The Option Investor Newsletter Sunday 10-24-99 1 of 6 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com Entire newsletter best viewed in COURIER 10 font for alignment ******************************************************************* MARKET STATS FOR LAST WEEK AND PRIOR WEEKS ******************************************************************* WE 10-22 WE 10-15 WE 10-8 WE 10-1 DOW 10470.25 +450.54 10019.71 -630.05 10649.76 +376.76 - 6.33 Nasdaq 2816.52 + 84.69 2731.83 -154.74 2886.57 +149.72 - 3.56 S&P-100 685.63 + 33.88 651.75 - 46.70 698.45 + 28.14 - 2.49 S&P-500 1301.65 + 88.12 1247.41 - 88.61 1336.02 + 53.21 + 5.45 RUT 418.69 + 3.99 414.70 - 13.01 427.71 + 4.18 + 6.44 TRAN 2863.15 + 7.67 2855.58 -226.13 3081.71 +213.37 - 10.38 VIX 22.89 - 8.59 31.48 + 10.28 21.20 - 5.26 - 3.08 Put/Call .55 1.05 .67 .68 ******************************************************************* Five more days and we are out of here! With Halloween only a week away the fear of a market collapse appears to be dwindling. With past Octobers being featured players in the Nightmare on Wall Street series, the tendency to play it safe and keep cash locked up on the sidelines has been strong. After the apparent rally last week it is "possible" we have seen the lows for the month. The markets appear unconcerned that the Employment Cost Index, due out on Thursday, may show inflation creeping into the economy. Investors appear to be disconnecting from the inflation worries and charging off to pour more money into the markets in anticipation of ever climbing stock prices. With the Fed meeting only three weeks away and odds of a rate hike hovering around 100%, again investors appear unconcerned. The Dow on Friday rose at the open and never looked back until the last thirty minutes of trading. Actually the Dow was accelerating into the close until rumors surfaced that CSCO was going to miss earnings. The rumor raced through the markets and left some traders scratching their heads after an eighty point drop. The Nasdaq lost -36 points of its +40 point gain but struggled back before the close to post a +14 gain for the day. Note the advance/decline line on the chart below. There is a small glimmer of hope as the free fall from last week started slowing. Three of the last five trading days the advances won the battle. The new highs are still trailing the new 52 week lows. Friday's new highs were only 213 and new lows were 738. Remember this was on the last day of a very positive week and you would have thought the new lows would have slowed substantially. The 7:2 ratio is still much better than the 10:1 from Monday but still very bad. The market would have closed much stronger had it not been for the CSCO rumor. The rumor could not be verified and CSCO did trade up again in after hours. The company was contacted and they said they were standing by their guidance to analysts. Look for a rebound in CSCO on Monday without any new news. The biggest reason given for the Friday rally was the agreement in Washington on the Financial Services Reform Bill. This bill reforms the prohibitions put in place in the depression. The agreement would allow the lines between different types of financial companies to blur. One of the cross pollination events for instance would allow banks to sell insurance and insurance companies to offer banking. This sets up the possibility of financial supermarkets. Companies like American Express, Citigroup, JP Morgan, Bank America, could become a one stop shop for all financial services. The smaller insurance companies soared on the news as takeover speculation was running rampant. Before you rush out and sell your tech stocks, I would caution you that we do not have a signed bill yet and it could be some time before this actually happens. Still the rally in financial stocks was enough to send the Dow back to levels not seen since the day after the Nasdaq set a new high on Oct 12th. JP Morgan led the charge on the Dow with a +8.44 gain. Also up were C +1.25, they already have Travelers in anticipation of the reform, AXP +3.75, GE +2.38. The next vote could come as soon as next week but we all know how slow good changes occur. Another reason these stocks did so well was because they had been beaten down so severely with interest rate worries recently. Other Dow leaders were the previous dynamic duo of IBM and Phillip Morris. IBM and MO both were performing their versions of the dead cat bounce. IBM gained +2.94 after their -$23 drop on Thursday. MO regained +1.13 of its -$9 drop. A very small recovery for their stockholders. Volume has been good on the NYSE with four days last week trading over 900mln shares. Normally a major move, +450 points, accompanied by strong volume, would signal the start of a major rally. Many analysts however still believe that the lack of a real sell off by the tech stocks has only put in a soft bottom at this level. A confirmation of this would be the selective failure of the previous leaders. Many of the stocks that took the Nasdaq to a new high only two weeks ago are slowly losing momentum. Some of the leaders are being taken out and shot one by one. Some examples from Friday are PHCM -19, INKT -17, ARBA -16, EMLX -12, CMRC -10, DCLK -6, EBAY -6, RNWK -6, BRCM -4, YHOO -4. Earnings for this cycle continue to come in ahead of estimates. With 60% of the S&P already reported, 28% came in higher than estimates and only 5% missed their numbers. There are six Dow stocks reporting Monday. AXP, T, CHV, XON, MMM and UK. Any unexpected problems from any of them could derail this fragile rally but good news could set the tone for the week. After signaling a clear market top (10719) on Oct 11th at 21, the VIX did an about face to move upward and signal a market bottom (10000) on Oct 15th at 33. The pendulum has now come full circle and the VIX is now back at 22. Remember, this indicator does not show the exact day each top or bottom will occur but is usually very close. Using the VIX as a forecast for the coming week we could expect a possibly weak follow through on this rally. We are not out of the October woods yet. Thursday is the anniversary of Black Thursday in 1929 when the selling was fierce and the Dow closed at 299. Anniversaries like this have a tendency to cast a pall over the bullish enthusiasm. The big news for the week will be the ECI and the GDP on Thursday. If you are not currently in the market then any pull back from the +450 points gained last week would be a welcome event and a buying opportunity. The Y2K fear is rapidly turning into Y2H (hype). Even with the constant stream of earnings warnings that are using the Y2K excuse, the market continues to shake it off. The most recent survey of investors shows that those still in the market are planning to stay invested and ride out any dips. This is causing great concern among the Y2K bears who wanted the buying opportunity for their personal portfolios. If, in fact, the average investor has decided to remain invested then the recent Dow 10000 could be the bottom. While we may not have confirmation until later in November, it may be time to start thinking about some leaps. If we get another dip between now and the FOMC meeting on Nov 16th then those who prefer long term investing should target some leaps on their favorite stocks. We will have a special section on Nov 6th to highlight some great leap plays. Pick your entry points carefully this week and sell too soon! Good Luck Jim Brown Editor ************* 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: 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'S PLAYS ******** Week ending 10/24/99 CMGI - Puts over $100 My target for this week on CMGI was to buy puts on any bounce over $100. After trading over $105 on Friday and then rolling over BEFORE the CSCO rumor, I bought the NOV-110 puts GCB-WB for $10.00. With the major Internet stocks losing ground on Friday and the Nasdaq and the Dow soaring, I thought it was a good play. My stop on this one is $8.50. YHOO - Puts over $175 Same story as CMGI. I waited patiently all week for the failed rally signal on YHOO. The spike at the open on Friday and the slide backwards looked like what I wanted. Not quite as strong as I would have liked but weakness appeared to be setting in. I bought the Nov-180 puts YHV-WP at $10.00. Stop is $8.00. OEX - 680-puts The plan was to buy OEX calls on a positive CPI and upward movement on the Dow. When the CPI was announced on Tuesday we had the big gap open but I wanted to see if it held. It did not on Tuesday. The gap open again on Wednesday kept me from opening the position. I was leary of the IBM earnings due after the close and decided to wait. Fortunately it was a good plan. With the market up +400 points for the week at the open on Friday I started looking for an entry point to switch to puts. I felt it would rebound off 700 but the CSCO rumor caught me off guard and the OEX dropped like a rock from 690. The premiums inflated and again I decided to pass. With the VIX at 22 we could be close to another top. I plan to buy puts if we get an opening rally on Monday which fades in the afternoon. IBM - calls over $108 After IBM held on the market dip Monday afternoon I bought some Nov-100 calls IBM-KT for $9.50. I sold them on Tuesday for $12.00 just after the open. After holding over the YHOO earnings I had recent nightmares about trades going against you after hours. I did not want to hold again. I think you need to be vaccinated against this type of dumb play at least once a quarter just to remind you of the stupidity and the pain. Obviously I was greatly relieved when I saw what happened to IBM on Thursday. VOD - Nov-50 calls The phone wars heat up! This was my play gone bad for the week. After showing signs of life last week and what looked like a bottom at $47, I had bought some Nov-50 calls for $2.00. When Mannesmann made the bid for Orange on Tuesday morning, VOD headed south and I bailed for $1.00. When it stated recovering on Thursday I considered buying back in but did not. Good move... After the close on Friday, VOD started making noises about making a $70 bln bid for Mannesmann. Look for VOD to trade down again on Monday if investors think they are paying too much just because their pride was hurt. KIDE - Nov-50 calls After gapping open on Monday the Dow weakness looked like an anchor on KIDE and the price slid all day. After being up several dollars on Monday morning, I closed out the position when it hit $15 at midday. KIDE was lifeless all week on profit taking and I did not re-enter. My cost was $15.13 and they traded as low as $10 on Tuesday. Glad I got out with only a -.13 loss. I still think KIDE is a good play, just longer term than I prefer. I would suggest that readers look for another dip before starting new positions. BVSN - Earnings Tue, 3:1 Split 10/25 I did not buy BVSN on Monday when the market dipped. It was showing no strength and I decided to wait and see if it had legs after the Tuesday earnings. After beating the street by +.03 and the positive MSFT announcement, BVSN was off and running on Wednesday morning. I bought the NOV-150 BDV-KJ at 25.50 and sold them on the closing bump for $35. I sold too soon but cn't complain. They traded as high as $55 on Friday. Because of the big split run BVSN has had I am looking for a possible drop Monday before the split. I shorted BVSN at $198 and will look to cover Monday. TARGETS FOR THIS WEEK Weeks goal: Don't fight the tape. Go with the market. I actually do not have any targets for Monday. With several plays in motion I want to see what direction the market is going before making any decisions. I will be in San Francisco for a week beginning Wednesday and I do not want to be in the market. If you want my opinion on possibles for next week, I think VRTS, SEBL, GMST, PBI, EXDS have lots of possibilities. Just be careful of the market until we are out of October. Good luck, sell too soon. Jim ************* READERS WRITE ************* Hi Newsletter Staff, I wanted to tell you how much I enjoy your newsletter and all the information it contains. I am new at trading and have devoured every word; taking notes, highlighting, and just plain enjoyed the humor and candid comments. When I was informed that my trial period was over, (which I knew would happen) I felt like I had been told, "Good-bye" from a long-time friend. Needless to say, I subscribed immediately! (Which I also knew would happen.) Thank you for all the hard work you do and for sharing it with us. Being able to use what you teach has allowed me to quit my 8 to 5 job and be home with my family. Now I enjoy my "job" so much, that I wanted to let you know how much you contributed to it. Sincerely, CH ************** STOCK NEWS ************** Sycamore's IPO Sizzles By S.P. Brown Analysts expected Sycamore Networks' (SCMR) IPO to make a big splash on Wall Street this past Friday, but the opening trade of $270.88, a 600 percent premium to the IPO price of $38, amazed even the most jaded market watchers. http://www.OptionInvestor.com/stocknews/102499_1.asp **** Money Managers Name Best and Worst Stocks for the Long Term By Cindy Christ The bloom may be off large-cap Internet stocks, at least among institutional investors. According to a survey released by Salomon Smith Barney consulting, most money managers believe gains in big-cap Internet stocks like Amazon.com (AMZN) and eBay (EBAY) are a short-term phenomenon. http://www.OptionInvestor.com/stocknews/102499_2.asp **** Financial Services Reform Bill to Change Industry Landscape By Cindy Christ The financial services industry cheered tentative passage of an historic bill that would allow banks, brokerages and insurance companies to merge and sell each other's products. http://www.OptionInvestor.com/stocknews/102499_3.asp **** Consolidation Wave Washes Up in Europe By Cindy Christ Following a flurry of merger activity here in the U.S., this week marked a rash of consolidation news from Europe telecoms. In a move to capitalize on the burgeoning wireless Internet market, Nokia announced today it was acquiring Telekol Corp., a Waltham, Mass.-based maker of Internet communications systems for corporations, for $56.5 million. http://www.OptionInvestor.com/stocknews/102499_4.asp MARKET SENTIMENT ***************** Sunday, October 24, 1999 Great Expectations III! Below is an updated list of equities (that should be reporting their earnings this next week) and our Pinnacle Index for those particular stocks. The Pinnacle Index is a proprietary product that determines current market sentiment and expectations for underlying equities and indexes, which is based upon speculation in the option markets. Also included are their expected earnings, the infamous whisper number (if available), and their estimated earnings release date. What we look for are liquid stocks/options that garner a lot of interest from the investment community. Most of the issues are high tech, and are thus more aggressive. We then filter out many of the equities, only to show stocks with excessive optimism or pessimism. From a contrarian standpoint (a high number is a good indication of extreme optimism, and a low number is a good indication of extreme pessimism) you should buy when its low, and sell when its high. Last quarter, we highlighted some stocks with a Pinnacle Index that were stratospheric (as high as the upper 20's). Needless to say, these stocks had so much pent-up enthusiasm, that after their earnings, they tanked. It is the old adage, buy the rumor - sell the news. There were also numerous companies with a Pinnacle Index less than one. However, once these companies came out with their bad quarter, the stocks rallied due to the oversupply of pessimism. If your favorite stock is not listed, the most common reasons are: 1) there are no options traded on the underlying equity 2) lack of interest by option speculators in the security 3) lack of quality information 4) company already pre-released 5) insufficient data. Also, as we get closer to the heart of earnings season, the list will expand dramatically to reflect companies whose earnings are due out shortly. Company Symbol Pinnacle Expected Whisper#: Estimated Index(PI): Earnings: Date*: AT&T T 2.61 +.53 +.54 10/25 Compaq Computer CPQ 1.32 +.05 +.06 10/26 Pixar PIXR 2.44 +.31 +.32 10/25 US Web USWB 4.53 +.13 +.15 10/25 Walt Disney DIS 0.80 +.11 +.11 10/25 BMC Software BMCS 0.50 +.41 +.43 10/25 Lucent Tech LU 0.69 +.29 +.31 10/26 Ebay EBAY 2.53 +.01 +.02 10/26 Priceline.com PCLN 2.74 -.10 -.09 10/26 Nortel Networks NT 6.88 +.26 +.28 10/26 Ameritrade AMTD 1.46 -.05 -.04 10/27 Qwest Comm. QWST 4.28 +.03 +.04 10/27 Amazon.com AMZN 2.56 -.28 -.27 10/27 Go2Net GNET 1.73 +.06 +.08 10/28 Infoseek SEEK 3.63 -.42 -.39 10/28 Infospace INSP 4.31 -.03 -.01 10/28 JDS Uniphase JDSU 12.80 +.25 +.27 10/28 Worldcom WCOM 1.90 +.53 +.53 10/28 Network Solut. NSOL 1.35 +.18 +.19 10/28 Last week we mentioned that Microsoft had very low expectations going into earnings. As such, they executed on their quarter, reported good numbers, the stock took a nice pop, and shareholders were happy. This was a very good example of using sentiment analysis for a trade, but the other part of the equation is execution by the company. They have to execute on their earnings (and meet the whisper number), and they need to avoid making negative comments about the future. As such, many people expected MSFT to either miss, or make negative comments about the future (Y2K slowdown?), but this didn't happen and the stock jumped. On the other end of the spectrum, we mentioned that IBM had low expectations. Now IBM did have a +7 dollar run into numbers after we mentioned it, but we all know the rest of the story. They couldn't execute on their quarter, missed the whisper by 3 cents, made Y2K comments, and got crushed. This was a good example of why a stock had such low sentiment, because they deserved it. Obviously, somebody knew the problems of Big Blue, and profited handsomely on the puts or shorts. That is why we like to show the expected earnings and whisper number, so you know as an investor, know how high the expectation bar is set. In IBM's case, the bar was set low, and they came in lower. Other low sentiment stocks that we mentioned (last Sunday) that had a good week was Microsoft, Ericcson, Exodus, Compuware, Coca-Cola, and Xilinx. Low expectation stocks for this week would include: Worldcom, Network Solutions, Ameritrade, Compaq, Disney, BMC Software, Lucent Tech, Ebay, Go2Net, and Amazon. High expectation stocks for this week would include Nortel Networks, US Web, and JDS Uniphase. Have a good trading week. 