The Option Investor Newsletter Sunday 10-31-99 1 of 5 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 10-29 WE 10-22 WE 10-15 WE 10-8 DOW 10729.86 +259.61 10470.25 +450.54 10019.71 -630.05 +376.76 Nasdaq 2966.43 +149.88 2816.52 + 84.69 2731.83 -154.74 +149.72 S&P-100 717.03 + 31.40 685.63 + 33.88 651.75 - 46.70 + 28.14 S&P-500 1362.93 + 61.28 1301.65 + 88.12 1247.41 - 88.61 + 53.21 RUT 428.64 + 10.22 418.69 + 3.99 414.70 - 13.01 + 4.18 TRAN 3058.98 +195.83 2863.15 + 7.67 2855.58 -226.13 +213.37 VIX 22.56 - 0.33 22.89 - 8.59 31.48 + 10.28 - 5.26 Put/Call .51 .55 1.05 .67 ****************************************************************** October Ends on a High Note Wow! On the 70th anniversary of the 1929 stock market crash in which the Dow dropped 30 points, which was 12% at the time, stocks made a major move upward. For the second consecutive day stocks soared higher on very heavy volume, signaling a big change in market sentiment. Even a week ago many were saying the market was headed lower and interest rates were going to hit at least 6.5%. Both of those things may still happen but right now it looks like a renewed bull market for both stocks and bonds. Alan Greenspan, who in the past seems to have tried to keep stocks from getting too high, made comments Thursday night that helped fuel the huge gains seen on Friday. He made some comments about the changing economy that to many seemed fairly dovish and made some traders hopeful that the Fed will leave rates alone in November. Currently most expect a rate hike. These comments came day after the GDP and ECI reports indicated very high productivity with relatively low price pressures and ignited a strong rally. Greenspan virtually guaranteed a continuation of the rally on Friday. It did not hurt that new home sales dropped over 12% to a 2-year low, indicating a cooling economy, which the Fed wants to see. Like yesterday the rally started right out of the gate, with the Dow rising about 130 points in the first half-hour of trading. It held on to most of those gains until some late afternoon profit taking brought the indexes down a little, but the Dow still finished with another triple digit gain. The magnitude of the rally came as a surprise to most everyone who follows the market. The NASDAQ easily pushed to a new record high and the Dow is up over 7% since October 18 when the Dow dropped below 10,000 for the first time since April. Closing figures show the Dow at 10729.86, finishing up 107.33 points, or 1.01%. Friday was the last trading day for the Dow in which Sears, Goodyear Tire, Chevron, and Union Carbide will hold it back. On Monday Intel, Microsoft, Home Depot, and SBC Communications take their places. By booting some of the laggards (dogs of the Dow) and adding these high growth, high performance type stocks the Dow will be more competitive with the NASDAQ, which has outperformed the Dow lately. Speaking of the NASDAQ outperforming the Dow, the NASDAQ tripled the Dow's percentage gain, rising 3.17%, or 91.21 points, to close at an all-time closing high of 2966.43. It was the sixth highest point gain ever for the NASDAQ, and now it looks like it won't take long for the NASDAQ to hit 3,000, its next milestone. The S&P 500 also had a strong day pushing its way up to 1,362.93, up 20.49, or 1.53%. The follwing chart shows that for the past six months, the NASDAQ has risen 15% while the Dow is at break- even. The main weakness the market had shown recently, both in rallies and sell-offs, was poor market internals. If it wasn't weak volume it was an awful advance decline line. For the past two days the internals could not have looked better. Friday's volume was huge, with over 1.09 billion shares trading hands on the NYSE, in spite of some traders taking some time off to go outside and watch the Yankee parade. The NASDAQ had an even better volume day, trading 1.43 billion shares making it the second highest volume day ever for the OTC market. Advancing stocks outnumbered decliners 21 to 9 on the NYSE and 23 to 17 on the NASDAQ. In what might be the telling sign of the strength of the rally was the new high / new low line. On the NYSE new highs beat new lows 120 to 90. It was the first time new highs won out since July. On the NASDAQ, which has held up better, new high more than doubled new lows 205 to 99. These figures show that most stocks are off of their lows and pushing higher. Like Thursday, it is difficult to find entire sectors that showed any weakness today. The only exception was the financial services sector, which had been soaring and suffered from profit taking and the feeling that the rally in financial stocks may be overdone. The PHLX/KBW bank index fell 0.5% and the AMEX Broker/ Dealer index declined 1.2%. The financial sector, however, is not a weak sector and will benefit if interest rates continue to decline. Most of the big banks like Citigroup, American Express, and JP Morgan are just slightly off their 52-week highs. The strongest sectors were in technology fields, which again seem to have assumed the leadership position in the market. Semiconductors in particular had a good day, with the PHLX Semiconductor index rising an attention-grabbing 6.3%, led by Intel and Applied Materials. Along with chips, software makers rose 4.9% and the hardware index gained 3.9%. One sector that had a very sharp rise was the paper products group. Riding on some analysts' bullish comments about Boise Cascade, the PHLX Forest and Paper Products index gained an amazing 7.8% in one day, shaming the Internet sector, which rose only 4.3%. It was a good day to take a tech company public, which is just what Akamai Technologies did. Shares of Akamai, a maker of computer software designed to speed up Web page delivery, soared over 450% from its initial offering price of 26. It finished the day at $145.20. They are already in a position to declare a stock split. At this point it is easier for technicians to call a market bottom. With the NASDAQ at all-time highs that sounds ridiculous but a lot of traders were running scared only a few days ago. Bond yields also may have bottomed, with the 30-year Treasury bond finishing the day with a yield of 6.15%. The yield has dropped a quarter percent since Monday and sentiment has improved tremendously. A week ago it was hard to find an analyst who did not see at least a yield of 6.5%. The huge volume and strong price moves would indicate that there is some pretty strong support now, and while support does not necessarily mean the market will shoot through the ceiling, the downside seems more limited than it did just a week ago. It should also be noted, however, that on Thursday and Friday the markets gapped up on the major indexes, and some technicians would way that those gaps have to be filled before going a whole lot higher. It should be noted that nothing fundamental has changed - only sentiment and expectations. Earnings have been very strong but they were strong during the market decline. The easing of interest rates has helped but a quarter point move one way or another does not make a huge difference to stock prices. Fundamentals drive the market long term, but investor sentiment and forward-looking expectations drive it in the short term. If investors expect good things to happen, they are willing to put their money in the market. Thursday and Friday a lot of money that had been on the sideline poured into stocks, so obviously expectations are getting higher. As long as those expectations are met the market should be in good shape going into next year. An old market axiom states that the market drops twice as fast as it rises. That was definitely not the case with this rally. Some profit taking early in the week would be expected so Monday and Tuesday there will likely be some weakness, but barring really bad news it would be just a few percentage points. It is important to note that the Nasdaq closed just 34 points from 3000 and investors may be holding off on selling as they figure traders will take the stocks to that level. Everyone likes to see a milestone hit and it may come early on Monday. October has historically been a month for market bottoms and judging by the last two days of the month that could very well be the case this year as well. For all of us involved in the stock market, Halloween will not be as scary as it could have been this year. So unless you have short positions causing you horror, enjoy your Halloween weekend. Chad Poulson Research Analyst *********** JIM'S PLAYS *********** There is no Jim's Plays secti on this weekend because Jim is in attendance of the Money Show in San Francisco.. ********** STOCK NEWS ********** The Federal Reserve's Numbers Game By S.P. Brown Market watchers are speculating over what the Federal Reserve will do November 16 at the next Federal Open Market Committee (FOMC) meeting. In a speech given to some corporate bigwigs on Thursday, Fed Chairman Alan Greenspan may have done a little foreshadowing by expressing his concerns over what could happen to inflation if the recent upswing in productivity should suddenly falter and tight labor markets begin to push wage demands higher. http://www.OptionInvestor.com/stocknews/103099_1.asp ***************** MARKET SENTIMENT ***************** Sunday, October 31, 1999 Caught off Guard! Friday capped off an extremely positive week for the bulls, and ended October in phenomenal fashion. The identical signs from this current market are exactly like the ones we witnessed last October of 1998. Investors Intelligence was extremely bearish, put/call ratios were bearish, market technicals looked poor, cash reserves were at their highs; corporate earnings were good yet were not rewarded, etc. The only difference, that can be alleviated very soon, is the fear of multiple interest rate hikes equivalent to 1994. These fears are starting to subside, especially after these most recent economic indicators, and the bears are paying the price. Below, we have a chart of the Nasdaq composite, and have highlighted the 4-month run made after October. With the most recent Investors Intelligence survey in (41.1% bullish, 38.4% bearish), the undertone is still heavily bearish. Granted, we are sure the statistics next week will reflect a more positive note, but they are still a very-long way from being positive, which correlates into a major market run! However, looking at the week ahead, we may have run up a little too much, too quick; and may be due for some profit taking. But then again, if you are looking out a little longer than 48 hours, which we hope you are, then look again at the chart of the Nasdaq above and you can easily have visions of Nasdaq 3500! One thing that we always watch is the volatility index. We have been consistent buyers at 32-33, and sellers at 20-22. We now stand at 22.32 which would indicate lightening up some positions for our clients, however, never take-for-granted the power of a bull run. The VIX has run down to 17 before, and can do it again very easily! We just want you to be prepared either way. Finally, we have very few major high-technology companies who have yet to release their numbers. We do have Dell, Cisco Systems, and Qualcomm. We will highlight Dell and Cisco next week, and below is the Pinnacle Index for Qualcomm. Company Price Symbol Pinnacle Expected Whisper#: Estimated Index(PI): Earnings: Date*: Qualcomm 223 QCOM 9.72 +.87 +.97 11/2 As a side note, the short interest for QCOM is 14.2 million shares (based upon 10/15), and the put/call ratio is also .75. The amount of short interest has decreased several million shares over the last couple of months (highly bullish sentiment). However, based upon the Pinnacle Index for QCOM, and the whisper number that is a dime higher, we would be very hesitant to start any new bullish positions before numbers. We would not be surprised to see a nice sell off after earnings, however; after Thursday & Friday, the shorts are very hesitant to hold any outstanding positions, and the bulls are starting to use their cash & buying power. Either way, you will not get caught off guard. BULLISH Signs: Bears have quick triggers: After being beaten up for many years, bears are quick to run & hide, and will cover short positions in a flash. Earnings: The results are in, with exception from a few stragglers, and the quarter ended up very solid. Investor Intelligence: As a contrarian indicator, we may have witnessed the bottom in pessimism, and should this prove right, this market has a lot more upside in the months ahead. Mixed Signs: Volatility Index: The VIX continues to prove that 32-33 is a great buying opportunity, and also shows that the low 20's have been a good exit point. Interest Rates: The yield on the 30-yr Treasury is now off the 52 week high, but is still in the danger territory. Advance/Decline Line: The A/D line is showing signs of basing out. BEARISH Signs: 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. OTM Call Analysis As we move closer to the November expiration cycle, Pinnacle is tracking the level of call buying (OTM) between 680-780 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% Friday, October 29 75,022 +92.0% The Power of Sentiment Analysis It has often been said that the crowd is right during the market trends but wrong at both ends. Measuring and evaluating the sentiment of the crowd, therefore, can give savvy option traders a decided edge. OEX Pinnacle Index Friday Benchmark (10/29) Overhead Resistance (720-740) 14.60 OEX Close 717.03 Underlying Support (700-715) 0.21 Average ratings: Resistance levels 2.0 / Support Levels .5 What the Pinnacle Index is telling us: Based on 10/29. Option speculators have really gotten caught off- guard by this latest up-move as evidenced by the lack of open interest above 700. But based on the data, resistance is building at 720+, and support is light 700-715. Put/Call Ratio Friday Strike/Contracts (10/29) CBOE Total P/C Ratio .69 CBOE Equity P/C Ratio .42 OEX P/C Ratio 1.51 Peak Open Interest (OEX) Friday Strike/Contracts (10/29) Puts 670 / 11,886 Calls 690 / 7,626 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 29, 1999 22.32 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. 