The Option Investor Newsletter Thursday 11-18-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com Published three times weekly, Sunday, Tuesday, Thursday evenings. ***************************************************************** MARKET WRAP (view in courier font for table alignment) ***************************************************************** 11-18-99 High Low Volume Advances Decline DOW 11035.70 + 152.60 11054.30 10886.10 1,022,810k 1,508 1,525 Nasdaq 3347.11 + 77.72 3347.11 3288.68 1,585,102k 2,326 1,733 S&P-100 749.11 + 9.94 749.98 740.40 Totals 3,834 3,258 S&P-500 1424.94 + 14.23 1425.27 1412.61 54.0% 46.0% $RUT 462.04 + 4.97 462.04 457.07 $TRAN 3018.16 + 14.03 3020.13 2968.64 VIX 20.10 - 0.97 21.99 19.99 Put/Call Ratio .47 ***************************************************************** Thank you Hewlett-Packard ! The markets soared today on the back of HWP. It was really hard typing those words. I can't remember when HWP has done anything good for the markets with an earnings announcement. They have often been the spoiler, not the charger. After beating reduced estimates last night by +.02, which was not a barn burner quarter, they had a fairly upbeat outlook. That coupled with the spin-off IPO of Agilent this morning sent HWP stock up +13.31. The biggest driver here was the Agilent IPO. HWP sold about 13% of the company and the share price soared this morning after being priced above expectations already. The single character IPO, "A" is the symbol, hit $50 at the open and settled to $42.44 at the close. This values the 452 million shares HWP kept at almost $20 billion. This was a huge windfall for HWP and their shareholders. The Dow had actually opened with some weakness but after HWP began trading the Dow jumped to +125. After two attempts to sell off during the day the last hour disconnected from bonds and soared to close over 11,000 for the first time since Sept-13th. On the surface the markets look like there is no upper limit. The Nasdaq set yet another record day with only a couple of minor pull backs which were meaningless. The Russell-2000 is setting the world on fire. The small cap rally is keeping pace with the Nasdaq in consecutive higher closes. The Nasdaq volume today was the second largest in history again. Market wisdom has always held that rallies on strong volume are the holy grail of investing. There is a catch. Yes, we have had a flood of volume but not in the normal historical perspective. The volume we are experiencing is due mainly to new market factors. The Internet IPO effect is pumping hundreds of millions of shares into the market each week. In recent weeks we have had over 20 IPOs per week. The minimum shares for each ranging around 5 mil and the upper limit 170 million in the Charter IPO. Considering most IPO traders flip their shares in the first week and some shares are flipped several times, the 100+ million new shares per week could amount to 300 million or more in new volume. The second cause is the China effect from the last two weeks. With the admission of China to the WTO, stocks that were trading 100k per day in volume are now trading 5-8 million shares per day. Yes there is volume but it is not volume in the historical sense. The high volume rallies give the impression that the train is leaving the station without you on it and investors are racing to throw money at anything that is moving. The China effect is also impacting the small cap rally as well since most of the China stocks are very low dollar. Nasdaq volume has increased +35% in the last month alone. The Fed bears met, raised rates and disappeared into the forest again until spring, right? It appears this is not so. Did anyone notice the disconnect between the bond and the stock market today? With yields rising to 6.17% today analysts were finally reacting to the parting shot in the Fed report. "growth in excess of what the economy can sustain" OOPS! Maybe they are not done. Maybe they really will raise rates in February without any look and see. The bond futures are slowly indicating an expected rate increase. How much longer until the market stops for a breath and sees the cloud forming over its head again? The Nasdaq was up strong again. The S&P set another new record high. The Dow closed over 11,000 again with a strong +152 performance. Or did it really? Inquiring minds will want to know that 114 of the 152 points was due to only four stocks. The rest were only along for the ride. The four stocks were HWP +13.31, IBM +4.25, INTC +3.75, HD +3.06. We all know why HWP was up strong and IBM was up on a combination of the HWP outlook and the Intel news that PC sales were so strong they could not make enough chips. Home Depot was up on their split announcement. Only four stocks represented over 2/3 of the gains on news events. What happens tomorrow? Who knows? I surely don't but based on historical norms I would say we are real close to some profit taking and possibly serious profit taking. At the risk of boring you with too many charts tonight I will state my case. The Dow, which had been range bound and dormant for weeks suddenly ran up +490 points in the last five days. By itself that would cause some alarm but we are also approaching some heavy resistance. The first at 11,100 then 11,200 then 11,325. This will be a tough obstacle course to overcome without building a base here or better yet pulling back some to get a better run at the next level. You know the Nasdaq story. We had a 10% pull back in October then ran for +717 points in four weeks with NO PROFIT TAKING. You can't call the minor stops this week profit taking, they were totally inconsequential. Any way you look at the Nasdaq chart there is no support at this level. We are here on faith alone and the day of reckoning will come. The Russell-2K has been blazing a trail the last three weeks. Investors, believing the year end rally had begun, simply bought anything with a pulse. The China effect also helped keep the small cap rally alive the last two weeks. Don't look now but we are entering a period of high turbulence. Fasten your seatbelts when we hit 465. We have failed to penetrate that level three of the last four attempts. You knew I would get to the VIX eventually. The VIX fell below 20 today for only the third time since Oct 1998. This is a dangerous level. Every time we hit this in the past there was a corresponding market top. Remember the VIX does not mean the markets will blow off tomorrow but it does indicate the pressure is building. In reality it indicates a lack of pressure. A total complacency. Everybody is bullish. When everybody is bullish there is nobody left to buy. They have already bought. We all know what happens when the buyers dry up. What is going to happen tomorrow? Who knows. History has a way of repeating itself and those who can't read are doomed to repeat it as well. I am not saying sell everything and take two weeks off. The only point I am trying to make is WE ARE IN NOSEBLEED TERRITORY and, as QCOM proved this week, the law of gravity has not been repealed. Just keep those stop losses close and don't buy every dip. The next one could be a killer. Speaking of QCOM, those of you who were not able to react fast enough to the special trading alert we issued when QCOM reached $330 on Wednesday, had another chance at a killer entry point today. After a +$20 rally off the low yesterday, QCOM gave in to pressure again this morning and touched $330 again. Two perfect chances in two days. It just does not get any better than this. +$20 on Wed and then +$25 on Thursday from the lows. Futures are flat as of 9:00 and tomorrow's direction is still up for grabs. My GUESS would be a follow through rally at the open followed by a slow fade in the afternoon as traders lock in their profits. Good Luck, Sell Too Soon. Jim Brown Editor ********** STOCK NEWS ********** Hewlett-Packard Wins Back Wall Street By S.P. Brown What a week it's been for Hewlett-Packard (HWP): A makeover, an earnings announcement, an IPO, and a soaring stock price all within a four-day span. One can only wonder what the company will announce tomorrow to finish off the week. Head to our website for the rest of this article. /members/stocknews/111899_1.asp **** ************** Market Posture ************** As of Market Close - Thursday, November 18, 1999 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,750 11,320 11,036 Neutral 11.12 SPX S&P 500 1,315 1,385 1,425 BULLISH 11.12 OEX S&P 100 675 725 750 BULLISH 11.12 RUT Russell 2000 425 445 462 BULLISH 11.12 NDX NASD 100 2,320 2,520 3,003 BULLISH 10.28 MSH High Tech 1,120 1,250 1,566 BULLISH 10.28 XCI Hardware 1,000 1,095 1,149 BULLISH 11.11 CWX Software 770 800 1,166 BULLISH 9.03 SOX Semiconductor 475 525 650 BULLISH 10.29 NWX Networking 550 615 783 BULLISH 10.28 INX Internet 495 525 599 BULLISH 11.05 BIX Banking 645 690 665 Neutral 10.28 XBD Brokerage 395 450 468 BULLISH 11.12 IUX Insurance 610 650 643 Neutral 11.09 RLX Retail 875 910 926 BULLISH 11.12 DRG Drug 375 390 390 BULLISH 11.04 HCX Healthcare 750 790 779 Neutral 11.09 XAL Airline 180 190 147 BEARISH 5.21 OIX Oil & Gas 285 305 315 BULLISH 11.16 Posture Alert The Nasdaq continues to blaze, setting another new record and once again, on very heavy volume. Leaders for Thursday included Software (+5.55%), Hardware (+3.73%), Networking (+3.51%), and Internet (+3.32%). On the