The Option Investor Newsletter Sunday 11-28-99 1 of 6 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com Entire newsletter best viewed in COURIER 10 font for alignment ****************************************************************** MARKET STATS FOR LAST WEEK AND PRIOR WEEKS ****************************************************************** WE 11-26 WE 11-19 WE 11-12 WE 11-05 DOW 10988.91 - 14.98 11003.89 +234.57 10769.32 + 64.84 - 25.38 Nasdaq 3447.81 + 78.56 3369.25 +148.10 3221.15 +119.95 +135.86 S&P-100 753.57 + 4.27 749.30 + 18.21 731.09 + 12.29 + 1.77 S&P-500 1416.62 - 5.38 1422.00 + 25.96 1396.04 + 25.84 + 7.30 RUT 458.94 - 2.33 461.27 + 11.58 449.69 + 7.28 + 13.77 TRAN 2909.16 - 67.34 2976.50 -113.07 3089.57 + 85.58 - 54.99 VIX 22.95 + 3.32 19.63 - 2.05 21.68 - .38 - 2.50 Put/Call .42 .47 .51 ****************************************************************** Bonds starting to weigh heavily on the markets. Don't look now but the stock market has not really disconnected itself from the bond market as it had appeared in the last two weeks. The Personal Income and Spending numbers for October were announced Friday morning and Alan Greenspan probably dropped his coffee cup at the breakfast table. The October Personal Income number came in at +1.3%, more than double what analysts had expected and the largest number in over five years. The Personal Spending figures also doubled estimates at +.6% for October and September was revised upward to +.5%. The bond market, which had already been seeing yields creep upward, closed Friday with a 6.23% yield. Things are looking great for the economy but bad for the Fed outlook. Next week we have the important NAPM Index on Wednesday which will probably show some higher prices as a result of the oil price gains. On Friday we have the November Jobs Report and analysts expectations are for a possible unemployment number under 4%. This would be very bad and could prompt the Fed to reconsider their "no more rate hikes this year" posture. Bond futures are already pricing in a hike for the February meeting. The strong economy is continuing to surprise everyone with its continued gains. The Fed does not like surprises and always has the last laugh. The Dow has been marking time in the 11000-11050 range for over a week after the big +500 points move earlier in the month. Several times it has closed exactly at the 11,000 bottom. The longer we stay in this range the more we will build stronger support and weaken the overhead resistance. The risk is a breakout under 11,000 which could have us trading back down in our previous range under 10750. I am not expecting this but it is a possible scenario. Monday should be the key. The Nasdaq has had such a strong run with very little profit taking that we should be on the lookout for a pause to refresh before starting the December rally. I put a retracement graph on the chart above so you could see the various levels of support. When you look at retracements you are looking at levels of profit taking on the gains made from the start of the rally. I used 2700 as the start in this example. That gives us over +750 points. A -15% retracement would put us back at 3358, a -25% at 3284 and -40% at 3173. Short of a serious news event or the Fed spontaneously announcing a new rate hike, the odds of a retracement over -15% are very slim and over -25% almost non-existient. Either number would only set us back to the levels we were at a little over a week ago. One of the more alarming charts from Friday was the VIX. After hovering in the dangerous ranges between 22-19 for over a week, it gapped up on Friday at the open and then spiked almost 1.5 points in just the last 20 min of trading. There is only one thing that could cause this spike and it is a large change in the ratio of puts and calls on the OEX. When everyone is bullish and buying calls the VIX drops under 20 like it did last week. This is a bearish sign that the market has become lopsided in favor of the bulls. When the bulls start buying puts to either protect their long positions or for speculation because they feel a correction is imminent the VIX will start moving up. So based on Friday's closing move, either a lot of people are expecting a correction on Monday or they bought "put" insurance on their long positions just in case. My experience is telling me that there are a lot of traders expecting the market to backup before moving forward. This does not make them right. It just means they voted with their wallets which carries a lot more weight than water cooler chit chat. Everyone knew that Friday would be a light day but the NYSE only managed 312 million shares to the Nasdaq's 721 mln. NYSE advancers beat decliners for a change but only slightly. The decliners had won the last six days. Actually in 10 of the last 15 days the decliners had the edge. Market breadth has been deteriorating steadily. You will not see the Dow mount any kind of serious rally with advance/decline heading south like you see in this chart. Also the Dow has pushed over 11000 five times in the last seven months and has failed to hold it every time. Much of the recent Nasdaq rally in the last two weeks has been due to shorts covering not positive earnings momentum. There is currently only 2.04 days of short interest on the Nasdaq compared to 2.29 in ths same period of last year. Everybody who shorted QCOM, JDSU, RHAT and company recently have been paying a stiff educational premium to learn that "the trend is your friend." Never bet against the trend. The stock news was very light on Friday with the same old story, "Nasdaq sets another new record" leading the way. The outlook for next week is a toss up. The bullish sentiment by the retail investor, as well as the institutional investor, should keep any possible correction reasonable. The orders are still there, just under the market, and any dip is likely to meet strong support. We are due for a pullback how far depends on the Y2K fear still lingering on investors minds. This has not shown any impact recently but the closer we get the more it becomes a possible problem. The wildcards for the week are the possible fallout from an inflation strong NAPM report on Wednesday and the non-farm payrolls report on Friday. We could continue to see the Dow weaker before both of these numbers but any serious