13, 1999 Bottom? 39.2 37.5 Oct. 27, 1999 41.1 38.4 ************** MARKET POSTURE ************** As of Market Close - Friday, October 29, 1999 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,750 11,320 10,730 BEARISH 9.23 SPX S&P 500 1,350 1,420 1,363 Neutral 10.29 * OEX S&P 100 690 725 717 Neutral 10.28 RUT Russell 2000 440 465 429 BEARISH 9.14 NDX NASD 100 2,320 2,500 2,637 BULLISH 10.28 MSH High Tech 1,120 1,250 1,310 BULLISH 10.28 XCI Hardware 1,000 1,090 1,060 Neutral 10.15 CWX Software 750 800 970 BULLISH 9.03 SOX Semiconductor 450 525 556 BULLISH 10.29 * NWX Networking 525 615 641 BULLISH 10.28 INX Internet 450 525 499 Neutral 10.15 BIX Banking 660 690 674 Neutral 10.28 XBD Brokerage 410 440 423 Neutral 10.28 IUX Insurance 645 660 618 BEARISH 7.23 RLX Retail 915 960 892 BEARISH 7.23 DRG Drug 365 390 389 Neutral 10.19 HCX Healthcare 720 785 767 Neutral 10.19 XAL Airline 180 190 152 BEARISH 5.21 OIX Oil & Gas 280 315 295 Neutral 10.21 Posture Alert The bears continued to run and hide, as Friday ended an extremely volatile October. A combination of positive comments from Greenspan and Intel helped all sectors across the board. Brokerage and Banking were down very slightly, after having huge gains Thursday, while Semi's led the way today with a 6.34% gain. Other leaders Friday include Software (+4.88%), Hardware (+4.40%), and the NDX. With Friday's action, we have upped Semiconductors to Bullish from Neutral, and the S&P 500 to Neutral from Bearish. A detailed description of our Market Posture and its applications can be found at: /members/marketposture ************* COMING EVENTS ************* For the week of November 1, 1999 Monday Construction Spending Sep Forecast: 0.4% Previous: -0.4% NAPM Index Oct Forecast: 55.0% Previous: 57.8% Tuesday Personal Income Sep Forecast: 0.5% Previous: 0.5% Mitsubishi Index 10/30 Forecast: -- Previous: -0.8% LJR Redbook 10/30 Forecast: -- Previous: 0.2% Wednesday Factory Orders Sep Forecast: -0.1% Previous: 1.3% Leading indicators Sep Forecast: Unch Previous: -0.1% NAPM Services Oct Forecast: -- Previous: 61.0% Thursday Jobless Claims 10/30 Forecast: -- Previous: 278K M2 10/25 Forecast: -- Previous: 7.1B Friday Average Workweek Oct Forecast: 34.6 Previous: 34.4 Hourly Earnings Oct Forecast: 0.2% Previous: 0.5% NonFarm Payrolls Oct Forecast: 320K Previous: -8K Unemployment Rate Oct Forecast: 4.2% Previous: 4.2% Consumer Credit Sep Forecast$8.5B Previous 10.8B ************** TRADERS CORNER ************** Follow the Money At the beginning of the month, I wrote that by Nov 1, we would know the perfect plan, but that it would be too late to execute it. Now, of course, we can clearly see the perfect plan for October. Play calls in the first week (unless you wanted to day trade the Oct 5 Fed announcement). Play puts in the second week. Sit out the third week. Wait until the last hour spike on Wednesday of the fourth week to enter call positions. Thankfully, the month is over, and we are within 2 weeks of the mid November Fed decision, which should be a positive for the market regardless of the outcome. Perhaps the most telling statistic for me is the amount of new money flowing into mutual funds. Second is the volume on Thursday & Friday. My net assessement is that buying will continue to be strong, though there will be normal cyclical dips which provide good entry points into rallies. My comparative advantage in this environment is discipline & patience. Easier said than done, though. My plan for the upcoming week was to make 3 trades on 3 days. I am adjusting that because I think we are at the start of a pretty major move up as investors, following last year's pattern, put money back to work with October behind us. I am sticking with my plan of only initiating 3 new positions, but these are going to be positions which I intend to hold for a few weeks, with targets focused on splits (eg, SEBL, AOL), or specific profit targets. With the VIX down around 21 - 22 again, I think we are due for normal technical pullbacks. I want to be very disciplined about watching the market through qcharts at 9:30 - 10:00 am, EST; 1 - 2pm; and 2:45 - 4:15. I will resist watching the market longer, and I am ignoring CNBC. At those junctures, I will target shoot entries into call plays from the newsletter. I want at least 1, maybe 2, December calls, and a November play too. I plan on commitming about 40% of my trading capital to these plays. Last Wednesday, I caught the last hour spike, though I missed the first 30 minutes of it. Fortunately, I exited a OEX put position, and made a small profit on an OEX call position. Not knowing why the market was spiking, I closed the OEX Nov 680 Call position at 18.25, and it subsequently went to 45 by Friday. Ouch. I was disciplined on Thursday & Friday in not jumping in, but, as I am sure you can understand, I was angry that I didn't just jump in. The newsletter had awesome picks that I was monitoring on my play list -- SEBL, VSTR & others. I had planned on just 3 trading days last week, and, unfortunately, "used them up" by Wednesday. I did target shoot SEBL and AOL calls for the last half of the day Friday. No fills, as the contracts continued to move up. So, I went ahead and moved my limit up on the AOL calls, and got filled, but I left the SEBL's for another day. With AOL's split set for Nov 22, and Holiday etailing upon us (not to mention a broadband strategy hovering in the wings), I expect my AOL Dec calls to move ahead of the market for the next few weeks. On the bright side, one of my longer term plays -- SCH Mar 35 Calls -- had a terrific few weeks, going from my entry price of 4.5 to 8 by the close Friday. The play is in the money, and I have 5 months to let it run. I have another newsletter writer, S.P. Brown, to thank for pointing me towards that play. As interest rate fears subside, Y2K becomes a non-event, and money flows back into the market, I expect SCH to benefit from increased trading activity, and to distinguish itself from online brokers which do not have the same amount of assets under management as Charles Schwab. Janar Wasito janar@OptionInvestor.com ****************** 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 10-31-99 Sunday 2 of 5 ******************* TRADERS CLUB UPDATE ******************* Sunday, October 31, 1999 NO TRICKS, JUST TREATS ARE OFFERED AT THE OPTION INVESTOR TRADING CLUBS!!!!! 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 ATLANTA, GA: ****************************** We had a very good meeting last Monday at the Sandy Springs Library in which we had a presentation by Ed Hecht on Long Options versus Covered Calls. It was a very informative meeting that covered Leaps (also recommended the book Leaps by Harrison Roth) by doing bull call spreads and bull puts spreads. He primarily sells a call, buys a put. More on these as we have a member who is going to the "Money Show" in California and I have requested examples that the newsletter and editors are going to present at the Money Show. First off, we are only going to have one meeting a month from now on. It will be the Monday night after the Options expire each month (3rd Friday). The next meeting will be November 22nd at the Sandy Springs Library at 6:00 PM. My sons and I are studying Rolling Stocks that we will add to our group come January. Happy Haunting (it's almost Halloween)! Your Covered Call Buddy, Tom - (removed) LAST WEEKS CHANGE FOR THIS WEEKS PICKS: *************************************** Daily Results Index Last Week Dow 10729.86 259.61 Nasdaq 2966.43 149.88 $OEX 717.03 146.58 $SPX 1362.93 61.28 $RUT 428.64 10.22 $TRAN 3058.98 195.83 $VIX 22.56 -1.29 Calls EMLX 155.94 16.69 It just keeps going and going and... VRTS 107.88 13.69 +18.06 from our suggested re-entry point SEBL 109.81 13.31 Good earnings and a 2:1 stock split KIDE 73.13 13.13 Dropped, recent decline means bed time VSTR 98.75 9.88 Rumors of a buyout for VoiceStream IMNX 63.00 9.06 New, investors reward stock for earnings AOL 129.38 9.00 New, they announced a stock split! CMVT 113.50 8.69 The stock was added to the S&P 500! ADIC 37.25 7.00 New, positive news makes for a breakout QCOM 222.75 7.00 Dropped, earnings time is here again LVLT 68.38 6.00 It gets positive comments from analysts GMST 86.88 5.00 A new 52-week high and earnings run RATL 42.75 4.75 New, e-development strategy lifts stock SYMC 47.75 4.44 This momentum play is picking up steam PCS 82.94 4.06 A leader in its sector put it at the top DELL 40.13 0.25 It's on a springboard ready to fly WMT 56.31 -0.75 Pullbacks provide solid points of entry Puts VISX 62.56 -10.56 New, competition is hurting its eyes BBY 55.75 -3.56 Moneystream remains weak for wounded stock GT 41.31 -2.38 The stocks being removed from the DJIA INKT 101.44 -1.56 Downgrades and wider losses are expected PBI 45.56 -0.94 Analysts are concerned on future profits LTD 41.00 -0.19 The stock is up in a cloud of fluff ALD 56.94 1.31 It found support, but now poised to fall LTR 70.88 2.00 Dropped, lawsuit is favorable STOCKS ADDED TO THE PICK LIST ***************************** Calls AOL - America Online ADIC - Advanced Digital Information IMNX - Immunex Corp. RATL - Rational Software Corporation Puts VISX - Visx 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 QCOM $222.75 (+7.00) QCOM was a pure and simple momentum play driven into an earnings' run. The profits can be measured on a grand scale. Since it's inception on September 23rd QCOM has made incredible advances topping a best profit of $39.75, or +21.3%! We're exiting the play this weekend ahead of scheduled earnings on Tuesday, November 2nd after the bell. We rarely hold over any stock's announcement due to the high risk of a decline. There's still a bit to chew on though. Recall that at present there aren't enough shares authorized for another split this year; however QCOM has been trading way above historical split-levels ($160) for quite a while now. It's possible the company could announce a stock split during its earnings' report. Keep your fingers crossed! We'd love to pick it up again on a split run. KIDE $73.13 (+13.13) Well, at last it is time to put KIDE to bed. It is possible that KIDE is going to make a bounce off of the 10-dma at $68.53 and make an earnings run, but we feel that at this point the risk is too great. We are grateful for the fantastic run that KIDE has provided and do not want to push our luck. We were looking for KIDE to close right around at $75, where it had been trading throughout most of the day however, KIDE made a plunge at the end of the day to close just above $73. With the market making such a bull run last week, there are a number of other stocks to catch the eyes of investors, stocks that have not been trading at huge premiums and are "on sale" in comparison to KIDE. And thus we bid a very fond farewell to Pikachu and his gang. PUTS LTR $70.88 (+2.00) It was reported at the end of the week that LTR would be reporting there earnings this week, but the day would not be announced. That means the earnings could come at anytime. We try not to hold any plays over an earnings report. Also on Monday there will be a jury decision coming that will have an effect on the Tobacco industry as a group. A Florida jury will have a decision on the class action suit against the industry that could lead to an estimate of $300 billion in punitive damages. In other news a court in New York reported favorable for U.S. tobacco companies, in a ruling to dismiss five class action suits brought against them. This positive news woke up the value players for a trade that had LTR bouncing back to as high as $71.44, before closing very close to our resistance level of $71, at $70.88. We will choose to close out this play at these levels, and wait to see what happens this week after Monday's ruling. STOCK SPLIT CANDIDATES *********************** CMVT - Comverse Technology Split candidates that are not current plays CHKP - Check Point Software MEDI - MedImmune QCOM - Qualcomm DCLK - CoubleClick MXIM - Maxim Intergrated STOCKS WITH UPCOMING SPLITS **************************** We don't list all splits available, only those we feel may have play possibilities. Symbol - Stock Splits/Date 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 SAPE - Sapient 2:1 11-05-99 ex-date 11-08 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 AOL - America Online 2:1 11-19-99 ex-date 11-22 AMGN - Amgen 2:1 11-19-99 ex-date 11-22 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: ********************** IMNX - Immunex Corp. $63.00 (+9.06) See details in sector list Chart = http://quote.yahoo.com/q?s=IMNX&d=3m **** CMVT - Comverse Technology $113.50 (+8.69)(+9.56) See details in sector list Chart = http://quote.yahoo.com/q?s=CMVT&d=3m Put play of the day: ********************** VISX - Visx Inc $62.56 (-10.56) See details in put list Chart = http://quote.yahoo.com/q?s=VISX&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 *********** ADIC - Advanced Digital Information $37.25 (+7.00) Advanced Digital makes and sells automated tape libraries for computer systems to back up data. They purchase the drives from companies like Sony, Quantum and Hewlett Packard and outfit them with robotic arms. This arm switched the tapes to capture, add and access data from the computer's hard drive. It has capabilities for small to large computers with tape sizes varying from 4mm, 8mm to digital linear tapes (DLT). Most sales are to large corporations looking to back up the massive amounts of information need for the Internet. After a period of consolidation, ADIC is making a breakout on a string of positive news. The positive news is really nothing new, but traders have obviously rekindled their love for ADIC. Here is a recap on where this stock has been during the last couple months. They fell out of favor in late September after a long run up during the summer that included a great earnings report in August and