downside is the Airline sector, which continues to be stagnant as the price of crude oil jumped to over $26 barrel. There are no current changes in posture. *************** Market Sentiment *************** Thursday, November 18, 1999 The Pendulum! Just when you thought it couldn't go any higher, they slap you in the face and continue marching on. Whether it is a benchmark Index, call option, your favorite technology stock, or your Visa bill after your spouse goes shopping, gravity seems to be non- existent. Anything and everything seems to be rocketing-to-the- moon, or at least waking up with all the new-money inflows. This week has also been witness to random speculation. We have seen many stocks trading in the $1-$3 range, that never trade size, all-of-a-sudden trade record breaking volume on no news. We witnessed the 48-hour love affair with those Chinese stocks, where one issue went from $1 to $80 during two trading sessions. The speculation is running rampant, and most likely, will continue for the near-term. In the past, speculation like we have witnessed recently, would indicate that we have reached the top in the market. Our interpretation of these last two weeks continues to be the same, too many dollars chasing too few stocks. Combine this with the fact that short-sellers are now gun-shy, and won't dare short anything, and you get our current market environment. During Wednesday's trading session, where the Nasdaq actually closed down, we noticed that put buyers were coming into the market, most likely trying to call the top on the market. The put buying continued today, as was most evident in our Pinnacle Index for the S&P 100. The Pinnacle Index for this range on Tuesday was over 14, and now stands just above 2. What this tells us is that support is building from the put buyers, and that a continuation in the rally is most prevalent. Another interesting development on Wednesday occurred with options on Hewlett-Packard. During yesterday's trading session, speculators were bearish heading into the earnings report. During the trading day, total put open-interest rose by about 8,950 contracts, while call open-interest increased by about 2,100 contracts. This suggested extremely negative sentiment, which was dominated by bears in a highly bullish market. Needless to say, anyone who took a contrarian stand on HP reaped big rewards today. In sum, this market is like a giant pendulum. When it swings, it swings to both extremes. When stocks are heading down, they usually go a lot further than you ever would have imagined. When the market is running up, stocks usually go significantly higher than ever expected. Hopefully, everyone is taking full advantage of the up-move on the pendulum while it lasts! BULLISH Signs: Cash Flow: The amount of money being poured into this market is phenomenal. The trading volumes on the exchanges is a good example of this, as well as last weeks 2 IPO's of UPS and CHTR which brought in over $10 billion in new money. Volume: There is an old saying, that volume precedes price, and it couldn't be better exemplified that the last two weeks. Short Interest: Short interest for the Nasdaq is at an all-time high, and increased over 5% from the preceding month. 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 and the quarter ended up 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. Interest Rates: The yield on the 30-yr Treasury is now safely off the 52-wk high, and is getting close to being under the 6% benchmark, which is a key psychological number. Advance/Decline Line: The A/D line is looking significantly better than the past 6 months. Mixed Signs: None. BEARISH Signs: Volatility Index (20.32): The VIX continues to prove that the low 20's have been a good exit point. The low close for the VIX was on July 16, when it closed at 18.13, so should its current level not hold, we could be in for more upside in the market. 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% Friday, November 05 89,143 +128.1% Friday, November 12 94,610 +142.1% The Power of Sentiment Analysis It has often been said that the crowd is right during the market trends but wrong at both ends. Measuring and evaluating the sentiment of the crowd, therefore, can give savvy option traders a decided edge. OEX Pinnacle Index Friday Tues Thurs Benchmark (11/12) (11/16) (11/18) Overhead Resistance (740-750) N/A 14.56 2.68 OEX Close 731.12 742.89 749.71 Underlying Support (720-735) N/A 2.25 1.25 What the Pinnacle Index is telling us: During the last two sessions, the put buyers have come racing in. The Pinnacle Index dropped dramatically for 740-750, and is indicating that further upside is probable. Put/Call Ratio Friday Tues Thurs Strike/Contracts (11/12) (11/16) (11/18) CBOE Total P/C Ratio .68 .69 .69 CBOE Equity P/C Ratio .51 .36 .39 OEX P/C Ratio 1.53 1.57 1.30 Peak Open Interest (OEX) Friday Tues Thurs Strike/Contracts (11/12) (11/16) (11/18) Puts 700 / 12,420 700 / 14,304 660 / 12,337 Calls 740 / 10,728 740 / 8,814 740 / 8,232 Put/Call Ratio 1.16 1.62 1.49 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 November 18, 1999 20.32 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 November 11, 1999 44.4 35.9 Please view this in COURIER 10 font for alignment ************************************************* CHANGES THIS WEEK Daily Results Index Last Mon Tue Wed Thu Week Dow 11035.70 -8.57 171.58 -49.24 152.61 266.38 Nasdaq 3347.11 -1.61 73.51 -26.13 77.72 123.49 $OEX 749.71 -2.33 14.13 -3.12 9.94 18.62 $SPX 1424.94 -1.65 25.64 -9.32 14.23 28.90 $RUT 462.04 3.28 3.91 0.19 4.97 12.35 $TRAN 3018.16 -24.97 35.07 -95.54 14.03 -71.41 $VIX 20.10 1.17 -1.43 -0.35 -0.97 -1.58 Calls Mon Tue Wed Thu Week VRTS 138.13 4.06 10.81 -1.44 8.63 22.06 Dropped YHOO 213.88 8.06 7.56 -6.38 7.69 16.94 Yahoo indeed! NOK 137.00 -2.06 5.19 1.81 9.81 15.38 Excellent! CMVT 135.25 1.88 7.63 1.81 2.69 14.00 Clock ticking HLIT 69.75 5.06 2.63 0.31 2.75 10.75 New AOL 159.43 2.94 9.88 -5.00 3.81 10.69 Strong rally SFE 122.94 4.00 8.75 -4.19 1.88 10.44 Needs volume EMC 89.31 -1.81 2.06 0.88 6.13 6.63 Gets a boost SUNW 125.75 0.19 7.13 -1.69 0.81 6.44 Trending higher NT 78.44 2.44 1.69 -1.75 3.50 5.88 Smokin'! GMST 104.88 4.38 1.25 -3.13 2.00 4.50 New LVLT 78.25 0.63 3.31 -2.88 3.25 4.31 Still bullish BVSN 92.25 0.88 -0.19 -1.19 4.25 3.75 Still going... LSCC 46.75 -1.22 1.34 0.88 0.75 1.75 Slow & steady SLR 88.50 -2.19 -0.94 0.75 3.00 0.63 Confidence! SNE 176.75 2.56 1.88 -3.00 -1.19 0.25 Possible entry MXIM 87.00 -2.81 -0.44 -2.06 4.94 -0.38 Stock split! CNCX 32.81 0.44 0.25 -1.50 -0.06 -0.88 Short term bull AAPL 89.63 -1.19 1.75 -0.94 -0.63 -1.00 Dropped LSI 64.50 -1.94 0.44 -2.25 2.75 -1.00 Good sentiment TMX 98.00 0.19 -0.88 -1.88 0.56 -1.00 Dropped JPM 138.19 -0.94 4.13 -2.50 -1.56 -1.13 Watch and wait QCOM 355.81 -10.00 -4.75 -20.38 12.94-22.19 Hello entry! Puts RMBS 82.94 -1.06 0.56 -4.00 -0.56 -5.06 New EL 42.06 -0.75 -0.81 -0.25 0.50 -1.31 Still ugly NKE 47.00 1.19 -3.00 -0.06 2.75 0.88 Upgrade RMDY 37.63 2.31 -0.88 -2.25 2.13 1.31 Under 10-dma CSC 65.31 -0.06 -1.56 0.13 3.19 1.69 Dropped 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. 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The Option Investor Newsletter Thursday 11-18-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** TMX $98.00 +0.56 (-1.00) We were excited about the proposed 2:1 stock split announced by the Board of Directors on Nov 10th and the new 52-week high at $102.50 that followed. However after watching Monday's promising performance, TMX has sagged below the 10-dma (now at $98.19) for the past two trading sessions. This bearish sign has put us on edge. Plus we saw a block trade of 394,400 units at $99.06 on Wednesday that crossed Salomon Smith Barney and this didn't seem to help matters. It's still possible TMX could rise in the near-term and break above the $100 mark, but time is money - there are more lucrative plays in our future. We're exiting the play this evening. AAPL $89.63 -0.63 (-1.00) AAPL was on probation this week while we watched for a sign of definitive upward movement to confirm that its momentum was indeed intact. Well, on one hand trading volume did pick up speed, but unfortunately on AAPL's two-day decline. This is certainly not what we wanted to happen. At this point too, the stock is under its 10-dma ($90.91) indicator and with AAPL's oblivious response to today's rallying market we have no choice but to drop the play tonight. PUTS: ***** CSC $65.31 +3.19 (+1.69) CSC broke out and spent the day trading above its 10-dma of $64.50. CSC also closed near the high of the day indicating renewed and continuing investor interest. It looks as though CSC has found it's legs and is prepared to make a run for it. Therefore, it is time for us to close our play on CSC. CSC announced that they have finalized the merger with Nichols as the shareholders voted their approval at the special meeting held on the 16th. The Federal Trade Commission approved the merger last week. It was announced this morning that Andersen Consulting plans to sue CSC for $10 million worth of unpaid invoices. The bottom line is the hardware sector is heating up and CSC could stand to benefit. ******************* TRADERS CORNER ******************* Scoreboard! In the last quarter of high school sporting events, winning crowds are often heard to chant, "Scoreboard, Scoreboard, Scoreboard," in response