pull back on the Nasdaq is only going to be seen as a buying opportunity. There are still some analysts around that are calling for the Dow to trade under 10,000 before December is over. If this comes to pass, back up the truck and load up because you may never see it again. Y2K Renewal Offer!!! Long time readers know that each December we offer our subscribers an extra value package as a thank you for their support. The package this year contains (2) of our Y2K Option Expiration Calendar Mousepads and the Millennium Edition of the Stock Traders Almanac, a $50 value. You will receive two mousepads, one for home and another for the office so you have no excuse for not knowing those expiration dates and strike price codes. We are also giving away the Millennium Edition of the Stock Traders Almanac by Yale Hirsch. This almanac has thousands of facts, tips and hard information that a trader cannot live without. Just one of these facts can pay for the newsletter subscription for the entire year and there are thousands of them. This is the serious stock traders bible. And the offer is.....Renew your subscription in December at the annual rate and receive (2) Y2K Option Expiration Calendar Mousepads and the Millenniun Edition of the almanac for FREE. This package is a $50 value. Added to the savings you receive on an annual subscription over the monthly rate and it is like getting over four months of the newsletter for free. A $180 value. The supply of almanacs is limited so don't delay. Click here for more info. http://www.OptionInvestor.com/renewalinfo.asp This weekends newsletter is packed full of great info. We have five articles from active traders in both Traders Corner and Womans World. Check out the many lessons you can learn without the expense of losing your own money. My educational article this week is called "Exit Strategies, Escaping with a Profit." This is the fourth in the series. Look for it on the website. Have a safe week in the market. Pick you entry points VERY CAREFULLY and sell too soon. Jim Brown Editor *********** JIM'S PLAYS *********** Due to a heavy office schedule last week I only managed plays on three stocks but they are all looking like winners. I played a conservative play (you will love this) on QCOM and two long calls on SUNW and BVSN. QCOM - The play of the week, again! You may recall from last week that I day traded QCOM all week for a strong but stressful win. This week I took a more conservative approach. Before the open on Monday QCOM was at $365. I am expecting QCOM to be over $400 soon. That is a $35 move. Just buying the stock would give you a bad case of nerves with $25 daily price swings. Since QCOM has a 4:1 split announced for December and the China WTO deal almost assures CDMA for China, there is almost no possibility of QCOM not being over $400 by Dec-17th options expiration. My conservative play was to sell the Dec-400 puts for $54.25 on Monday. If QCOM is over $400 in three weeks then I have a $55 profit. If I had bought the stock and held to $400 then I would only have a $35 profit. (Yes, I know I would have possibilities for over $400 gains with the stock) By selling the puts the time decay works in my favor instead of buying calls with $20 or more of time premium that would decay against me. The puts AAFXY closed Friday at $35.50 and QCOM looks ripe to breakout over $400 any day. I am now up +$20 and my worst case scenario would be owning QCOM stock at something less than $400 with a basis of $345. I also took advantage of the morning dips on Tue/Wed to buy the stock and sell it the same day for $5 and $7 net profits each day. I pointed out this trend last week as well. Friday however, QCOM did not dip but gapped open and could be starting a new and even better trend. I still plan to go long on QCOM at $400 and sell Dec covered calls at $440 or Dec 3rd, which ever occurs first. If you are not in this play just buying the stock now and selling the $410 calls would return you over $45 in the next three weeks with a close over $410 on Dec-17th. SUNW - $120 calls SunMicro has had a long, strong run and had pulled back for a week to rest. This was as simple a play as you will ever see. Strong stock, pull back on profit taking, retest of previous high ($130), retest of previous support ($125), rebound and breakout. Classic entry point, perfect play. If only they would all react like this! Bought $120 call at $11.50 on Tuesday. Friday's close was $18.25. If not for the split just around the corner I would have sold on Friday but I was hoping to see $140 or better on Monday. I will sell this in a heartbeat on any Nasdaq weakness. BVSN - $100 calls Broadvision has also been making strong moves. When I saw the spike on Monday afternoon I was very frustrated. I had been looking for a pull back to enter the play and not a spike. The quick dip on profit taking on Tuesday morning did not quite get back to Monday's trading range. When the rebound started I pulled the trigger and was congratulating myself until Wednesday. I rationalized that it was simply more rotational profit taking and I would wait until Friday to sell if the direction changed. The opening gap was a relief and I chalked the afternoon slide to the Nasdaq roll over. I entered the calls at $12.50 and was wishing I had sold them at Friday's $18.50 after the market closed. I very seldom pass up a 50% profit on a stock that is not moving fast. I put in a limit sell for the Monday open just in case we get a gap and crap Nasdaq on Monday. Recap: With only three plays it was a very successful week. I fully expect the QCOM puts to expire worthless and that play alone will be very profitable. This week is a toss up. I plan to go with the flow. I have been trading too much trying to pick tops and bottoms which is something we preach against constantly. Emotional trading is one of the hardest things to conquer. With the possibility of the markets being unstable this week I will setup my trading screen on Sunday night with four call plays and four put plays and see which way we head at the open. JDSU has been looking like QCOM for several days now and with any market weakness it may be a good short/put candidate. One stock that refuses to go down is USM. We have been waiting for a pullback to enter the play but it just will not quit. SCI and SDLI are also unstoppable. VRSN