a 2:1 split. The selloff began on September 26th as the company finalized a secondary offer. Although it was heavily subscribed by institutions, it took awhile for the dilution to be digested. After staying in this rut for a month, ADIC came to life with the IPO of Crossroads Inc. ADIC owns 2.6 million shares of CRDS that they purchased for $1.63. This is more than HWP and INTC's stake combined. With the incredible opening for CRDS, it turned their few million dollar investment into over $180 mln dollars at last count. This goes along with other strategic investments like @Backup.com. Not to mention ADIC's own business is growing by leaps and bounds. They beat earnings estimates last quarter by $0.03 with a $0.22 profit (vs. $0.04 cents last year). This is important because ADIC's Q4 ends on October 31. Because it is a year-end, earnings aren't out until early December but you can see from the chart that traders have already returned to participate in the anticipation. We like the entry point the market makers gave us Friday near the close. ADIC had been rolling along with the market this week and hit a new 52-week high at $41 when the market-makers hit the stock near the close. It dropped quickly to support at $37 on light volume. We want to see the $36-$37 range hold on Monday and the stock to begin up once again. Resistance is at $41 and more support will be at $34 if we get so lucky. Here is some of the good news we were referring to above. On Tuesday the 19th, ADIC announced that along with Veritas they would be demonstrating a new high performance Storage Area Network (SAN) at the Storage Networking World during the week. ADIC is continually being seen with the strongest players in the industry. On the Oct 26th, ADIC was named by Forbes magazine as one of the "The Hot Ones - Ten Supercharged Companies Poised for Growth" in Forbes's piece on the top 200 best small companies in America. BUY CALL NOV-35 QXG-KG OI=315 at $4.00 SL=2.50 BUY CALL NOV-40 QXG-KH OI=144 at $1.88 SL=0.75 BUY CALL DEC-35*OQG-LG OI=124 at $5.38 SL=3.50 BUY CALL DEC-40 OQG-LH OI=122 at $3.50 SL=1.75 Picked on Oct 31st at $37.25 P/E = 100 Change since picked +0.00 52-week high=$114.44 Analysts Ratings 2-3-0-0-0 52-week low =$ 24.50 Last earnings 08/99 est= 0.19 actual= 0.22 Next earnings 12-08 est= 0.19 versus= 0.09 Average Daily Volume = 458 K Chart = http://quote.yahoo.com/q?s=ADIC&d=3m **** DELL - Dell Computer Corp $40.13 (+0.25)(-2.93)(-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. And honestly, we've been waiting longer than anticipated for a significant resurgence. DELL has been trading in a tight stance between firm support at $38 and strong near-term resistance of $41 since October 19th. This narrow range is essentially creating a springboard. In other words, when DELL does break out the move will likely be sharp and swift. Of course the question is WHEN. Thursday's market provided an ideal environment for a rebound and we were disappointed in the stock's lack of participation. We held the play over in the event DELL was simply lagging behind. The stock's $1.63 gain on strong volume and the $40.75 daily high on Friday prompted us to keep DELL on our call list going into next week. As a conservative player, it's obviously very important to confirm stock direction with a show of volume before opening a new position. Earnings are expected in a couple weeks on November 11th. Recall Dell did release an earnings' warning on October 18th citing the sharp rise (25%) in chip components would hurt their bottom line. However the following week, Warburg Dillon Read came out with news that instead of a shortfall Dell could actually "post significant upside surprise in revenue growth" referring to preliminary September PC shipment data. So we're now looking for momentum ahead earnings to help revitalize this technical play. There was lots of good news surrounding Dell this week. On Tuesday it hit the press that for the first time in history, Dell surpassed rival Compaq computers (CPQ) as the leading PC maker in the US! For the 3Q Dell claimed 17.1% of the PC market while CPQ slipped to 15.3%. The next day it was also reported that Dell took the #1 position of PC sales in the US educational industry away from Apple computer, capturing 21% of the market share. Then Dell announced it had completed its first ever acquisition (in its 15-year history) of privately held ConvergeNet Technologies. According to the terms, 6.9 million shares of Dell common stock were exchanged for all outstanding shares and options of ConvergeNet - the deal is valued at approximately $340 mln. BUY CALL NOV-35 DLQ-KG OI=12972 at $5.50 SL=3.75 BUY CALL NOV-40*DLQ-KH OI=33060 at $1.88 SL=0.75 BUY CALL NOV-45 DLQ-KI OI=47887 at $0.31 SL=0.00 High Risk! Picked on Oct 17th at $42.81 P/E = 53 Change since picked -2.69 52 week high=$55.00 Analysts Ratings 12-13-7-0-0 52 week low =$24.25 Last earnings 07/99 est= 0.17 actual= 0.19 surprise +11.8% Next earnings 11-11 est= 0.20 versus= 0.14 Average daily volume = 26.3 mln Chart = http://quote.yahoo.com/q?s=DELL&d=3m **** LVLT - Level 3 Communications $68.38 (+6.00) Level 3 Communications, Inc. is a communications and Information services company that is building the first upgradeable international network optimized for Internet protocol technology. The Level 3 network combines local, long distance, and undersea networks, connecting customers end-to-end across the U.S. and in Europe and Asia. The company expects to complete its planned network construction in phases beginning in the first quarter of 2001. Level 3 was the talk of Wall Street this past week, after the earnings report on Oct 22nd, the shares began to trade up nicely behind very positive comments from analysts. Currently the shares are sitting at $68.38, after pulling back at the end of trading on Friday in what looks like a minor round of profit-taking after hitting a intra-day high of $71.38. The technical picture could not look more promising for a short- term uptrend. The volume, moneystream, and relative strength are all converging at the same time. This should trigger higher prices for the stock in the short-term. Going forward it will be important to confirm the upward trend, the profit- taking might not be over, with the price increases this past week of over 10 points from the intraday high to intraday low we should be cautious, but bullish when looking for an entry point. Look at any pullbacks as a buying opportunity. There is major support at the $64.50 level. Current price targets on Wall Street sit at the $80 a share. Keeping in mind that this stock is bouncing back from a 52-week high of $100.13. The analysts seem to be buying the story that LVLT is selling. BUY CALL NOV-65*QHN-KM OI=1862 at $6.13 SL=4.38 BUY CALL NOV-70 QHN-KN OI=2784 at $3.13 SL=1.63 BUY CALL DEC-65 QHN-LM OI= 987 at $8.25 SL=6.38 BUY CALL DEC-70 QHN-LN OI=1108 at $5.75 SL=4.50 Picked on Oct 28th at $68.63 P/E = N/A Change since picked -0.25 52 week high=$100.13 Analyst Ratings 5-3-1-0-0 52 week low =$ 29.88 Last earnings 10/22 est=-0.51 actual=-0.43 Next earnings 02-18 est=-0.65 versus=-0.11 Average daily volume = 1.80 mln Chart = http://quote.yahoo.com/q?s=LVLT&d=3m **** EMLX - Emulex Corp. $155.94 (+16.69)(+11.25)(+28.13) 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 keeps going and going and... We really like this stock! Emulex has been one of those plays you wait all year long to catch. We started this play at $128 and saw it rocket to $161. It pulled back from there to support at $137 before taking off again. This week we saw another awesome $25.50 swing as Emulex returned to its high. Thursday, EMLX put on a great performance as the market soared on the good economic news. The stock added $5.75 confirming that support was solid. Friday saw the stock open at Thursday's close and run an impressive $17.53 in the first hour of trading. By midday, EMLX bottomed at $148 before putting in a nice move up by the close. This may indicate that the sellers are done and that a retest of its high is forthcoming. The shareholder meeting on Nov 18th will include a vote to increase the authorized shares to accommodate the split. The payable date will be set as well. As that day gets closer, look for increased volatility and keep in mind that the stock is prone to large price swings. Initiate trades accordingly. Enjoy the ride! BUY CALL NOV-150 UMQ-KJ OI= 85 at $16.25 SL=12.00 BUY CALL NOV-155*UMQ-KK OI=128 at $13.38 SL=10.00 BUY CALL NOV-160 UMQ-KL OI=421 at $11.13 SL= 8.25 BUY CALL NOV-165 UMQ-KM OI= 85 at $ 9.25 SL= 7.00 Picked on Oct 17th at $128.00 P/E = 76 Change since picked +27.94 52-week high=$161.75 Analysts Ratings 3-3-0-1-0 52-week low =$ 6.00 Last earnings 10/99 est= 0.14 actual= 0.19 surprise +35.7% Next earnings 01-31 est= 0.17 versus= 0.05 Average daily volume = 418 K Chart = http://quote.yahoo.com/q?s=EMLX&d=3m *************** Internet *************** AOL - America Online Inc $129.38 (+9.00) AOL is the world's #1 provider of online services with over 17 million subscribers. It's acquisitions in 1998 and 1999 have given the company a 60% market share and diversity. CompuServe, an online service geared more to professionals, added its 2 million users to the AOL portfolio in 1998. This year AOL brought the Web navigator, Netscape, to its organization and is also using DIRECTV to launch an interactive TV service. The recent announcement of a proposed merger between EarthLink (ELNK) and MindSpring (MSPG) and the new wave of companies offering free Internet access is certainly heating up the competition for AOL. After a fantastic earnings' run with over 10% in gains and reaching newer near-term highs on the momentum, we adhered to our rule not to hold over an earnings' announcement and exited the play the evening before the scheduled release. On October 20th AOL reported Q1 earnings at more than triple when compared at $0.15 p/s versus $0.04 p/s, the same quarter last year and topped First Call consensus by $0.02. However in our closing write-up, we alerted our readers one last time that we were still anticipating a split announcement for the following reasons. First off, AOL had been trading in the proximity of historical split levels ($120) since early October and second, there was an upcoming Shareholders' Meeting on October 28th to vote on increasing the number of authorized shares from 1.8 bln to 6 bln. And Bingo! Thursday evening AOL announced a 2:1 stock split! This is the second time the stock has split this year and the 7th time since the company went public in March of 1992. Shares will reflect the split next month on Nov 22nd. We expect lots of momentum and excitement in the upcoming weeks driving AOL's share price up, up, up! Looking for an entry into this split play? Technically short- term support is just below the 10-dma at $119.94, however a reasonable entry is in the range of $123 and $126 - a likely level of consolidation on a pullback assuming AOL shows strength. Take a look at a 10-day chart for visual comprehension - these marks represent the latter daily highs. But if all goes according to plan and the stock doesn't take a breather then it'll be inevitable to target shoot a daily bottom for an entry. In related news this week, AOL executives sold about $158 mln shares of stock to diversify their personal portfolios and according to AOL's Chairman Steve Case, the stock sales were routine. Happy Trading! BUY CALL NOV-125*AOO-KE OI=22973 at $ 8.25 SL=6.50 BUY CALL NOV-130 AOO-KF OI=22570 at $ 5.50 SL=3.75 BUY CALL NOV-135 AOO-KG OI=11146 at $ 3.50 SL=1.75 BUY CALL DEC-130 AOO-LF OI= 2581 at $10.00 SL=7.50 BUY CALL DEC-135 AOO-LG OI= 1727 at $ 7.88 SL=6.25 Picked on Oct 31st at $129.38 P/E = 183 Change since picked +0.00 52-week high=$175.50 Analysts Ratings 23-15-3-1-0 52-week low =$ 20.63 Last earnings 09/99 est= 0.13 actual= 0.15 surprise +15.4% Next earnings 01-27 est= 0.14 versus= 0.08 Average Daily Volume = 18.6 mln Chart = http://quote.yahoo.com/q?s=AOL&d=3m **************************** SEE DISCLAIMER IN SECTION ONE
