current valuation, the company's phenomenal top and bottom-line growth and strong fundamentals of VISX's core business. The credit spread position from Sunday was available at the suggested credit but it may be best to let the short-term rally play-out before making a entry. The share value is certain to mover higher on the announcement and a better position may be available in the next few days. Our old friend C.R. Bard (BCR) had a nice rally today, climbing $4 to just short of our sold strike at $55. The company reported a strong financial performance in the third quarter and that's noteworthy when you consider that the period is traditionally lower in sales and revenues. Most traders are still waiting for the merger/buy-out announcement that has been rumored for weeks but as the current flurry of speculation dies down, the option prices for the front month series should fade. That's when we will try to exit our remaining (calendar spread) position for a small profit. Corporate earnings dominated the blue-chip rally and Johnson & Johnson (JNJ) led the way in the long-term portfolio with a $5 gain to the $100 mark. Biogen (BGEN) wasn't far behind, climbing $4 to the mid-$70 range while Medtronics (MDT) moved up $1.25 to finish above $35. Computer Associates (CA) recovered some of last week's losses, climbing $3 to $56 during the session before consolidating at the close. Of course the rebound in drug stocks helped our LEAPS/CC's portfolio significantly but it comes two days too late as we published last Friday's closing numbers in the monthly summary. Summary Of Monthly Positions: ********************* CREDIT SPREAD SUMMARY ********************* Stock Pick Last Position Credit Cost G/L Status AXP $135.81 $135.00 OCT120P/125P $0.75 $0.00 $0.75 Closed MU $66.50 $71.00 OCT47P/50P $0.25 $0.00 $0.25 Closed PHG $100.69 $96.81 OCT80P/85P $0.56 $0.00 $0.56 Closed PMCS $88.62 $85.63 OCT105C/100C $0.62 $0.00 $0.62 Closed SAPE $86.31 $87.94 OCT100C/95C $0.62 $0.00 $0.62 Closed YHOO $175.44 $169.38 OCT210C/200C $1.00 $0.00 $1.00 Closed ZRAN $22.31 $25.75 OCT30C/25C $0.68 $1.06 $0.38) Closed * Zoran (ZRAN) was closed early to limit potential losses. Credit spreads are profitable if both positions remain OTM until expiration. The cost-to-close price can be used to compare the initial opening credit to the current spread value. ************* DEBIT SPREADS ************* Stock Pick Last Position Debit Value G/L Status ABX $19.81 $20.63 JAN12C/20C $2.50 $6.50 $4.00 Closed BNBN $18.00 $19.13 OCT15C/17C $1.75 $2.38 $0.62 Closed CMGI $97.93 $97.81 NOV85C/95C $6.50 $6.00 ($0.50) Open COMS $27.06 $30.00 OC17C/22/25C $5.50 $6.75 $1.25 Closed CSE $49.31 $50.88 OCT45CC/45NP $43.50 $45.00 $1.50 Closed DELL $42.50 $42.81 NOV55P/45P $8.00 $8.00 $0.00 Open FON $51.12 $64.00 NOV40CC/40NP $39.12 $39.93 $0.88 Open GBLX $25.19 $35.38 JAN17C/22C $4.75 $5.88 $1.12 Open GMST $83.63 $75.44 NOV62C/70C $6.00 $5.00 ($1.00) Open HQ $42.25 $49.13 NOV25C/40C $11.50 $14.50 $3.00 Closed IDTC $22.62 $22.63 DEC17C/25C $3.38 $3.50 $0.12 Open JDSU $129.38 $128.63 NOV100C/110C $8.93 $8.12 ($0.81) Open MCHP $52.32 $57.75 OCT35C/45C $8.31 $9.50 $1.19 Closed MO $38.68 $30.56 OCT32C/37C $4.00 $3.25 ($0.75) Closed NEM $21.81 $26.13 DEC17C/22C $1.93 $4.00 $2.06 Closed NETA $19.80 $17.38 DEC12C/17C $3.62 $3.00 ($0.62) Open QWST $30.00 $33.31 OCT22C/27C $3.00 $4.50 $1.50 Closed RNB $58.56 $60.75 OCT50CC/50NP $49.19 $50.00 $0.81 Closed SBUX $23.88 $22.00 OCT22C/23C $0.75 $0.88 $0.12 Closed SEE $60.68 $54.69 OCT70P/65P $3.50 $5.00 $1.50 Closed TUTS $29.75 $27.69 OCT22C/25C $2.06 $2.12 $0.06 Closed UNFY $19.88 $21.75 OCT12C/17C $4.12 $4.75 $0.62 Closed * Many of these positions finished at maximum profit but were closed early to protect profits or limit potential losses. A debit-spread is profitable if the value of the position exceeds the initial cost of the spread when the play is closed. However, because we track plays based on the current cost/value, potential gains may not be reflected until both positions are closed. *********************** CALENDAR SPREAD SUMMARY *********************** Stock Pick Last Position Debit Value G/L Status