has a split soon and looks good. Other than that, be very careful on Monday. Look for buying opportunities during the week instead of rushing into plays just because the market is open. Remember, my trading plan is to trade "only when profitable" and yours should be also. Jim ******************** OPTIONS 101 - 1 of 2 ******************** Exit Strategies, Escaping with Profits By Jim Brown No, this is not an article on Sell Too Soon. I just wanted to put all your minds at ease that I was not going to try to twist your arm to sell those winners, while they were still winners. I am going to try to broaden your horizons with some types of exits that will add to your profits and reduce your losses. With that aim, I have to build from a common base and move into the more exotic stuff. So bear with me. STOP LOSSES It would be really nice if we never needed to discuss this topic but we all know that Murphy's Law is alive and well. Before you enter a trade, you should always know how much you are willing to lose. I said LOSE. I know from experience that most will enter a $6 option with the idea that you will sell if it hits $10 or $4. Profit and loss. Now in reality the closer the price gets to either number human nature takes over and we start changing the plan. On the loss side, the closer it gets to $4 the more you will start rationalizing that the stock chart looks like a bottom is forming. I will sell it when it gets to $3.00. It had to be just a large block order. The drop is market related. I will sell it when it gets to $2.50. The earnings's warning was from another company. It will bounce soon. I will sell it when it gets to $2.00. It has to come back up. I will sell it when it gets to $1.00. Why did the jobs report impact my stock. I wish it would go back up so I could get $1.00 for it. Lose means sell for a loss. Not hold for a loss. Before a $6 option can sell for $3 it has to sell for $5, and $4 etc. The trend is going against you and yet for some reason we always convince ourselves that it is just temporary. Once you understand the following principle and act on it, selling for a loss will be a lot easier. Here is the principle: You can buy it back. When you are in the trade you cannot think clearly and objectively. Maybe you are that one individual that can always do this but I have never met anyone that does. We all know that when a trade is going against us, the minute we sell for a loss is the minute the stock will rebound like a rocket. This keeps us from exercising rational judgement and closing the trade. In reality this is always made worse by our procrastination to sell in the first place. If we had sold that option at $4.50, we would not have had the problem of rationalizing a sell for a bigger loss at $3. If we are in a trade that, we researched every conceivable way before making the trade and the trade goes against us then the answer that should instantly pop into our minds is: OOPS! That was not the entry point! I will sell it and wait for a better entry point. If we had that attitude then everything else in trading would be easy. Instead, we all take the position that "It will come back" and our fate is sealed. We agonize over every .25 drop in the stock and corresponding drop in the option. We are totally focused on this position and are missing other winning plays because we are trying to "hope it back up." Think about it. If you liked the stock/option at $6.00 you should really like it at $2.00. If you had sold it at $4.00 and the stock was bouncing then you would love to be back in at $2.00. The essential point here is the decision you make to get back in. If you had not made the first trade, WOULD YOU BUY THIS OPTION ON THIS STOCK AT THIS TIME AT THIS PRICE? This should be an entirely different decision. Not one based on a previous play. Many times traders will jump right back into the fire they just escaped from simply because they felt the first loss was just a mistake. MAKE SURE THE SECOND BUY IS BASED ON SOUND REASONS. Types of stop losses: When you enter the first trade, you should know exactly where your loss exit will be. This number can either be based on the option price or the stock price. There are pros and cons to both. Basically, the option price is loosely tied to the stock price. Depending on the time remaining and the ITM/OTM depth of the strike price the option price can move more OR less than the stock price. Stops based on Option Price: By setting a stop loss based on the option price you are not filled until the option price actually hits that price. Sometimes the stock can be moving so fast that the option price lags the actual stock move. By the time the option prices hits your stop and then you get executed it could be much lower than you expected. When stocks are moving rapidly the spread between bid and ask on options widens. Stops based on the Stock Price: Recently another way of setting stop losses has been developed. That is setting the stop loss or sell order based on the stock price. I believe this way has merits for many situations. If you are setting stops that are very close to the current option price then you should use the option price method. Let's say you bought a $6 option that is trading for $10 and you want to set a profit stop loss at $9.50. When the bid hits $9.50 your order turns into a market order instantly and you execute at or close to $9.50. Stops based on the stock price are better utilized as catastrophe insurance. If your $6 option was trading at $10 and you wanted to protect yourself against intraday spikes in the option price due to order volume or small swings in the stock price then you could use a stock price stop. If the stock price was $150 you could enter the order to sell your option if the stock price touches $144.75. It would take a full $5.25 downward move in the stock price to execute your sell but you would be protected against a major disaster. The example is extreme but I think you get the idea. I like the stock price concept since the stock price is what drives the option price. If some event caused a quick drop in the stock price your order could be executed before the option price had a chance to fully equalize and possibly get you out quicker and for a higher sell. The only broker I know that offers this option is Preferred Capital. Trailing Stops: A wise way