The Option Investor Newsletter 10-31-99 Sunday 3 of 5 CALLS CONTINUED *************** ******** SOFTWARE ******** RATL - Rational Software Corporation $42.75 (+4.75) Rational Software Corporation, the e-development company, helps organizations develop and deploy software for e-business, e-infrastructure, and e-devices through a combination of tools, services and software engineering best practices. Rational's e-development solution helps organizations overcome the e-software paradox by accelerating time to market while improving quality. Rational's integrated solution simplifies the process of acquiring, deploying and supporting a comprehensive e-software development platform, reducing total cost of ownership. RATL is one of the world's largest Internet software companies. It was recently announced that the e-development company drove 80 percent of the record second quarter revenue of $128 million, making it one of the largest Internet-focused software companies in the world. Based on the recent company success of the e-development strategy and the formidable market opportunities that are foreseen for the future, RATL feels that they have the potential to accelerate the growth rate during Fiscal 2001. The Internet economy has impacted there sales in such a positive way that there expectations have been exceeded. The stock has been hitting new 52-week highs this week trading as high as $43.38. Currently the stock sits just slightly off of those highs in a minor wave of profit-taking on Friday at $42.75. The stock has been on a nice uptrend for about three weeks, tacking on about 13 points. At current levels some profit-takers should present themselves, but look at any pullback as an entry point. We are bullish on the shares as long as the technical picture remains strong with moneystream, volume, and prices converging nicely to the upside. Always confirm the current technicals before entering a new position. This recent breakout comes on the back of the company posting earnings that came in 40% better than expected and a 50% increase over the year ago period. This sparked two upgrades from Credit Suisse First Boston and SG Cowen. Price targets were raised to $47 a share in the near-term. BUY CALL NOV-40*RAQ-KH OI=240 at $4.38 SL=2.63 BUY CALL NOV-45 RAQ-KI OI= 8 at $1.88 SL=0.88 low OI BUY CALL DEC-40 RAQ-LH OI=156 at $5.75 SL=4.50 BUY CALL DEC-45 RAQ-LI OI= 19 at $3.38 SL=1.63 low OI Picked on Oct 31st at $42.75 P/E = 49 Change since picked +0.00 52-week high=$43.38 Analyst Ratings 6-3-1-0-0 52-week low =$18.81 Last earnings 10/14 est= 0.19 actual= 0.21 Next earnings 01/00 est= 0.25 versus= 0.19 Average daily volume = 1.16 mln Chart = http://quote.yahoo.com/q?s=RATL&d=3m **** SYMC - Symantec Corp $47.75 (+3.75)(+0.69) Symantec is one of the two leading providers of utility software for the security market. Its fierce competitor is Network Associates and the two companies are continually striving to be in the #1 position. Symtanec's software is designed for business and personal computing with three distinct business segments: security and assistance, remote productivity solutions, and Internet tools. The distributor company, Ingram Micro, accounts for 33% of its sales revenue. For those readers just coming aboard, we picked up this momentum play last Tuesday as we saw no post-earnings meltdown, but instead a growing intensity. On October 20th, they unveiled their Q2 results of fiscal 2000 beating of $0.42 cents by reporting a $0.45 per share profit, a $0.03 cent upside surprise! This is significant for a company that typically only beats estimates by a penny. For more details regarding the company's earnings please refer to Tuesday's write-up. Overall SYMC has been climbing steadily since leaving the $33 mark at the end of September despite the rocky October market. Now we did see the effects of the market weakness in mid-October as SYMC was stuck at resistance at $40, but that is history. Together with a strong Internet sector and growing momentum, SYMC continues to move forward advancing daily into new territory. Support is firmly established at $40 and this was certainly a target entry point mid-week. However SYMC has claimed new 52- week highs for the past four consecutive days with the newest record at $48.50 hit during active trading on Friday afternoon. This pattern made it a challenge to get your foot in the door. A pullback next week to just above the 10-dma ($42.57) followed by another surge would be ideal however, still be prepared to look for an intraday bottom. Most likely there will be investors taking cash off the table after these gains providing the opportunity for a variety of entry points into this momentum play. In the news on Thursday, Banc of America started coverage with a Buy rating and issued a target price of $60. BUY CALL NOV-40 SYQ-KH OI=504 at $8.25 SL=6.50 BUY CALL NOV-45*SYQ-KI OI=351 at $4.50 SL=2.75 BUY CALL NOV-50 SYQ-KJ OI= 15 at $1.75 SL=1.00 BUY CALL DEC-45 SYQ-LI OI= 81 at $6.13 SL=4.50 BUY CALL DEC-50 SYQ-LJ OI= 0 at $3.38 SL=1.75 **New Strike** BUY CALL JAN-50 SYQ-AJ OI= 10 at $4.75 SL=3.00 Picked on Oct 26th at $44.00 P/E = 25 Change since picked +3.75 52-week high=$48.50 Analyst Ratings 6-0-0-0-0 52-week low =$ 8.69 Last earnings 09/99 est= 0.42 actual= 0.45 Next earnings 01-14 est= 0.49 versus= 0.42 Average daily volume = 918 K Chart = http://quote.yahoo.com/q?s=SYMC&d=3m **** VRTS - Veritas Software Corp $107.88 (+13.69)(+3.10) 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. Vacations, vacations, where do you want to go next! With moves like this, you can see the world. VRTS put on a respectable $18.06 from our suggested re-entry point, at the 10-dma, in Tuesday's update. Each day the volume increased as investors loaded up the truck for a very profitable split run. On Thursday, VRTS broke through resistance like a hot knife going through butter. Then on Friday there was no stopping this winner as it charged ahead and closed at a new all time high! Both days the volume was strong and steady. There were no intraday dips indicating investors are confident higher prices are coming. Even in after-market hours on Friday, VRTS continued to see large numbers of shares being bought. Monday should see a continued increase in share price but a word of caution here. The price has increased steady and strong for three days and investors will lock in profits on any perceived upset in the market. If you entered this trade on Thursday you will have a nice cushion to fall back on, so keep a trailing stop in to ride any bumps in the road. The split is still three weeks away on Nov 22nd and this gives time for dips and nice entry points for more profits. At this pace we could see this stock reach even higher as the markets continue to rally. VRTS will split its stock after the next expiration date of November 19th so plan your exits and new entries accordingly as we get close. We are in new territory now that the previous 52-week high has been taken out. Watch for VRTS to dip this week and test its new found territory. Enjoy the ride as this play has turned out spectacular to say the least! BUY CALL NOV-95 VUQ-KS OI=350 at $15.00 SL=$11.25 BUY CALL NOV-100*UQJ-KT OI=417 at $11.38 SL=$ 8.50 BUY CALL NOV-105 UQJ-KA OI= 0 at $ 8.13 SL=$ 6.00 New Strike BUY CALL NOV-110 UQJ-KB OI= 0 at $ 5.62 SL=$ 4.25 New Strike Picked on Oct 21st at $91.09 P/E = N/A Change since picked +16.78 52-week high=$107.88 Analysts Ratings 6-10-3-0-0 52-week low =$ 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 = 2.00 mln Chart = http://quote.yahoo.com/q?s=VRTS&d=3m **** SEBL - Siebel Systems Inc $109.91 (+13.31)(+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' has been sizzling. Share prices have skyrocketed $25.06, or 29.6% setting a new 52-week highs 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 analysts 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 further fueled the fire under SEBL. With the stock split forthcoming in a couple weeks we expected the investor's excitement to elevate share prices in the near-term and it sure has! SEBL was on simmer the first part of this week effectively offering traders entry points into this split play. The consolidation period didn't push the stock below its 10-dma (then @ $89) or its firm support at $85 demonstrating strength at the higher price levels. For those who read the writing on the wall and entered positions, the rewards were abundant. SEBL tacked on $6.44 on Thursday and another $9.50 during Friday's rally! The 52-week record now stands strong at $110. Two firms, SoundView Technology and Banc of America reiterated Strong Buy ratings and the latter also issued a $135 price target. A pullback to near-term support at $95 would be an optimum entry point, however if there's no reprieve next week it's likely you have to look for an intraday bottom to get a solid entry into this powerful split play. The split date is scheduled for November 12th, after the bell. **Presently there are no strikes above 110** BUY CALL NOV-100*SGQ-KT OI=1736 at $12.13 SL=9.75 BUY CALL NOV-105 SGQ-KA OI= 13 at $ 8.63 SL=6.50 low OI BUY CALL NOV-110 SGQ-KB OI= 0 at $ 5.88 SL=4.25 No OI yet Picked on Oct 21st at $94.88 P/E = 110 Change since picked +14.93 52 week high=$110.00 Analysts Ratings 9-5-0-0-1 52 week low =$ 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 = 1.65 mln Chart = http://quote.yahoo.com/q?s=SEBL&d=3m ******* Telecom ******* VSTR - VoiceStream Wireless $98.75 (+9.88) VoiceStream Wireless is a provider of wireless communication services. These services are available in the western United States. VoiceStream has an aggressive marketing plan, boasting more minutes, more features and more service. Jamie Lee Curtis is the always on-the-go spokeswoman for VSTR and her famous "hello" sign off is helping to make VoiceStream a household name. Hel-lo!! What a great day for VoiceStream! VSTR set a new 52-week high at $100.75. With VSTR working its way up steadily throughout the day while offering a trading range of $13.63, entry points were not difficult to come by. VSTR spiked up briefly in afternoon trading before settling back and continuing on with its positive momentum/takeover rumor driven run. VSTR closed just $2 dollars shy of the high for the day and looks to be right on course to keep going. VSTR made two bounces at $95 on Friday, which should serve as support heading into next week. The only resistance is the new 52-week high of $100.75. Use caution if entering a new play on VSTR as this run is based on rumor and rumor alone. VSTR has a long way to fall before being caught by it's 10-dma which is currently all the way down at $83.83. This play is recommended for a High Risk Profile only! If you are making a play or plan to enter a new one, it is imperative that you use your stops and of course, confirm continuing positive momentum before doing so. It appears as though this 13% gain on Friday was a result of takeover rumors. As VSTR prepares to acquire Omnipoint and Aerial Communications, it has become an even more attractive takeover target. So who is interested? Perhaps the better question would be, who isn't? The Baby Bell companies have always got their eyes open for just such prey and many of them are either looking to either launch or expand their wireless operations. SBC's ears are piqued as well. Oddly enough, no one was available for comment on Friday, so we will just have to wait and enjoy the ride in the meantime. BUY CALL NOV- 85 UVT-KQ OI=398 at $16.13 SL=13.00 BUY CALL NOV- 90 UVT-KR OI=248 at $12.63 SL=10.00 BUY CALL NOV- 95 UVT-KS*OI=276 at $ 9.25 SL= 6.75 BUY CALL NOV-100 UVT-KT OI= 26 at $ 6.75 SL= 4.75 low OI Picked on Oct 28th at $85.75 P/E = 81 Change since picked +13.00 52-week high=$100.75 Analysts Ratings 13-4-1-0-0 52-week low =$ 16.38 Last earnings 10/99 est= -0.85 actual= 0.90 Next earnings 01/00 est= -1.02 versus=-1.03 Average Daily Volume = 1.63 mln Chart = http://quote.yahoo.com/q?s=VSTR&d=3m **** PCS - Sprint PCS $82.94 (+4.06)(+8.13) 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. As wireless communications become a bigger part of your daily life, Sprint PCS will be striving to provide its users information at the next level. PCS will be 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. PCS added 720K new subscribers last quarter and expects to add over 1 mln more by the end of this quarter. This new technology and growth potential has excited investors, which in turn have rewarded the stock with some steady gains. PCS remains at the head of the class and managed to post yet another 52-week high at $83.44, which is just above the closing price on Friday. Like current investors, we too remain bullish on PCS and foresee higher prices in the near-term. Now that we broke our previous resistance at $79-$80, it's just a matter of time before we hit $90. With positive momentum going into Monday's trading, let's see if we can narrow the gap. For those investors entering new trades, watch for slight pullbacks during intraday trading. It's tough picking exact entry points because of lack of technical data at these new levels. If the stock pulls back, the old high at $82 should act as support, but of course you would want to confirm a bounce first. When PCS reaches new highs, increase your stops to protect your gains. In the news Alamosa PCS Holdings, a provider of wireless personal communications services in the Midwest and southwest and an affiliate of Sprint PCS Group, filed on Friday to raise as much as $185 million in an initial public offering. BUY CALL NOV-75 PCS-KO OI=1478 at $9.13 SL=6.75 BUY CALL NOV-80*PCS-KP OI=1696 at $5.38 SL=3.25 BUY CALL NOV-85 PCS-KO OI= 124 at $2.75 SL=1.75 BUY CALL DEC-80 PCS-LP OI= 195 at $7.50 SL=5.75 BUY CALL DEC-85 PCS-LQ OI= 111 at $4.88 SL=3.25 Picked on Oct 24th at $78.88 P/E = N/A Change since picked +4.06 52-week high=$81.96 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 **** CMVT - Comverse Technology $113.50 (+8.69)(+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. Now that's more like it! You may recall from Thursday's write up that we were biting our nails a little over the fact that CMVT didn't participate much on Thursday. Well it must be a late bloomer because on Friday we got a decent rally. The stock rose 4.84% and finished up $8.69 on the week. The bonus is that the stock really came alive late in the day on Friday and hit a new 52-week high of $114.44. This may carry over into next week. The big announcement for the week was about CMVT's addition into the S&P 500 which took place on Tuesday and would thus explain the monster volume that day. We are also looking forward to earnings at the end of the month. We think CMVT may also announce a stock split. Besides these catalysts, we saw no fresh news to report for the second half of the week. Technically, we are looking strong as CMVT is setting higher highs and higher lows. At this point it is just a guess to how high CMVT may take us but we can define the support. $108 looks solid followed by the 10-dma at $104 but confirm the bounce first. We reported last Sunday that First Albany analyst Herbert Tinger had raised his price target from $93 to $105. Great call, Herbert! Now if he could just set a target maybe a touch higher so that CMVT doesn't knock it out a week later. I guess if you pick your points so close, you are less likely to be wrong. At an all-time high, we aren't going to guess at how high the momentum might go. Let's just go with the flow and see what unfolds. BUY CALL NOV-100 CQV-KT OI= 488 at $14.50 SL=11.50 BUY CALL NOV-105 CQV-KA OI=1020 at $10.25 SL= 7.75 BUY CALL NOV-110*CQV-KB OI= 301 at $ 6.25 SL= 4.50 BUY CALL DEC-100 CQV-LT OI= 61 at $ 9.50 SL= 7.00 Picked on Oct 21st at $102.13 P/E = 62 Change since picked +11.38 52-week high=$114.44 Analysts Ratings 8-3-0-0-0 52-week low =$ 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 = 1.2 mln Chart = http://quote.yahoo.com/q?s=CMVT&d=3m ************* Miscellaneous ************* WMT - Wal-Mart $56.31 +0.56 (-0.75)(+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. Wal-Mart set a new 52-week high in early trading today, spent the majority of the day trading right around $58 and made an afternoon move down to close up just under a point. WMT set solid support at $55 on Thursday, which WMT traded well above all day on Friday. WMT has further support at the 10-dma of $54.50. Should the market back off a bit on Monday, a pullback and bounce at this level should create a solid point of entry. Should the market continue to run, wait for a breakthrough WMT's new 52-week high of $58.50, which now serves as resistance. Confirm positive momentum before entering any new plays. Either way, a new entry should be a safe bet with an upcoming earnings announcement on November 9th and all of the recent good news. Retail in general has had a strong week as consumer confidence has recovered a bit thanks to a positive GDP report and employment data released on Thursday which helped to ease the fears in regards to an upcoming rate hike. This positive momentum carried into trading on Friday and we look for it to continue into next week as well. On Friday, it was announced that Wal-Mart was named as one of the "The Best of the Century" retailers by Lebhar-Friedman, a publisher and provider of information for retail and foodservice communities. Wal-Mart was the winner in the Discount Category. Wal-Mart was also added to the Goldman Sachs recommended list last week. BUY CALL NOV-50 WMT-KJ OI= 7384 at $7.50 SL=5.75 BUY CALL NOV-55*WMT-KK OI=14091 at $3.25 SL=1.50 BUY CALL NOV-60 WMT-KL OI= 2076 at $0.88 SL=0.00 High Risk! Picked on Oct 24th at $57.06 P/E = 50 Change since picked -0.75 52-week high=$58.50 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 = 5.96 mln Chart = http://quote.yahoo.com/q?s=WMT&d=3m **** GMST - Gemstar International Group $86.88 (+5.00)(+7.69) 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. Gemstar opened up nearly $1 on Friday and held a fairly tight range until the afternoon when it made a brief run up to hit a new 52 week high of $89.19. GMST burned out quickly and shot down to close just above the low of the day. GMST looked to have established solid support at $87 on Friday, however closed just below that level. The next support holds at $86. Before entering any new plays, it is important to confirm GMST's direction. On Friday, GMST met late day resistance at $88.50. If GMST manages to break through this level a new entry may be considered. This is now an earnings run play so GMST could have no problem making it through resistance and hitting another new 52-week high next week. GMST continues to trend up and post nice consistent gains. We are looking for this trend to continue through to the announcement. Gemstar is scheduled to announce earnings on November 10th (confirmed). Also the option volume continues to remain extremely active as it has been all month. We noted this before and there could be some other surprise lingering that we are unaware of. Sometimes this indicator is a difficult one to pin down but we wanted to make you aware. BUY CALL NOV-75 QLF-KO OI=2246 at $13.63 SL=11.00 BUY CALL NOV-80*QLF-KP OI=4637 at $ 9.75 SL= 7.00 BUY CALL NOV-85 QLF-KQ OI=1066 at $ 6.38 SL= 4.25 Picked on Oct 21st at $79.06 P/E = N/A Change since picked +7.81 52-week high=$89.19 Analysts Ratings 6-0-0-0-0 52-week low =$20.44 Last earnings 08/99 est= 0.00 actual= 0.17 Next earnings 11-10 est= 0.18 versus= 0.15 Average Daily Volume = 1.18 mln Chart = http://quote.yahoo.com/q?s=GMST&d=3m **** IMNX - Immunex Corp. $63.00 (+9.06) Their primary products include Enbrel, for treating rheumatoid arthritis, Lukine, which is used in the treatment of bone-marrow transplant patients and Novantrone, used to treat acute non- lymphocytic leukemia and to ease pain associated with prostate cancer. Immunex develops biopharmaceutical products aimed at treating cancer, auto-immune disorders, and infectious diseases. They are in the developmental stages of developing other drugs to treat asthma, leukemia, and certain other cancers. Immunex competes in the marketplace with heavy weight Amgen, Bristol- Meyers Squibb and Merck. 54% of Immunex stock is owned by American Home Products through its subsidiary American Cyanamid. IMNX is popular with the institutions as well with over 270 holding stock in the company. Prior to announcing earnings, shares of IMNX were the trading near $42. Since reporting better than expected earnings on Oct 18th, IMNX has been headed higher. The market has been able to shrug off several analysts downgrades as well. The day after earnings came out Salomon Smith Barney downgraded the biopharmaceutical company from a Buy to an Outperform based on lower product revenue and a higher expense outlook with a price target of $58. Others feel the $110 million sales estimate for their drug Enbrel is too high, with a new estimate of $102 mln. On Monday Immunex was rated a near-term Sell at Gilmour and Associates. Since the downgrades the price of the stock has climbed over $15. We are not picking on the analysts or the brokerage houses as they all do their work and call them as they see them. However, what we are trying to point out is the investing public and traders many times will buy or sell with little or no regard to analysts, brokerage firms or yes, even Internet Newsletter recommendations. This past week IMNX gained over $9.00 primarily on the heels of the strength in the broader markets and an announcement that several biotech companies, including IMNX, are successfully moving their products for treating secondary-progressive multiple sclerosis(MS) through clinical trials. Many times, information showing there may be a breakthrough or a new treatment for an illness or a disease is all it takes to drive the price of a company's stock through the roof. If you see continued strength in the price of IMNX we would jump on board, but keep your stops close, as IMNX has gained over 50% since Oct 15th. Should we get a pullback, intraday support for IMNX is between $59-$60, and then between $55-$56 and a bounce off those levels might prove to be a good entry point as well. As always, consider your potential rewards versus risk prior to entering a position in IMNX. BUY CALL NOV-50 IUU-KJ OI=673 at $13.75 SL=11.50 BUY CALL NOV-55 IUU-KK OI=723 at $ 9.50 SL= 7.25 BUY CALL NOV-60*IUU-KL OI=389 at $ 5.88 SL= 4.25 BUY CALL DEC-60 IUU-LL OI=470 at $ 8.00 SL= 6.25 Picked on Oct 31st at $63.00 P/E = 252 Change since picked +0.00 52-week high=$73.50 Analysts Ratings 3-7-8-0-0 52-week low =$16.61 Last earnings 10/99 est= 0.10 actual= 0.12 surprise +20.0% Next earnings 02-03 est= 0.09 versus= 0.06 Average daily volume = 1.61 mln Chart = http://quote.yahoo.com/q?s=IMNX&d=3m ******************************* CALLS CONTINUED IN SECTION FOUR ******************************* SEE DISCLAIMER IN SECTION ONE
The Option Investor Newsletter 10-31-99 Sunday 4 of 5 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. **** GT - Goodyear Tire and Rubber Co. $41.31 (-2.38) Goodyear has helped most of us keep our grip at one time or another. After all, they are the world's largest tire maker. They also own the Dunlop and Kelly-Springfield brand. Headquartered in Akron, Ohio, the company manufacturers engineered rubber products and chemicals too in more than 90 facilities in 30 countries. It has marketing operations in almost every country around the world. Goodyear, with the recent addition of its Dunlop tire joint ventures, employs more than 105,000 people worldwide. Friday was another stellar day for the markets as investors continued to purchase shares of their favorite stocks. Subdued inflation fears and falling bond yields were the motivating factors behind these movements. Unfortunately this euphoria seeped into our put play on GT. After trading flat most of the day, late afternoon buyers stepped in and closed the stock slightly higher. Despite this slight setback we remain bearish with this position. We originally started this play because of readjustments within the DJIA. GT will be removed from the list of thirty stocks and more worthy opponents will take its place among the elite. The problem that ensues from this type of restructuring is every DJIA and "Dogs of the DOW" index fund must now begin the process of selling its GT holdings, then buying its replacements. The selling has already started but it could be just a drop in the barrel compared to what lies in the near future, so watch for continued distress. When placing new trades, wait for confirmed weakness in the stock. A good entry point would be at current trading levels at $40-$41. We know that $40 is not an established support level because it was broken on Friday, however GT managed to bounce at $38.50. The nearest resistance level is $45, which shouldn't be a factor if all goes well. However, because broader market sentiment has turned positive, use the recommended stops just to be safe. BUY PUT NOV-45*GT-WI OI=1004 at $4.38 SL=2.50 BUY PUT NOV-40 GT-WH OI=1332 at $1.25 SL=0.00 High Risk! Average Daily Volume = 767 K Chart = http://quote.yahoo.com/q?s=GT&d=3m **** ALD - Allied Signal $56.94 (+1.31) Allied Signal makes a wide variety of products for industries in aerospace, automotive, pharmaceutical, fibers, and plastics. Aerospace products by AlliedSignal include airborne weather- radar systems, wind-shear detection systems, and radar systems for avoiding traffic collisions. Through its performance polymers segment, the company produces specialty fibers and films such as Spectra, used in body armor. Other segments produce aircraft and marine engines, and consumer automotive products such as Fram filters, Autolite spark plugs, and Prestone antifreeze. Tuesday we added ALD to our play list as a put. Since that time shares of ALD have jumped over $4 to the $57 area. If we make a bad play selection we will always be the first to admit it, drop it, take our loss and lick our wounds. We decided to keep ALD on our list for several reasons. First the intermediate trend is and has been down since the Oct 11th high at $64.25. At this point, ALD has never given us a good entry point as the stock has bounced back primarily on the strength of the broader markets. There has no company or industry news that would lend any support to the price of the company's stock. So why do we have buyers at these levels? Probably traders and investors are bottom fishing, or traders covering short positions. Another reason ALD is still on our put list is the lack of follow through during Friday's session. ALD gapped up $0.94 at the open on the strength of the major indices and then really went nowhere. New Buyers?, we don't think so. With the broader markets going from oversold to approaching overbought in the matter of a week, we are due for a pullback. If we get it early in the week ALD may provide us with an excellent entry point for a put play. Given that scenario, a play in ALD may be a quick in and out type of play, or it could test the lows made earlier last week near $52.38. If you are considering a new play in ALD, the $55.75 area on an intraday chart could provide support. If ALD breaks that level with any conviction then the next support for the stock is near $53.50. Please consider not only your risk profile, but the potential rewards before entering a play in ALD. In the news Wednesday, brokers at Ladenburg Thalmann did reiterate ALD as a Strong Buy, suggesting long-term investors buy on weakness. BUY PUT NOV-65 ALD-WM OI=2550 at $9.25 SL=7.00 BUY PUT NOV-60*ALD-WL OI=2543 at $4.50 SL=2.75 BUY PUT NOV-55 ALD-WK OI= 583 at $1.44 SL=0.00 High Risk! Average Daily Volume = 1.75 mln Chart = http://quote.yahoo.com/q?s=ALD&d=3m **** PBI - Pitney Bowes Inc $45.56 (-0.94)(-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). The shares of PBI continued to hit 52-week lows the past week trading as low as $42.50 on steady and increasing volume. The momentum continued to the downside, with continued questions from analyst concerning the company's profitability in the future. Stocks that continue to hit lower prices over a consecutive period of time, normally will have a bounce to support levels and then begin to retreat again, as the downtrend firms up after the oversold bounce has ceased. Such is the case in the shares of PBI at this point, we had a resistance level set on our radar screen at the $46.69 level. This was the high of the day on Friday, before the stock settled in to end the trading day at $45.56. As we look forward to this week's trading we believe the trend downward will continue below the resistance level at $46.69. Look for the momentum to the downside to remain in place, keeping stops tight to protect gains. If this is more than an oversold bounce it should be evident from higher prices above our resistance level, backed by strong volume. We currently remain technically bearish on the shares of PBI. BUY PUT NOV-50*PBI-WJ OI=285 at $5.00 SL=3.25 BUY PUT NOV-45 PBI-WI OI= 31 at $1.69 SL=0.88 Average Daily Volume = 912 K Chart = http://quote.yahoo.com/q?s=PBI&d=3m **** LTD - The Limited $41.00 +2.25 (-0.19) The Limited is a distributor of men's, women's and children's clothing. LTD owns and operates an approximate 3,700 stores across the U.S. under the names The Limited, Express, Lerner New York, Lane Bryant, Structure, and Gaylan's Trading Company. The Limited also owns 84% of Intimate Brands which operates Victoria's Secret and Bath and Body Works. You may wondering just why we are continuing to play LTD as a put. We feel that LTD is up in a cloud of fluff, a cloud that may very well dissipate next week. With the positive GDP report and an initiation of coverage by Goldman Sachs at Market Outperform, LTD was given a reprieve from its downward trend. We are betting that it was a brief pardon from the LTD's long time course and see LTD pulling back early next week. LTD has a history of making a quick run up, attaining a lower high and then turning around and sinking to lower lows. Right now, LTD has support at its 10-dma of $40.23 however, should