to any insulting cheers from the opposite side of the stadium. That's how I feel, halfway through November, as I tally my trades. In the back of a graduate school portfolio management class, I was doing what passes for doodling -- calculating the compound returns on my different portfolios over 1, 5, 10, and 25 years on my financial calculator. Portfolio A. My 403b (like a 401k, but for teachers). I figure that I can expect 10% a year. So, after 25 years, this boring financial instrument will finally equal where my short term option portfolio is today. Portfolio B. My Long Term stock holdings. I calculated returns for 15%, 20%, and 25%, and these differences make a huge difference. After 10 years, my LT port will be twice as large if I return 25% vs. 15%. Right now, this is the bulk of my financial assets, weighing in at 57%. Portfolio C. My Short Term Option Trading Portfolio. Now 38% of my assets, up from 15% at the beginning of the year. Return for the year: 300+%. I started my career as an option trader in Jan99. I calculated returns for 250% and 750% a year, and, needless to say, the numbers grew ridiculous after 5 years. Which lead me to some of the following musings... What will happen after 3 years? Until now, I had planned to end my short, glorious career as an option trader in the Summer of 2000, when I would probably take a job as some type of professional barred from active trading. But I've already made more this year in trading than I would in some entry level professional jobs. Therefore, I need to reevaluate career choices -- I need to take a hard look at working in a start up company (and really rolling the financial dice) or another job that allows me to continue to trade actively. Portfolio Management. I am planning on systematically transferring 1% of my ST Option portfolio to my LT Stock portfolio each month, and using that cash to buy LEAP positions in stocks that I think are poised for continued growth. The downside of this strategy is expressed in books like Tony Perkins, The Internet Bubble, which argue that Internet stocks are due for a shakeout. The counter argument, expressed by Venture Capitalist John Doerr, is that the Internet is UNDERhyped. Other books, like the Long Boom and The Roaring 2000s, make the case that continued technological development and the spending habits of baby boomers will cause a continued stock market boom until 2009. Weighing these perspectives together, and tending to be bullish (I am, after all, writing this email from a wireless modem equipped lap top at a little cafe in Palo Alto), I plan to dollar cost average into LEAP positions in my LT Stock portfolio over the course of the next 6 to 12 months. My rationale is that, over the long term, this program will increase the annual return on my LT Stock portfolio by at least 10% a year. As well, this makes me eligible for LT capital gains taxation, and gives me the ability to defer my taxes by purchasing the underlying, if I decide to do that in certain cases. As the portfolio class ends, the professor makes a telling point: the reason that young people should take riskier positions is that they have career flexibility -- if they take large losses, they have the ability to work harder or longer, or to get more education. This makes sense, but the flip side of this, for me, is that if I build up a good amount of capital now, I have the flexibility to work as I choose to. As another of my professors put it, the biggest career risk of being an entrepreneur is that you become terminally unemployable, except to work for yourself. And, to some degree, every trader out there is an entrepreneur, accountable to ourselves, for our wins & losses. Success in this line of work represents real freedom. Anyway, my trades. Earlier this week, I closed out my "truckload" of AOL Nov 140 Calls at 12, 14, and 15 for 100%+ profits on all of them (cost basis = 6). I also closed out open Nov call positions on AAPL, SUNW and BVSN for overall gains in my ST Option Account; open Jan & Mar call positions on SCH and CSCO for 100%+ gains in my LT Stock Account; open Jan and Jan '02 LEAP Calls on MSFT for 10 - 20% losses in my LT Stock Account. I made a bad play on some OEX Calls immediately after the Fed decision, and realized that I was not making good decisions, so I decided to take my monthly break from ST Option Trading beginning on Tuesday this week, instead of next week. On Monday/ Tuesday, I almost target shot NOK calls when the underlying dipped to the support level of 121 that the newsletter suggested; damn! Going into Thanksgiving, I am almost completely in cash, except for some Dec OEX puts, which I purchased because I think that the market is overdue for a short term top. My overall gain for Nov Trading in my ST Option Account is 59%, though it could have been 74% without that blown day trade right after the Fed decision. The other vital statistic is that I spent 16 days in open trades, which are tiring and will wear down your ability to make good decisions. Now, I am in what I consider to be a vital monthly re-building/ maintenance phase. In the next few weeks, I plan to enter some Jan plays and LEAPS in my LT Stock Account, get authorization to write spreads and naked calls/ puts in my accounts, study some of the advanced strategies, plan a trip to Disneyland, and ignore the day to day movement of the markets until after Thanksgiving. Tonight, our local club will meet and hear from representatives from Preferred Trade, as well as celebrate the success of a few members who were playing QCOM LEAPS(!). Any successful trader will tell you the same thing -- what you do in the time you are not in the markets is just as important as what you do when you are deep into a trade with blinders on. Good Luck Janar Joseph Wasito janar@OptionInvestor.com ***************** PICK NEWS - CALLS ***************** CMVT $135.25 +2.69 (+14.00) The clock is now ticking more loudly on our play of CMVT. We have had such a spectacular run and have benefited from plenty of time to be patient for new entry points but that luxury is running out. Speaking of the great run, CMVT bolted northward on Wednesday, tagging $140 in the first hour. It then melted back towards $130, which is support. Strangely, it briefly went through $130 this morning to hit $128.13 for the day-low but quickly returned to trend higher for the rest of the session. If you have been following this play, then you know these brief dips are standard procedure for CMVT. Anyway, with today's close over $135, everything looks good. If the market keeps going, we are likely to retest $140 again. The earnings report is due out on Nov 30th and that is why the clock is ticking. We will be closing out of the play ahead of the earnings release to avoid any surprises but we do think a stock split is likely. SNE $176.75 -1.19 (+0.25) A few days of consolidation for Sony is certainly not unreasonable considering Sony has given us over $25 so far this month. It looks as though a breakthrough of the psychological resistance of $180 may have triggered this recent sell-off. SNE did not even test support at it's 10-dma of $174 before the bulls resurfaced and pulled SNE back up to close up over a dollar from the low of the day. Sony posted volume roughly three times the average, another good indication of continuing investor interest. This current trading level offers potential as a possible area of entry for a new play, something that has not been easy to come by as of late. Once SNE confirms a reclamation of its positive momentum, it may be time to hop on board. LSCC $46.75 +0.75 (+1.75) It was a strong day in the market for the majority of the Semis and LSCC was no exception. LSCC maintained a slow and steady upward trend toward its current 52-week high of $48. LSCC traded up to $47.25 early in Wednesday's session before making a late day pullback to close at $46. This level held up well throughout trading today as LSCC made several bounces right around this point. As we mentioned in Sunday's write-up, we were looking for LSCC to have some intraday pullbacks for possible entry points. LSCC has done a nice job of providing these for us this week, offering a trading range of nearly $4. Going forward, LSCC looks good heading into Friday's session with a close today near the high and strong volume. Look for $46 to hold support. LSCC's 10-dma is at $44 which could hold as further support if needed. We want to see a breakout soon though to justify keeping LSCC around with so many other hot plays out there right now. MXIM $87.00 +4.94 (-0.38) Our anticipated split play on MXIM got a shot in the arm today, which is just what the doctor ordered. MXIM announced today that its Board of Directors has authorized a 2:1 split for shareholders of record on November 30th. The ex-date for MXIM will be December 22nd. MXIM declined yesterday a little more than we would like to have seen making an intraday low of $81.50 late in the day. This morning with the shareholder's meeting underway MXIM started the day in plus territory and never looked back. MXIM hit the $87.75 mark and fell back to close at $87.00 up $4.94 for the day. MXIM gave us lots of good entry points today. The volume today was a bit better than average at 1.6 mln shares, but still nothing to write home about. MXIM is faced with the same challenge we mentioned Tuesday and that is the resistance