to use stop losses is to follow your option price upward with a trailing stop loss. This prevents you from losing all the profits you have gained to that point. If your $6 option is now trading for $10, and you would rather not take the 66% profit then set a stop loss for $7.75. I never use an even number. If you watch the bid and ask on active stocks like QCOM or JDSU then you will see the market maker adjust the bid from a 1/4 or 3/8 to 13/16 or 15/16. He will not go to the even number. Retail investors tend to set even numbers as limit sell stops and by stopping the bid on the even dollar number he will get a flood of sell orders. By setting the bid, just under the even dollar amounts he has time to survey the order flow and decide where to go next. Options market makers however seem to like even numbers. If the stock is falling they will tend to react to the next even number for the option price. Setting your trailing stop at the $x.75 level may keep you from being stopped out by an intraday spike. It has saved me on numerous occasions. Selling for a Profit: Now that we got the stop loss discussion out of the way, we can move into the more enjoyable side of selling. Selling for a profit. There are many ways to do this but first consider trailing stops as your first line of defense. The best offense is a limit sell for a predetermined amount. If you are happy with a 66% profit then place a $9.88 limit sell for your $6.00 option once your order is executed. You will have a much better chance of being filled if you use the same logic on profit sell orders as you do on stop losses. That is don't place even number orders. The best number is probably $x.75. It allows the market maker to set the ask for the even number and then creep the bid to take you out at the same time. Obviously you need to take into account the normal bid/ask spread on the option first. If you are playing QCOM options the bid/ask spread could be $2 but an AOL spread could be only 1/8. Once you set your limit sell you can become the market at any time. If the stock moves quickly and the order flow is thin then the market maker may not want to cover you and the next "market" buy order that comes in can take you out even when the posted prices are different. This should not happen in an electronic market but it does. Whenever humans are involved human nature plays a big part in execution. Set a sell immediately after you buy! What to sell for? I will not go into the different rationales for when to sell but you know my thoughts. I like to take a profit over and over instead of trying to make a homerun on every play. I feel like the longer you have an open position the more chances of a market event turning your profit into a loss. With a $10,000 account, if you took a 25% profit once every two weeks for a year you would have $62,500 profit without the benefits of compounding. Read that again. If you never invested more than $10,000 total at one time, and only closed the trade once every two weeks, you could make over $62,500 in one year. Granted, some positions will lose money but even if you are in the market you will also have many positions that will make more than 25% due to news events or gap opens. I estimate that a trader who will follow instructions EXACTLY can net $50,000 on a $10,000 account every year without fail. Notice I said follows instructions EXACTLY. Different personalities of course will want to risk larger losses for the possibilities of larger profits. That is your choice. Just don't bad mouth options trading if you get your account cleaned from time to time. Types of Closes: The simple way out is of course to sell your entire position at once when your profit target is reached. Too simple? Too limiting? Not enough upside? Not everyone likes coffee either. Optional exits include selling only a portion of your position at predetermined exits. This allows for greater profits on the remaining contracts while locking in a minimal return on the early contracts. Lets say you bought 20 contracts at $4.00 and sold 5 contracts at +50%, 5 contracts at +75%, 5 contracts at +100% and 5 contracts at +150%. Your total profit would be 7,500 and you would have only $1,500 at risk after the first ten contracts are sold. 20 x $4.00 = $8,000 5 x $6.00 = $3,000 50% 5 x $7.00 = $3,500 75% 5 x $8.00 = $4,000 100% 5 x $10.00= $5,000 150% You can adjust this scenario any way you want. Maybe 10 @ 50% and 10 @ 100%. The downside of course is the length of time in the trade. The first sell may be in only a day or two and the last sell could be two weeks later. My thoughts are always on limiting my time in a trade. The longer you are at risk the better chance of that risk biting you. Of course my trading goals and risk profile is much shorter than 90% of most option traders. If you are committed to holding options rather than trading them then this is a good strategy for reducing your risk. After the first half sell, the trade is almost risk free and you can ride it indefinitely. Now the exciting exits! Exiting on the upside Lets say you have been in a play for some time. Your $6 call option for the $75 strike is now worth $13 and the stock is at $86. You could just sell for the $13 and have a homerun but you feel that even though the stock is looking tired it may still have some room to move. How can you maximize this position? Consider this. Sell the $90 call option to close the play. If the stock is at $86 the $90 option is probably $5 or more depending on the time remaining on the option. By selling a higher priced strike you lower your cost on the play. If you sell the $90 for $5 your $6 option now has a cost basis of $1.00. If the stock finishes under $90 your higher strike expires worthless and you keep the $5.00. If the stock goes over $90 your upside on the $75 call is now limited to $15 (the difference between $75-$90) but you made $5 on the higher call. At expiration you exercise your $75 call to cover the $90 call you sold. The net to you is $20. This type of play should be used on tired stocks that may have peaked and you expect them to finish around the strike price you sold. The risk is having to hold the $75 call longer to remain covered on the $90 call. Of course, you could close both positions at any time the stock price started falling. You should still be profitable on