LTD violate this level the next support, which is weak at best, is at $38.50. Watch for a violation of the 10-dma before entering a new play. Once LTD picks up the negative momentum to propel down through that first support, $36 could be easily attainable. It is imperative to exercise caution with this play and confirm negative momentum as LTD has an upcoming earnings announcement on November 16th (we will be confirming this date with the company next week.) BUY PUT NOV-45*LTD-WI OI= 50 at $6.50 SL=4.75 BUY PUT NOV-40 LTD-WH OI=518 at $1.13 SL=0.50 Average Daily Volume = 853 K Chart = http://quote.yahoo.com/q?s=LTD&d=3m **** BBY - Best Buy Company Inc. $55.75 (-3.56) The US's #1 consumer electronics specialty retailer, Best Buy sells home office products, consumer electronics, entertainment software and appliances. Ahead of rivals Circuit City and Tandy in sales but not store count, Best Buy has more than 310 stores in about 40 states coast to coast, with heavy concentrations in the Midwest, Texas, California, and Florida. Remarks from the Chairman of the Federal Reserve Alan Greenspan raised hopes on Friday that the central bank may not see the need for repeated additional rate hikes to keep the economy from overheating. Interest rates tumbled on the inflation sensitive government bond, and this had stocks bouncing back from recent sell-offs. The retail sector was brighter, but not flourishing after a separate report suggested that consumer confidence has moderated. Shares of BBY bounced back somewhat after a "Business Week" article said that the Internet should help better electronic retailer BBY's stock and give it a lift. The company is set to launch there Internet unit in February. From a technical standpoint, this news did not make much of a difference. The volume remained average, but not strong. The Moneystream remained weak, with the time segmented moving average showing some signs of life, but nothing special. We will remain bearish at current levels $55.75. The key resistance level still remains at $58, at this levels, with the convergence of price surges and volume we will question the trend. Look for selling pressure to return this week, with most analyst still questioning there Christmas performance. Continue to look at these bounces as possible trading opportunities. BUY PUT NOV-60 BBY-WL OI=2682 at $6.25 SL=4.50 BUY PUT NOV-55*BBY-WK OI=2514 at $3.13 SL=1.63 Average Daily Volume = 2.18 mln Chart = http://quote.yahoo.com/q?s=BBY&d=3m **** INKT - Inktomi Corp. $101.44 (-1.63) Inktomi Corp. provides fast Web search services, which can be customized. One of the top sites on the Web, Yahoo uses the Inktomi search application. Inktomi's Traffic server is a large scale network caching application licensed to Internet service providers. INKT also makes online shopping software. They have operations in the UK as well as in the United States. Inktomi competes in the market place with Compaq, Excite@Home, and Infoseek. San Mateo, CA is where Inktomi calls home. As option traders we all know it can be tricky. When trading puts, it can be especially tricky as timing can be everything. We added INKT to our put list Thursday night. We added INKT based on the recent down turn in the price off the stock, along with Merrill Lynch analyst Henry's Blodget's downgrade and his report citing projected wider losses for the company. Well, Friday morning one of Inktomi's competitors, a company called Akamai, had its IPO. You may have heard of it Friday. Akamai, had expected to sell 8 mln shares somewhere between $18 and $22. Well, by the end of the day Akamai's shares had traded as high as $145.19. For a company that had no revenue last year, Akamai now has a market value of 13.3 billion. That's a 458% gain in one day, the fourth biggest gain for a U.S. stock in first day trading. INKT jumped over $7 on the strength of Akamai's IPO, finally settling at $101.44 up $4.88 for the session. We are leaving INKT on our play list for now because the fundamentals for the company have not changed. INKT could still struggle. Once reality sets in for Akamai, we would expect shares of INKT to continue their downward slide. We could still see shares of INKT move higher first. The initial area of resistance for INKT is between $105 and $106, followed by $108. For you technicians there is a huge gap between $118 and $108, created a week ago when Mr. Blodget released his report on INKT. Our outlook, for now we will just wait and see how long it takes for the "Akamai Effect" to wear off. INKT could fall off from here, or it could hit the resistance levels first, followed by a return to lower prices. As we said TIMING can be everything. If you are going to consider a position in INKT, wait for a down turn with solid volume and choose your entry points carefully. BUY PUT NOV-105 QYK-WA OI=1246 at $8.00 SL=6.25 BUY PUT NOV-100*QYK-WT OI= 693 at $5.00 SL=3.25 BUY PUT NOV- 95 QYK-WS OI=1041 at $3.00 SL=1.50 Average Daily Volume = 2.13 mln Chart = http://quote.yahoo.com/q?s=INKT&d=3m **** VISX - Visx Inc $62.56 (-10.56) Visx is engaged in the design, marketing, and sales of its Star S2 excimer laser correction unit. This was the first FDA approved laser eye surgery machine that is used to correct near-sightedness, astigmatism, and far-sightedness. Surgeons to correct other defects and diseases of the cornea in an outpatient procedure also use this machine. A steady decline associated with above average volume paints the perfect picture for our latest put play, VISX. The stock has run across some tough times lately and it's apparent by its current price, which as fallen over 22 percent since posting its earnings back on October 13. Even though the company posted earnings of $0.36 per shares beating estimates by $0.02, investors were expecting Visx's bottom-line growth to be higher. BancBoston Robertson Stephens analyst Wade King said investors also expected more of Visx's revenue to be generated by an increase in the number of surgery procedures performed. Another worry haunting the company and its investors is competition beginning this quarter from others such as Bausch & Lomb and LaserSight. With increased competition on the horizon and a pending verdict in its patent-infringement suit against Japan's Nidek, expect more of the same in terms of decreasing share values. When placing trades look for slight spikes in the stock price, fluctuations should be available considering the strength of the broader market influences. A good entry point is at current price levels however, for more conservative investors you may want to wait until the stock breaks $60, it nearest support level. The closest resistance point is $70, which we're hoping won't be a factor in the near-term. There was no recent news on VISX that would alter our play at this time. BUY PUT NOV-65*VFS-WL OI=416 at $6.25 SL=3.50 BUY PUT NOV-60 VFS-WL OI=468 at $3.13 SL=1.50 Average Daily Volume = 1.70 mln Chart = http://quote.yahoo.com/q?s=VISX&d=3m ************************ SPREADS/STRADDLES/COMBOS ************************ Index Spreads: Hedging and Arbitrage..Part II The Combos editor is attending the MoneyShow in San Francisico so today we'll continue our discussion on the methods of stock index spreaders and the mechanics of intra-market arbitrage. Before we begin, it is important to understand that the spreader's trading philosophy differs from the hedger's because the spreader never assumes a position in the underlying instrument; rather he tries to combine a long contract with an offsetting short contract to achieve profits on market price differences. Indexes.. Stock indexes are portfolios which are composed of many different company's shares. Different indexes have different values because of the composite shares' performance and the way they are weighted in the index. The S&P 500 Index for example, is a value weighted combination of 500 different companies, representing approximately 80% of the value of all the shares traded on the New York Stock Exchange. Each company's weight in the index is determined by its relative market importance and their values are then computed by multiplying each company's number of outstanding shares of common stock by the share's current cash market price. These values then are summed and compared to a 1941-1943 base period to determine the final cash value. The cash market values of the S&P 500 Index represent the interaction between a market-wide rate of return and the average growth rate in earnings (and dividends) and will accurately reflect the overall market supply and demand factors. Futures.. In addition to acting as general market indicators, indexes have been widely adopted as underlying instruments for futures. The underlying interest may be anything from grain to gold and silver or Treasury bonds. In the case of a futures contract, the seller agrees to provide an underlying commodity (or instrument) at a specified price and time while the buyer of the futures contract agrees to buy the product on the same terms. Historically, the need for futures grew out of America's agricultural economy of the early 1900's. Farmers would agree to sell their crops, when harvested, at some specific future date, at a profitable price. Speculators would purchase these contracts with the expectation of reselling the crops at even higher prices, thereby making a profit for themselves. In addition to market speculators, food processors and wholesale manufactures would purchase futures to guarantee the cost of raw materials for future production. In time, the futures contract has become a trading vehicle of its own and it is now offered on a host of underlying interests, including stock indexes. The problem with index futures is the actual delivery of the underlying instrument in the event the seller decides to "exercise" the contract. In reality, only a small percentage of futures are exercised, so physical delivery is not likely. Nevertheless, when a contract is exercised, the seller's duty is to deliver the commodity; wheat, orange juice, or pork bellies etc.. to the buyer. In the case of an index future, cash is the actual method of payment. The most common index futures traders in the market today are institutions (insurance companies, banks, and brokerage firms) that need to protect large positions in stocks and mutual funds. The portfolios for these types of investors generally include positions in many different instruments. By diversifying their stock holdings, they hedge the risk of loss if one issue drops in value. The gains on other components in the portfolio are used to offset such a loss. The problem with this practice is the lack of protection for a market-wide or across-the-board loss, in which the majority of the securities in a portfolio are affected by a major downturn. This is where index futures are most useful. Institutions purchase futures contracts on the indexes whose composition resembles the mix of stocks in their portfolio. The futures contract provides the necessary downside protection without exposing the stock portfolio to excessive risk and is used as a hedge against the loss of inventory value. In addition to the institutional "insurance" buyers, speculators and other position traders will attempt to profit by taking outright long or short positions in futures contracts. This type of activity helps maintain a mechanism of risk transfer for investments in farming, industry, and other financial instruments. Options On Futures.. The first derivatives were based on stocks but today options are traded on a number of instruments such as government securities, currencies, and indexes. While options are very different from futures in many ways, they are also used by portfolio managers to hedge market risk. Most options involve the delivery of the underlying interest but with indexes, the exercise of the option results in a cash payment. Trading options on futures, including index futures is much more complicated. When a futures option is exercised, the buyer takes delivery of the futures contract. To take delivery of the cash, the owner has to exercise the futures contract. To protect their holdings against risk, institutional investors must maintain large and often complex positions in the index futures and their options. These portfolios are difficult to manage without the aid of computerized trading programs. The term "Program Trading" refers to the process where a computer is used to manage the specific needs of the portfolio (the size of the required options/futures positions along with the prices at which the contracts should be exercised) by entering the orders necessary to exercise the options and their underlying contracts. These sophisticated trading programs have created a stock market phenomenon known as the "witching hour". This period is generally near the physical expiration of the options and futures; at which time the contracts must be exercised or be allowed to expire. The volume of exercised contracts has increased significantly in the computer trading age and this surge creates excess volatility and affects market values of the underlying stocks and indexes. There is an even greater event known as the "triple witching hour", when the expiration dates of options, indexes and futures coincide. The resultant volatility represents such a threat to fair and orderly markets that regulatory requirements have been implemented to stem the flow of orders generated by these computerized systems. Index Arbitrage.. In the current economic system, stock market values depend on the interaction between the required rate of return (an interest rate adjusted for risk) and the long-term growth rate in dividends and earnings. The cash values of stocks will also reflect the overall supply and demand factors of the current market and the sentiment of the investing public. Futures prices for a given commodity are also affected by supply and demand along with being subject to an additional influence, carrying costs. Carrying costs are incurred by someone who buys a commodity