found in the $88 area. A breakout through the $88 level will now be the key to our split run. It would appear that MXIM has the momentum to continue higher. If it can't push through the overhead resistance then our play could be in jeopardy. If you re-entered a play in MXIM keep your stops close. If you are considering a new play, wait for MXIM to break above the $88 level on a closing basis. EMC $89.31 +6.13 (+6.63) Thank you Hewlett-Packard. The Dow and the computer hardware sector got a boost today from the strength in HWP. HWP accounted for approximately 80-90 points of the Dow move today and probably accounted for a good portion of the move in EMC. Analysts rewarded HWP for their earnings efforts yesterday and the jump in revenues. Although the picture for 1st quarter of 2000 could be somewhat cloudy, investors heard just what they needed or wanted to hear, driving shares of HWP over 16 percent higher for the session. EMC and most of the stocks in the hardware sector jumped on HWP's back and enjoyed the ride. EMC made a new high at $90.38 in the last 15 minutes of the trading day. Volume was a solid 6.4 mln., indicating there is probably more room to go on the upside. We would view continued strength as an opportunity to buy calls, however some traders are apparently beginning to talk about the "bubble" on the Nasdaq and when it may burst. That's always the $64,000 question. Should we see a retracement in EMC, initial intraday support lies in the $87-$88 area, followed by $83. In looking for a new play we would like to see these support levels hold on a consolidation or a retracement prior to entering a new play. If we see continued strength in EMC, we would consider adding to already established positions and then keep your stops close, as traders who bought EMC earlier in the week when it was trading at the near $80 may decide to take some of their money to the bank. JPM $138.19 -1.56 (-1.13) JPM could be setting up to give us a great entry point for our call play. After the FED decision to raise interest rates JPM jumped $4.13 on Tuesday. Wednesday and today gave it back. Concerns over the price of oil and potential inflation have crept back into the market. The banking sector has given back more than what it gained Tuesday. So all things considered JPM has held up pretty well. As we said JPM COULD be setting up for a good entry point. It bounced off the bottom of its near term channel today. We would like to see some solid movement trough the $139-$140 area accompanied by strong volume before entering a new position. We are honestly looking for a pullback or retracement to begin in the major indices as they are strong, but have got more and more overbought and need some time to backfill and consolidate. The VIX closed at 20.10 indicating a drop could come soon. Whether or not it happens, and the extent to which the banking stocks will join in is obviously yet to be seen. We believe that JPM could be an outstanding play, it may just take a little time to develop so we will need to have patience. YHOO $213.88 +7.69 (+16.94) After a strong opening yesterday, YHOO retraced to the $205 range, a level that could be evolving as near-term support. The downdraft effectively offered solid entry points into this split-candidate play. In the past, Yahoo! has announced stock splits when the share price reaches $200 to $220. Presently there aren't enough shares authorized for another split and therefore a Shareholder Meeting would be required. Today this potential splitter rallied again on holiday momentum and new coverage giving HIGH-RISK Internet players $7 to $8 in immediate profit. The company announced Yahoo! Gift Registry, a service that provides a place for users to develop a "wish list" of goods from its over 7500 merchants and then e-mail choices to friends and family. And today First Union Securities started coverage with a Strong Buy rating and issued a bullish price target of $240. On the international news front, Yahoo stands to benefit over time in light of the recent landmark agreement between the US and China. Yahoo! already has presence in the China economy with its Yahoo! China, a Chinese-language site launched in September. It's predicted that Chinese Internet users will increase from the anticipated 8 mln in year 2000 to over 30 mln by 2003 putting this Internet content provider in quite a lucrative position. AOL $158.63 +3.00 (+10.69) AOL has rallied strong ahead of its 2:1 stock split scheduled for Monday, after the bell. Just this week alone, AOL has tallied almost $10 in profits in moderate trading activity. For those players holding open positions, please consider exiting your play by Monday (the very latest) to avoid the risk of any post-split decline. Short-term resistance is at yesterday's daily high of $161 and honestly any exit in that proximity should have provided lucrative returns. Otherwise there's a good chance Greed could deal you a nasty hand quickly pulling those profits right out from under you. Concerned parents were glad to hear of AOL's recent commitment to provide ratings on all its computer games played on its sites. Also Microsoft (MSFT) announced it's backing down from the fierce battle over instant messaging it's had with AOL in recent months. In good spirit, Microsoft released a new version of its free instant messages (IM) that no longer gives access to AOL's competing AIM system. SLR $88.50 +3.00 (+0.63) As you know, SLR consolidated in the neighborhood of its near-term support at $85 and the 10-dma ($85.71) indicator since last Friday. This respite provided lots of opportunities for entries into this momentum play. Today our patience was rewarded and SLR pumped up $3 in robust trading activity. The 52-week high (set last Thursday) is just overhead at $90, but another strong day should propel the stock right through this mark as $87-$88 was the real opposition. Don't be alarmed if we get a slight pull-back with the broad market tomorrow. Unless there is some unforeseen event SLR is poised to go higher on investor confidence resulting from recent acquisitions, analyst comments, and upcoming earnings confirmed for December 13th. LVLT $78.25 +3.25 (+4.31) The trading pattern for LVLT has remained consistent with our repeated strategy. If you have been buying on the pullbacks and selling into strength, you have been making money every other day. Yesterday the stock closed at the lower end of the range, trading to as low as $74.25, before closing at $75. Incidentally we had recommended in Tuesday's letter to look for a bounce at the $74.25 level, and that is exactly what happened. Today it retraced the drop in price to close the day at the high end of the range at $78.25. Once again the volatility remained consistent, the buying on dips strategy has worked now three or four different times. The technicals remain consistent with our bullish sentiment on the stock and this hot telecommunications sector continues to see inflows of money from Wall Street. Look for more of the same with LVLT, volatility, buy on dips, sell on strength, and higher prices. Going forward look to enter on a confirmation of the trend above $78.38 or wait for a pullback to support levels near $75. Keep in mind past performance does not future results, but it is hard to deny this trading pattern. SUNW $125.75 +0.81 (+6.44) After reaching an intraday high on Wednesday of $131.31, the shares of SUNW began to give back some of the gains as the Nasdaq decided to pullback for only the third time in over twelve trading sessions. Today with the Nasdaq returning to record highs, the tech bell- wethers pushed higher as well. SUNW is still trending higher, but caution is in the wind. A lot of the volume is profit- taking, but there are still new buyers, buying ahead of the stock split. Just a reminder the stock will split 2 for 1 on 12/09. We have had a nice run, and want to protect the gains, so keep your stops tight. There is still over two weeks of trading before the stock split takes effect, so we do not believe the split run has ceased, but protect yourself at these levels. There seems to be a since of complacency in the market, which could be dangerous. The seasoned veterans of Web application platforms like SUNW remain steady, but money is also moving into the smaller cap companies as well. There has been a broad based rally in the Internet names. Look for support near the $124 level, aggressive traders could use this level for a possible entry point. CNCX $32.81 -0.19 (-0.88) It seems as those ISP's, to be specific the ISP's that have recently announced stock splits in the Internet sector, have gotten the most attention lately, with the likes of AOL, VIGN, BRCD to name a few have been surging ahead of these upcoming splits. Some of the smaller ISP's have been rolling over. CNCX falls into that category. After starting the week with prices reaching $35.25, the momentum has fizzled somewhat to fill the gap. Filling the gap is not always a bad thing. Sometimes when a stock retraces recent levels, it is gearing up for another leg up that will take the stock to higher-highs. CNCX, trading as low as $31 today, before bouncing to close near the $33 level. This is encouraging and we look to see if the volume and moneystream can converge with the bounce and take the stock to new levels. We look to add to current positions above the $35.25 