both since the OTM $90 call will decay faster than the ITM call. Exiting on the downside Yes, it happens. You did not sell when it hit your stop loss. Now you are wishing you had sold but the stock just does not want to cooperate. Your $75 call for $6 is now only worth $.50 and the stock price is $72 and dropping. How can you salvage some capital? Consider this: Sell the $70 call for $3.00 using your worthless $75 call for collateral (margin). If the stock price is $72 but sliding then the ITM call for $3.00 is soon to be out of the money and worthless also. You recover $3 of your investment in the $75 call. If the stock continues to less than $70 then both options will expire worthless and you keep the $3 or half of your starting investment. Your risk is that the stock will have a miraculous recovery and bounce off $70 and move up again. This is good news! You should close the position on the call you sold when it passes what you received for it. The good news is that your previously worthless call is now appreciating in value and the play you started with is alive again. If you did not cover in time the most you could be out is $2.00 even if the stock went to $100. That is the difference between $70 and $75 ($5) minus the $3 you received as premium. The way to avoid this is to maintain a buy to close stop loss of say $4.00. Your total out of pocket would be $1.00 and you are still long an appreciating $75 option. Conclusion: It is always better to manage profitable positions than losing positions. Be proactive on the profit side and totally inflexible on the down side. Set your stops and take small losses. Jim Brown ************** Market Posture ************** As of Market Close - Friday, November 26, 1999 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert DOW Industrials 10,750 11,320 10,989 Neutral 11.12 SPX S&P 500 1,315 1,385 1,417 BULLISH 11.12 OEX S&P 100 675 725 754 BULLISH 11.12 RUT Russell 2000 425 445 459 BULLISH 11.12 NDX NASD 100 2,320 2,520 3,117 BULLISH 10.28 MSH High Tech 1,120 1,250 1,621 BULLISH 10.28 XCI Hardware 1,000 1,095 1,195 BULLISH 11.11 CWX Software 770 800 1,224 BULLISH 9.03 SOX Semiconductor 475 525 638 BULLISH 10.29 NWX Networking 550 615 801 BULLISH 10.28 INX Internet 495 525 670 BULLISH 11.05 BIX Banking 635 690 633 Neutral 10.28 XBD Brokerage 395 435 439 BULLISH 11.12 IUX Insurance 605 650 607 Neutral 11.09 RLX Retail 875 930 922 Neutral 11.23 DRG Drug 375 390 393 BULLISH 11.04 HCX Healthcare 750 790 779 Neutral 11.09 XAL Airline 180 190 145 BEARISH 5.21 OIX Oil & Gas 285 315 301 Neutral 11.23 Posture Alert The holiday gave everyone an opportunity to say thanks, especially those of us who have been long technology stocks. Friday's half day saw the Nasdaq break another high, with good volume to boot considering the shortened trading day. Leaders included Networking (+2.59%), Internet (+1.30%), and Software (+1.23%), while Insurance (-1.66%) was the day's loser. There are no current changes in our current posture. ************* COMING EVENTS ************* For the week of November 29, 1999 Monday Existing Home Sales Oct Forecast: 5.2M Previous: 5.13M Tuesday Chicago NAPM Nov Forecast: -- Previous: -0.2% Consumer Confidence Nov Forecast: 59.0 Previous: 58.8 Wednesday NAPM Index Nov Forecast: 58.0 Previous: 56.6 Construction Spending Oct Forecast: unch Previous: 0.5% Leading Indicators Oct Forecast: 0.1% Previous: -0.1% Thursday New Home Sales Oct Forecast: 800K Previous: 811K Friday Non-Farm Payrolls Nov Forecast: 203K Previous: 310K Unemployment Rate Nov Forecast: 4.0% Previous: 4.1% Factory Orders Oct Forecast: 34.6 Previous: 34.6 NAPM-non-manuf Nov Forecast: -- Previous: 60.0 Week of 11/29 12/07 Productivity - Q3-Rev 12/07 Consumer Credit - Oct 12/09 Export Prices - Nov 12/09 Import Prices - Nov 12/09 Wholesale Inventories - Oct 12/10 PPI - Nov 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 11-28-99 Sunday 2 of 6 ************ Stock News ************ Making Tracks By S.P. Brown What's the hottest trend in corporate finance these days? The tracking stock, and the list of big-name companies joining the trend is growing. Some of the heavy hitters that have recently issued these newfangled securities include Donaldson, Lufkin & Jenrette (DLJ), Sprint (FON), Barnes and Noble (BKS), and Ziff- Davis (ZD). http://www.OptionInvestor.com/stocknews/112899_1.asp BEA Systems Tops Holiday Buy Lists By Cindy Christ Looking for a bargain in the sizzling e-commerce software arena? Impossible, you might say, and with good reason. In recent months, stock prices in this scorching sector have grown at hyper speed. Check out share levels of companies like Broad Vision (BVSN), Commerce One (CMRC) and Vignette (VIGN), and you'll see that e-commerce players like these have climbed between four- and sixteen-fold this year. http://www.OptionInvestor.com/stocknews/112899_2.asp ************ Womans World ************ We have another new contributor to the Woman's World educational section starting today. Lynda Schuepp, is a long time buy and hold stock trader and has ten years experience in option trading. She is an active day trader and holds a BA in Music and a MS in Finance. Please welcome her to Option Investor - Jim. TURKEY OR THANKSGIVING First I want to assure you that Jim has not gone over the edge by having a second woman write for the newsletter. I hope that my style of option trading will provide some insight to both male and female readers of OIN. It is my intent to share a good and bad experience weekly unless; of course there is no bad experience for the week (highly unlikely). While it is painful enough to lose money, sharing my experiences in writing, forces me to analyze and determine where I went wrong or right and why. It is comforting to know we are not alone in our "dumb mistakes". I tend to write in outline form because I know how limited traders' time can be, particularly if you read 2-3 newsletters daily. Details will be provided for the investor who is new to options --advanced traders can skip over my details. My successful AND unsuccessful Split play of the week this week was QCOM. STOCK SPLIT STRATEGY: One of my trading strategies in to buy in the money call options on highly volatile stocks that are in a split run. I use this as a leveraged way to play the stock for about 1/10 the cost. This week was no exception. MY