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. Volatility Index: The VIX is below the 25 benchmark, and continues to prove that 32- 33 is a great buying opportunity. However, it is currently getting close to the point where the market failed before, so be careful. Mixed Signs: None. 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 back to highs. 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 these last couple of weeks with issues such as IBM, 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. November Expiration Cycle OEX OTM Call Analysis (Open Interest November 680-780) Date Open Interest Change % Alert Friday, October 15 39,072 - Friday, October 22 61,250 +56.8% 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. Pinnacle Index OEX Friday Benchmark (10/22) Overhead Resistance (685-700) 2.32 OEX Close 685.63 Underlying Support (660-680) 1.28 Underlying Support (630-650) 12.66 Average ratings: Resistance levels 2.0 / Support Levels .5 What the Pinnacle Index is telling us: Based on 10/22, both overhead resistance and underlying support are light, which means we can easily rally 15 points just as easily as fall 15 points. However, should the market drop, we show great support at OEX 630-650. Put/Call Ratio Friday Strike/Contracts (10/22) CBOE Total P/C Ratio .69 CBOE Equity P/C Ratio .46 OEX P/C Ratio 1.67 Peak Open Interest (OEX) Friday Strike/Contracts (10/22) Puts 640 / 11,789 Calls 690 / 7,562 Put/Call Ratio 1.56 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 15, 1999 Bottom? 32.06 October 22, 1999 22.89 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 Oct. 20, 1999 41.0 38.5 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 10-24-99 Sunday 2 of 6 MARKET POSTURE ****** As of Market Close - Friday, October 22, 1999 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert DOW Industrials 10,750 11,320 10,470 BEARISH 9.23 SPX S&P 500 1,350 1,420 1,302 BEARISH 9.16 OEX S&P 100 690 725 686 BEARISH 10.15 RUT Russell 2000 440 465 419 BEARISH 9.14 NDX NASD 100 2,320 2,500 2,486 Neutral 10.19 MSH High Tech 1,120 1,250 1,215 Neutral 10.19 XCI Hardware 950 1,050 1,006 Neutral 10.15 CWX Software 750 800 892 BULLISH 9.03 SOX Semiconductor 450 525 514 Neutral 10.19 NWX Networking 525 600 598 Neutral 10.19 INX Internet 450 525 493 Neutral 10.15 BIX Banking 660 690 623 BEARISH 7.23 XBD Brokerage 410 440 388 BEARISH 7.23 IUX Insurance 645 660 558 BEARISH 7.23 RLX Retail 915 960 887 BEARISH 7.23 DRG Drug 365 390 388 Neutral 10.19 HCX Healthcare 720 785 763 Neutral 10.19 XAL Airline 180 190 146 BEARISH 5.21 OIX Oil & Gas 280 315 303 Neutral 10.21 * Posture Alert The relief rally continued, as the broad market rallied to end the week strong. Near the close of the day, rumors were circulating around the major trading desks that Cisco Systems would miss numbers, and that sparked some incredible selling pressure in the biggest high-tech names (CSCO, MSFT, AOL, ORCL, SUNW). Thanks to the potential of repealing the Glass-Steagall Act, sector leaders Friday included: Brokerage (+7.74%), Insurance (+6.25%), and Banking (+4.08%). With Friday's action, we have upped Oil&Gas to Neutral from Bearish. A detailed description of our Market Posture and its applications can be found at: /members/marketposture COMING EVENTS ************* Monday: Existing Home Sales Sept Forecast: 5.18M Previous: 5.25M Tuesday: Consumer Confidence Oct Forecast: 133.4 Previous: 134.2 BTM Schroders 10/23 Forecast: -- Previous: -0.8% LJR Redbook 10/23 Forecast: -- Previous: 0.4% API Oil Stocks 10/22 Forecast: -- Previous: 325K Wednesday: Durable Goods Sept Forecast: -0.1% Previous: 0.9% Thursday: Jobless Claims 10/23 Forecast: -- Previous: 298K Real GDP Q3-adv Forecast: 4.4% Previous: 1.6% Money Supply 10/18 Forecast: -- Previous: $1.3B Employment Cost Index Q3 Forecast: 0.9% Previous: 1.1% Help Wanted Index Sept Forecast: -- Previous: 86 Friday: New Home Sales Sept Forecast: 949K Previous: 983K Chicago NAPM Oct Forecast: -- Previous: 53.8 Univ Mich Sentiment Oct-F Forecast: -- Previous: 105.3 Next week's economic releases (preliminary) November 1 Construction Spending - Sept November 1 NAPM Index - Oct November 2 Personal Income - Sept November 3 Factory Orders - Sept November 3 Leading Economic Indicators - Sept November 5 Non-Farm Payrolls - Oct November 5 Consumer Credit - Sept ************** TRADERS CORNER 1 of 2 ************** Debrief One of the techniques for improving yourself in any area is to critique your performance. I am doing that with my paper trading this week. I am asking myself the following questions -- What did I expect the market to do? What were the critical factors in the market this week? What was my comparative advantage as a trader? Here are my paper trades: Qty Contract Symbol Sold Price Bought Price Profit Gain% 5 OEX Nov 660 Call OEYKL 19-Oct 25.13 18-Oct 19.38 5.75 30% 5 OEX Nov 660 Call OEYKL 19-Oct 20.00 18-Oct 19.38 .62 3% 10 IBM Nov 110 Call IBMKB 21-Oct 0.25 20-Oct 6.25-6.00 -96% 10 IBM Nov 110 Call IBMKB 21-Oct 0.25 20-Oct 6.38-6.13 -96% 5 OEX Nov 670 Call OEYKN 21-Oct 21.75 21-Oct 16.75 5.00 30% 3 OEX Nov 670 Call OEYKN 22-Oct 26.75 21-Oct 16.75 3.00 60% 2 OEX Nov 670 Call OEYKN 22-Oct 26.00 21-Oct 16.75 9.25 55% 5 OEX Nov 680 Puts OEYWP 22-Oct 11.88 22-Oct 12.50 -.62 -5% Last monday, the VIX was coming off of a top at 33+. On the previous monday, the VIX was coming off of a low around 21. I came into the week expecting a rally based on a VIX movement back to the low 20s. In addition to the VIX, the other critical factors affecting the market were: 1) money flow back into mutual funds as investors perhaps remember last Oct 8 as the market low; and 2) earnings. My edge was the VIX, which I watched both Monday and Thursday afternoon to make good entries into OEX Call plays, which almost paid for the disaster on the IBM calls (I described this in my last column). Additionally, I found two very good indicators which I view in Qcharts: NYSE Adv - Dec Vol, (symbol = advdecv.ny; advdecv.nq for the NASDAQ). My lessons learned are: 1) Stick to the OEX, unless I read the newsletter, and really study a stock through cross research. 2) Focus on the VIX & advancing vs. declining volume 3) Stay in one trade at a time for now so that a bad trade like IBM does not steal my focus 4) Be cautious of entering a new trade immediately after closing a winning trade, unless the indicators are signaling a strong reversal 5) The TYX, or 30-year bond yield, is losing its power to predict market reversals as money managers deploy cash flowing into their funds regardless of rates. In retrospect, I was able to make that second profitable OEX Call trade this week because the IBM trade was only a paper trade. Otherwise, I would not have been quite so dispassionate. My plan for next week is to make a max of two trades, in the OEX unless I really dig into one of the newsletter plays, and to be in trades only 3 days in the upcoming week. Now the VIX is back at the low end of its range. Each week in October has represented an uptrending or downtrending channel for the VIX, resulting in very profitable movement. The upcoming week will put the VIX tendency to rebound back to the middle of its range against continued good earnings and continued cash inflows to money managers. MSFT and AOL earnings were strong this week, but next week's earnings line up might be anticlimactic. I'll have to review who is on deck. All things considered, I would think that a failed rally formation on Monday, maybe Tuesday, accompanied by a VIX at 21 or so might signal a pretty good entry point into some OEX puts. One thing is for sure, the VIX is definitely at the low end of its range in the 22 area, and there is no reason for the range to change decisively before the Fed Meeting in November. After a week of paper trading, I feel a heck of a lot more rested, and am ready to stalk some good trades next week. Yesterday, I had breakfast with a local option club member, who has taken courses with both Jim Brown and George Fontanills. We discussed advanced strategies, such as spreads and straddles. In a bull call spread, the trader buys a call (eg, IBM Nov 110C) and sells a call with a higher strike (eg, IBM Nov 115C). One of the other local club members played this spread this week, but, fortunately, closed it for a profit before IBM announced. Since the 110C gains in value faster than the 115C, the trade is profitable as the price of the underlying moves up from 106 to 112, as it did earlier this week. As well, the trader has limited both his risk and reward. The graduate of Fontanills' course said that the real value of taking the 2-day seminar is how quickly you can calculate the risk/reward, and apply spreads and other strategies. There is a strategy for every situation. For example, when the VIX gets low, premiums go down, and it is a good time to enter straddles, which will pay off in a big move in either direction of the underlying, particularly if the VIX again shoots back up. Something to think about with the VIX at 22, though straddles require more capital than spreads. Like many traders out there, I am just learning about these strategies. I'll be at the Money Show in San Francisco on Oct 28 - 31, where I'll demonstrate my laptop/ wireless modem/ qcharts trading set up. I encourage you to bring your trades from the last 2 weeks and do a debrief according the format I outlined above. We will attempt to disect them during the "chalk talk." Janar Joseph Wasito janar@OptionInvestor.com ************* READERS WRITE ************* Janar, A friend of mine, who has been watching me engage my resources as a novice trader the past year, sent me an article you wrote entitled 'Intelligence Preparation of the Battlefield' figuring I might relate having studied war most of my life and pulled some time in the Corps. Never saw combat except for being shot at briefly in the Philipines, and that was target practice for the communists as we were not authorized to return fire. In any case, I've been kinda bored in civilian life ... but when I started trading I really took to it (not successfully, it just grabbed my attention... and it wasn't about the money). I know a battlefield when I see one, and the markets offered victory and defeat, carnage and combative challenge on a daily basis .... Contour maps and face paint are replaced by other tools of course, but there was no shortage of adrenaline and tactics - in any of the markets... So I thought your article was Outstanding ! You punched out the 10X ring at 600 meters without dropping a round, in my view. It prompted me to sign up for a trial subscription to Option Investor. I couldn't believe I found a trader who thinks in terms of ground combat - my wife thinks I'm not quite right in the head, as I frequently find analogies in life that relate to warfare in some fashion. I showed her the article and all she said was " Oh my God ... there's more of you out there..." I've taken some serious casualties trading options this year !! Had some victories, but the body count is nothing compared to the 50% casualties I've taken. Learned caution, humility, and the danger of holding an opinion, among other lessons taught to me by market forces....I read about time decay, but that lesson had to be demonstrated to me personally with cold hard cash on the line.... In fact, it seems that no matter what books I read, what wisdom I took in, I had to experience and learn each lesson the hard way... Got my eyes and ears wide open now, however. Nothing like a good whipping to get my attention ... I'm down but not out, going to lick my wounds and come back stronger and wiser than before... Keeping my powder dry until I get some training and demonstrate a successful six months of paper trades. Then its back on the line and into the fray when a good trade sets up... I'll be heading up to SF for the Money Show on the 28th... Got lots to learn. I look forward to reading more of your articles.... Looking forward to reading more studies from you.... Semper Fi, Andrew ************** TRADERS CORNER 2 of 2 ************** The Hunt for (Red) October By George Fontanills and Tom Gentile Yes folks, October is here and with it brings ghosts, goblins, and uncertainty in the marketplace. To most traders, October is a month to step aside and wait until November before making any trading decisions for fear of going "in-the-red". From Fed meetings, to third quarter earnings releases, to market guru projections, the fear of a surprize can send the average trader into a panic mode, as already demonstrated in years past. So how does the month of October affect options traders and what advantages can be sought out? October has generally not been kind to options buyers. At this time last year, the VIX or market volatility index tracked at the Chicago Board Options Exchange, recorded an intra-day high of just over 60, nearly double the value from just 2 weeks prior. Since the crash of 1987, daily VIX data reveals that spikes up in options implied volatility occurred in October nearly 70% of the time. Professional traders pay particular attention to the VIX, because it is a general gauge not only of option premiums, but also of market direction. One of the best quotes in the options trading industry is that when the VIX is high, its time to buy, and when the VIX is low, its time to go. What this means is that when the VIX is trading at yearly highs, such as last October, professional traders predict an upturn in the market, buying the asset, buying calls, or selling puts. These traders are betting on a drop in the VIX which in turn projects a rise in the markets. When the VIX is trading at a low, traders are betting on a future drop in the markets, and will take steps by selling securities, buying puts, and selling calls. The only problem with this strategy is that we as traders don't know exactly when these tops and bottoms occur until hindsight. A volatility trader gives up at least one risk when trading, and that is directional risk. A Straddle, which is one example of trading volatility, allows the trader a non- directional bias of the market, though he adds more time risk to his trading strategy. A straddle is an options strategy in which at-the-money calls and puts are bought on one ticket. Applying the volatility information above, the volatility trader hopes to profit not on a particular direction of the market, but on a rise in option premiums. Looking at the last 14 years of VIX closing prices, October on average has shown over a 20% gain in option premiums. Volatility traders stack the winning percentages in their favor buying option premium before October, and looking for exit strategies during the middle of the month, when premiums are at their highest. This type of volatility increase can often offset time decay as long as volatility rises. So what strategies can be implemented with extremely high option premiums before the bubble of volatility bursts? While selling naked puts and calls does put one in the favor of a volatility crush, this type of trading does come with some substantial risk. We trade a more sensible way by using out of the money credit spreads. A credit spread is similar to selling options premiums in that we look for a spread to decay in option premium, but with a protective collar in case the trade was to go against us. Risk and margin requirements are substantially lowered as is the stress of holding a naked put or call overnight. In either of the two strategies above, we are using the fear and greed of other traders in the forms of option premium extremes in our favor. George Fontanills is the President of Pinnacle Investments, a hedge fund which is located in Boston MA. He also is the main instructor of the Optionetics Seminar Series. Tom Gentile is the Chief Options Strategist for Optionetics and George Fontanills. He assists George as a co-instructor at the OptionInvestor/Optionetics 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? TRADING CLUB UPDATE ******************* Sunday, October 24, 1999 THE OPTION INVESTOR TRADING CLUBS OFFER A CHANCE FOR INFORMATIVE DISCUSSION WITH OTHER INVESTORS IN YOUR LOCAL AREA!!! Visit the trading club message boards and see what others have to say: http://boards.OptionInvestor.com/tradersclubs/ If you would like to join contact us at Visit@OptionInvestor.com and Organize@OptionInvestor.com. UPDATE FROM TORONTO, CANADA: ****************************** What a wild Ride! The last few sessions have really been turbulent. I hope there has not been any serious cases of whiplash with anyone in our group. I for one was kicked around a bit, but so far I have come out ahead a few bucks. How is every one else managing? Let's meet on Saturday at 4:00 pm in downtown Toronto to discuss some strategies. For those who can make it please let me know. OIN would like to know what we would like to see in the newsletter. Let's all think about it and do some brainstorming when we are together. Let's make OIN even better than what we already have. This seems to be a publication which wants to tune itself in to what its readers want. I was talking to the manager at the Greenline office in London. He told me that they are planning an advanced options trading strategy meeting on Nov. 30. Maybe some of us can attend that. I think it will be free. CBOE is sending somebody up. See you all in Toronto on Saturday, eh. Thomas firstname.lastname@example.org Earnings this week ******* With 60% of the S&P already announced, the list is already beginning to shrink but still too big to be put in the email newsletter. Simply click here for the entire earnings list. http://www.OptionInvestor.com/misc/102499_1.