level. Aggressive traders should keep this one on the radar screen for a retracement and a bounce off of the $30-$31 level for a possible entry point. The overall bullish sentiment remains with the sector and we expect higher prices, but keep stops tight and take your profits accordingly. The stock remains in the recent relative strength channel, this is also bullish over the short-term. LSI $64.50 +2.75 (-1.00) The semiconductor stocks as a group bounced back today from recent consolidations. Stocks like TXN, NSM, STM, and other broad-line semiconductor stocks helped to push the $SOX index up over 18 points today. Also on the back of good earnings from AMAT, although AMAT sold off today, it helped to remind Wall Street about the earnings that are anticipated from the sector overall. This overall positive sentiment helped stocks like LSI push forward to slightly higher prices for the day. We still are looking for the stock to trade above recent 52 week highs of $65.50 for another entry point and we possibly could see that level tomorrow in a volatile option expiration trading session. We had mentioned in Tuesday's newsletter to look for a possible trading entry point at the $61.75 level for a buy on a bounce. That is exactly what happened, and if you entered a position at the end of the trading day on Wednesday, you now have a profitable trade. Protect those profits going forward. If today's rotation of funds into the sector was serious, you will see higher-highs, look to ride the wave above $65.50. In recent news, LSI reported that its single chip CDMA baseband processor has been approved by system operators for use in the Japanese market. This is good news for the overall profit picture going forward for LSI. BVSN $94.25 +4.25 (+3.75) So much for running out of steam. It never happened. While we were getting a bit twitchy about the declining volume earlier in the week. Volume doubled today over yesterday's 1.3 mln shares, taking BVSN easily through $92 resistance to close up $4. As long as volume remains in the issue, the next likely test of resistance is at its all-time high of $95.94. Friday will be a bit tricky with options expiration serving to hold prices up, while profit-taking could force these big gainers down. Well folks, over the last three weeks, we've been given a demonstration that liquidity manifested in volume will overcome intelligence 12 out of 15 times. While we keep thinking that NASDAQ is due for a breather after such strong gains, there just is no substitute for volume in keeping prices on the move. Support is at $90, $88, $86. Target shoot to your risk profile at these levels and remember to protect your profits with trailing stop losses if you are already in a position. NT $78.44 +3.50 (+5.88) Forget groovin' up slowly. Nortel is smokin' up quickly to become the number one producer of optical networking equipment, by a margin of 32% market share compared to Lucent's 27%, according to a new study released by California consulting firm, RHK. While yesterday gave us some profit- taking, today was a textbook chart as NT ascended all day, and finished the final hour with a strong surge of volume. Remember to protect those profits with trailing stops. Support is pretty good at $75 both historically and in the channel. The channel resistance is at $82. By the way, today was a new high for NT. Watch for volume increase if NT breaks out again, or wait for the dip to take a position. With the VIX so low at 20.10, we can't help but think, investors are just a bit too comfy for this market. SFE $122.94 +1.88 (+10.44) Did you use a trailing stop to protect your profits as SFE traded as high as $127.75 today? Unfortunately, profit-taking ensued shortly thereafter, testing support at $120 before bouncing into a strong rally at the close. At least the theory held that old resistance becomes new support. There is no news driving the price right now, just momentum. (of course, the momentum is borne of this incubator company taking its babies public or spinning them off in IPO's) That said, volume is only average telling us that SFE may need to base a bit before moving up to the next level. There could be some market wide profit-taking in the meantime, which would likely take SFE with it. If you are going to take a position, we suggest target shooting at $120, market willing. And keep your eye on the volume. Just "average" (ADV) won't keep it moving up with conviction. There is still the possibility of a split, but we don't think its likely any time soon, since the next earnings date isn't until February, which would be a likely time for the announcement. NOK $137.63 +10.44 (+15.38) Wahoo! Party hats and horns! Careful. That's about the time somebody puts the lampshade on their head and the police show up. Nonetheless, this was a fantastic move (ain't momentum great?), but subject to some correction should the market do some backing and filling from such a strong run. Intraday support is at $134. Channeling support is at $125 with channeling resistance between $135 and $138 (we're there now). Historical support is way back at $120. Honestly, today was a great day to own this (then sell it), but a bit tougher to buy since we never got the opportunity for a good entry. Patience will pay off here. Don't chase it. Wait for a better entry. What likely sparked today's big move was Merrill Lynch's price target revision from $120 to $180. That always looks good. It doesn't hurt that NOK traded up into historical split announcement territory either ($130-$140). With a big gap up, a move outside the channel, and a profit- taking Friday staring us in the face, those in the play will want to have a trailing stop in place. QCOM $355.81 +12.94 (-22.19) Anybody catch that buying alert yesterday as QCOM touched $328? Or how about this morning as moved down to $330 in amateur hour? Either way, it had "buy" written all over it. With earnings handily beating street estimates, a 4:1 split (shareholder meeting scheduled for Dec 20th), wire line networks being chucked in favor wireless in developing countries and QCOM's plan to spin off or sell its handset division, the future of this company is great. Support is in the $330 range; on a bad day it could get to $300. But we doubt that will happen as volume over the past few weeks indicates that funds have been doing the buying and are not likely to part with it soon. That said, selling volume was a bit high yesterday; buying volume a bit low today. At least nobody seems interested in dumping at this price (that may change if the market decides to take profits tomorrow). The next big event for QCOM is the split, which will likely be set for late December. And as that date gets closer, we should start to see the volume pick up again and move the price back up. Until then pick your entry carefully as QCOM had a hard run to $406 and may still have some backing and filling to do. That's especially important now that the time value of the options is astronomical. By way of example, we note the DEC-400 ($45 out of the money) at $19.75 ask. This is no bargain. Again, pick your entry carefully. ***************************** SEE DISCLAIMER IN SECTION ONE
The Option Investor Newsletter Thursday 11-18-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. **************** PICK NEWS - PUTS **************** RMDY $37.63 +2.13 (+1.31) Despite a late surge in the RMDY, the basis for our play is still in tact. We have suggested that the 10-dma be our guide as resistance. RMDY has bounced off that level with each rally in the for the past two weeks. This has made a good entry point for new put plays. The 10-dma is currently at $38. We are concerned with the spike up late in the day because it had volume to back it up. There is no news on the wire but somebody got interested in RMDY during the last hour of trading. Because of this, we would recommend holding off on new plays until we see a definitive bounce off resistance. We had a good play Wednesday as RMDY dropped back to support at $35. Eventually, either the 10-dma or support at $35 is going to have to give. These two indicators will tell us whether to continue searching for puts in RMDY or to look elsewhere. NKE $47.00 +2.75 (+0.88) Help, our play is walking dangerously close to the edge. Hopefully today was just a head fake or NKE may fall on to the drop list. Today's rally probably had something to do with the Lehman Bros Buy rating established yesterday. This brought buyers into the market as volume came back from the dead. A look at a one-week chart shows what may be a bottom pattern on Wednesday after the announcement. We want to give NKE one more day though to prove itself. You will probably want to avoid any new plays right now until NKE re-establishes its downtrend. It is right at resistance and support is now at the weekly-lows at $44. So use caution after the upgrade From Lehman. EL $42.06 +0.50 (-1.31) Come on, is that the best EL could do in a market like this? Rather then be concerned about a day El went up, we view this as more of a testimony as the continuing weakness of EL. EL is trading more than a dollar below it's 10-dma and until we see a breakthrough of this level, we are not convinced that EL's momentum has changed direction. EL's next support is still all the way down at $40 but we are looking for EL to make the plunge to the 52-week low of $35.50. Before