RULES: * Buy a call option with a delta >.5 on stocks with great momentum prior to the split. Delta is the % the option will change in relation to the change in the underlying stock. For example: an option with a delta of .5 would move $.50 for every $1 the stock moves. * Buy options that are fairly priced on a dip but do not exceed 1/10 of the cost of the stock. * Buy options that are fairly priced. Volatility plays the biggest part in pricing of options, particularly stock split runs. If the implied volatility is less than or equal to the historical volatility then the option is fairly priced. If the implied volatility is higher than the historical volatility, I wait or buy very deep in the money. * WRITE down mental stops and exit strategy. For my stop: I use the average daily range for the 2 weeks prior to the stock split announcement. While this may appear to be quite aggressive in stocks like QCOM, it keeps me in the play longer for greater profits. Below is the chart I constructed for QCOM. As you can see, the average daily trading range was 10 points. After the split announcement the average daily range increased to $24. So, you see a 10-point stop is actually quite conservative. For my exit: sell when the stock increases 2 times the stock's average daily range, in this case 20 points. If the stock moves up 20 points, I would sell the option at the bid. I don't quibble at this point to determine whether the market maker is paying me a fair price for the option. * Determine position size: You may want to decrease you normal position size on stocks with this kind of range. If you have a normal maximum loss set at $1000 per trade, then only buy 1 contract (100 x 10 point swing). I tend to break my own position sizing rules when I do split plays as long as the market is trending up. * Buy the current month's calls if there is ample open interest (300 contracts or more) QCOM CHART TO DETERMINE STOP & EXIT Date Open High Low Close 2-Nov-99 229.50 229.50 219.25 224.81 1-Nov-99 221.56 229.56 220.00 225.19 29-Oct-99 221.00 226.38 217.38 222.75 28-Oct-99 213.13 218.00 208.50 218.00 27-Oct-99 210.81 210.81 203.50 208.13 26-Oct-99 215.88 217.25 207.38 207.75 25-Oct-99 216.25 219.69 210.13 211.13 22-Oct-99 220.25 225.75 211.06 215.75 21-Oct-99 199.00 216.88 197.69 215.69 20-Oct-99 201.44 202.38 196.53 202.31 19-Oct-99 200.88 205.69 195.00 198.00 Avg Hi --> 200.16 190.53 <--Avg Lo Avg Daily range--> 9.62 Exit at --> +20.00 QCOM has so much momentum it is difficult to not make money in this stock. While it was not my most profitable trade of the week, it was the most successful using the strategy described above. On 11/23, QCOM had pulled back to $344 for the day. I watched it cross back up over $350, which, because there was a lot of support there, would provide me a good entry point. After scanning all the options, I purchased 10 contracts of the Dec 350 call ($2 in the money) for $30. QCOM was $352, delta was .55 and the option's theoretical value was $30.50, indicating that the option was fairly priced. There was plenty of open interest and the market trend was favorable so, all my criteria were met. All I had to do was make sure QCOM didn't drop below $342 and wait until it got up to $372 to sell my options. That day QCOM closed at 360 ¼, about half way to my planned exit. The next day QCOM moved down 6 points in the first 30 minutes. Because I was in over my head on the wrong side of a trade in BRCM, fear and greed, our emotional enemies, clouded my judgment. I didn't practice my exit strategy on BRCM I so eloquently stated above. It's always hard to exit a trade with a pretty substantial loss because in doing so, you're admitting you were wrong. When I fail to implement my exit strategy, I usually have to bleed for a long time and then finally reach my saturation point before exiting. Naturally, after my exit, the stock seems to pick that particular moment to turn back around. God, I hate when that happens. I'm getting better at exiting bad trades but as you can see, I haven't managed to effectively implement that strategy 100% of the time. I hope by sharing my failures, I will help others to learn more quickly. Perhaps you can now understand that when I saw that first "10 min up candle" on QCOM, I was eager to lock in some profit. I sold my options for a 3-¼ point gain. Now for the bad news: if I had followed my exit strategy on QCOM, I only would have had to wait until later that day for my 10-point profit. QCOM never went below my stop and therefore never triggered a sell signal. In analyzing this mistake, I realized the bigger mistake was in not exiting the BRCM trade the day before when my stop was signaled. Because BRCM was still down 10 points at the open on 11/24, I reacted emotionally when I saw QCOM heading south. Had I taken my loss on BRCM the day before, I wouldn't have been fazed when QCOM dipped 6 points and I would have gone forward and made my intended profit. Sometimes, however, you do get lucky (at least in a bull market). BRCM did turn back around and I am currently even. The Moral: Try to rely less on luck and more on good systematic trading to protect your wins, minimize your losses and preserve your capital. In other words, when you act like a turkey pray and you might have something to give thanks for. Lynda Lynda@OptionInvestor.com ****************** Another new contributor this week. Mary Redmond is an options trader and a licensed broker with a degree in economics. She will be contributing on a weekly basis from a sound fundamental perspective. Please welcome her to the newsletter and give her your support. Jim Strong research does not guarantee a win but it sure helps! In the last week I was able to make a 65% return on an original investment in three days with one of my stock option positions. I have found that the best way for me to trade options is to balance a solid understanding of the fundamentals of the company with the leverage and momentum available in the options market. Warren Buffet, the third richest American, is still considered by many the best investor of all times and follows a clear rule when investing: Only buy what you understand. Options traders can modify this rule: Only buy options on stocks you understand. I only buy an option on a stock when I have read the annual report, watched the stock's trading