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 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 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 five 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 Janar Washito: Qcharts, wire less trading 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 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 LAST WEEKS CHANGE FOR THIS WEEKS PICKS: ****************** Daily Results Index Last Week Dow 10470.25 450.54 Nasdaq 2816.52 84.69 $OEX 685.63 33.88 $SPX 1301.65 54.24 $RUT 418.69 3.99 $TRAN 2863.15 -1.69 $VIX 22.89 -8.59 Calls BVSN 196.88 34.88 Dropped, its splitting 3:1 on Monday QCOM 215.75 17.25 It is showing signs of another big run ADBE 128.81 11.44 Dropped, the stock splits on Tuesday SEBL 96.50 11.38 Good earnings and a 2:1 stock split EMLX 139.25 11.25 Split fever and strong momentum CMVT 104.81 9.56 Crushed the 52-week high set on Thursday PCS 78.88 8.88 New, offers Internet on hand held phones GMST 81.88 6.44 Earnings run with huge option volume WMT 57.06 6.25 New, breakout for earnings run RMDY 34.75 5.75 Dropped, earnings will be on Monday TFSM 45.44 4.81 Potential mergers for TFSM and DCLK AMZN 78.63 3.56 Harpooned in late trading but still alive VRTS 94.19 3.09 Splitting and headed for higher ground KIDE 60.00 0.88 Heard of Pokemon?? KIDE owns them AMGN 81.13 0.38 New, again, drugs are in the spotlight MACR 52.88 -0.38 Trying to break its chains that hold it DELL 39.88 -2.94 Stock warned of a 3Q earnings shortfall Puts PBI 46.50 -9.50 New, Analyst question future performance EFII 37.13 -8.36 Still trying to find a bottom CI 65.25 -2.69 Going down with no indication of slowing LTR 68.88 -2.13 Tobacco lawsuits continue to hurt stock CB 48.81 2.13 Dropped, broke its 10-dma with strength CMGI 103.13 5.31 Use caution and keep trailing stops tight EXDS 73.69 8.75 New, time to take advantage of the rise BAC 58.75 10.56 New, their looking to turn and burn JPM 125.63 19.13 New, rising bond yield doesn't bode well STOCKS ADDED TO THE PICK LIST ************ Calls PCS - Sprint PCS AMGN - Amgen Inc WMT - Wal-Mart Puts EXDS - Exodus Communications PBI - Pitney Bowes Inc. BAC - Bank of America Corporation JPM - J.P. Morgan Inc PICKS WE DROPPED THIS WEEK ********** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS RMDY $34.75 (+5.75) A gain, and we're dropping it? Why's that? Well, earnings will be announced on Monday. Veteran readers will recall that we rarely, if ever, hold a position over earnings. The risks are just too high. Even on a technical basis, volume is falling out of the stock and top of the trading range is stuck at $35. Yes, we're on top, but there's no remedy if RMDY goes south from here...better to take your profits now and close out your play prior to Monday's close. ADBE $128.81 (+11.44) ADBE just keeps wanting to go higher. On Friday it hit yet another new 52-week record at $131.25 in an early morning rise but again the volume was lacking. Putting volume aside, this momentum/split play has been a stellar performer providing traders with gains of $14.13, or 12.3% since we added to our call list on Oct 5th. Nevertheless good things must come to an end. The stock splits 2:1 this Tuesday, October 26th. Since we never recommend holding open positions over the split date because it's not worth the risk of a post- split decline, we're retiring ADBE this weekend. Please don't misunderstand, we're not saying ADBE couldn't continue its ascent but simply that we need to exit before the split. **************************** SEE DISCLAIMER IN SECTION ONE
The Option Investor Newsletter 10-24-99 Sunday 3 of 6 ***************** Drops - Continued ***************** BVSN $196.88 (+34.88) What a play! If they could just all be this good. As we said Thursday this play couldn't have worked out better if it we had scripted it. After selecting the stock at $162 last week we did get the pullback that we were looking for early Monday. Tuesday we got a nice bounce in anticipation of BVSN's earnings announcement. BVSN beat the street by 23%, and Wednesday morning it was off to the races for our split play. By the last hour of the session Friday shares of BVSN were trading as high as $207.94 before settling back at $196.88 up $34.88 for the week. Unfortunately they all don't work out as well as BVSN, as this turned out to be an exceptional play. With BVSN splitting 3:1 on Monday we will close this play and look for other possibilities and opportunities in the market place. PUTS CB $48.81 (+2.13) The markets rallied on, closing the week with respectable gains on the broader markets. Unfortunately, this rally was just too strong for our put play on CB. The final dagger was driven into the heart when the stock broke its 10-day average at $47. We hoped CB would bounce off this resistance point, but influences of the broader market took control. Because the tides have turned and CB has found new revived strength, we have decided to end this play. With so many opportunities in the market we decided to concentrate our efforts elsewhere. STOCK SPLIT CANDIDATES *********************** CMVT - Comverse Tech QCOM - Qualcom Split candidates that aren't current plays: INKT - Inktomi CHKP - Check Point Software MEDI - MedImmune STOCKS WITH UPCOMING SPLITS **************************** We don't list all splits available, only those we feel may have play possibilities. Symbol - Stock Splits/Date BVSN - Broadvision 3:1 10-25-99 ex-date 10-26 DISH - EchoStar 2:1 10-25-99 ex-date 10-26 ADBE - Adobe Systems 2:1 10-26-99 ex-date 10-27 CNXT - Conexant 2:1 10-29-99 ex-date 11-01 MFITX- Monument Net 3:1 11-01-99 ex-date 11-02 DNA - Genentech 2:1 no date set GIS - General Mills 2:1 11-08-99 ex-date 11-09 JAKK - Jakks Pacific 3:2 11-10-99 ex-date 11-12 KING - King Pharm 3:2 11-11-99 ex-date 11-12 PHCM - Phone.com 2:1 11-12-99 ex-date 11-15 SEBL - Siebel Systems 2:1 11-12-99 ex-date 11-15 EMLX - Emulex 2:1 11-18-99 vote to aprove VRTS - Veritas 3:2 11-19-99 ex-date 11-22 OCLI - Optical Coating 2:1 11-30-99 ex-date 12-01 ADVP - Advance Paradigm2:1 11-30-99 ex-date 12-01 SUNW - SunMicro 2:1 12-07-99 ex-date 12-08 AGN - Allergan 2:1 12-09-99 ex-date 12-10 XLNX - Xilinx 2:1 12-27-99 ex-date 12-28 JDSU - JDS Uniphase 2:1 12-29-99 ex-date 12-30 For a complete list of all the coming splits check out the "split calendar" on the side of the online edition newsletter page. ******************** THE PLAYS OF THE DAY ******************** With all the great plays each week we can never decide on just one so take your pick. Call plays of the day: ********************** SEBL - Siebel Systems Inc $96.50 (+11.38) See details in sector list Chart = http://quote.yahoo.com/q?s=SEBL&d=3m **** GMST - Gemstar International Group $81.88 (+6.44) See details in sector list Chart = http://quote.yahoo.com/q?s=GMST&d=3m Put play of the day: ********************** PBI - Pitney Bowes Inc. $46.50 (-9.50) See details in put list Chart = http://quote.yahoo.com/q?s=PBI&d=3m **** EXDS - Exodus Communications $73.69 (+8.75) See details in put list Chart = http://quote.yahoo.com/q?s=EXDS&d=3m ************* DEFINITIONS ************* SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. TP/P= True premium or Time premium RRR = Risk/Reward/Ratio ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume MTD = Move to double - amount stock must move to double option price in one week. ONE WEEK MOVE ONLY ! Numbers within ( ) are the amount of change for the week. Numbers within ( ) may be designated with PxW, like P3W, prior 3 weeks The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. *********** CALLS PLAYS *********** Hardware *********** DELL - Dell Computer Corp $39.88 (-2.94)(-2.69) 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 technical play we added on October 12th. After Intel missed its earnings by $0.02, we added DELL to our call list with the expectation that Intel would pull the hardware sector down and create a variety of buying opportunities. The strategy being to target shoot it at different levels of support between $38 and $44 and eventually ride up the sector's recovery. Well this week we got a bit more than we asked for. On Monday DELL warned of a 3Q earnings shortfall due to a 25% rise in chip prices and IBM stumbled a whopping 20% on Thursday keeping DELL in a tight stance between $38 and $40 just below its 10-dma ($42.19). Technically the stock has strong support here and from a historical perspective, buyers have usually stepped in at this level. Also on the bright side, trading volume continues to be robust and many analysts have restated their confidence in the company this week. CSFB did cut 3Q estimates to $0.17 from $0.20 and ABD AMRO also brought down its estimates to $0.18 from $0.20, but only to reflect the rising cost in chip components. Both firms however maintained their ratings, a Strong Buy and Hold respectively. Robertson Stephens reiterated a Long-Term Attractive and Hambrecht & Quist kept their Buy rating after the earnings warning. Bear Sterns was the only firm to downgrade DELL to an Attractive from Buy, but offered no comment on Tuesday. We see too much upside versus downside here and are keeping DELL our on call list anticipating a rebound. Remember, the company's earnings' date as of now anyway is scheduled for November 11th. BUY CALL NOV-35*DLQ-KG OI=11399 at $5.63 SL=4.00 BUY CALL NOV-40 DLQ-KH OI=29402 at $2.13 SL=1.00 BUY CALL NOV-45 DLQ-KI OI=45892 at $0.56 SL=0.00 High Risk! Picked on Oct 17th at $42.81 P/E = 53 Change since picked -2.94 52 week high=$55.00 Analysts Ratings 14-11-7-0-0 52 week low =$24.25 Last earnings 08/99 est= 0.17 actual= 0.19 surprise +11.8% Next earnings 11-11 est= 0.20 versus= 0.14 Average daily volume = 26.2 mln Chart = http://quote.yahoo.com/q?s=DELL&d=3m **** EMLX - Emulex Corp. $139.25 (+11.25) Emulex is all about easy access. The company designs three types of network connectivity products: network access servers, printer servers, and high-speed fibre channel products. The firm's network access servers enable remote access to WANs, while its printer servers connect directly to LANs (others usually connect to file servers), thus enhancing network performance. Its Fibre Channel products, such as the flagship LP7000 adapter, provide high performance interfaces for computer networks. Emulex sells its products to OEMs (71% of sales) and distributors (25% of sales). Sequent Computer Systems and IBM account for 12% of 11% of sales, respectively. It just does not get any better than this! At least until Friday afternoon rolled around. Last Sunday we picked EMLX for a number of reasons; great earnings, split announced, upgrades and the stock came through in a big, big way. On Monday EMLX opened down and took the typical amateur hour dip giving us an excellent entry point. Tuesday was quiet and then whamo! Wednesday the pad was dusted off, the ship fueled and the ignition button pushed. Emulex launched for a nice +11.25 gain by the closing bell and then jettisoned the fuselage for Thursday shoving it into space for another awesome +18.88! On Friday though our great space flight turned into the space station MIR and began falling apart. EMLX dropped $20 in 2 hours as the market got nervous over a potential earnings dud from CSCO. It was just a rumor but it hurt our momentum for EMLX. Emulex hit a new all time high of $161.75 before investors could not take it any longer and sold off into the close. The stock gave back $22.50 of its days gains which is a nice healthy profit taking. The closing price stayed $6.25 above previous resistance which shows strength. Volume maintained its strong pace. We expect higher stock prices for EMLX as the approaching shareholder meeting on Nov 18th takes place. This meeting is to approve the shares for another split. Once the shares are approved, they will set the ex-div date. From here look for a bottom before jumping aboard. These quick and painful dips are just that, quick. It is to be expected with the kind of gains we have encountered but any quick bottoming and start of a new up move is considered bullish and makes for good entry points. BUY CALL NOV-135*UMQ-KG OI=247 at $15.63 SL=11.75 BUY CALL NOV-140 UMQ-KH OI= 0 at $13.50 SL=10.00 New Strike BUY CALL NOV-145 UMQ-KI OI= 0 at $11.25 SL= 8.50 New Strike Picked on Oct 17th at $128.00 P/E = 76 Change since picked +11.25 52-week high=$161.75 Analysts Ratings 2-4-0-0-0 52-week low =$ 6.00 Last earnings 07/99 est= 0.14 actual= 0.19 surprise=+35.7% Next earnings 01-31 est= 0.18 versus= 0.05 Average daily volume = 380 K Chart = http://quote.yahoo.com/q?s=EMLX&d=3m *************** Internet *************** AMZN - Amazon.com $78.63 (+3.56)(-14.19) 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! We switched AMZN from a put play to a call play on Thursday in anticipation of an earnings run, which appeared to have begun then. (Earnings are scheduled Wednesday, October 27 after the bell.) While we still expecting it to happen, Friday's move caused beads of sweat to form on our foreheads. Volume has been only 60%-70% of the ADV all week, indicating a real lack of investors' conviction for this issue. Even so, AMZN popped up to over $83 on Friday's open, then settled back to the $81-$82 range for most of the rest of the day. All's well, right? Nope. In the last half-hour of trading on Friday, volume gradually increased, harpooning AMZN for a $2.13 loss at $78.63. It wasn't just an AMZN problem - the whole market took a hit, perhaps portending a rough Monday. Remember we noted though that support was in the $77 range, representing a target shooting opportunity so long as the rest of the market cooperates. There is much stronger support at $75, which will yield the greatest return if you can get filled at a BOUNCE from this level. Of course, you run the risk of not getting filled at all. However, given the shakiness of Friday's close, we're inclined to look for the lower entry. Plan to be out before the announcement so you don't get torpedoed after earnings. Did we mention to confirm market direction before taking a position? In the news, AMZN is suing Barnes and Noble.com for a patent infringement of its "1-Click" technology, which allows shoppers to buy without re-entering billing information for every purchase. Given that any software engineer can write any code to do the same thing, it seems unlikely that AMZN will gain much from the action. BUY CALL NOV-75*YQN-KO OI=6500 at $8.50 SL=6.50 BUY CALL NOV-80 YQN-KP OI=5782 at $6.00 SL=4.25 BUY CALL NOW-85 YQN-KQ OI=5193 at $4.13 SL=2.50 Picked on Oct 21st at $80.75 P/E = N/A Change since picked -2.13 52-week high=$110.62 Analysts Ratings 11-7-4-0-0 52-week low =$ 16.50 Last earnings 07/99 est=-0.25 actual=-0.25 Next earnings 10-27 est=-0.28 versus=-0.08 Average Daily Volume = 12.4 mln Chart = http://quote.yahoo.com/q?s=AMZN&d=3m **** TFSM - 24/7 Media Inc $45.44 (+4.81) They do business in the rapidly growing Internet advertising industry. 