entering any new plays, we obviously want to see a reclamation of EL's negative momentum. Once we see this turn, this could very well be a good place for a new entry. ************** NEW CALL PLAYS ************** GMST - Gemstar International $104.88 +2.00 (+4.50 this week) Gemstar International Group makes videorecording 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. The last month has been very, very good to the shareholders of GMST stock. After consolidating between $70 and $80 from late September until the third week of October, GMST began a nice earnings run. On October 8th with the price of GMST trading near $86, GMST reported decent earnings of $0.19, beating the street by a penny. The next day GMST broke through the $90 mark and began another run up, in anticipation of a split announcement. Traders received the news yesterday that GMST had declared a 2:1 for shareholders of record November 29th. The ex-date is scheduled for December 13th. This is the second split for the Audio and Visual Equipment company. GMST split 2:1 back on May 17th. Today GMST suffered a bit of a post announcement depression early in the session, but recovered late in the day bouncing off its low of $101.00 to close +2.00 on the session. Technically GMST has solid support between $100-$101. We are looking for the strength in GMST to continue as many of the technical indicators are in positive territory. One negative is the volume as it has been a little light this week. If we see new buyers enter the market on GMST and continued strength we would look to buy calls. We would urge caution not so much in GMST, as in the broader markets. They are over due for a pullback and consolidation. If we see that occur, GMST may not be able to avoid the selling. On the bright side it could provide a better entry point for our play. Before entering our split play watch the major indices and the movement of GMST, before placing an order. In other news, the analysts recently showed their approval of GMST's earnings with 3 different firms last week reiterating Buy recommendations and raising their 2000 target estimates. Most now finally approve of GMST's acquisition of TV Guide back in early October and believe the merger will only strengthen the company. BUY CALL DEC-100 GST-LT OI= 507 at $11.88 SL=9.50 BUY CALL DEC-105*GST-LA OI= 723 at $ 9.38 SL=7.25 BUY CALL DEC-110 GST-LB OI= 314 at $ 7.00 SL=5.25 BUY CALL DEC-115 GST-LC OI=2661 at $ 5.25 SL=3.75 Picked on Nov 18th at $104.88 P/E = 138 Change since picked +0.00 52 week high=$110.63 Analysts Ratings 6-0-0-0-0 52 week low =$ 25.31 Last earnings 09/99 est= 0.18 actual= 0.19 surprise +2.5% Next earnings 02-10 est= 0.21 versus= 0.17 Average daily volume = 1.22 mln Chart = http://quote.yahoo.com/q?s=GMST&d=3m **** HLIT - Harmonic Inc. $69.75 +2.75 (+10.75 this week) Harmonic designs, manufactures and markets digital and fiber optic systems that deliver video, voice and data over cable, satellite, telcom and wireless networks. These advanced solutions enable cable television and other network operators to provide a range of interactive broadband services that include high-speed Internet access, telephony and video-on- demand. The company also operates its Harmonic Data Systems subsidiary and an R&D center in Israel. HLIT is one of the companies in this Telecom equipment sector that is on fire. Stocks like JDSU, ADCT, TLAB, just to name a few of these high flyers are seeing prices surging towards higher-highs almost on a daily basis. Traders are rushing into the sector in search of the next Qualcomm. HLIT specifically has recently split its stock back in the middle of October. After a split you normally have a post-split dip that takes your prices down for a period of time as profit takers step in. Then you will see the stock start to trace higher if the positive earnings picture still remains intact. It seems that HLIT's positive picture remains intact as the stock has traded up with the sector up over 10 points this week. HLIT currently sits at the $69.75 level which is at the high end of the recent trading range on stronger than average volume. We like the shares at current levels and look to add to positions, and then again above recent highs near the $71 level. The stock has trading support at $67, if there is a pullback due to a volatile session or market breather, look for a possible entry point at this level. Resistance is at the 52-week high at $80. CE Unterberg Towbin has recently upgraded the stock from a Buy to a Strong Buy. They have also recently been on the acquisition trail to strengthen there overall business. They have entered into an agreement to acquire the Divicom business of C-Cube Microsystems. The combination will position HLIT as a leading supplier of open-systems solutions for delivering video, voice, and data over a variety of networks. BUY CALL DEC-65 LQL-LM OI= 402 at $10.13 SL= 7.63 BUY CALL DEC-70*LQL-LN OI= 314 at $ 7.63 SL= 5.63 BUY CALL JAN-65 LQL-AM OI= 188 at $13.88 SL=11.38 BUY CALL JAN-70 LQL-AN OI= 85 at $11.63 SL= 9.50 low OI Picked on Nov 18th at $69.75 P/E = 372 Change since picked +0.00 52 week high=$79.00 Analyst Ratings 4-4-0-0-0 52 week low =$ 5.50 Last earnings 11/13 est= 0.15 actual= 0.23 Next earnings 01-19 est= 0.22 versus= 0.03 Average daily volume = 1.00 mln Chart = http://quote.yahoo.com/q?s=HLIT&d=3m ************* NEW PUT PLAYS ************* RMBS - Rambus Inc $82.88 -0.63 (-5.06 this week) Rambus Inc. develops and licenses high-performance, chip- to-chip interface technology that enables semiconductor memory devices to keep pace with faster generations of processors and controllers. Rambus technology is incorporated onto dynamic random access memory (DRAM) chips and the logic devices that control them to deliver more than ten times the performance of conventional DRAMs. A single Rambus(R) DRAM, referred to as RDRAM(R), transfers data at speeds up to 800MHz over the Rambus Channel to Rambus-compatible ICs. Rambus began November with great positive momentum, gaining nearly $31 between November 1st and November 4th. RMBS continued to maintain this momentum until right around the 10th, when RMBS began to roll and settle into a fairly steady downward trend. Rambus licenses designs to Intel, and was specifically cited as a factor in the downgrade of Intel on November 11th by Merrill Lynch analyst Joe Osha. He stated concern in regards to Intel's support of Rambus Memory Technology. Intel was delayed in releasing their 820 chipset, which is essential in making Rambus memory work on desktop PCs. All of this has caused major setbacks for Rambus as continuing glitches, setbacks and mistakes in marketing continue to plague the introduction of Rambus memory. So when we get down to it, this is a play fueled by the continuing negative momentum of Rambus and the not so Midas touch of Intel. RMBS is currently trading $5 below it's 10-dma. Support looks to be holding right around $80 and should RMBS break through this level, could be cleared for a healthy fall. Rambus posted weak volume in today's session, indicating a lack of investor interest heading into tomorrow. Look for brief rallies for possible points of entry. The 10-dma should act as resistance and is currently at $88 BUY PUT DEC-85 BNQ-XQ OI= 309 at $9.00 SL=6.75 BUY PUT DEC-80*BNQ-XP OI=3428 at $6.63 SL=4.75 Average Daily Volume = 1.80 mln Chart = http://quote.yahoo.com/q?s=RMBS&d=3m ********************** PLAY OF THE DAY - CALL ********************** CMVT - Comverse Technology $135.25 +2.69 (+14.00 this week) 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. Sunday's Write Up The action has returned in our play of CMVT. A week ago we talked about how trading had really quieted down as CMVT was only up a quarter for the week. But we also noticed that the lows were getting higher, forming an ascending bullish triangle pattern that usually signals a move to the upside. In fact, Jim outlined this in his Options 101 article last Sunday if you want to go back to see the pattern to compare with the result. The result was a strong move up starting at the beginning of the week. CMVT ended over $120 on Monday and hit $130 by the close on Wednesday. The beauty to this play is the intraday pullbacks that CMVT offers as entry points. In has routinely come off the highs and back to support before going higher once again. As you know, we are playing this on the earnings run, which are due Nov 30th after the close. We are seeing an increased intensity in the run due to the high probability of a split announcement. Like always, we will drop the play ahead of earnings to avoid the inherent risks associated with holding over earnings. But we will consider bring CMVT back depending on the timing of the ex-date. For now, a dip back to $120 could be considered for an entry point. You may want to use caution ahead of the FOMC on Tuesday though. Resistance is the new high set at $130. CMVT has never broke the 10-dma (currently $117.50) and any close below it would be a bad development. Place your stops accordingly. In typical CMVT fashion, the news is light. In fact, there was only one article on the newswire this week relating to Comverse. On Monday, it was announced that Norstan Inc will incorporate CMVT's Infosys' Ultra and Mentor products. Terms of the agreement were not disclosed and this kind of news has relatively little impact on CMVT's stock