AW $11.38 $10.81 MAR12C/NOV12C $1.12 $0.88 ($0.25) Open BCR $46.50 $50.94 JAN50C/OCT50C $1.93 $3.00 $1.06 Closed BCR $51.25 $50.94 JAN55C/NOV55C $1.43 $1.31 ($0.12) Open BEL $64.13 $63.88 APR65C/NOV65C $2.50 $3.62 $1.12 Open COMS $25.31 $30.00 JAN27C/NOV30C $1.38 $2.75 $1.38 Open EGRP $24.94 $25.06 APR25C/JAN30C $3.75 $3.25 ($0.50) Open GD $67.31 $52.13 FEB70C/OCT65C $1.75 $0.50 ($1.25) Closed LGE $22.69 $22.38 MAR22C/NOV22C $1.25 New Play Open LGTO $45.44 $52.00 DEC50C/NOV50C $0.75 $1.25 $0.50 Open MUEI $10.50 $10.13 APR10C/NOV10C $1.00 $0.88 ($0.12) Open OXY $21.69 $22.50 JAN22C/NOV22C ($0.12) $0.50 $0.62 Open PILL $13.62 $12.88 APR15C/NOV15C $1.62 $1.38 ($0.25) Open PSFT $16.19 $14.81 JAN17C/NOV17C ($0.56) $0.62 $1.18 Open VYTL $26.19 $30.00 NOV30C/OCT30C $0.93 $1.50 $0.56 Closed WFC $41.69 $39.00 JAN42P/NOV40P $2.00 New Play Open ZOLT $7.68 $7.75 APR7C/NOV7C $0.62 $0.75 $0.12 Open YEAR-2001 LEAPS BGEN $83.81 $74.50 LJAN90/NOV90C $13.38 $9.25 ($4.12) Open CA $53.56 $52.38 LJAN60/NOV60C $5.62 $9.00 $3.38 Open CS $16.80 $16.50 LJAN15/NOV17C $3.12 $3.75 $0.62 Open GM $71.68 $62.13 LJAN75/NOV65C $6.75 $4.12 ($2.62) Open GM $71.68 $62.13 LJAN75/NOV65C $4.00 $4.12 $0.12 Open JNJ $95.68 $93.31 LJAN100/N100C $6.38 $10.00 $3.62 Open LTD $45.68 $41.81 LJAN50/NOV45C $5.50 $3.25 ($2.25) Open MO $38.68 $30.56 LJAN35/NOV37C $5.38 $2.62 ($2.75) Open MOT $100.00 $88.00 LJA105/NOV95C $11.50 $11.00 ($0.50) Open MDT $39.38 $33.13 LJAN37/NOV37C $4.75 $4.50 ($0.25) Open PRD $25.37 $20.94 LJAN25/NOV25C $4.88 $2.88 ($2.00) Open SLR $71.25 $73.81 LJAN70/NOV70C $8.62 $13.00 $4.38 Open SUNW $71.75 $92.56 LJAN75/NOV85C $13.25 $21.00 $7.75 Open XON $81.94 $72.00 LJAN85/NOV80C $5.38 $4.75 ($0.62) Open * New LEAPS/Covered-Calls plays are generally not profitable for at least two strike periods. The calendar (or time spread) is profitable if the value of the position exceeds the initial debit (or cost-basis) at the end of the expiration period for the long position. However, because we track the plays based on the current closing cost/value, the gains for time spreads will rarely be reflected until the play closes. Each month, as we sell a new option against the long position, the net cost should decline or the position value should increase. *************** READERS REQUEST *************** Stock Pick Last Position Debit Value G/L Status ATHM $48.06 $40.81 NOV45C/50C $2.62 $1.25 ($1.38) Open ATHM $48.06 $40.81 JAN40C/NOV50C $8.00 $5.50 ($2.50) Open QCOM $183.75 $198.50 JAN140C/150C $7.25 $7.38 $0.12 Open EFII $61.60 $45.50 OCT45C/55C $8.12 $8.00 ($0.12) Closed *************** DEBIT STRADDLES *************** Stock Pick Last Position Debit Value G/L Status ALLC $22.50 $20.25 NOV22C $0.50 $0.88 $0.38 Closed DEBIT-STRADDLE COMBINATIONS (short-butterflies): Stock Pick Last Position Debit Value G/L Status BRCM $111.87 $118.63 NOV135C/N140C $1.38 $1.25 ($0.12) Closed BRCM $111.87 $118.63 NOV90P/NOV85P $1.38 $1.25 ($0.12) Closed DCLK $74.50 $113.50 OCT90C/OCT97C $2.00 $7.12 $5.12 Closed DCLK $74.70 $113.50 OCT60P/OCT52P $2.00 $0.25 ($1.75) Closed * A debit-straddle (or combination) is profitable when the value of the position exceeds the initial cost of the spread. **************** CREDIT STRANGLES **************** Stock Pick Last Position Credit Cost G/L Status HWP $100.81 $82.75 OCT115C/90P $2.38 $1.50 $0.88 Closed JNJ $96.06 $93.31 OCT100C/90P $2.43 $1.88 $0.56 Closed MER $71.94 $64.25 OCT80C/75P $2.50 $1.88 $0.62 Closed * All of these positions were closed early to protect profits or limit potential losses. A credit-strangle is profitable if the cost to close the position is less than the initial credit from the spread. Note: We trade the "paper" portfolio just as we would trade in our personal account and the ongoing narrative is a service we provide to help novice traders understand how various positions might be opened and closed. It is not intended as a substitute for your own trading techniques nor does it replace your duty to manage the positions in your portfolio. We publish a list of current plays once-a-month (after expiration) and the summary is a reasonable representation of the positions offered during