24/7 Media is an Internet advertising and direct marketing firm. The company generates revenues primarily by selling advertising and promotions for their Affiliated Web sites. TFSM customizes solutions to allow advertisers and direct marketers to tailor their advertising to reach a specified target market. They also provide sophisticated tracking and reporting functions for their Affiliated Web sites. Some of 24/7's more well known customers include Ameritech, Dell and Prodigy. 24/7 Media competes with some pretty heavy hitters including CMGI, Double Click, and Flycast Communications. The uptrend continued into the week's end for shares of TFSM. These kinds of plays can be tricky as the rumors and speculation surrounding the company come and go. A potential merger between TFSM and DoubleClick (DCLK) is what drew our attention to TFSM again. We still have been unable to substantiate any truth to the rumors but the chat rooms are full of them again. The fact that the stock has recovered from a pullback to the $34 area and seems to be moving towards its previous highs hasn't hurt either. Wednesday TFSM announced it had added 13 sites to its network and which seemed to have a positive effect on the price of its stock. Among the more notable additions were The Sporting News Online, FreeAgent.com and Phonefree.com. Technically with Thursday's move TFSM closed over its 10-dma at $42.94. Support for TFSM is near $44 and again at $42. Can the trend continue? At this point it would appear as though it probably can. Even though TFSM closed $1.44 higher on Friday, we would like to have seen a little better follow-through from Thursday's strong advance. If you entered this play Friday keep your stops close, as the rumors could die out again at any time. If you are considering a new play in TFSM confirm strength in the stock and the broader markets before entering a new position. The other catalyst here is an earnings run. TFSM is set to announce earnings during the second week of November. They may shed some light on all the rumors and investors will be anticipating that. Not to mention, investors are always looking for an upside earnings surprise. So look for these dips to jump in for the earnings run. BUY CALL NOV-40 BMQ-KH OI= 807 at $7.88 SL=$6.00 BUY CALL NOV-45*BMQ-KI OI= 967 at $4.88 SL=$3.25 BUY CALL NOV-50 BMQ-KJ OI=1386 at $3.00 SL=$1.50 Picked on Oct 21st at $44.00 P/E = N/A Change since picked +1.44 52-week high=$69.63 Analysts Ratings 6-3-0-0-0 52-week low =$ 5.00 Last earnings 08/99 est=-0.37 actual=-0.37 surprise=0% Next earnings 11-09 est=-0.61 versus=-0.50 Average Daily Volume = 639 K Chart = http://quote.yahoo.com/q?s=TFSM&d=3m ******** SOFTWARE ******** MACR - Macromedia $52.88 (-0.38) Software maker Macromedia offers cyber artists a host of Web publishing products, multimedia playback and graphics development tools and interactive learning products. While its Authorware, Director, and FreeHand products have traditionally brought in most of Macromedia's sales, its more recent products have enhanced its reputation as a leader in Web site design. AOL, Apple Computer, and Microsoft have incorporated into their products Macromedia's Flash graphics tool and Shockwave animation plug-in. Macromedia's entertainment Web sites feature interactive games, music, and chat rooms. The broader markets ended the week on a good note, bringing hope that positive momentum will continue into next week. As companies continue to report mixed earnings and inflation fears continue to haunt investors, it's questionable how the markets will react come Monday. With the Dow up 450 points and the NASDAQ up 85 points this week, its clear the markets are trying to recoup losses from earlier in the month. Our earnings play on MACR is trying to break its chains as well. We originally chose MACR as a call play for its technical strength and earnings run potential. Unfortunately, the technical side has fizzled since then, sending the stock into a stall mode. For a week now MACR has traded within the range of $51 and $54. Friday, once again, the stock settled in this comfort zone at $53. The kicker we're hoping will get us through this stall is the stock's earnings that will be announced on Oct 27th. We have a few days left before the announcement and expect the stock to make one last surge. With Internet stocks on the rise, see if MACR will break the resistance level at $55 and head to new highs. If the broader markets and MACR show convincing strength, buy the stock at its current level. If not, wait for a slight pullback to the stock's support level at $51-$52. Remember, confirm market direction before placing the trade. The latest news on MACR was released on Thursday. Robertson Stephens Managing Director and Senior Networking Software Analyst John F. Powers initiated coverage of Macromedia with a Buy rating. BUY CALL NOV-45 MRQ-KI OI=220 at $9.88 SL=7.00 BUY CALL NOV-50*MRQ-KJ OI=625 at $6.50 SL=4.75 BUY CALL NOV-55 MRQ-KK OI=266 at $4.25 SL=2.50 BUY CALL DEC-50 MRQ-LJ OI=100 at $7.88 SL=5.75 Picked on Oct 17th at $53.25 P/E = 101 Change since picked -0.38 52-week high=$55.31 Analysts Ratings 6-2-2-0-0 52-week low =$13.72 Last earnings 07/99 est= 0.14 actual= 0.15 Next earnings 10-27 est= 0.16 versus= 0.10 Average Daily Volume = 850 K Chart = http://quote.yahoo.com/q?s=MACR&d=3m **** VRTS - Veritas Software Corp $94.19 (+3.09) Veritas Software is the industry's leading enterprise-class application storage management software provider. They furnish storage management software for protection against data loss and file corruption, efficient file processing and network back-up. Veritas (Latin for "truth") has made its name by partnering with such technological heavyweights as Hewlett-Packard (HWP), Microsoft (MSFT), and Sun Microsystems (SUNW), all of which have licensed and embedded Veritas products in their operating systems. Its purchase of the network and storage management software group of the disk drive maker, Seagate Technology (SEG), doubled Veritas size and gave Seagate a 35% stake in the company. And the beat goes on! Upgraded recommendations and a new 52-week high plus a coming 3:2 split are making for a nice continuing play on this one. Since our recommendation last Sunday, VRTS has not disappointed. On Monday VRTS opened down and then took a nice dip to $79.44 giving us an excellent entry point. As the week progressed, VRTS put on some steam and had nice gains. On Wed. VRTS added +5.88 and Thurs. added another +2.81 closing right at resistance. On Friday, VRTS did not stop there as investors pushed the stock over the hurdle and held it into the close. This week we should see continued strides as VRTS prepares for a nice split run. The split is scheduled for Nov 19th so there is plenty of time for VRTS to build momentum to reach its last pre-split high of $107. Five more analysts have moved the stock to a Strong Buy and 4 more to moderate Buy. The next resistance level is around $100 so keep your stops set to lock in profits should VRTS decide to pull back before taking on its old high. Volume is keeping a steady pace above the average and there was no negative news last week to stifle the stock. Since its low on Monday, VRTS has added over $12 so investors could decide to lock in profits so we want to watch out for a change in sentiment. Nothing goes up in a straight line and we have had three up days in a row and could be due for a day or two of rest. If you get stopped out, look for an entry with a bounce off the 10-dma at $87.50. BUY CALL NOV- 90*VUQ-KR OI=414 at $8.88 SL=6.25 BUY CALL NOV- 95 VUQ-KS OI=284 at $6.25 SL=4.50 BUY CALL NOV-100 VUQ-KT OI=226 at $4.13 SL=3.00 BUY CALL DEC- 95 VUQ-LS OI= 44 at $9.12 SL=7.25 low OI Picked on Oct 21st at $92.94 P/E = N/A Change since picked +1.25 52-week high=$95.94 Analysts Ratings 6-10-3-0-0 52-week low =$19.38 Last earnings 10/14 est=0.17 actual= 0.21 Next earnings 01-28 est=0.19 versus= 0.12 Average daily volume = 1.94 mln Chart = http://quote.yahoo.com/q?s=VRTS&d=3m **** SEBL - Siebel Systems Inc $96.50 (+11.38) Siebel Systems designs, markets, and supports enterprise-class information systems focusing on customer service and call center software. The company's main software product, Siebel Sales Enterprise, is used globally by well-known clients such as Lucent Technologies, Glaxo Wellcome, and Prudential Insurance. Anderson Consulting owns 8% of the company and CEO and Chairman Thomas Siebel has a 28% stake. On Tuesday, October 19th SEBL announced better-than-expected earnings and a 2:1 stock split. Since then Siebel Systems' share price has sky-rocketed 13.8% and reached new heights along the way. 3Q profits more than doubled resulting from a 63% increase in software sales and higher revenues from maintenance and consulting. According to CFO, Howard Graham, the new Siebel 99.5 software designed for Internet-based sales, marketing and customer service "extended the ability of our software to capture all the customer information over the Internet" and since its release in June has played an important role in fueling the company's growth. The earnings' numbers topped analyst's estimate by $0.02 coming in at $0.27 p/s, a 93% gain since last year's $0.14 same quarter results. The 2:1 stock split announcement put a fire under SEBL and each consecutive day the stock set newer highs. The 52-week record now stands at $99.50 and with the split date just a few weeks away the investor's excitement is likely to elevate share prices even more in the near-term. The stock is scheduled to go ex- dividend after the bell on November 12th. After three days of impressive gains it's possible the stock may pullback to the 10-dma ($88.26) or even its firm support at $85 as a result of profit-taking. However, sometimes pre-split runs just go full steam ahead without taking a breather. So confirm direction next week and expect the possibility of having to look for an intraday bottom to get an entry into this play. As a result of the positive events surrounding the company, Banc of America Securities reiterated a Strong Buy rating and issued a 12-month price target of $110 for SEBL on Tuesday. The following day three more analysts came forward. Deutsche Banc Alex Brown and SoundView Technology reiterated their Strong Buy ratings while SG Cowen raised the 1999 fiscal earnings to $1.01 from $0.95 and the year 2000 to $1.34 from $1.20. BUY CALL NOV- 90*SGQ-KR OI=1300 at $10.00 SL=7.50 BUY CALL NOV- 95 SGQ-KS OI= 334 at $ 7.13 SL=5.25 BUY CALL NOV-100 SGQ-KT OI= 46 at $ 4.75 SL=3.00 low OI BUY CALL DEC- 95 AGQ-LS OI= 206 at $ 9.75 SL=7.25 BUY CALL DEC-100 AGQ-LT OI= 36 at $ 7.13 SL=5.25 low OI Picked on Oct 21st at $94.88 P/E = 94 Change since picked +1.63 52-week high=$99.50 Analysts Ratings 9-6-0-0-1 52-week low =$18.25 Last earnings 09/99 est= 0.25 actual= 0.27 Next earnings 01-28 est= 0.27 versus= 0.20 Average Daily Volume = 1.66 mln Chart = http://quote.yahoo.com/q?s=SEBL&d=3m ******* Telecom ******* CMVT - Comverse Technology $104.81 (+9.56) Comverse makes enhanced telecommunications systems and is the 3rd largest firm in the voice mail market. Its TRILOGUE Infinity and Access NP product lines supply voice and fax messaging, automated personal assistant, and call answering services. TRILOGUE is marketed to telecom network operators and gives multiple telephone users access to integrated digital information and messaging services. Comverse's AUDIODISK and ULTRA lines are communications monitoring systems used by police and surveillance agencies, correctional institutions, emergency 911 services, financial institutions and tele-marketers. Day one of the play got off on the right foot as CMVT went up with the market and crushed the 52-week high set on Thursday. It topped out at $108 before settling just under $105 as the NASDAQ gave way to the late-day selling pressure. Let's recap why CMVT is a current call play. It is a split candidate that is on the runway for an earnings run. These are two of the stronger catalysts for a stock to rise. CMVT will finish up business for the quarter ending on Oct 31st and begin to tally up the profits which are to be reported on Nov 30th (we will confirm this date as it gets closer). You may also remember when we were playing this stock in early October. CMVT had an annual shareholder meeting to authorize more shares on Oct 8th. Sure enough it was approved but we didn't get a split announcement. That left the stock to consolidate during the rocky month of October before now breaking out over $100. But we remember the words of the CEO who said at the time of the shareholder meeting that a split would be considered in the coming weeks and months. Hmm, that coincides quite nicely with their date for an earnings report. This could be the reason for renewed interest as the bulls have come back to the market mid-week. Resistance is now set at the 52-week high of $108. Of course, this is going to be dependent on the stock market continuing to rebound. We may have some time for entry points as the real interest will come closer to earnings so watch for a dip to come aboard. In the news on Monday, First Albany analyst Herbert Tinger raised his price target for CMVT from $93 to $105. He also reiterated his Accumulate rating on the stock and cited new product developments as a positive catalyst. BUY CALL NOV-95 CQV-KS OI=478 at $12.13 SL=9.50 BUY CALL NOV-100*CQV-KT OI=583 at $ 8.13 SL=6.25 BUY CALL NOV-105 CQV-KA OI=124 at $ 5.13 SL=3.25 BUY CALL DEC-100 CQV-LT OI= 16 at $10.38 SL=7.75 low OI Picked on Oct 21st at $102.13 P/E = 57 Change since picked +2.69 52-week high=$108.00 Analysts Ratings 8-3-0-0-0 52-week low =$ 24.50 Last earnings 08/99 est= 0.49 actual= 0.52 Next earnings 11-30 est= 0.53 versus= 0.41 Average Daily Volume = 866 K Chart = http://quote.yahoo.com/q?s=CMVT&d=3m CALLS CONTINUED IN SECTION FOUR ******************************* SEE DISCLAIMER IN SECTION ONE
The Option Investor Newsletter 10-24-99 Sunday 4 of 6 CALLS CONTINUED *************** QCOM - Qualcomm Inc $215.75 (+17.25)(-15.44)(+27.13)(P4W +23.44) Qualcomm develops and manufactures communications technologies and products. It's best known for its CDMA (code division multiple access) technology which is the industry standard for mobile communications. This technology and is used in cellular phones, wireless telephone system equipment, and satellite ground stations. QCOM also provides the trucking industry with a monitoring system call OnmiTRACS and is currently in a joint venture to develop a low-earth-orbit satellite communication system call Globalstar. They are also the #2 supplier of digital cell phones following Nokia. For the new readers just coming aboard, QCOM initially started off as a pure and simple momentum play that has provided us with ample profit opportunities. Since we first picked it on September 23rd the stock has made incredible advances topping over $30 at the stock's peak. Volume however has fluctuated to levels as low as 50% of it ADV but the momentum remained intact. Now the play has an added twist. Earnings are fast approaching confirmed to report on November 2nd (after the bell) and investor enthusiasm is becoming evident. On Thursday QCOM was showing signs of another run. The stock made a direct ascent from its near-term support at $190 and $200 to flirt with recent highs and advanced $13.38, or 6.6% to close at $215.69 that day. Banc of America went to the plate for QCOM and raised its target price to $240 from $200 citing 4Q sequential chipset orders are better-than-expected. On Friday QCOM came out of the gate strong reaching a pinnacle of $131.25 before stabilizing around $220 for the better part of the day. Some players did take a little cash off the table before the final bell but there were no signs of panic selling. It was just some old fashion profit-taking which is quite common after a stock hits a new 52-week high. Actually this is a blessing since QCOM's recent runs have been so fast and furious it was sometimes difficult to get a solid entry on the upswing. This slight pullback may be just what we need to get in on the play. Even still be prepared to target shoot for a daily low if there isn't a lull on Monday or Tuesday. Remember too, QCOM will report in just seven trading days on November 2nd. OIN never recommends holding of an announcement as the risk of decline is too strong so keep this in mind as you plan your strategy. BUY CALL NOV-210 AAO-KB OI=3392 at $18.50 SL=14.50 BUY CALL NOV-220*AAO-KD OI=2853 at $13.75 SL=11.00 BUY CALL NOV-230 AAO-KF OI=2090 at $ 9.78 SL= 7.25 Picked on Sep 23rd at $186.63 P/E = 334 Change since picked +29.13 52 week high=$225.75 Analysts Ratings 6-8-4-0-0 52 week low =$ 18.87 Last earnings 08/99 est= 0.63 actual= 0.75 surprise +19.1% Next earnings 11-02 est= 0.88 versus= 0.27 Average Daily Volume = 9.33 mln Chart = http://quote.yahoo.com/q?s=QCOM&d=3m ***** PCS - Sprint PCS $78.88 (+8.88)(-4.25) Sporting the largest of all digital wireless communications system built from the ground up, PCS is sprinting to become the dominant player in the wireless field with full use of Qualcomm's CDMA technology. Though formed with capital from Cox, TCI, and ComCast Cable companies, PCS's parent company, Sprint Communications (FON) bought out the others' interests, then issued a tracking stock (PCS) within the last year. PCS has garnered nearly 4.7 mln subscribers since its inception in 1995 to become the #6 wireless carrier in the country, with coverage of 170 mln people. MCIWorldCom (WCOM) in early October announced it would acquire Sprint (FON) in the largest merger ever in U.S. corporate history ($129 bln), with WCOM getting the crown jewel of wireless carriers in the deal. This is mostly a technical play with a good story to back it up. By the end of the year, PCS will have been the first to roll out Internet and e-mail service over its hand held phones, which will contain an Internet browser functional with Yahoo! and Ameritrade, with others to be added soon. While PCS actually missed their Q3 earnings numbers (actual -$1.31 vs -$1.23 est.), PCS added 720K new subscribers (18K more than estimated) last quarter and expects to add over 1 mln more in Q4. That's some incredible growth - and as far as we know, the fastest grower in the field, percentage-wise. Wall Street didn't blink at the earnings miss though. Instead it continued to award PCS higher value, which culminated in a close on Friday at a new high, completely unaffected by the afternoon sell-off just $0.13 from the high of a day. From a low of $68, PCS has been up the last 6 days in a row, which means it may be time for a bit of profit- taking. Also, technical pessimists may think it's due for a bounce south of previous resistance ($79). (Pessimists can be right too.) Actually, there is mild support at the $75-$76 range, which in our opinion is target shootable. Conservative types can wait for a clear move over $79.50 with volume to get in. Of course, you'll want to make sure the overall market has support too and is moving in your favor before taking a position. There is a real analyst tug-o-war going on here. In the last 3 weeks, here's what happened: Jeffries and Co. initiated coverage with a Hold; JP Morgan upgraded to a Buy; Morgan Stanley Dean Witter upgraded to a Strong Buy; DB Alex Brown downgraded to an Underperform; and Edward Jones issued a Buy rating. Price targets from MSDW and JPM are $88 and $90, respectively. BUY CALL NOV-75*PCS-KO OI=4176 at $6.25 SL=4.50 BUY CALL NOV-80 PCS-KP OI=1588 at $3.63 SL=2.00 BUY CALL NOV-90 PCS-KQ OI= 0 at $1.31 SL=0.75 Wait for OI Picked on Oct 24th at $79.88 P/E = N/A Change since picked +0.00 52-week high=$79.25 Analysts Ratings 4-9-7-0-1 52-week low =$12.75 Last earnings 10/99 est=-1.23 actual=-1.32 surprise=-7.8% Next earnings 01-20 est=-1.44 versus=-1.43 Average Daily Volume = 1.71 mln Chart = http://quote.yahoo.com/q?s=PCS&d=3m ************* Miscellaneous ************* KIDE - 4Kids Entertainment $60.00 (+0.88)(+8.88) 4Kids Entertainment is a vertically integrated entertainment based company. KIDE provides a wide range of services. KIDE designs, develops, and produces toys. It also handles international merchandise licensing media buying and planning, television distribution and production. KIDE is responsible for the licensing of World Championship Wrestling and the very popular Pokemon. The market made a strong rally on Friday but KIDE did not seem to be in much of mood to play. KIDE traded up to its $62 high of the day in early trading and then made a slow decline, hitting lower bottoms throughout the day and finally closing just $0.63 above the low for the day. Not to worry! KIDE looks to have set a higher support, making two bounces right around $59.50. KIDE also maintains quite a bit of support in the range of $57. Being that KIDE seems to be poking around a bit (pun intended), it is important to wait for confirmation of positive momentum. A good indication of this would be a breakthrough of KIDE's 52-week high, $64.88. Two things in KIDE's favor are, an upcoming earnings announcement (should be the week of November 11, we will confirm with the company next week) and the holidays looming just around the bend, where various Pokemon products are sure to grace the wish lists of children worldwide. There is no new news to report at this time. BUY CALL NOV-55 IUK-KK OI=537 at $11.13 SL=8.75 BUY CALL NOV-60*IUK-KL OI=267 at $ 8.38 SL=6.25 BUY CALL NOV-65 IUK-KM OI=300 at $ 6.13 SL=4.25 BUY CALL NOV-70 IUK-KN OI=210 at $ 4.25 SL=2.50 Picked on Oct 14th at $54.50 P/E = 38 Change since picked +5.50 52-week high=$64.88 Analysts Ratings 0-0-0-0-0 52-week low =$ 1.67 Last earning 08/99 est= N/A actual= 0.36 Next earning 11-11 est= N/A versus= N/A Average Daily Volume = 847 K Chart = http://quote.yahoo.com/q?s=KIDE&d=3m **** GMST - Gemstar International Group $81.88 (+6.44) Gemstar International Group makes video recording systems. They develop, market and license proprietary technologies and systems under the "VCR Plus+" name. Their VCR Plus+ system lets users program VCR's simply with one-to-eight digit codes published in TV listings worldwide. Gemstar's primary source of revenues are from licensing fees paid by consumer electronics manufacturers and publications for the licensing of the VCR Plus+ technology and the right to print the PlusCode numbers. Gemstar has signed long-term renewals of license agreements with Sony Corp, and Thomson Consumer Electronics. Recently they launched the system in Mexico, the 40th country in which VCR Plus+ programming is offered. This little gem is proving to be quite a star! Gemstar had a stellar day in the market on Friday, trading up over $4 during the day. GMST tested and held support right around $80.50 at two different points on Friday. This could make an excellent entry point on Monday, depending upon the market direction. GMST then made a good afternoon move, reaching higher highs and setting a new possible support at $82. GMST again had huge option volume on Friday, the largest gainer being the NOV-70 calls trading 2834 contracts, up $3.50. There seem to be a number of bullish indicators for GMST and therefore, we expect Gemstar to breakthrough the 52-week high of $88.50 with relative ease in days to come. Gemstar is set to announce earnings on November 2nd. That makes this an earnings run play as well which probably explains all of the recent activity. In fact, we are inclined to think that GMST has either beaten expectations or has some other positive announcement pending. This could explain the large amount of option volume that is uncharacteristic for GMST. Either way we are only here for the anticipation and don't recommend holding over earnings so make sure you have finished your play by Monday the 1st. We will be confirming the date this week. BUY CALL NOV-75 QLF-KO OI=2328 at $10.88 SL=8.75 BUY CALL NOV-80*QLF-KP OI=5821 at $ 8.25 SL=6.25 BUY CALL NOV-85 QLF-KQ OI= 458 at $ 5.38 SL=3.25 Picked on Oct 21st at $79.06 P/E = 119 Change since picked +2.81 52-week high=$88.50 Analysts Ratings 6-0-0-0-0 52-week low =$20.44 Last earnings 08/99 est= N/A actual= 0.17 Next earnings 11-02 est= 0.18 versus= 0.15 Average Daily Volume = 1.15 mln Chart = http://quote.yahoo.com/q?s=GMST&d=3m **** AMGN - Amgen Inc $81.13 (+0.38) Founded in 1980 by a group of scientists and venture capitalists, Amgen is a global biotechnology company. They discover, develop, manufacture and market human therapeutics based on advances in cellular molecular biology. Epogen, Neupogen and Infergen are three of Amgen's primary products currently being manufactured and marketed. AMGN currently budgets over one- fourth of its revenues for research and development. They have strategic research and marketing alliances with several companies including Hoffman-LaRoche, Johnson & Johnson, and Kirin. Located in Thousand Oaks, California AMGEN competes in the market place with Glaxco Wellcome, Merck, and Novartis. It is with great pleasure we welcome AMGN back to our play list. After suffering through an early summer drop, to the $52 area shares of the major drug company have been making their way higher since late June. Our main interest in AMGN at this time is two-fold. First they announced a 2:1 split to stockholders of record on November 5th. AMGN did peak around $90 earlier this month and dropped near the $77 area this last week. With less than two weeks until the scheduled split we are looking for shares of AMGN to begin a run back up towards the previous highs. They also reported 3rd quarter earnings Wednesday of $0.50 per share compared to $0.42 for the same quarter in 1998. Earnings came in $0.01 ahead of analysts estimates. Our other reason for considering AMGN at this time are due to recent developments in the treatment of Alzheimer's disease. Thursday researchers announced they have found a protein essential to the development of Alzheimer's and say that drugs similar to those that have helped subdue the AIDS virus might be used to treat the brain-destroying Alzheimer's scientists say that although such drugs may not be on the market for years, they believe their discovery gives them a target to aim for. With these recent developments, the 2:1 stock split, and good earnings we feel that AMGN could be poised to make a run to new highs. If you are considering a play in AMGN, look for continued strength in the broader markets, the drug industry and the stock itself. Consider your risk profile and confirm the direction of the stock itself prior to entering a new position. In other news this week AMGN received a downgrade from Lehman Brothers from a Buy to an Outperform. Cruttenden Roth initiated coverage of the drug maker with a Buy rating on Friday. BUY CALL NOV-75 AMQ-KO OI=1520 at $7.88 SL=6.00 BUY CALL NOV-80*AMQ-KP OI=2721 at $4.38 SL=2.75 BUY CALL NOV-85 AMQ-KQ OI=5507 at $2.00 SL=1.00 BUY CALL DEC-80 AMQ-LP OI=5548 at $6.50 SL=4.75 Picked on Oct 24th at $81.13 P/E = 44 Change since picked +0.00 52-week high=$90.06 Analysts Ratings 14-12-7-0-0 52-week low =$36.56 Last earnings 10/99 est= 0.49 actual= 0.50 surprise +2.4% Next earnings 01-28 est= 0.49 versus=-0.45 Average daily volume = 4.36 mln Chart = http://quote.yahoo.com/q?s=AMGN&d=3m **** WMT - Wal-Mart $57.06 (+6.25) Wal-Mart. Need I say more? Even if you have been living in the back woods under a rock with no other human contact, there is probably a Wal-Mart nearby that you have shopped at before. After all, it has become the American way (not to mention the Puerto Rican, Canadian, Argentinean, Chinese, and Brazilian way). Wal-Mart operates discount department stores as well as warehouse membership clubs (Sam's Club). Wal-Mart also operates a chain of Wal-Mart super centers, a combo grocery/ department stores where you can purchase everything from apples to zippers. You have just got to love earnings season! Wal-Mart finally broke through $55 on Friday, which is just what we were waiting for. WMT set a new 52-week high, trading up to $58, making a small bounce at $56 early on and moving up steadily throughout the day. WMT made another small bounce just below $57 before the close. The important factor here is going to be a confirmation of market direction early next week. With upcoming economic news, the market could roll over, in which case we would want to see a pull back and bounce from $55 before entering a new play. However, should the market continue on with its upward trend next week, it will be time to jump on the WMT earnings express and take a ride. WMT is set to report earnings November 9th, which we will be confirming with the company next week. Other than the fact that this is definitely an earnings run play, Wal-Mart has recently been receiving a great deal of attention for its Internet site, www.walmart.com. In a recent Forresters poll for the best electronic commerce sites, Wal-Mart's site was the runner up, second only to Amazon.com and noted as "a real contender" for its prompt delivery time and easy returns. This site will most likely have a positive impact on earnings too. (As if WMT needs any more help) In the latest monthly sales report, it was reported that Wal-Mart sales rose 26.4 percent to $15.66 billion over the year-ago period. BUY CALL NOV-50 WMT-KJ OI= 6672 at $7.63 SL=5.75 BUY CALL NOV-55 WMT-KK OI=11667 at $3.50 SL=1.50 BUY CALL NOV-60 WMT-KL OI= 1205 at $1.13 SL=0.00 High Risk! BUY CALL DEC-55*WMT-LK OI=11730 at $4.50 SL=2.75 Picked on Oct 14th at $57.06 P/E = 51 Change since picked +0.00 52-week high=$58.00 Analysts Ratings 5-14-5-0-0 52-week low =$31.38 Last earnings 07/99 est= 0.28 actual= 0.31 Next earnings 11-09 est= 0.28 versus= 0.35 Average Daily Volume =5.63 mln Chart = http://quote.yahoo.com/q?s=WMT&d=3m PUTS, PUTS, PUTS ***************** Put plays can be very profitable but have a larger risk than call plays. When a stock is falling the entire investment community (except the shorts) is hoping it will reverse and start back up. The company management is also doing everything they can to shore up their stock price. The company issues press releases, brokers talk it up, analysts try to put a positive spin on everything. Then of course there is the death knell, the "buy recommendation" simply because the price has dropped to some level that analysts feel attractive again. Buyers who like the stock wait until it appears a bottom has been reached and then jump on it in a feeding frenzy. They may already have a large position and are averaging down. Many factors can stop a free falling stock in mid drop. **** CI - Cigna Corp. $65.81 (-2.69) 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. Cigna has been going down since mid-September and has given no indication of slowing down. There is good reason for the decline as well. Their business is rooted in two of the weak sectors in the market, Healthcare and Insurance. Even the rallies from Thursday and Friday in the markets did little to curb the slide. CI ran into a wall of resistance at $66 on Friday which lends itself to entry points if we can confirm the trend on Monday. This trade is based on solid entry points and taking advantage of the technical patterns that CI routinely provides. From here CI should roll back down to $64 to test the support created on Thursday. If it is like all the other short-term support lines of the past 3 weeks, it won't hold and the stock will head lower in search on new support. Cigna was shy of news to factor in this week but we will be watching for further signs of deterioration in the sector to fuel the new lows we anticipate. Insurance is in a rut due to worries over Y2K damages and legislation while Healthcare is falling over concerns that the lawyers involved with the historic Tobacco lawsuits are teaming up against HMOs. So keep an ear to the newswires for new developments. We expect the market to rollover this week and take CI with it. BUY PUT NOV-70 CI-WN OI= 43 at $6.13 SL=4.25 low OI BUY PUT NOV-65*CI-WM OI=150 at $2.38 SL=1.25 Average Daily Volume = 918 K Chart = http://quote.yahoo.com/q?s=CI&d=3m **** CMGI - CMGI Inc $103.13 (+5.31)(-14.69) 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. The bell-weather Internet stocks like CMGI held up for most of the trading day on Friday with it trading as high as $106.22, but succumbed in the afternoon trading to selling pressure in the sector due the poor earnings report from INKT. CMGI closed the trading day at $103.13, well off the intraday highs and also below a major support level of concern at the $104.25 level. CMGI was also flying high in early morning trading because of their 89% ownership in Navisite which went public on Friday. Navisite is an Internet application service provider that ended the day positively. The interest in the IPO was its connection to CMGI. We cautiously remain in this play, but until strong momentum and strong volume converge to close the shares above current overhead resistance levels near $104.50, we will stick with it. If you have not been stopped out, keep trailing stops tight. Current support still sits at the $103 level. BUY PUT NOV-105*GCB-WA OI= 603 at $7.88 SL=6.25 BUY PUT NOV-100 GCB-WT OI=1368 at $5.13 SL=3.38 Average Daily Volume = 4.9 mln Chart = http://quote.yahoo.com/q?s=CMGI&d=3m **** LTR - Loews Corporation $65.94 (-2.12) Diversified holding company Loews Corporation's main interest is insurance, through publicly traded subsidiary CAN Financial. other holdings include tobacco (the Kent, Newport, and True US cigarette brands, through litigation-addled subsidiary Lorillard Tobacco Company); 15 hotels in the US, Canada, and Monaco (through subsidiary Loews Hotels); watchmaker Bulova; and contract oil-drilling subsidiary Diamond Offshore Drilling, which operates 46 oil rigs. The company also owns a minority stake in fiber optic company Global Crossing. After the carnage of Tobacco stocks this week, they got a little bounce on Friday, along with the rest of the overall market. Bargain