and carries it until the physical delivery occurs. This cost includes the fees for storing, insuring, and transporting the commodity, as well as the interest that could have been earned on the money that was used to buy the commodity. The arbitrage concept is easily explained in relation to physical commodities. If a commodity's futures contract price is greater than the sum of its current price and carrying charges, then the trader will buy the commodity in the cash market and sell it for the higher price by shorting the futures contract. Purchasing and carrying the physical commodity will be financed by borrowing. At delivery, the commodity will be sold for the higher futures price. The difference between the revenue from the sold futures positions and the carrying cost (interest fees included) of the commodity is an arbitrage profit since it was guaranteed by the higher price of the futures contract. This process is sometimes called a "cash and carry" transaction. Stock Index futures contracts are based on financial instruments, thus they can also be arbitraged via a cash and carry process. The basic transaction is very similar to that of a physical commodity but the carrying charges are composed entirely of interest, or the net cost of financing the position in the instrument. Since an S&P 500 stock portfolio provides cash inflows in the form of dividends, these returns have an important effect on the price of the futures contracts. The relation of the financing rate to the portfolio's percentage returns will determine if there is a positive carrying cost. A favorable net carry will occur when the current financing rate is less than the underlying instrument's inflow yield. It is important to realize that the S&P 500 "cash and carry" is a difficult transaction, much more complex than those using physical commodities because the equity index cash instrument is harder to purchase. For example, the cash position in soybeans is initiated by simply purchasing 5,000 bushels of soybeans in the spot market whereas an S&P 500 cash position is constructed by purchasing the component stocks in the same proportion as their inclusion in the index. The composition of this position requires the purchase of many odd lots in a timely manner, at share prices that will result in a cash value consistent with successful arbitrage. Without the availability of sophisticated software and real-time electronic trading, it would be almost impossible to accomplish this task. That is one of the reasons why the strategy is difficult for most retail investors; they do not have the capability to execute large simultaneous trades in the necessary instruments. Another obstacle is the necessary collateral to finance the futures contracts at a favorable interest rate. In reality, S&P 500 index futures rarely trade outside of parity because there are plenty of institutions that do participate in this type of arbitrage when the opportunity arises. Good Luck! ******************************* SEE DISCLAIMER IN SECTION ONE
The Option Investor Newsletter 10-31-99 Sunday 5 of 5 COVERED CALLS ************* Covered-Call Strategies... One of our new subscribers asked us to describe the basic method for playing a covered-call. The ideal covered call offers reduced risk and a good probability of making an acceptable profit. With the recent volatile market, our current focus is on ITM plays with average returns of 3% to 5% per month. We expect you to open our positions at or near the cost basis that is quoted in the play narrative. That's the one way you can guarantee (initially) the overall return-on-investment we are offering. One of the best ways to open these positions is with a buy-write. We don't recommend legging-in to these plays because in many instances, the premium is greatly reduced when you eventually sell the call option. You may choose to buy the stock now and sell the call later but that generally requires the stock price to move higher after you have purchased it, a more aggressive technique. The easiest way to utilize this section is to take our wide range of candidates and narrow them down through your own due diligence until you find plays that meet your risk/reward tolerance. Always research the company and the calendar (upcoming events, earnings dates, scheduled announcements etc.). When you have good knowledge of a stock and its industry, you are way ahead of most investors and with the research tools on the Internet, there is no excuse for not being well informed about any company or industry group. After a candidate has been selected, you must decide how many shares of stock to buy. Most traders plan to purchase a minimum of 500 to 1000 shares (so commissions don't significantly affect the ROI) and they place both sides of the order with the broker as a net-debit or buy-write. After your order is filled, stay informed by monitoring all the news and announcements affecting your play until the sold call expires or the position is closed for other reasons. The most important lesson an investor must learn is when to exit a losing position to preserve capital. Because this is painful to do (admitting "I made a bad decision" or "I was wrong") and the psychological/emotional tendency is to ride the trade/investment down, hoping for redemption (been there, done that!), we suggest you identify a target exit point before you enter the position. This play-closing limit for covered-call positions should be a specific percentage loss (10% to 20%) or a technical level near price (or trend) support areas. The key is to establish a system that removes you (and your emotions) from the decision-making process. It's difficult to learn to close-out losing plays early but the simple fact is: there is no reason to hold on to losing plays when there are so many other profitable positions that deserve your time and money. Not only do you continue to accrue losses by staying in a losing play, you forego potential profit in other positions while your trading capital is invested. Accept your losses, learn from your mistakes (evaluate them critically), then move on! Successful traders earn their distinction by using proven money management techniques to minimize the cost of losing positions. More information on this complex subject is available in "Trading for a Living," by Dr. Alexander Elder. 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 10.69 NOV 10.00 2.31 *$ 1.25 14.3% 12.4% LIPO 7.56 7.88 NOV 7.50 0.75 *$ 0.69 10.1% 11.0% PILL 13.88 12.50 NOV 12.50 2.75 $ 1.37 12.3% 8.9% MRVT 11.38 10.94 NOV 10.00 2.13 *$ 0.75 8.1% 8.8% ITIG 8.06 10.00 NOV 7.50 1.25 *$ 0.69 10.1% 8.8% LTXX 15.19 15.81 NOV 15.00 1.25 *$ 1.06 7.6% 8.3% ZIXI 33.00 39.75 NOV 25.00 9.88 *$ 1.88 8.1% 7.1% COOL 8.53 8.31 NOV 7.50 1.88 *$ 0.85 12.8% 6.9% CNCX 26.50 25.63 NOV 22.50 5.25 *$ 1.25 5.9% 6.4% RRRR 11.44 14.75 NOV 10.00 2.25 *$ 0.81 8.8% 5.5% PILT 12.69 11.75 NOV 10.00 3.38 *$ 0.69 7.4% 5.4% NPIX 23.25 28.00 NOV 17.50 6.75 *$ 1.00 6.1% 5.3% COOL 9.06 8.31 NOV 7.50 2.06 *$ 0.50 7.1% 5.2% LCBM 14.06 12.50 NOV 12.50 2.50 $ 0.94 8.1% 5.0% BNYN 8.72 10.38 NOV 7.50 1.63 *$ 0.41 5.8% 5.0% ASMI 8.50 8.41 NOV 7.50 1.56 *$ 0.56 8.1% 5.0% ELON 8.91 7.88 NOV 7.50 1.88 *$ 0.47 6.7% 4.8% ABTL 15.13 14.06 NOV 12.50 3.13 *$ 0.50 4.2% 4.5% PILL 14.88 12.50 NOV 12.50 2.88 $ 0.50 4.2% 4.5% DRYR 17.13 17.06 NOV 15.00 3.13 *$ 1.00 7.1% 4.4% MAPX 9.06 8.50 NOV 7.50 2.06 *$ 0.50 7.1% 4.4% EGGS 9.38 9.31 NOV 7.50 2.31 *$ 0.43 6.1% 4.4% NPIX 23.00 28.00 NOV 17.50 6.50 *$ 1.00 6.1% 4.4% GBLX 35.38 34.63 NOV 30.00 6.75 *$ 1.37 4.8% 4.2% NVDA 22.63 22.13 NOV 20.00 4.62 *$ 1.99 11.0% 4.0% NPNT 22.13 26.81 NOV 17.50 5.25 *$ 0.62 3.7% 4.0% LCBM 14.88 12.50 NOV 12.50 3.00 $ 0.62 5.2% 3.8% IRF 17.44 19.44 NOV 15.00 3.00 *$ 0.56 3.9% 3.4% PAIR 13.44 12.25 NOV 12.50 1.81 $ 0.62 5.3% 3.3% BNBN 20.00 18.38 NOV 17.50 3.38 *$ 0.88 5.3% 3.3% PRGY 21.75 25.38 NOV 17.50 4.88 *$ 0.63 3.7% 3.2% NEM 23.25 21.94 NOV 22.50 2.25 $ 0.94 4.5% 2.4% CS 16.69 16.69 NOV 15.00 2.38 *$ 0.69 4.8% 2.1% EGHT 5.00 4.25 NOV 5.00 0.88 $ 0.13 3.2% 1.7% *$ = Stock price is above the sold striking price. Comments/Observations on Open Positions: Lifecore Biomedical Inc (LCBM) rebounded this week and offered a favorable early exit. A break below last Friday's low ($11.88), on a closing basis, may again warrant an early exit. Monitor the Proxymed Inc (PILL) position as it moves towards support and Newmont Mining Corp (NEM), if gold weakens further. Positions Closed: Youbet.Com Inc (UBET); Beyond.Com Corp (BYND). 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 Return Not Called Stock Price Mon Strike Option Opt Open Cost RC RNC Sym Price Symbol Bid Intr Basis CYOE 5.56 NOV 5.00 QTO KA 1.06 1530 4.50 11.1% 11.1% FLAS 9.63 NOV 7.50 UFL KU 2.63 35 7.00 7.1% 7.1% SFSK 8.44 NOV 7.50 FQK KU 1.25 805 7.19 4.3% 4.3% ITIG 10.00 DEC 10.00 ITU LB 1.25 13 8.75 14.3% 14.3% RRRR 14.75 DEC 12.50 RRU LV 3.25 117 11.50 8.7% 8.7% DRIV 22.75 DEC 20.00 DQI LD 4.25 65 18.50 8.1% 8.1% PRGY 25.38 DEC 22.50 PUY LX 4.50 581 20.88 7.8% 7.8% LTXX 16.00 DEC 15.00 UXT LC 2.06 40 13.94 7.6% 7.6% TOPP 9.81 DEC 7.50 TOQ LU 2.75 395 7.06 6.2% 6.2% Company Descriptions CYOE - Coyote Network Systems $5.56 *** Volatility Play *** Coyote Network is engaged in the sale of telecommunications equipment, international long distance services and network services, primarily to entrepreneurial carriers, competitive local exchange carriers and Internet service providers. The high call volume on Friday (669 contracts) and the inflated premium with no corresponding news make this interesting speculation. The issue has moved quickly back above the July - August lows on heavy volume and looks ready to challenge the September high. A reasonable cost basis on a volatile issue. NOV 5.00 QTO KA Bid=1.06 OI=1530 CB=4.50 RC=11.1% RNC=11.1% Chart = http://quote.yahoo.com/q?s=CYOE&d=3m **** FLAS - FlashNet Communications $9.63 *** What's Up? *** FlashNet is a nationwide provider of consumer Internet access and business services, offering high speed Internet access and related services that enable customers to outsource Internet and electronic commerce activities. Flashnet announced record new subscribers for the third quarter though earnings are not due until November 4. There is no news to explain the jump in price on Tuesday though there are plenty of "take-over" rumors. Something appears to be brewing. Three week speculation with a favorable cost basis. NOV 7.50 UFL KU Bid=2.63 OI=35 CB=7.00 RC=7.1% RNC=7.1% Chart = http://quote.yahoo.com/q?s=FLAS&d=3m **** SFSK - Safeskin Corporation $8.44 *** Stage I Base *** Safeskin is a leading developer and manufacturer of high-quality, powder-free, disposable latex and synthetic gloves for the healthcare, high-technology, scientific industries and consumer markets. Safeskin missed earnings estimates by a penny as it struggled with lower selling prices. The disappointment already appears to have been priced in the issue as the stock has been forming a base for 8 months. Safeskin is forecasting a better bottom line in Fiscal 2000. Favorable, short-term speculation. NOV 7.50 FQK KU Bid=1.25 OI=805 CB=7.19 RC=4.3% RNC=4.3% Chart = http://quote.yahoo.com/q?s=SFSK&d=3m **** DRIV - Digital River $22.75 *** On The Rebound *** Digital River is the largest online source of software and a leading outsource provider of Web-based commerce solutions. The company provides software publishers and online retailers with its proprietary technology for Internet delivery of more than 100,000 digital products, including 30,000 software products and applications. DRIV is building on the underlying strength of their core business; electronic software delivery and also is developing a complementary array of e-business initiatives that will contribute to future growth and competitive advantage. Sales were up 27% in the third quarter and analysts expect new revenues to increase exponentially. DEC 20.00 DQI LD Bid=4.25 OI=65 CB=18.50 RC=8.1% RNC=8.1% Chart = http://quote.yahoo.com/q?s=DRIV&d=3m **** ITIG - Intelligroup, Inc. $10.00 *** Next Leg Up? *** Intelligroup provides a wide range of information technology services, including enterprise-wide business process solutions, Internet applications services, systems integration and custom software development based on leading technologies. The company provides information technology services to develop and implement cost-effective client/server business solutions on a timely basis by combining its expertise in a wide range of technologies and business processes with its proprietary implementation methodology and development tools. Intelligroup reported record revenue for the third quarter and though net income was lower than last year, they did beat estimates. They also announced an alliance with Compaq and an agreement with FirePond. We favor the cost basis as an entry point as Intelligroup consolidates for the next move. DEC 10.00 ITU LB Bid=1.25 OI=13 CB=8.75 RC=14.3% RNC=14.3% Chart = http://quote.yahoo.com/q?s=ITIG&d=3m **** LTXX - LTX Corporation $16.00 *** 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 LTXX is exiting a lateral consolidation to the topside. Earnings should be announced near the third week of November. DEC 15.00 UXT LC Bid=2.06 OI=40 CB=13.94 RC=7.6% RNC=7.6% Chart = http://quote.yahoo.com/q?s=LTXX&d=3m **** PRGY - Prodigy $25.38 *** 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 reported a 3Q EPS loss of -$0.38 on revenues of $48.9 million (beating estimates) and reported subscriber growth up 181%, to 1.2 million users. With its Telmex relationship intact and a great third quarter, Prodigy is bringing out the advertising guns with TV spots featuring music legend Aretha Franklin and Basketball Hall of Famer Larry Bird. The chart looks great. DEC 22.50 PUY LX Bid=4.50 OI=581 CB=20.88 RC=7.8% RNC=7.8% Chart = http://quote.yahoo.com/q?s=PRGY&d=3m **** RRRR - Rare Medium Group, Inc. $14.75 *** Upside Break Out! *** Rare Medium Group is an Internet business services firm, helping clients develop Internet strategies, improve business