price. Thursday's Write Up The clock is now ticking more loudly on our play of CMVT. We have had such a spectacular run and have benefited from plenty of time to be patient for new entry points but that luxury is running out. Speaking of the great run, CMVT bolted northward on Wednesday, tagging $140 in the first hour. It then melted back towards $130, which is support. Strangely, it briefly went through $130 this morning to hit $128.13 for the day-low but quickly returned to trend higher for the rest of the session. If you have been following this play, then you know these brief dips are standard procedure for CMVT. Anyway, with today's close over $135, everything looks good. If the market keeps going, we are likely to retest $140 again. The earnings report is due out on Nov 30th and that is why the clock is ticking. We will be closing out of the play ahead of the earnings release to avoid any surprises but we do think a stock split is likely. BUY CALL DEC-120 CQV-LD OI=885 at $19.00 SL=15.00 BUY CALL DEC-125 CQV-LE OI=576 at $15.25 SL=12.00 BUY CALL DEC-130*CQV-LF OI=812 at $12.75 SL= 9.75 BUY CALL DEC-135 CQV-LG OI= 32 at $10.38 SL= 7.50 low OI Picked on Oct 21st at $102.13 P/E = 75 Change since picked +33.13 52-week high=$139.75 Analysts Ratings 8-3-0-0-0 52-week low =$ 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 = 1.3 mln Chart = http://quote.yahoo.com/q?s=CMVT&d=3m ************************ COMBOS/SPREADS/STRADDLES ************************ Nowhere To Go But Up?!? Wednesday, November 17 Equity markets consolidated Wednesday as crude oil prices moved to new highs, renewing inflation fears that have plagued stocks for the past few months. The Dow Jones Industrial Average closed 49 points lower at 10,883 and the Nasdaq composite ended down 26 points at 3,268. It was the technology market's busiest day ever as 1.65 billion shares were exchanged. The S&P 500 index slipped 9 points to 1,410. Declining stocks outpaced advances 3 to 2 on heavy volume of 944 million shares on the NYSE. The 30-year U.S. Treasury bond moved to its highest level in two weeks, with the closing yield at 6.07%. Tuesday's new plays (positions/opening prices/strategy): Able Telecom ABTE MAR10C/DEC10C $1.00 debit calendar Cybercash CYCH MAR15C/DEC15C $1.12 debit calendar Peoplesoft PSFT JAN15-CC $14.12 debit covered-call Tut Systems TUTS FEB17C/FEB25C $0.00 debit bull-call Tut Systems TUTS FEB20C/FEB25C $0.00 debit bull-call Our two new speculation plays traded in different directions as Cybercash quickly moved higher while Able Telecom started lower and failed to recover during the session. CYCH did not meet our recommended target however, $1.12 is a reasonable price for the position. ABTE finished $0.81 lower and there were opportunities to achieve the suggested debit in the first hour of trading. PSFT moved up at the open and climbed gradually throughout the day. The covered-call play was available (at a slightly higher cost basis) but the bullish debit spread offered no favorable entries. Tuts was a mysterious position as the quoted prices appeared to be in error. We double-checked the CBOE and they were listed at one of the exchanges briefly but, it's obvious they were incorrect. We did find a new disparity at a slightly higher strike price but both of the original plays were unavailable. Portfolio plays: Investors moved carefully among the market leaders as fears of inflation remained a concern despite the Fed's recent rate hike. The FOMC said the 25-basis point interest rate increase will cut the risk of inflation but the central bank warned that the tight jobs market may present another problem over the next few months. The Labor Department offered more economic news, reporting the October Consumer Price Index rose 0.2%, matching forecasts. One issue that worried analysts was the fact that the price of crude oil closed near a three year high, increasing the possibility of inflation among consumer goods and services requiring petroleum products. Oil stocks closed higher after the world's top producers agreed to maintain supply curbs until next year and that moved one of our long-term positions into profitable territory. Exxon (XON), a Dow 30 component, closed near $81 and our LEAPS/CC's play is now favorable with a $1.50 profit at the $80 strike. We plan to roll forward at the end of the week and the next two days will determine our outlook. There was little activity with the rest of the JAN-2001 positions but the recent rally in Motorola (MOT) appears to be gaining support near $115. Our current portfolio spread (LJAN105C/DEC105C) has a cost basis of $14.50, but the profit will decrease significantly if the stock moves higher. A roll-up to the $110 call may be the best move as it would yield a $1.12 return on $3.88 invested for the month of December. The downside margin would be approximately $105 and a transition to the (bullish) diagonal spread would limit upside losses if the underlying issue moves higher in the coming months. Sun Micro (SUNW) is the other issue that continues to move higher without any signs of an upside limit. A move to the $115 strike (on the short side), added $8.50 to our current debit of $28.25. In the big-cap technology issues, CMGI Incorporated (CMGI) rocked our portfolio with a $21 gain after their chief executive said they expect to become the second-largest Internet firm in terms of revenues by the end of the fiscal year. Prudential Securities and Goldman Sachs upgraded the stock and moved target prices up to the $180 range. Another technology issue that moved up in the consolidating market was our old favorite JDS Uniphase (JDSU). The stock price gained $5 in a rally to recent resistance near $200. A few mid-cap stocks also made favorable gains. Aware (AWRE) and 3Com (COMS) both moved to new highs as communications issues continue to dominate the growth stock market. Bell Atlantic (BEL) also moved higher, finishing at our sold strike in the long-term (neutral) calendar position. The current price offers a perfect opportunity for the move into December options with a credit of $1.88 for the DEC-$65 call. Lower-priced issues are the current focus of the Spreads/Combos portfolio and as the new year approaches, we should notice the seasonal transition to these growth stocks. MessageMedia (MESG) was one of the big gainers today, moving $1.50 to a recent high near $16. Our bullish debit spread is now profitable and we will look for a favorable opportunity to close the play. Other rising issues included Network Associates (NETA), up $2.75 to a 26-week high near $28 and Nividia (NVDA) which traded at a new all-time high of $37.50 during the session. Apollo group (APOL) rebounded to $23.68 and our bullish debit position moved back to positive territory (don't let that one get away). One of our newer plays on Loral Space and Communications (LOR) is recovering nicely as the stock price moved up another $0.87 to the recent resistance area near $19. Some of the recent bullish plays fell on profit-taking and this activity prompted us to move one of the at-the-money positions forward to next month. The (bullish) diagonal spread on Youth Networks (NETS) is now a FEB22C/DEC25C at $2.88 debit. There is no upside break-out protection with the current cost-basis thus the play will have to be monitored daily or managed with trading stops. One issue that fell in our favor was Multex.com (MLTX). The stock price consolidated after recent big gains and just as we mentioned in Tuesday's narrative, the volatility in December options fell slightly, allowing a favorable exit of the diagonal position. A credit of $4.00 was available during the session. Thursday, November 18 Stocks rallied again Thursday as investors tossed aside fears of inflation and plowed new profits back into market-leading issues. The Dow ended up 152 points at 11,035 and the Nasdaq index rose 77 points to 3,347, its 12th record close in 15th sessions. The S&P 500 index climbed 14 points to 1,424, also setting a record. In the broader market, declining stocks edged out advances 1,526 to 1,512 on active volume of more than 1 billion shares on the New York Stock Exchange. The 30-year U.S. Treasury bond weakened 15/32 to yield 6.17%. Portfolio plays: Excite@home (ATHM) made a nice move today, rising $4.19 to close at a recent high near $49. The bullish debit position should now be exited at a $3.75 credit. The long-term (diagonal) spread has also moved into a favorable range and the DEC-$50 options traded at $4.12 bid, moving the debit for the overall price of the play (JAN40C/DEC50C) to $3.88. The technology rally was widespread and included many of our recent positions. Cisco Systems (CSCO), 3Com (COMS), Etrade Group (EGRP), Gemstar (GMST), MessageMedia (MESG), Netbank (NTBK), Peoplesoft (PSFT) and Pixar (PIXR) all joined the party. Motorola (MOT) and Solectron (SLR) topped the LEAPS/CC's section and both continue to rally to new highs now that they have moved above recent trading ranges, Medtronics (MDT) is another issue that appears to be making a stand near $38 and support at that level should propel it to a new, post-split high during the next bullish move. If the market offers a reasonable consolidation in the near term, we will search for some new candidates for this strategy. One of our older positions, a very profitable (bullish) calendar spread on Peoplesoft (PSFT) finally had to