that period. Questions & comments on spreads/combos to ray@OptionInvestor.com ********* NEW PLAYS ********* This week I received some new requests for conservative, low-cost plays on smaller issues. These positions have favorable option pricing and their bullish outlook is based on the current price or trading range of the underlying issue and the recent technical history or trend. Always review each play individually and make your own decision about the future outcome of the stock price. TALK - Talk.com $13.75 *** On The Move! *** Talk.com is the nations leading e-commerce telecommunications provider and the founder of AOL Long Distance; America Online's most successful partner program to date. Talk.com is also the exclusive provider of AOL Long Distance, the revolutionary low cost long distance program exclusively for AOL members. The price of TALK shares rose last week after a telecom analyst at First Union initiated coverage of the company with a "strong buy" rating. An article in CBS MarketWatch said that First Union analyst David Trossman set a 12-month target of $51 a share. He probably meant $15 share but in any event, the stock is now on the move. In his research report, he comments that Talk.com is one of the few Internet companies that generates free cash flow and uses the Internet effectively for real-time billing services as well as to drive down costs. As of June 30, Talk.com had 1.2 million customers, the 8th largest long distance phone company nationwide and the company's gross margin is one of the highest in its sector. Implied volatility stayed firm this week and volume moved higher as the stock continued to gain ground. The new activity produced a favorable disparity in the OTM call options and we are going to use the mis-priced positions to a bullish calendar spread. PLAY (conservative - bullish/calendar spread): BUY CALL JAN-15 QQK-AC OI=2514 A=$1.68 SELL CALL NOV-15 QQK-KC OI=3479 B=$0.75 INITIAL NET DEBIT TARGET=$0.88 TARGET ROI=50% Chart = http://quote.yahoo.com/q?s=TALK&d=3m **** PR - Price Communications $26.25 *** Telecom Takeover's? *** Price communications is a nationwide corporation whose current primary business is owning and operating television stations through wholly-owned indirect subsidiaries. Their television properties currently consist of one ABC affiliated television station, WHTM-TV, serving Harrisburg/Lancaster/Lebanon/York, Pennsylvania; and three NBC affiliated television stations in the midwest. Earnings are due in late October and expectations are that the company will beat analysts estimates. Call option buyers have been speculating on the outcome recently with bullish positions. A news item in The Street.com also referred to rising takeover sentiment in the telecom sector after the announcement that a British mobile-telephone company, Orange PLC (ORNGY) confirmed it had been in talks with German engineering and telecom group Mannesmann. Regardless of the reason for the interest, traders have provided us with favorable premium disparity in the (OTM) call options and we are going to use it to open a conservative calendar spread. PLAY (conservative - bullish/calendar spread): BUY CALL FEB-30 PR-BF OI=56 A=$2.12 SELL CALL NOV-30 PR-KF OI=165 B=$0.62 INITIAL NET DEBIT TARGET=$1.38 TARGET ROI=50% Chart = http://quote.yahoo.com/q?s=PR&d=3m **** APOL - Apollo Group $24.00 *** Technicals Only *** Apollo Group is as leading provider of higher education programs for working adults. The company specializes in a program that is based on the concept that working adults require a very different teaching/learning model than those designed for the 18 to 24 year old student. The company provides working adults with education that includes excellent accessibility, curriculum consistency and time/cost effectiveness along with learning programs that have an immediate application to the workplace. APOL's quarterly earnings were announced recently and the company came through, matching analysts' estimates of $0.21 a share. The number of degree enrollments were up 25% as the school opened new campuses in six cities. Revenues totaled $498 million, an increase of 