pattern for a while, and seen how it responds to good and bad news which is disseminated on the company as well as overall market trends. For example: if some analyst downgrades your stock tomorrow from a buy to a hold is it likely to lose 50% of its value in one day? This is something you should be aware of (Microsoft is an example of a stock which has support like an armored tank; even a "downgrade" from the Dept of Justice didn't destroy the stock price.).Has the management of the company demonstrated a willingness and ability to help boost the stock price during difficult periods in the market? Does the company have patented technology and a unique niche in their industry or are they a commodity business, which means competition will decrease profit margins? Are the earnings of the company growing at a faster rate than the earnings of the S&P 500? Is the company profitable or bleeding red? Companies which are not yet profitable and rely heavily on the debt markets for financing can be dramatically effected on a short term basis by fluctuations in the interest rate market. Also after trading options for a while you learn to know your own response to fear and greed. For example, when I am trading short term (expiring) options I get too nervous to hold them longer than a day. For that reason, I usually like to trade 6 month options or leaps. I had been expecting a big move in CMGI in December prior to the earnings, which are to be reported the third week in December, because the company did a successful IPO this quarter and also because of the success of their Alta Vista web site which attracted 800,000 new viewers in less than 6 months. CMGI had been dormant for several weeks at the 100 level. I had purchased a Jan 2001 100 call at 33, and put on a spread on the Jan 2001 110/120 calls for a total debit of $2. A few factors lined up last week which pushed the price from 100 to a high of 143. First, CMGI presented at the Goldman Sachs internet conference in California on Wednesday which was announced the day before . I expected it to pop up 5-10 points that day and it moved up over 20 points probably in part because two analysts (Prudential and Goldman) upgraded the stock. In addition, it was announced that the trade agreement with China will benefit CMGI. The Jan 100 leaps went up from 33 to 45 5/8. I sold them (12 5/8 points profit) and bought the Jan 110 leaps for 42 1/2. Usually after this stock makes a dramatic move in one day there is a follow through the next day probably because everyone assumes something phenomenal must be happening. The next day the stock went higher on strong volume but I didn't take a profit on the 110s. Mistake. The only thing holding me back was the possibility of missing another big move the next day. This is called balancing fear and greed: fear of losing profits vs. fear of missing the next big move.. However, it's never a profit until you take it. On Friday I tried to sell the 110 leaps at 44 7/8, but missed the market and panicked when the stock went to 120. Sold at 40 1/2. 2 point loss Bought June 125 calls at 28 5/8. On Monday I sold the June 125 calls for 30 3/8 and closed out the short position of the spread early in the day at 44 3/8. Later in the day I closed out the long position Jan 110 call at 57 for a profit of 11 points on spread. I think the stock has further upside with earnings coming up, however, the party can't continue at this rate forever; if the stock continued to increase 40 points every week it would be a 2000 dollar stock in one year. A few years maybe. So I bought an out of the money leap, leaving the profit in cash in the acct.. I know the top 10 rules say don't buy OTM calls but with a leap it can be a more realistic bet. Depending on market conditions it may be possible to target shoot another in the money call prior to the December earnings release. This particular type of trading is not suitable for everyone, as leaps have drawbacks. They are expensive which limits your capital available for other positions. The spread between bid and ask can be as much as 2 points, which makes it difficult to day trade for a one or two point profit since you are essentially at the mercy of the market maker. However, if some of your favorite stocks have been dormant and you are expecting a dramatic price increase trading leaps can be highly lucrative and less risky than short term options. Mary Redmond firstname.lastname@example.org ********** Losing Money on Vacation, Part II On Tuesday, I shared a story of overconfidence, the expense of a vacation and a list of mistakes I have learned from. My gains in the first quarter of 1999, caused me to loose sight of how fragile directional plays really were. To be honest, all of the mistakes I listed did not occur while I was on one vacation. I added a few other lessons. My account drop did not occur just from a trip. Once returned, I got distracted with some personal issues that were more important to me, than trading. Basically, I turned my back on my account for 6 weeks. I did not realize it would do that much damage, because before, the market had always come back. I do things differently now. By the way, never let anyone convince you that picking the right option to play, is the most important aspect of option trading. Only beginners believe that theory. Learning to think like an option trader takes time, practice, fine tuning and an ability to dissect your losses. The subtleties within the market, and how you decipher them, are what make your trades more likely to succeed or not. Yes, in the beginning, it is a little easier to follow the red caboose, but with time, your goal is to develop your own radar and sensing device. Just like cooking, sometimes you just get that little feeling, maybe you shouldn't leave it in the oven as long as the recipe says. The biggest lesson learned from my experience this year, was that I did not trade efficiently. Not having an efficient system when things turn against you, costs you exponentially on the downside curve. Upon returning to trading, the first thing I did was order a real time quote service with charts. I now use Qcharts, where I can follow stocks, indexes, options and charts of each. I am able to follow the 10 day moving average, which helps on entry points. I doubt that a trader that holds a full time job needs real