and value players stepped in to the tobacco stocks after R.J. Reynolds Tobacco Holdings Co. reported there earnings which beat expectations. We believe that this was a bounce that will not have very much follow through for the stocks like LTR in the tobacco group. It was reported last week that on Nov 1st a jury will decide on the class action suit against the industry that could lead to an estimate $300 billion in punitive damages. Gone are the days when the tobacco companies will be protected from punitive damages in lawsuits. That is negative news and ahead of the ruling we believe the stocks will continue to suffer. From a technical standpoint the shares of LTR did not break any major overhead support levels, which currently sits at the 71 level. If the turnaround is for real these levels will be violated. Going forward we expect the pressure to the downside to resurface, confirm the strong momentum and volume pressure to the downside before entering a new position. The downtrend clearly is still in place. $70.50 is our current resistance point. BUY PUT NOV-70*LTR-WN OI=56 at $3.50 SL=1.75 BUY PUT NOV-65 LTR-WM OI=95 at $1.38 SL=0.69 Average Daily Volume = 241 K Chart = http://quote.yahoo.com/q?s=LTR&d=3m **** EFII - Electronics for Imaging $37.13 (-8.38) 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. Electronics for Imaging rallied slightly with the market on Friday, though not enough to indicate a reversal of EFII's downward trend. EFII maintained a rather tight trading range throughout the day with volume just slightly higher than average. EFII did close near the low of the day and should the market pull back on Monday, which we are looking for it to do, we expect that it will take EFII along with it. Again we reiterate watching the support levels. EFII has strong support set at $35 and as we mentioned in Thursdays write up, a breakthrough of this level would be a very bearish indication and a solid entry point. EFII has no news to help lift the dark cloud looming overhead so it looks as though the rather bleak Q4 forecast remains. The NASDAQ in general may have a few rough sessions ahead as companies such as Cisco Systems report earnings in upcoming weeks. BUY PUT NOV-45 EFQ-WI OI=199 at $9.13 SL=6.75 BUY PUT NOV-40*EFQ-WH OI=286 at $5.25 SL=3.25 Average Daily Volume = 840 K Chart = http://quote.yahoo.com/q?s=EFII&d=3m **** EXDS - Exodus Communications $73.69 (+8.75) EXDS offers services that let businesses outsource the management of their Internet sites. Exodus has thirteen Internet Data Centers where clients store their servers in secure vaults. In addition to providing storage space, the company furnishes services such as maintenance and network connections. Its clients include CBS Sports, eBay, and MSN Hotmail. Exodus is expanding its geographic penetration and security services offerings through acquisitions. Well, it's time to take advantage of the recent rise in stock prices by betting on the downside. Of course this does not apply to all stocks, but one in particular, EXDS. The stock had a recent string of good luck, which has catapulted the stock from recent lows of $60 to Friday's intraday high of $80.94. The stock has benefited from a ratings upgrade following a 367 percent jump in its third quarter revenue. Jeffrey Camp, an analyst at Morgan Stanley Dean Witter, raised his rating to a Strong Buy from an Outperform rating, with a price target of $120 per share. News concerning increased revenues is definitely worth a hoot and holler, but not to the extent the stock has recently undergone. We're not the only one's that feel this way, which was shown by Friday's trading session on EXDS. After trading as high as $80.94, investors were not willing to hold the stock and sold off their positions, closing the stock only fractionally higher for the day. The reason investors are hesitant to hold the stock is because of its recent earnings report that was very lack luster. The company reported a loss of 29 cents a share, before charges, vs a year- earlier net loss of 23 cents per share. With these types of earnings, an upgrade can only take you so far. We believe Friday's trading was the beginning of a turnaround for the stock. When placing trades, look for entry points at the stocks current trading level, the stock closed near its low on Friday. The closest support level is $60, which is where the stock traded before the upgrade. Let's see if the stock will return back to these levels from earlier in the week. The nearest resistance is $75, which was a stall level for the stock during the month of September. Look for more profit- taking in the near-term, returning the stock back to its lower levels. BUY PUT NOV-75*EXF-WO OI= 180 at $7.50 SL=5.75 BUY PUT NOV-70 EXF-WN OI=1740 at $4.88 SL=3.25 Average Daily Volume = 3.50 mln Chart = http://quote.yahoo.com/q?s=EXDS&d=3m **** PBI - Pitney Bowes Inc. $46.50 (-9.50) Pitney Bowes is meter made. The world's largest producer of postage meters, the company also makes other mailing equipment, copiers, and fax machines and provides shipping and weighing systems. Pitney Bowes also offers financing for office equipment purchases, and its Capital Services division finances other companies purchases of office equipment. Focusing on the untapped small and home office markets for its sales, it offers Postage by Phone service and is developing e-postage (stamps that can be downloaded from a PC). PBI shares were trading at yearly lows last week after reporting earnings that actually rose by 21 percent above the expectations. Wall Street reacted very unkindly after some analyst raised questions about its performance going forward. This had the shares continuing the downtrend that began back on Oct 12th. The shares consistently have traded at lower lows, ending the week just above its new 52-week low at $46.50. To be more specific Salomon Smith Barney expressed concern about the quality of the earnings, which the firm said were achieved in part through lower-than-normal taxes and research and development spending. Revenues were also weaker than expected. At the beginning of this month the shares of PBI traded as high as $63.81, now after this weeks earnings report sell-off it sits at $46.50, that is over 17 points off of the highs. This is a drastic move in a short period of time that is backed by strong volume and selling pressure which shows no signs of letting up. The downtrend must be confirmed before entering a new position, because the stock is oversold, but as long as volume stays strong in favor of the sellers, the carnage is not over. The lower lows also confirm that as well. Current support sits at the 52-week low of $46.38, resistance is at the $49 level. BUY PUT NOV-50*PBI-WJ OI=285 at $4.50 SL=2.75 BUY PUT NOV-45 PBI-WI OI= 10 at $1.81 SL=0.88 Average Daily Volume = 828 K Chart = http://quote.yahoo.com/q?s=PBI&d=3m PUTS CONTINUED IN SECTION FIVE ******************************* SEE DISCLAIMER IN SECTION ONE
The Option Investor Newsletter 10-24-99 Sunday 5 of 6 PUTS CONTINUED *************** BAC - Bank of America Corporation $58.75 (+10.56) It is amazing what $43 billion will buy. For Bank of America Corporation (the holding company, formerly Named BankAmerica Corporation, resulting from NationsBank's merger with BankAmerica), that sum bought the #1 bank ranking, plus bragging rights as the US's first coast to coast bank. The combined firm has about 11,500 branches in 47 states in almost 40 countries. Bank of America is headquartered in North Carolina. The firm offers consumer, commercial, and global corporate banking, commercial, real estate; investment and brokerage services, insurance, and mutual funds. U.S. financial services stocks as well as major money center banks, rallied sharply on Friday as Washington prepares to pass a historic bill allowing banks, brokers and insurance companies to enter one another's business. On Friday Congress and the Clinton administration reached a historic agreement to reform U.S. banking laws, which dated back to the Depression era. Jefferson Pilot may make an attractive target for a bank and already has a close relationship with Bank of America Corp. After reporting earnings last Monday that came in better than expected, an overall market bounce, and the positive news in the sector had the shares of BAC up almost 11 points for the week, backed by strong volume and momentum. So why are we bearish? I'm glad you asked. In current market conditions with this recent price surge, and as prices continue to react violently behind any major economic news that does not come in favorable, financial stocks will be in trouble. We will focus in this week on two reports: U.S. gross domestic product (GDP) and the Employment Cost Index, both to be released on Thursday. Both reports are anticipated to come in stronger than expected, and that should be enough to send bond yields higher, which is bearish for financials. From a technical standpoint for the stock of BAC, the downtrend that was fully in place has now turned around, and the shares sit right at the 50-day moving average near $58. An uptrend is in the beginning stages so be careful to look to enter the play after the buyers have vacated. Look for the momentum to change directions and resume the downtrend ahead of the economic data. Current overhead resistance sits at the 50-dma mentioned above and support sits way down at $55. BUY PUT NOV-65*BAC-WM OI= 859 at $7.00 SL=5.25 BUY PUT NOV-60 BAC-WL OI=2880 at $3.25 SL=1.69 Average Daily Volume = 4.4 mln Chart = http://quote.yahoo.com/q?s=BAC&d=3m ***** JPM - J.P. Morgan Inc $117.19 (+19.13) J.P. Morgan, one of the top international banking companies, offers a wide variety of commercial banking and investment services, including investment banking; brokerage services; asset management for institutions, corporations, and the proprietary investing, including direct equity investments in companies. J.P. Morgan is reinventing itself by making a transition from traditional commercial banking to investment banking. The company has a strong overseas presence, with more than half of the sales originating from outside the US. The company's sole presence in the consumer market is its 45% interest in American Century Investments, which offers a variety of mutual funds. A put?? It ran up +8.44 on Friday! They reported nearly triple gains for last quarter? The markets are poised to launch? The...We know, we know, but J.P. Morgan has been on the slippery slope all week and Friday was, in our opinion, a fluke for the financials. We still believe the outlook is bleak in the light of a coming interest rate hike. The bond yields are climbing and there are more financial companies reporting this week so we are not buying into this potential bear trap. We feel this price range is an entry point for a nice short-term profit. Looking at the charts, you will find resistance at $130 and support is at $104. JPM is within $5 of resistance and if that proves to be the top, it will make for a nice entry and profit when the stock turns and runs. Keep an eye on the bond market as there lies the evidence of weakness for equities. As the bond yield stays above 6.25% and climbs towards the magic number of 6.50%, many investors will flee stocks for the safety of bonds. If there are bad reports this week in the financial sector, JPM will get caught in the down draft. It is almost a given that Greenspan will take back the final .25 point and with all the other things mentioned above this will be the last nail in the coffin for the financials to fall fast and hard. J.P. Morgan is one of the biggest and most widely held in the sector, so it stands to reason they will take the brunt of any sell off. Stand ready to enter this trade on any sign of weakness next week. The Federal Reserve is set to meet on November 16th and the tone is for the inevitable rate hike. BUY PUT NOV-130 JPM-WF OI= 48 at $8.13 SL=$6.00 low OI BUY PUT NOV-125*JPM-WE OI=324 at $5.13 SL=$3.75 Average Daily Volume = 1.08 mln Chart = http://quote.yahoo.com/q?s=JPM&d=3m ************************ SPREADS/STRADDLES/COMBOS ************************ A Great Way To End The Week! Friday, October 22, Blue-chips stocks continued their recent rally on Friday as banks and financial issues led the market higher. The Dow gained over 172 points to end at 10,470. For the week, the index was up 450 points, its best five-day gain since July. The technology-laced Nasdaq composite rose 14 points to 2,816 while the S&P 500 index added 18 points to 1,301. In the broader market, advancing issues outnumbered declines almost 2 - 1 on active volume of 956 million shares on the NYSE. Thursday's new plays (positions/opening prices/strategy): Data Broadcasting DBCC DEC10C/NOV12C $1.88 debit diagonal MessageMedia MESG DEC10C/DEC12C $1.38 debit bull-call Anesta NSTA JAN12C/DEC12C $0.31 debit calendar Our new candidates performed favorably during Friday's rally and all three positions were available at or near the suggested entry prices. NSTA traded in a small range for most of the morning and the spread debit remained at $0.38 until 10:00 am. MESG was up at the open and the option premiums inflated with the rising market. The best observed entry price was slightly higher than our target. DBCC was the most productive issue, up almost $1 in the first few minutes of trading with plenty of movement to achieve a favorable opening debit. Portfolio plays: The market rallied again today as earnings reports continued to dominate corporate news. Overall, earnings have been favorable and most companies are posting double-digit gains in the third quarter. Next week the onslaught continues as a number of other Dow components will take their turn at the corporate version of Russian Roulette. Some of the issues in our long-term portfolio have fared poorly in the earnings game. Polaroid was one of the most recent failures, having fallen to the bottom of this year's range after a mediocre report. On Monday, Exxon (XON) will try it's hand at pleasing analysts and investors alike. We expect a favorable announcement (due to the rise in crude oil prices) but at the same time, a post-earnings drop will most likely follow. There were two big movers in the LEAPS/CC's portfolio today; one that was favorable and the other catastrophic. Lets discuss the bad news first. The price of Biogen (BGEN) shares fell over $8 following the company's announcement that it was halting several Phase II trials of an antibody-based drug, Antova. The new drug was being tested for treating hemophilia, multiple sclerosis, and diabetes. Biogen said that it was working closely with the FDA on reviewing the data and determining when trials could be resumed. In reaction to the news of the canceled trials, many of Wall Street's analysts downgraded the stock and dropped their price targets. In our case there was nothing to do but close the position and look for a new drug issue to balance the industry selection in our long-term portfolio. The good news is that our old favorite Motorola (MOT) moved up to a recent trading range with a $5 rally on news that rival company Ericsson, the world leader in mobile systems and third largest mobile phone maker, posted solid earnings and forecast exponential growth for the industry. MOT had previously reported a 90% increase in wireless phone orders and the company expects to gain a larger share in the handset market. New phone models being introduced will also help maintain that momentum over the next several quarters so there is hope for growth in the stock price. The best performers in the calendar spreads section were new positions. Price Communications (PR) climbed $1.31 to $27 as speculation continued with the earnings date approaching and Talk.com (TALK) moved $0.88 higher on growing buying pressure from the recent upgrade. Wells Fargo (WFC) is the only issue in that portfolio that is moving in the wrong direction; up with the financial stocks after the government prepared to pass a historic bill allowing banks, brokers and insurance companies to merge their industry. The debit spreads are once again outperforming the rest of the section as stocks like CMG Incorporated (CMGI), Gemstar (GMST), Global Crossing (GBLX), JDS Uniphase (JDSU) and QualComm (QCOM) ove higher with the technology group. Our sole bearish issue, The Limited (LTD), is also safely ITM. The stock price is now holding comfortably in the $40-$42 range and we expect it to remain below resistance near $46 for the next few weeks. The put-debit spread on Dell Computers (DELL) was closed earlier in the week for a favorable profit. Questions & comments on spreads/combos to ray@OptionInvestor.com ********* NEW PLAYS ********* AWRE - Aware Incorporated $31.00 *** New Life With Intel *** Aware designs, develops and markets telecommunications software, chipsets and modems which incorporate ADSL technology and also increase the speed of communications over conventional copper telephone lines. The company's products are designed to allow telephone companies to utilize