29% over fiscal 1998 and yearly earnings per share climbed to $0.75, well above the previous numbers ($0.59) for 1998. Since the announcement, APOL has started a new trend, rebounding sharply on strong volume. The current move should carry it into the mid-$25 range before any significant test occurs. Those who favor the short-term outlook for this unique issue can participate in the bullish trend with a conservative (ITM) spread position. PLAY (conservative - bullish/debit spread): BUY CALL NOV-20.00 OAQ-KD OI=68 A=$4.62 SELL CALL NOV-22.50 OAQ-KX OI=71 B=$2.62 INITIAL NET DEBIT TARGET=$1.88 ROI(max)=32% B/E=$21.88 Chart = http://quote.yahoo.com/q?s=APOL&d=3m ******************** INDEX OPTION SPREADS ******************** As a trader, you may be familiar with options on individual stocks where you have the right to buy (call option) or the right to sell (put option) a particular stock at some predetermined price within some predetermined time. The buyer has the rights and the seller the obligations. With index options the basic ideas are the same. Index options allow you to make investment decisions on a specific market industry or on the market as a whole. Spread strategies can be made with index options similar to those made with individual stock options. Many professional traders employ index spreads as a hedge strategy. We favor debit positions on the SPX for momentum and hedge or longer-term plays and OTM credit spreads on the OEX when the risk/reward is favorable. Low ROI disparity spreads will be listed (when available) for the conservative index trader. OEX - S&P 100 Index $660.27 OTM Credit-Spreads The Standard & Poor's 100 Index is a capitalization-weighted index of 100 stocks from a broad range of industries. The component stocks are weighted according to the total market value of their outstanding shares. The impact of a component's price change is proportional to the issue's total market value, which is the share price times the number of shares outstanding. OBSERVATIONS: For OTM credit spread trades, we like to use the actively-traded S&P 100 Index options because they contain much more premium than options on individual stocks and provide an underlying instrument less prone to huge, gapping moves. Review the 'Market Sentiment' section for specific technical information on the S&P 100 Index. PLAY (bearish): BUY CALL NOV-710 OEZ-KB OI=4965 A=$2.00 SELL CALL NOV-705 OEZ-KA OI=1715 B=$2.88 NET CREDIT TARGET=$0.88 ROI=21% PLAY (bullish): BUY PUT NOV-600 OEY-WT OI=8984 A=$4.25 SELL PUT NOV-610 OEY-WA OI=8276 B=$5.50 NET CREDIT TARGET=$1.25 ROI=14% By combining these two positions, you can participate in a popular neutral strategy known as the Long Iron Condor. It is often used with OEX positions and is a limited risk, limited profit, credit spread strategy that gives you a wide range for success. Today's play is an aggressive combination position. CHART= http://quote.yahoo.com/q?s=^oex&d=b ********* STRADDLES ********* The recent cycling of the broad market has provided little help for the remaining plays in the straddles section. New earnings announcements are dominating the news and the market outlook is now determined by the most current economic report. The market volatility has remained at high levels with DOW swings of 125 points or more during many of the sessions but the majority of our issues are mired in small ranges. New plays are difficult to find in the current bearish trend because as the markets decline, the implied volatility in options generally increases with the fall of the underlying issue, making prices too expensive for straddle buyers. For now, we will wait for the market to settle down and use Tom Gentile's (Optionetics) guidelines to look for new plays. Remember, the keys to finding good candidates in his straddle strategy are market consolidation, historically cheap option premiums and impending news or events. Here is the opening price for our new straddle (from this Sunday): Station Casinos STN JAN25C/JAN25P $3.75 debit straddle Good Luck! ************ See Disclaimer in section one ************
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