be adjusted today. The new character of the underlying issue suggested that we move to a diagonal spread to protect profits. The cost of rolling-up to the DEC-$20 calls was $0.88. The play is no longer on the credit side but we have great upside potential with a $2.12 maximum profit on $0.38 invested. Other plays that may need attention before Friday at the close (expiration) are Computer Associates (CA), Echelon (ELON), Exxon (XON), Medtronics (MDT), Micron Electronics (MUEI), and Toys-R-us (TOYS). We also have to make decisions on C.R. Bard (BCR) and Monsanto (MTC), our short-term volatility positions. QLT PhotoTherapeutics (QLTI) gave us a big scare today as Federal advisers announced support of a new drug that may prevent serious vision loss from one of the leading causes of blindness in the elderly. Visudyne, developed by QLTI and Swiss firm Novartis AG, treats age-related macular degeneration, a disease with very few available treatments. Members of an FDA advisory panel said they thought Visudyne was safe and effective for treating severe forms of the disease. The stock jumped $8 but then fell quickly and a conservative exit was available (near 11 AM) with a closing debit of $0.25. Straddles: Not much to report in this section with the market cycling back and forth over the past few days. There was one stand-out in the lower priced issues. Mylan Laboratories (MYL) has made the turn and is now comfortably bullish after breaking through resistance near $19. The APR-$17 straddle is now trading at $1.43 profit and we suggest you consider closing the bearish position to lock-in some of the positive returns. This type of early exit technique can be a more profitable strategy for experienced traders but it involves additional risk and solid knowledge of basic technical analysis. The most common approach to this method is to monitor the underlying issue for a breakout or key reversal through a technical support or resistance level. When the trend has been positively identified, the lower priced options are sold along with half of the higher priced options. The remaining options are held until a reasonable profit target is met (and downside protection is maintained with trailing stops). Advanced traders favor this follow-up technique because it is based on technical trends and the action usually occurs near the play's break-even points. When one of these points is reached, two simple trades lower the overall cost basis while retaining a high probability of eventual profit. Friday will be as exciting investors move to lock-in profits and option traders unwind (and roll forward) this month's positions. Fortunately, we have made the majority of necessary adjustments for November's expiration period and the list of new positions for December will be posted in Tuesday's edition. Questions & comments on spreads/combos to ray@OptionInvestor.com ********* NEW PLAYS ********* With the "out of control" market rallying to record highs and Friday's options expiration expected to be similar to a World Wrestling Federation "free-for-all", we thought it might be a good time to offer a brief discussion on Calendar Spreads. We have received lots of favorable email regarding this simple strategy and the more I participate in it on a personal basis, the better it becomes. The premise is simple; time will erode the value of the near-term option at a faster rate than it will the far-term option. Using this concept, it is also possible to establish a directional (bullish) bias, constructing aggressive out-of-the-money positions to take advantage of upward movement and short-term option disparities. As the stock price nears the sold strike price, theoretical value increases in both options but the time premium falls in the short position, adjusting the spread differential in your favor. It is often possible to close these positions early if stock moves up in a reasonably stable manner and the original pricing disparity can make the spread profitable as the options return to theoretical value. To the average trader, it would appear that this technique can't lose. One would simply buy the longer-term option and sell the shorter-term option. As both time values decayed, the spread would gain value. In reality, it's rarely that easy because the the underlying stock does not remain constant but the strategy hinges on the fact that most of the losses will be small and the infrequent large profits will able to overcome those losses. The risk in a calendar spread is limited to the original debit spent to establish the position and thus the trader is always aware of the potential loss. It is generally best to establish this type of spread at least 2 - 3 months before the long option expires, capitalizing on the ability to sell another option against the longer-term position. That is the basic idea in this spread play; selling time value in the options when they are overpriced (high implied volatility) and buying it back (if necessary) when they return to intrinsic value. Ideally, the spreader would like to have the stock finish just below the sold strike when the near-term option expires. If the short options are in-the-money at expiration, he will have to buy them back to preserve the long-term position. Covered-Calls With LEAPS: I have had some new requests for LEAPS/Covered-call positions in the past few weeks but I am hesitant to offer any plays in this category with the current (overbought?) market levels. However, I have found two candidates that may quench your demand in the short-term. Proctor and Gamble (PG) is a market bellwether with a relatively conservative (and stable) bullish outlook and Adobe Systems (ADBE) is a leading-edge technology issue that appears to have no limit to future potential. Each play has its own merits. Proctor and Gamble (PG) offers the conservative investor a high probability of limited profit through the sale of at-the-money (and slightly out-of-the-money) options on a well known industry conglomerate. Adobe (ADBE) provides a high volatility candidate with incredible potential for investors who want to speculate on a proven technology leader. Both of these plays will also allow new investors to learn successful trend-trading techniques with a small margin of safety (LEAPS have incredible resilience) while managing the short positions for upside profit and downside risk. These plays are based on the current price or trading range of the underlying issue and the recent technical history or trend. Current news and market sentiment will have an effect on these positions so review each play individually and make your own decision about the future outcome of the stock price. PG - Proctor And Gamble $109.50 *** A New High! *** Procter & Gamble manufactures and markets a broad range of consumer products in many different countries throughout the world. Their products fall into many segments: Laundry and Cleaning, Paper, Beauty Care, Food and Beverage, and Health Care. Some of the company's other products include commercial services and pharmaceuticals along with well-known brands such as Tide, Ariel, Crest, Crisco, Vicks, Noxema and Max Factor. PLAY (conservative - neutral/Covered-Calls with LEAPS): BUY CALL JAN01-100 ZPG-AT OI=1025 A=$21.50 SELL CALL DEC99-110 PG-LB OI=959 B=$3.12 INITIAL NET DEBIT TARGET=$18.00 TARGET ROI=100% (13 months) Chart = http://quote.yahoo.com/q?s=PG&d=3m **** ADBE - Adobe Systems $76.13 *** Where Will The Run End? *** Adobe Systems develops, markets, and supports computer software products and technologies that enable users to express and use information across all print and electronic media. The company offers a market-leading line of application software and type products for creating and distributing communication materials. The company licenses its industry-standard technologies to major hardware manufacturers, software developers & service providers. The company's software works with Microsoft Windows, Apple and UNIX platforms. PLAY (aggressive - bullish/Covered-Calls with LEAPS): BUY CALL JAN01-80 ZAE-AP OI=69 A=$16.75 SELL CALL DEC99-85 AEQ-LQ OI=10 B=$1.93 INITIAL NET DEBIT TARGET=$14.50 TARGET ROI=150% (13 months) Chart = http://quote.yahoo.com/q?s=ADBE&d=3m **** SATH - Shop-At-Home $13.00 *** Break-Out? *** Shop-at-home sells and distributes consumer products through live, customer interactive retail sales programming that is transmitted via satellite to cable television systems, television broadcast stations and satellite dish receivers. They sell a variety of consumer products, including sports collectibles and sports related products, rare coins, collectible cutlery, electronics, jewelry, and health and beauty, personal care, household and lifestyle products, and other select merchandise and collectibles such as dolls and figurines. We follow this company regularly in the covered-calls section and today's move out of the previous range produced a favorable disparity in the listed options. The issue has excellent upside potential to an area near the sold strike, perfect for this type of strategy. PLAY (aggressive - bullish/calendar spread): BUY CALL FEB-15 SQR-BC OI=322 A=$2.38 SELL CALL DEC-15 SQR-LC OI=345 B=$1.00 INITIAL NET DEBIT TARGET=$1.19 TARGET ROI=25% Chart = http://quote.yahoo.com/q?s=SATH&d=3m ************ See Disclaimer in section one ************
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