their installed bases of copper lines to provide both residential and business customers with interactive data transmissions at speeds much higher than currently available. The price of Aware stock rocketed higher last week after the company announced that semiconductor giant Intel Corporation (INTC) would license its telecommunications technology. Aware was up over $13 on news that Intel would use their software in its DSL, or digital subscriber line, product offerings which allow for high-speed Internet access over telephone lines. One analyst said the Intel deal gives Aware the inside track on a potentially huge consumer market for high-speed data access. An AWRE spokeswoman said the company generally receives up-front licensing fees and contract engineering revenues along with per unit royalties in these situations. Under the agreement, Aware will provide Intel with full-rate ADSL, a consumer product that allows users to send and receive data at speeds up to 20 times faster than a normal phone connection over copper wires. Aware is also scheduled to release third quarter earnings on Monday, and the company is expected to meet analyst estimates of $0.05 per share. We favor the new fundamental outlook for the company and the expensive front-month option premiums will allow us to open a conservative bullish position with plenty of time to achieve a favorable profit. PLAY (conservative - bullish/diagonal spread): BUY CALL JAN-30 WUQ-AF OI=377 A=$7.25 SELL CALL NOV-35 WUQ-KG OI=363 B=$2.75 INITIAL NET DEBIT TARGET=$4.25 ROI TARGET=50% INITIAL UPSIDE (BREAKOUT) ROI=17% Chart = http://quote.yahoo.com/q?s=AWRE&d=3m **** GTSG - Global Telesystems $23.00 *** Tele-Merger-Mania *** Global Telesystems is a provider of a broad range of telecom services to businesses, other telecom service providers and consumers in Russia, the Commonwealth of Independent States and Central Europe. The company's business activities consist of the ownership and operation of international long distance businesses, local access networks, cellular networks, and a domestic long distance business along with data networks and carriers' carrier networks. This is the newest of the merger candidates to find its way into the rumor mill after last week's news in The Street.com about the rising takeover sentiment in the telecom sector. The column referred to the news that more consolidation was in the works as British mobile-telephone company, Orange PLC (ORNGY) said it had been in meetings with German engineering & telecom group Mannesmann. One analyst commented that all these telecom companies are in sync as huge European monopolies and they are looking to expand. Options traders are participating in the new rumor speculation with increased activity in the front-month calls. Regardless of the reason for the interest, they have again provided us with a favorable premium disparity in the OTM positions. We are going to use the overpriced premiums to open a short-term volatility position in the form of a calendar spread. PLAY (conservative - bullish/calendar spread): BUY CALL DEC-27.50 GTQ-LY OI=0 A=$1.56 SELL CALL NOV-27.50 GTQ-KY OI=482 B=$1.06 INITIAL NET DEBIT TARGET=$0.38 TARGET ROI=50% Chart = http://quote.yahoo.com/q?s=GTSG&d=3m *************** TECHNICALS ONLY *************** This play is based on the current price or trading range of the underlying issue and the recent technical history or trend. The current news and market sentiment will have an effect on the position so review it carefully and make your own decision about the future outcome of the stock price. EDS - Electronic Data Systems $50.19 *** Recent Troubles *** Electronic Data Systems offers its clients a variety of services worldwide, including the management of computers, networks, information systems, information processing facilities, business operations and related personnel, providing to its clients advantages in cost-effectiveness, speed of implementation and state-of-the-art technology. Earnings are due next Thursday and it doesn't appear that many investors are confident about the outcome. The recent history of distribution reflects increased volume over the last month as institutions exited the issue in large quantities. The new downtrend may be broken as the stock price nears support at $47 but the well-defined neckline at $58 will offer a significant obstacle as it recovers. PLAY (conservative - bearish/credit spread): BUY CALL NOV-65 EDS-KM OI=37 A=$0.68 SELL CALL NOV-60 EDS-KL OI=1768 B=$1.25 INITIAL NET CREDIT TARGET=0.68 ROI=15% Chart = http://quote.yahoo.com/q?s=EDS&d=3m ********* STRADDLES ********* Today the financial and insurance company stocks surged after the White House and Congress agreed on a banking reform bill. The new law is expected to reduce the extended time involved with mergers in the finance business by repealing Depression-era laws meant to keep banks out of the securities industry. One of our positions that benefitted from this activity was Hartford Life (HIG) which soared to a midday high near $46. The stock was quickly upgraded by Salomon Smith Barney and with the new merger/acquisition fever in the insurance industry, this should be one to watch. Earnings are due Monday and that will add even more fuel to the fire. Two of the remaining short-term (Optionetics) straddles report quarterly earnings on Monday. Those issues are Union Carbide (UK) and Exxon (XON). UK had an excellent pre-announcement rally today and the position traded near $12.25 credit, a $1.75 profit for the one month straddle. Both plays are now in the suggested exit period and their final prices will be posted next week. Another position that is coming up to our recommended exit point is Avis Rent-A-Car (AVI). The DEC-22.50 straddle is currently trading at a $0.50 credit and we don't want to allow time value erosion to reduce our profit from the position. As you know, the highest increase in time decay for at-the-money options occurs in the last 30 days before expiration. Today's new candidates are from professional trader Tom Gentile. Tom did a great job educating OIN readers in this technique and if you would like to learn more about delta-neutral trading, as well as many other option strategies, then join him in the next round of OptionInvestor/Optionetics seminars. There are some new short-term segments including "trading on the earnings reports", "stock splits", and "momentum plays". Many of these techniques are also from Jim Brown's personal treasure chest of strategies and we invite you to learn from the top experts in the industry with satisfaction guaranteed. Find out more at: http://www.OptionInvestor.com/seminar/ ****************************************************************** NEW PLAYS These positions are based on the successful Optionetics method for straddles; Consolidating markets, inexpensive options and a probability of upcoming news or events. These three criteria will help you increase profits, while limiting risk on straddle positions. As with all candidates, review each play carefully and make your own decision about the future of the underlying issue. GNET - Go2net, Inc $55.88 *** Internet Volatility *** Go2net is an interactive technology company that operates a group of Web sites and develops software. The company focuses on utilizing innovative technologies to deliver its content and to enhance the attractiveness and utility of its product offerings. They are focused on developing latency-tolerant multi-user board, card, trivia, party, and simulation games, as well as chat, messaging and bulletin boards. The company also plans to develop certain proprietary, original games based on the PlaySite technology. PLAY (aggressive - neutral/debit straddle): BUY CALL JAN-55 GQI-AK OI=72 A=$9.88 BUY PUT JAN-55 GQI-MK OI=116 A=$8.75 INITIAL NET DEBIT TARGET=$17.50-$17.75 Chart = http://quote.yahoo.com/q?s=GNET&d=3m **** EBAY - EBay Inc $142.62 *** King Of The Auctions *** EBay is the largest personal online trading community. Ebay created a new market: efficient one-to-one trading in an auction format on the Web. Individuals, not big businesses, use eBay to buy and sell items in more than 1,000 categories, including collectibles, antiques, memorabilia, computers, toys, beanie babies, dolls, figures, coins, stamps, books, magazines, music, pottery, glass, photography, electronics, jewelry, gemstones, and much more. These are seriously expensive options but one look at the chart and the recent (cheap) premiums makes them much more favorable from a probability viewpoint. PLAY (aggressive - neutral/debit straddle): BUY CALL JAN-145 QXB-AI OI=202 A=$20.50 BUY PUT JAN-145 QXB-MI OI=118 A=$21.62 INITIAL NET DEBIT TARGET=40.00-$41.00 Chart = http://quote.yahoo.com/q?s=EBAY&d=3m **** AOL - American Online $120.38 *** Cheap Options *** America Online is a provider of online services to consumers all over the world. The company offers subscribers a wide variety of services, including electronic email, conferencing, news, sports, weather, stock quotes, software, computing support and online classes. These services can be accessed from a range of personal computers using the company's proprietary software. This position is a probability play on the cheap prices (low implied volatility) in America Online options. Volatility is an important factor in pricing options and when the volatility is lower in the stock, it reduces the premium of the option. These specific options are near the 52-week lows in volatility and if AOL makes a large or sudden move in the next three to four weeks, the premiums will expand, providing an excellent opportunity for profit. PLAY (aggressive - neutral/debit straddle): BUY CALL DEC-120 AOL-LD OI=1457 A=$10.12 BUY PUT DEC-120 AOL-XD OI=240 A=$9.12 INITIAL NET DEBIT TARGET=$18.50-$18.75 Chart = http://quote.yahoo.com/q?s=AOL&d=3m SEE DISCLAIMER IN SECTION ONE *****************************
The Option Investor Newsletter 10-24-99 Sunday 6 of 6 COVERED CALLS ************* The Pre-January Effect... It's that time of the year to start thinking about the historical trading relationship between small-cap and large-cap stocks. Some experts refer to this phenomenon as the JANUARY EFFECT. The change is barely noticeable but generally the big-caps outperform smaller issues from mid-November to mid-December; due to profit taking in the lower priced stocks. As we move towards the New Year, many investors transition into the small-caps and the trend reverses. The historically strong performance of small stocks in the first few months of the year is well known and easily proven. The less obvious cycle in November and December is probably more profitable as the majority of traders don't use the trend to their advantage, thus leaving the effect intact for those that are aware of it's existence. Some of the analysts that participate in this strategy are debating whether or not the recent market decline has skewed the cycle for this year. Many refer to severe October declines in previous years which did not significantly affect the trend. The impressive performance of technology stocks over the last month support this theory. Some experts also believe the impending Y2K situation may affect the historical trend, but it appears that much of that issue has already been factored into the current pricing of the market. It is important to remember that throughout the history of the stock market there have been many lesser known trends that have perpetuated into well-defined cycles. If you hope to make money in the market, it's absolutely essential that you understand the importance of these historical tendencies. You must also learn to discern the broader, more technical movements in the market, in contrast to those produced by short-term emotional factors. Our economy also moves in identifiable cycles that precede bull and bear activity and you can't expect to be a successful investor until you correctly judge whether the current trend is a part of a primary wave (which is a bull or bear market cycle of several years' duration) or a short-term component of a secondary wave, which lasts from a few weeks to a few months. While no one has demonstrated the ability to spot the top of a bull market or the bottom of a bear phase on a consistent basis, it's important to be aware of these market tendencies and use that knowledge to your advantage. The key is to maintain a general perception of the overall condition of the market (and the economy) and adjust your portfolio and trading style accordingly. Good Luck! SUMMARY OF PREVIOUS PICKS Stock Price Last Mon Strike Opt Profit ROI Monthly Sym Picked Price Price Bid /Loss ROI SATH 11.06 10.31 NOV 10.00 2.31 *$ 1.25 14.3% 12.4% PILL 13.88 14.75 NOV 12.50 2.75 *$ 1.37 12.3% 8.9% ITIG 8.06 9.88 NOV 7.50 1.25 *$ 0.69 10.1% 8.8% ZIXI 33.00 33.13 NOV 25.00 9.88 *$ 1.88 8.1% 7.1% COOL 8.53 8.50 NOV 7.50 1.88 *$ 0.85 12.8% 6.9% RRRR 11.44 11.50 NOV 10.00 2.25 *$ 0.81 8.8% 5.5% PILT 12.69 12.50 NOV 10.00 3.38 *$ 0.69 7.4% 5.4% NPIX 23.25 23.75 NOV 17.50 6.75 *$ 1.00 6.1% 5.3% COOL 9.06 8.50 NOV 7.50 2.06 *$ 0.50 7.1% 5.2% BNYN 8.72 9.50 NOV 7.50 1.63 *$ 0.41 5.8% 5.0% ASMI 8.50 7.69 NOV 7.50 1.56 *$ 0.56 8.1% 5.0% PAIR 13.44 12.63 NOV 12.50 1.81 *$ 0.87 7.5% 4.6% DRYR 17.13 17.38 NOV 15.00 3.13 *$ 1.00 7.1% 4.4% MAPX 9.06 8.38 NOV 7.50 2.06 *$ 0.50 7.1% 4.4% EGGS 9.38 9.69 NOV 7.50 2.31 *$ 0.43 6.1% 4.4% NPIX 23.00 23.75 NOV 17.50 6.50 *$ 1.00 6.1% 4.4% GBLX 35.38 35.50 NOV 30.00 6.75 *$ 1.37 4.8% 4.2% NVDA 22.63 21.56 NOV 20.00 4.62 *$ 1.99 11.0% 4.0% NEM 23.25 24.81 NOV 22.50 2.25 *$ 1.50 7.1% 3.9% IRF 17.44 17.75 NOV 15.00 3.00 *$ 0.56 3.9% 3.4% BNBN 20.00 18.50 NOV 17.50 3.38 *$ 0.88 5.3% 3.3% PRGY 21.75 21.56 NOV 17.50 4.88 *$ 0.63 3.7% 3.2% ELON 8.91 7.25 NOV 7.50 1.88 $ 0.22 3.1% 2.3% LCBM 14.06 11.88 NOV 12.50 2.50 $ 0.32 2.8% 1.7% EGHT 5.00 4.25 NOV 5.00 0.88 $ 0.13 3.2% 1.7% CS 16.69 14.81 NOV 15.00 2.38 $ 0.50 3.5% 1.5% LCBM 14.88 11.88 NOV 12.50 3.00 $ 0.00 0.0% 0.0% BYND 15.13 10.13 NOV 12.50 3.38 $ -1.62 -13.8% 0.0% *$ = Stock price is above the sold strike price. Comments/Observations on Open Positions: Lifecore Biomedical (LCBM) dropped $2.18 Friday, after the FDA postponed the November 16 advisory panel meeting during which LCBM's Integral adhesion prevention solution was to be reviewed. The setback may be temporary as the FDA attempts to reschedule the meeting. The wide-ranging deal between Gateway and America Online appears to be weighing heavily on Beyond.Com Corp (BYND) and last week's extended website outage didn't help. You may consider exiting the play as the recent rally failed. Positions Closed: Youbet.Com Inc (UBET). NEW PICKS ********* Definitions: OI - Open Interest CB - Cost Basis (Price paid - Prem rec'd, the break-even point) RC - Return Called RNC - Return Not Called (Stock Price Unchanged) Sequenced by Company Stock Price Mon Strike Option Opt Open Cost RC RNC Sym Price Symbol Bid Intr Basis ABTL 15.13 NOV 12.50 UBL KV 3.13 50 12.00 4.2% 4.2% CNCX 26.50 NOV 22.50 QXF KN 5.25 1446 21.25 5.9% 5.9% LIPO 7.56 NOV 7.50 LPQ KU 0.75 638 6.81 10.1% 10.1% LTXX 15.19 NOV 15.00 UXT KC 1.25 910 13.94 7.6% 7.6% MRVT 11.38 NOV 10.00 SQD KB 2.13 28 9.25 8.1% 8.1% NPNT 22.13 NOV 17.50 NUP KW 5.25 233 16.88 3.7% 3.7% PILL 14.88 NOV 12.50 PQQ KV 2.88 801 12.00 4.2% 4.2% Sequenced by Return Not Called Stock Price Mon Strike Option Opt Open Cost RC RNC Sym Price Symbol Bid Intr Basis LIPO 7.56 NOV 7.50 LPQ KU 0.75 638 6.81 10.1% 10.1% MRVT 11.38 NOV 10.00 SQD KB 2.13 28 9.25 8.1% 8.1% LTXX 15.19 NOV 15.00 UXT KC 1.25 910 13.94 7.6% 7.6% CNCX 26.50 NOV 22.50 QXF KN 5.25 1446 21.25 5.9% 5.9% ABTL 15.13 NOV 12.50 UBL KV 3.13 50 12.00 4.2% 4.2% PILL 14.88 NOV 12.50 PQQ KV 2.88 801 12.00 4.2% 4.2% NPNT 22.13 NOV 17.50 NUP KW 5.25 233 16.88 3.7% 3.7% Company Descriptions ABTL - Autobytel.com, Inc. $15.13 *** Basing Formation? *** Autobytel.com is a branded Internet site for new and used vehicle information and purchasing services. On the site, consumers can research vehicles and connect with a nationwide network of 2,993 dealers to complete a purchase. Earlier this month, Autobytel.com launched the first online auction system; the most comprehensive automotive auction process to date, including new and used vehicle listings by both dealers and consumers, as well as classic car listings. Autobytel.com has now strengthened its position with the agreement to acquire A.I.N. Corporation, the owner of CarSmart.com, the third most visited online buying site for new vehicles. The stock appears to be forming a base with several positive technical divergences evident. With earnings due on Friday, we favor the cost basis just above the September low. NOV 12.50 UBL KV Bid=3.13 OI=50 CB=12.00 RC=4.2% RNC=4.2% Chart = http://quote.yahoo.com/q?s=ABTL&d=3m **** CNCX - Concentric Network $26.50 *** ISP Strength! *** Concentric Network provides complete, easy-to-use Internet business solutions for small- to medium-sized companies and customized Virtual Private Network and data center services for larger organizations. Concentric's