processes and develop interactive content using Internet-based technologies. Rare Medium develops Internet and web-based solutions primarily for large and medium-sized corporations, including Microsoft, The New York Times, Epson, Pfizer, Hotel Reservation Network and the Federal Reserve Bank, among other leading companies. Lots of news out on Rare Medium since we ran this October 3. Just closed at a five month high (may challenge the April highs) and the downtrend has been broken. DEC 12.50 RRU LV Bid=3.25 OI=117 CB=11.50 RC=8.7% RNC=8.7% Chart = http://quote.yahoo.com/q?s=RRRR&d=3m **** TOPP - Topps Company, Inc. $9.81 *** Pokemon Mania! *** TOPP is marketer of collectible picture products. TOPP also distributes Bazooka brand bubble gum, novelty candy products, branded lollipops, collectible toys, comic books, and sticker and album collections. Mom...Dad, can I get some "MORE" Pokemon cards?!? TOPPS said it expects sales of Pokemon products to be in the range of $80 million to $100 million for the fiscal year, based on orders for cards featuring the Pokemon movie. Not to mention the Pokemon Lollipop shipments! When Topps reported earnings this quarter they beat estimates by $0.06 and said $0.05 a share can be attributed to the distribution of Pokemon cards. Where to enter? We favor a conservative entry point below the 150 dma that offers a monthly return of 4% (8% using Margin) and about 30% downside protection. Just in case this is a demonstration of irrational exuberance... DEC 7.50 TOQ LU Bid=2.75 OI=395 CB=7.06 RC=6.2% RNC=6.2% Chart = http://quote.yahoo.com/q?s=TOPP&d=3m NAKED PUT SECTION ***************** Option Trading Mechanics: The Exchange... This week, the OptionInvestor staff is in sunny California at the 1999 San Francisco MoneyShow. The Bay area is home to one of the country's major option exchanges; the Pacific Options Exchange (PCX). The location of the event offered a great opportunity to visit the professionals and learn more about the most common trading techniques used by market makers on the exchange floor. The PCX and the Chicago Board of Options Exchange (CBOE) both utilize a competitive market maker system, while the American (AMEX) and Philadelphia (PHLX) exchanges are specialist markets. These specialists are thought to have an exclusive franchise in the maintenance of a market, subject to the specialist's capital and inventory. At most exchanges, there are also traders referred to as locals that are funded by individuals or institutions. They buy and sell options for private accounts and are prohibited from executing orders on behalf of public customers. Since there is always a buyer for each option sold (option purchases and sales must match at the end of each day), these locals help maintain liquidity in the options market. Option markets that use competitive systems are consensual, where the liquidity and capital is spread around to those in the crowd. The PCX and the CBOE place certain market makers (The Lead Market Maker at PCX and the Designated Primary Market Makers at CBOE) in a quasi-specialist role. In exchange for assuming more marketing and customer service responsibilities, these market makers enjoy a guaranteed order flow participation. The result is increased accountability with greatly enhanced customer convenience and the traditional benefits of the competitive system are maintained. All trading posts in the PCX options market are staffed by LMMs and the seat prices are subject to supply and demand just as options prices. The current market for a seat on the PCX is $220,000 bid at $280,000 offered. The risk management strategies and floor mechanics are the most difficult part of the learning curve. Mistakes are expensive and repeat offenders are short-lived. Implied volatility and option pricing theory are the mathematical principles that a specialist must understand to be successful. Most floor traders participate in neutral combinations that don't require a specific movement in the underlying security to be profitable. They utilize the GAMMA in options to create profitable positions. This type of trading is much different than our retail style of buying/selling options (or spreads) to profit from directional moves in the underlying stock. The concept involves being long or short GAMMA in a class of options at the right time. GAMMA is the ratio of a change in the option DELTA to a small change in the price of the asset on which the option is written. You might think of it as a desire to own options when there is a demand for them or be short options when they are in great supply and inexpensive to repurchase. The most unique tool of the professional trader is the electronic, hand-held terminal that brings computer support to specialists on the trading floor. These unique, state-of-the-art devices provide market makers with automated trading data, maintaining intra-day positions with real-time risk assessment. The computers store all of the theoretical values and profit equations and offer portfolio management ability to the associated clearing firm. The specialists that I spoke with were very friendly and I highly recommend a visit to one the major exchanges. The lessons learned are a basic requirement for any option trader who is interested in becoming a successful, long-term participant in the complex market of derivatives. Those of you interested in more information on the PCX should go to: http://www.pacificex.com Good Luck! SUMMARY OF PREVIOUS PICKS Stock Price Last Mon Strike Opt Profit ROI Monthly Sym Picked Price Price Bid /Loss ROI NVX 7.94 5.31 NOV 5.00 0.56 *$ 0.56 26.0% 16.2% DUSA 14.94 13.50 NOV 12.50 0.50 *$ 0.50 12.4% 13.4% SUPG 26.56 28.13 NOV 22.50 0.75 *$ 0.75 10.3% 11.1% ENMD 24.75 24.00 NOV 20.00 0.75 *$ 0.75 12.7% 11.0% NPIX 23.00 28.00 NOV 15.00 0.81 *$ 0.81 15.0% 10.8% PRGY 21.63 25.38 NOV 17.50 0.50 *$ 0.50 10.0% 10.8% NSPK 12.44 11.94 NOV 10.00 0.44 *$ 0.44 14.8% 10.7% TALK 14.94 15.94 NOV 12.50 0.38 *$ 0.38 9.7% 10.5% USIX 35.00 33.31 NOV 25.00 0.75 *$ 0.75 9.7% 10.5% DUSA 14.38 13.50 NOV 10.00 0.44 *$ 0.44 13.3% 9.6% NPIX 23.25 28.00 NOV 15.00 0.56 *$ 0.56 10.7% 9.3% LTXX 15.56 15.81 NOV 12.50 0.38 *$ 0.38 10.7% 9.3% SUPG 24.38 28.13 NOV 20.00 0.63 *$ 0.63 10.5% 9.1% KIDE 40.44 73.13 NOV 25.00 1.13 *$ 1.13 12.3% 8.9% NEWZ 9.47 10.88 NOV 7.50 0.31 *$ 0.31 14.1% 8.7% SPGLA 12.00 14.50 NOV 10.00 0.38 *$ 0.38 11.9% 8.7% VERT 39.75 56.00 NOV 30.00 1.25 *$ 1.25 13.6% 8.4% BNYN 9.91 10.38 NOV 7.50 0.31 *$ 0.31 13.5% 8.4% CNCX 26.50 25.63 NOV 20.00 0.44 *$ 0.44 7.7% 8.3% RMDY 29.00 43.00 NOV 22.50 0.50 *$ 0.50 7.9% 6.9% SUPG 22.50 28.13 NOV 17.50 0.56 *$ 0.56 11.1% 6.9% TALK 12.63 15.94 NOV 10.00 0.31 *$ 0.31 10.9% 6.8% NPIX 23.88 28.00 NOV 15.00 0.31 *$ 0.31 6.1% 6.6% ZOMX 34.63 27.88 NOV 25.00 0.69 *$ 0.69 9.1% 6.6% ZIXI 33.00 39.75 NOV 20.00 0.50 *$ 0.50 7.0% 6.1% LGE 22.44 22.00 NOV 20.00 0.56 *$ 0.56 7.9% 5.7% TUTS 34.69 33.38 NOV 25.00 0.38 *$ 0.38 5.2% 5.6% NPIX 19.13 28.00 NOV 12.50 0.38 *$ 0.38 9.0% 5.6% HRBC 17.00 15.94 NOV 12.50 0.31 *$ 0.31 8.4% 5.2% CPTH 44.19 45.75 NOV 30.00 0.56 *$ 0.56 6.0% 5.2% *$ = Stock price is above the sold striking price. Comments/Observations on Open Positions: Theglobe.Com Inc (TGLO) did not rally with the Market and has been moved to the closed list. Positions Closed: Ardent Software (ARDT); Theglobe.Com Inc (TGLO). NEW PICKS ********* Definitions: OI - Open Interest CB - Cost Basis (break-even point if put exercised) ROI - Return On Investment Sequenced by ROI Stock Price Mon Strike Option Opt Open Cost ROI Opt Sym Price Symbol Bid Intr Basis Expired HELX 40.31 NOV 35.00 HHQ WG 1.00 255 34.00 8.5% DRIV 22.75 NOV 20.00 DQI WD 0.56 176 19.44 8.1% IRF 19.63 NOV 17.50 IRF WW 0.38 13 17.12 6.2% RMDY 43.00 NOV 35.00 LRQ WG 0.50 59 34.50 5.2% EXTR 80.31 NOV 60.00 EUT WL 0.75 192 59.25 4.5% STRX 7.63 DEC 5.00 TQQ XA 0.44 0 4.56 22.4% MLTX 16.19 DEC 12.50 UXM XV 0.50 0 12.00 13.4% IONA 21.38 DEC 15.00 YWQ XC 0.56 7 14.44 11.6% Company Descriptions DRIV - Digital River $22.75 *** On The Rebound *** Digital River is the largest online source of software and a leading outsource provider of Web-based commerce solutions. The company provides software publishers and online retailers with its proprietary technology for Internet delivery of more than 100,000 digital products, including 30,000 software products and applications. DRIV is building on the underlying strength of their core business; electronic software delivery and also is developing a complementary array of e-business initiatives that will contribute to future growth and competitive advantage. Sales were up 27% in the third quarter and analysts expect new revenues to increase exponentially. NOV 20.00 DQI WD Bid=0.56 OI=176 CB=19.44 ROI=8.1% Chart = http://quote.yahoo.com/q?s=DRIV&d=3m **** EXTR - Extreme Networks $80.31 *** Extremely Favorable *** Extreme Networks designs, develops, manufactures and sells high performance LAN solutions that adapt swiftly to change and enable future applications for the new enterprise. The company's family of stackables and modular switching systems combine Ethernet and the Internet Protocol with wire speed layer three switching to increase the flow of information and allow for future network growth. A recent upgrade with increased estimates from Robertson Stephens after the company reported solid earnings results. The upside in the quarter was driven by excellent revenue growth in both of the company's product lines. NOV 60.00 EUT WL Bid=0.75 OI=192 CB=59.25 ROI=4.5% Chart = http://quote.yahoo.com/q?s=EXTR&d=3m **** HELX - Helix Technology $40.31 *** Still Going Strong! *** Helix Technology is a global leader in the development and application of innovative solutions in the field of vacuum technology. They provide a broad range of critical components and subsystems key to the performance of semiconductor, flat panel and data storage manufacturing facilities along with new information solutions and ongoing operational support services to semiconductor device producers throughout the world. Posted strong order bookings and revenues in the quarter with excellent performance gains expected in the year ahead. Solid technicals and a bullish trend with some support near the cost basis. NOV 35.00 HHQ WG Bid=1.00 OI=255 CB=34.00 ROI=8.5% Chart = http://quote.yahoo.com/q?s=HELX&d=3m **** IRF - International Rectifier $19.63 *** A New High! *** International Rectifier designs, manufactures and markets power semiconductors that refine or condition electricity from wall outlets or batteries into a more usable form. IRF reported solid earnings this month, beating estimates by a penny. Their revenue increase reflected strong telecom and PC demand while total unit shipments increased 45% year-to-year and 11% sequentially. The price continues to move higher and now the issue is near a two year high with only one remaining technical hurdle at $25. Lehman Brothers recently upgraded IRF from NEUTRAL to BUY with a 12-month price target of $35 per share based on accelerating revenue growth and expanding gross margins. NOV 17.50 IRF WW Bid=0.38 OI=13 CB=17.12 ROI=6.2% Chart = http://quote.yahoo.com/q?s=IRF&d=3m **** RMDY - Remedy $43.00 *** Up, Up And Away! *** Remedy develops, markets and supports highly adaptable, client to server applications software for support and business processes. They are a leading provider of adaptable enterprise applications and the fastest solutions available for IT Service Management, Customer Relationship Management & Employee Workplace Automation. Remedy is the #2 enterprise applications vendor worldwide and the industry is growing rapidly. More information on this issue is available in the "calls" section of the OIN. NOV 35.00 LRQ WG Bid=0.50 OI=59 CB=34.50 ROI=5.2% Chart = http://quote.yahoo.com/q?s=RMDY&d=3m **** IONA - Ionay $21.38 *** Unique Technicals *** Ionay provides software products that enable the development, integration and management of network-based applications. They help organizations build and deploy enterprise portals, Internet commerce sites, and other large-scale distributed applications. The IONA iPortal addresses the problems in developing, deploying and managing a specific class of business applications commonly referred to as enterprise portals. IONA iPortal Suite unifies the members of an e-business project team and allows them to deploy and manage an enterprise portal that integrates with existing enterprise applications. We favor the bullish technical outlook. DEC 15.00 YWQ XC Bid=0.56 OI=7 CB=14.44 ROI=11.6% Chart = http://quote.yahoo.com/q?s=IONA&d=3m **** MLTX - Multex.com $16.19 *** Bottom Fishing *** Multex.com is a provider of online investment research and other information services designed to meet the needs of individual and institutional investors, investment banks, brokerage firms and corporations. Their services enable online access to over 900,000 research reports and other investment information on over 15,000 companies from more than 400 investment banks, brokerage firms and third-party research providers worldwide. We favor the technicals and you can learn more about Multex at multex.com. DEC 12.50 UXM XV Bid=0.50 OI=0 CB=12.00 ROI=13.4% Chart = http://quote.yahoo.com/q?s=MLTX&d=3m **** STRX - Star Telecommunications $7.63 *** Telecom Mergers *** Star Telecom is an international long-distance provider offering highly reliable, low-cost, switched-voice services on a wholesale basis, primarily to U.S long-distance carriers. They provide long distance service to foreign countries through a flexible network of resale arrangements with long distance providers, termination relationships, international gateway switches and leased or owned transmission facilities. Recent speculation on the outright sale of the company or a division, possibly to German interests. The cost basis appears to be a fair price for the issue. DEC 5.00 TQQ XA Bid=0.44 OI=0 CB=4.56 ROI=22.4% Chart = http://quote.yahoo.com/q?s=STRX&d=3m SEE DISCLAIMER IN SECTION ONE *****************************
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