portfolio of services for small to medium sized companies includes high-speed DSL access, Web hosting and e-commerce. For larger enterprises, the company offers dedicated Web hosting and data center services. Concentric came through with earnings, beating 3Q forecasts. Several brokerages initiated coverage as they believe that companies that provide the skills for other companies to use the Web offer high potential growth. The rally from the October low with heavy volume has moved Concentric back above its 150 dma as the technical characteristics strengthen. The cost basis is within the neckline of the just completed double bottom. NOV 22.50 QXF KN Bid=5.25 OI=1446 CB=21.25 RC=5.9% RNC=5.9% Chart = http://quote.yahoo.com/q?s=CNCX&d=3m **** LIPO - Liposome Company, Inc. $7.56 *** Eternal Hope *** Liposome is a biopharmaceutical company engaged in the discovery, development, manufacturing and marketing of proprietary lipid-and liposome-based pharmaceuticals, primarily for the treatment of cancer and other life-threatening illnesses. Remember LIPO? They took a tumble in September after the Oncologic Drugs Advisory Committee denied approval for its breast cancer drug Evacet. Liposome plans to address the issues raised by the ODAC and resubmit a new application by year's end. The chart is showing a reversal of selling pressure to buying pressure as investors gain new hope. Short-term speculation with a favorable cost basis. Quarterly earnings are scheduled for Tuesday. NOV 7.50 LPQ KU Bid=0.75 OI=638 CB=6.81 RC=10.1% RNC=10.1% Chart = http://quote.yahoo.com/q?s=LIPO&d=3m **** LTXX - LTX Corporation $15.19 *** Technicals Only *** LTXX designs, manufactures, and markets automatic test equipment for the semiconductor industry that is used to test system-on-a- chip, digital, analog, and mixed signal integrated circuits. The Company's newly introduced Fusion product is a single test platform that can be configured to test system-on-a-chip devices, digital VLSI devices including microprocessors & microcontrollers, and analog/mixed signal devices. Though they announced a public offering, the tape remains bullish as LTX is exiting a lateral consolidation to the topside. NOV 15.00 UXT KC Bid=1.25 OI=910 CB=13.94 RC=7.6% RNC=7.6% Chart = http://quote.yahoo.com/q?s=LTXX&d=3m **** MRVT - Miravant Medical $11.38 *** Stage I Base *** Miravant Medical is engaged in the research and development of drugs and medical device products for use in photodynamic therapy, a procedure which uses light-activated drugs to achieve selective photochemical destruction of diseased cells. Miravant's technical picture continues to improve as it has recently moved above its 150 dma. With coverage initiated earlier this month and a cost basis below the 150 dma, Miravant Medical offers favorable risk-reward speculation. NOV 10.00 SQD KB Bid=2.13 OI=28 CB=9.25 RC=8.1% RNC=8.1% Chart = http://quote.yahoo.com/q?s=MRVT&d=3m **** NPNT - NorthPoint Communications $22.13 *** More Technicals *** NorthPoint Communications is a national, facilities based provider of high speed, local data network services. NorthPoint's networks use digital subscriber line, or DSL, technology to transport data at guaranteed speeds up to 25 times faster than common dial-up modems. NorthPoint markets its network and data transport services to ISPs, broadband data service providers, and long-distance and local telephone companies. NorthPoint appears to be entering a stage I base as speculation increases on a possible buy-out or merger with Covad (COVD). Several agreements with iBEAM, High Speed Access Corp., and Pacific Bell Internet Services should help NorthPoint expand. With the successful test of the August low (above our cost basis), NorthPoint is a favorable candidate. NOV 17.50 NUP KW Bid=5.25 OI=233 CB=16.88 RC=3.7% RNC=3.7% Chart = http://quote.yahoo.com/q?s=NPNT&d=3m **** PILL - Proxymed Inc. $14.88 *** Buy-Out Rumors? *** Proxymed is a healthcare information systems company providing clinical and financial electronic data interchange transaction processing services to physicians and healthcare providers. The company offers various valued added clinical products that it believes differentiates itself from its competitors and are designed to increase physician usage. Why is everyone buying calls on Proxymed? There are rumors of merger or buy-out in the works. The technical pattern is bullish with support near our cost basis. We favor the more conservative ITM write to lower our cost basis on this speculative issue. NOV 12.50 PQQ KV Bid=2.88 OI=801 CB=12.00 RC=4.2% RNC=4.2% Chart = http://quote.yahoo.com/q?s=PILL&d=3m NAKED PUT SECTION ***************** More On Market Cycles.. This week we received an interesting question from one of our new subscribers regarding the possible effects of the upcoming election year. Presidential elections have always been a part of the wavelike advances and retreats of the broad market and understanding how they affect the long-term ebb and flow of aggregate stock prices are an essential component of successful investing. The current period offers an excellent opportunity to compare present cycles with past trends. Many historians thought that equity markets would continue to flourish in 1999 as there hasn't been a down year in the third year of a presidential term since the war-torn era of 1939. The only severe loss in a pre-presidential election year (since 1914) occurred just after the Depression in 1931. The four year presidential term has perpetuated a well defined stock market cycle. Most bearish trends occur in the first or second year after elections. Then the market improves because each new administration usually does everything in its power to boost the economy so that voters are in a positive mood for the next election. History suggests the winning streak will continue and that the market in pre-presidential election 1999 will gain ground before years end. Prospects improve considerably when the market has experienced a correction, or has spent a long period moving sideways, as it has in the last few months. It's no small coincidence that the last two years (the pre-election year and election year) of the 42 administrations since 1832 produced a total net market gain of over 700%, well above the 235% gain for the first two years of these administrations. The time spent in office also coincides with many significant historical events. Wars, recessions and bear markets tend to start or occur in the first half of the term while prosperous times and bull markets usually follow in the latter half. The complex facets of our economy that determine the overall financial health of the nation and key events that affect our country are anticipated by the emotion of the market. Any study that compares these historical events with the movement of the major indices will demonstrate how war, recession, and electing a president can influence the current cycle. These actions all have a profound impact on the economy and the stock market. It is important to become familiar with historically repetitive rhythms in the market and apply this knowledge as a practical part of your long-term investment strategy. Good Luck! *** WARNING!!! *** Selling naked-puts offers an attractive method of generating small profits on portfolio collateral but occasionally a company will experience catastrophic news causing a severe drop in the stock price. This may cause a devastatingly large loss which may wipe out all of your smaller gains. There is one very important rule; Don't sell naked puts on stocks that you don't want to own! It is important that you consider using trading STOPS on naked option positions to help limit losses when the stock price drops. Many professional traders suggest closing the position when the stock price falls below the sold strike or using a buy-to-close STOP at a price that is no more than twice the original premium from the sold option. SUMMARY OF PREVIOUS PICKS Stock Price Last Mon Strike Opt Profit ROI Monthly Sym Picked Price Price Bid /Loss ROI NVX 7.94 6.25 NOV 5.00 0.56 *$ 0.56 26.0% 16.2% ENMD 24.75 22.50 NOV 20.00 0.75 *$ 0.75 12.7% 11.0% NPIX 23.00 23.75 NOV 15.00 0.81 *$ 0.81 15.0% 10.8% NSPK 12.44 11.94 NOV 10.00 0.44 *$ 0.44 14.8% 10.7% DUSA 14.38 14.88 NOV 10.00 0.44 *$ 0.44 13.3% 9.6% NPIX 23.25 23.75 NOV 15.00 0.56 *$ 0.56 10.7% 9.3% LTXX 15.56 15.19 NOV 12.50 0.38 *$ 0.38 10.7% 9.3% SUPG 24.38 26.56 NOV 20.00 0.63 *$ 0.63 10.5% 9.1% KIDE 40.44 60.00 NOV 25.00 1.13 *$ 1.13 12.3% 8.9% NEWZ 9.47 10.94 NOV 7.50 0.31 *$ 0.31 14.1% 8.7% SPGLA 12.00 13.25 NOV 10.00 0.38 *$ 0.38 11.9% 8.7% VERT 39.75 62.44 NOV 30.00 1.25 *$ 1.25 13.6% 8.4% BNYN 9.91 9.50 NOV 7.50 0.31 *$ 0.31 13.5% 8.4% RMDY 29.00 34.75 NOV 22.50 0.50 *$ 0.50 7.9% 6.9% SUPG 22.50 26.56 NOV 17.50 0.56 *$ 0.56 11.1% 6.9% TALK 12.63 14.94 NOV 10.00 0.31 *$ 0.31 10.9% 6.8% ZOMX 34.63 32.50 NOV 25.00 0.69 *$ 0.69 9.1% 6.6% ZIXI 33.00 33.13 NOV 20.00 0.50 *$ 0.50 7.0% 6.1% LGE 22.44 22.25 NOV 20.00 0.56 *$ 0.56 7.9% 5.7% NPIX 19.13 23.75 NOV 12.50 0.38 *$ 0.38 9.0% 5.6% HRBC 17.00 20.06 NOV 12.50 0.31 *$ 0.31 8.4% 5.2% CPTH 44.19 42.00 NOV 30.00 0.56 *$ 0.56 6.0% 5.2% TGLO 16.50 11.50 NOV 12.50 0.75 $ -0.25 -6.2% 0.0% ARDT 27.75 18.88 NOV 22.50 0.38 $ -3.24 -52.0% 0.0% *$ = Stock price is above the sold strike price. Comments/Observations on Open Positions: Theglobe.Com Inc (TGLO) did not break $10 on a closing basis and rallied Friday. Earnings will be announced on October 28. Ardent Software Inc (ARDT) tanked unexpectedly after the earnings were reported and Barron's data showed insider selling. The breakdown in price was extreme and an early exit should be considered. NEW PICKS ********* Definitions: OI - Open Interest CB - Cost Basis (break-even point if put exercised) ROI - Return On Investment Sequenced by Company Stock Price Mon Strike Option Opt Open Cost ROI Opt Sym Price Symbol Bid Intr Basis Expired CNCX 26.50 NOV 20.00 QXF WD 0.44 271 19.56 7.7% DUSA 14.94 NOV 12.50 QDU WV 0.50 43 12.00 12.4% NPIX 23.88 NOV 15.00 XMQ WC 0.31 613 14.69 6.1% PRGY 21.63 NOV 17.50 PUY WW 0.50 137 17.00 10.0% SUPG 26.56 NOV 22.50 UQG WX 0.75 130 21.75 10.3% TALK 14.94 NOV 12.50 QQK WV 0.38 4211 12.12 9.7% TUTS 34.69 NOV 25.00 QSS WE 0.38 185 24.62 5.2% USIX 35.00 NOV 25.00 UUX WE 0.75 10 24.25 9.7% Sequenced by ROI Stock Price Mon Strike Option Opt Open Cost ROI Opt Sym Price Symbol Bid Intr Basis Expired DUSA 14.94 NOV 12.50 QDU WV 0.50 43 12.00 12.4% SUPG 26.56 NOV 22.50 UQG WX 0.75 130 21.75 10.3% PRGY 21.63 NOV 17.50 PUY WW 0.50 137 17.00 10.0% TALK 14.94 NOV 12.50 QQK WV 0.38 4211 12.12 9.7% USIX 35.00 NOV 25.00 UUX WE 0.75 10 24.25 9.7% CNCX 26.50 NOV 20.00 QXF WD 0.44 271 19.56 7.7% NPIX 23.88 NOV 15.00 XMQ WC 0.31 613 14.69 6.1% TUTS 34.69 NOV 25.00 QSS WE 0.38 185 24.62 5.2% Company Descriptions CNCX - Concentric Network $26.50 *** ISP Strength! *** Concentric Network provides complete, easy-to-use Internet business solutions for small- to medium-sized companies and customized Virtual Private Network and data center services for larger organizations. Concentric's portfolio of services for small to medium sized companies includes high-speed DSL access, Web hosting and e-commerce. For larger enterprises, the company offers dedicated Web hosting and data center services. Concentric came through with earnings, beating 3Q forecasts. Several brokerages initiated coverage as they believe that companies that provide the skills for other companies to use the Web offer high potential growth. The rally from the October low with heavy volume has moved Concentric back above its 150 dma as the technical characteristics strengthen. The cost basis is within the neckline of the just completed double bottom. NOV 20.00 QXF WD Bid=0.44 OI=271 CB=19.56 ROI=7.7% Chart = http://quote.yahoo.com/q?s=CNCX&d=3m **** DUSA - Dusa Pharmaceutical $14.94 *** New Drugs *** Dusa Pharmaceutical is a company engaged in the development of photodynamic therapy and photodetection, utilizing Levulan, the company's brand of 5-aminolevulinic acid, for various medical indications. The company follows a strategy of focusing their resources on selected, priority indications chosen for future development based on clinical, regulatory & marketing criteria. Recent speculation on reports of the new Phase II study and a rescheduled FDA Advisory Panel Meeting. A CIBC analyst issued a 12 month target of $21 and the technicals suggest a trading range is forming above $13. Please research this issue before opening any positions. NOV 12.50 QDU WV Bid=0.50 OI=43 CB=12.00 ROI=12.4% Chart = http://quote.yahoo.com/q?s=DUSA&d=3m **** NPIX - Network Peripherals $23.88 *** Bright Future! *** Network Peripherals designs, develops, manufactures, markets and supports client/server LAN solutions with leading edge networking technologies. Its integrated solutions incorporate high performance network adapters, network operating system software drivers, concentrators, client/server switching hubs and network management software. The earnings are out and the forecast looks great as new contracts will likely contribute $8-$10 million in revenue in FY 2000. They also plan to start shipments into the distribution channel, as demand increases for their stackable Gigabit Ethernet switches. NOV 15.00 XMQ WC Bid=0.31 OI=613 CB=14.69 ROI=6.1% Chart = http://quote.yahoo.com/q?s=NPIX&d=3m **** PRGY - Prodigy $21.63 *** On The Rebound! *** Prodigy Communications is a leading nationwide ISP that provides fast and reliable Internet access and related services. Prodigy has nationwide customer acquisition channels not available to regional and local ISP's, and utilizes a nationwide network covering different cities in all 50 states allowing most of the US population to access Prodigy's services with a local telephone call. Prodigy just completed its acquisition of BizOnThe.Net, a highly successful Web hosting company. Jefferies recently revised its 12 to 18 month price target to $28, expecting a surge in this quarter's subscriber gains. Prodigy's technicals are bullish as it completes a double-bottom formation and the cost basis ($17) is a good price for the stock if you want own it. NOV 17.50 PUY WW Bid=0.50 OI=137 CB=17.00 ROI=10.0% Chart = http://quote.yahoo.com/q?s=PRGY&d=3m **** SUPG - Supergen $26.56 *** More New Drugs *** SUPG is a pharmaceutical company dedicated to the acquisition development and commercialization of products intended to treat life-threatening diseases, particularly cancer and blood cell disorders, and other serious conditions such as obesity. SUPG is developing anticancer drugs through its generic and proprietary products. Recently announced an agreement with US Oncology (USON) to carry out research using SUPG's major anti-cancer compounds. Another favorable drug company with a bullish trend on excellent technicals. As with all issues, this play requires due-diligence. NOV 22.50 UQG WX Bid=0.75 OI=130 CB=21.75 ROI=10.3% Chart = http://quote.yahoo.com/q?s=SUPG&d=3m **** TALK - Talk.com $14.94 *** Up, Up And Away! *** 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. TALK shares rose last week after a telecom analyst issued a "strong buy" rating with a 12-month target of $51 a share. Talk.com is the 8th largest long distance phone company nationwide and the company's gross margin is one of the highest in its sector. NOV 12.50 QQK WV Bid=0.38 OI=4211 CB=12.12 ROI=9.7% Chart = http://quote.yahoo.com/q?s=TALK&d=3m **** TUTS - Tut Systems $34.69 *** They Still Use Copper? *** Tut Systems designs and develops communications products which enable high-speed data access over the copper infrastructure of telephone companies, as well as the copper telephone wires in homes, businesses and other buildings. The products incorporate Tut's proprietary FastCopper technology in a cost-effective and easy to deploy solution to exploit the underutilized bandwidth of copper telephone wires. TUTS reported quarterly results with an upside surprise and was upgraded by Robertson Stephens. The outlook is for continued exponential growth over the next year. NOV 25.00 QSS WE Bid=0.38 OI=185 CB=24.62 ROI=5.2% Chart = http://quote.yahoo.com/q?s=TUTS&d=3m **** USIX - USinternetworking $35.00 *** Another E-nabler *** USinternetworking is an application service provider that offers outsourcing business applications over the Internet for a flat monthly fee. Their services allow companies to quickly deploy enterprise applications without the associated cost and burden of owning, managing or supporting the applications or underlying infrastructure. The company has a global network of enterprise data centers, which interconnects with major Internet backbone providers through priority peering relationships designed to ensure fast and reliable connections. A volatile issue with an upward bias and short-term support exists near the cost basis. NOV 25.00 UUX WE Bid=0.75 OI=10 CB=24.25 ROI=9.7% Chart = http://quote.yahoo.com/q?s=USIX&d=3m SEE DISCLAIMER IN SECTION ONE *****************************
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