time, but any trader at home trading intra-day, certainly does. It has made all the difference in the world. Charts also give one the ability to research your stocks for historical activity, during previous earnings and stock split runs, or sector sell offs. Also, Qcharts allows you to tie your real time quotes in with your Preferred Trade account. Since I had heard great things about Preferred, I decided to try them. Now, I could point at a stock or option, right click, and my Preferred Trade account would pop up in my face, loaded & ready, for a buy or sell order. My trade execution time immediately vaporized to seconds, from very long minutes with Fidelity. (My IRA is still at Fidelity) This feature alone can well pay for your Qcharts. I can now grab a momentary dip, or sell on a peak...and their options are cheaper too. Combining these two services alone, with basic TA, can teach you a wealth of knowledge that improves your trading. Also through Preferred Trade, I was able to follow my cost basis for the first time. This helped me to feel the pain if a trade was against me, thus helping me to exit quickly, preventing further loss. For basic technical analysis (TA) information, go to your local book store and pull out several from different authors. Find one that reads easy for YOU. The basic info is what you want. From a basic book, you will understand basic patterns which will get you thinking through "entry points", "support" and "resistance". I know you read all the time, how important these points are. They really are. If a high flying stock like Qualcomm, pulls back intra-day, to its 10 day moving average, staring at a 4:1 stock split in the near future, you will understand how this becomes a buying opportunity "buying the dip", versus a reason to run for cover & sell off your position... or worse, "catching a falling knife". Also, between learning a little TA and having charts, you will be able to follow stochastics, bollinger bands, MACD or any other indicators that your internal radar becomes accustomed to. We all agree that hind site is 20:20. Well, if a play goes against you, you have the luxury of learning from it, by actually going back and studying the indicators you missed, which should have clued you into the move. This can be done after hours. Eventually, you will learn not only to look at your stock, but its sector index, the market it trades, the futures, bond yields, market sentiment and the VIX all before entering your positions. All of these give you little hints, of things that are brewing in the background, which might affect your trades. I review the TA and indicators on all my plays before leaving town, if I keep them at all. Other things I learned include: diversifying LESS in my option trades, LESS companies, LESS strike prices, LESS open positions. If I believe in a trade, I PLAY it! If I'm wrong, I get out soon. Before, I played 15 companies, now 4-5, but with more contracts each. I play one or two strike prices, choosing the one with the highest open interest. Getting out of a low open interest option, always worked against me. Nobody wanted it. And by far, the best lesson I have learned was Jim's SELL TOO SOON. This concept alone, will help you repair your mistakes on entry & exits, protect your profits and keep more money in your pocket when you're right or wrong. It's great to use before a vacation. I hope everyone had a yummy Thanksgiving. I had a wonderful time. It made me think of my Daddy. Tuesday, I want to share with you some of my early memories, of things he taught me. Renee renee@OptionInvestor.com ************** TRADERS CORNER ************** Filling Up the Christmas Stocking In my monthly "off week," I have been taking care of some longer term investment management items. First of all, I closed a OEX Put position for about a 33% loss. The pullback which I thought was coming was minor and was over by Tuesday morning. I think December will be more volatile than November has been so far, but I was not prepared to stay in that position and pray for a better exit. Time to move on. My plan for the week was to enter a series of longer term call positions with January 2000 or January 2002 expiration. These were my targets: EGRP & SCH. I have been following the increased trading volume and think that this will turn into increased profits for these online brokers. Schwab, for example, traded as high as 77 in April before breaking below 30 in October, where I entered my first play on that stock. I exited that play for 150% profit last week, and entered new January plays on both SCH and EGRP on Tuesday of this week. The new breed of online traders are basically bullish and as the market goes into a Holiday Rally- Y2K "Melt Up," I expect these stocks to benefit from a tidal wave of liquidity flowing back into the markets. SUNW. I follow this current newsletter pick because of several successful option trades. In addition, I know it is splitting in a few weeks. In the current Internet mania, this is one of those stocks that I am sure every mutual fund manager will hold through the early December turbulance and want to own in the new year. I bought January calls on SUNW on the general market weakness on Tuesday. Nice profit there already. CSCO. This is one of my best performing core, Long Term Stock holdings, having returned 300+% since I bought it in early 1998. I think that it will continue to appreciate, even through a major shakout of negative revenue, "dot com" companies which I expect in the next 6 to 18 months. Therefore, I bought a Jan 02 LEAP position on CSCO on Tuesday's weakness. This is the beginning of a change in how I manage my LT Stock Portfolio: over the next 6-12 months, I plan to add a set dollar amount each month in LEAP investments to benefit from the greater leverage in these instruments. YHOO. The "sawtooth" pattern of run up to earnings & drop off after earnings is clear if you look at YHOO over the last year or two. Next earnings are first week or two in January. Therefore, I am getting on this train now. The stock should benefit from a great Holiday ecommerce season, a potential split, and other good news. I entered this play on Tuesday's dip, and it is already paying off. AMZN. I entered a Jan call position on AMZN back in October. What a ride! Down to mid 60s after Jeff "Who Needs Profits" Bezos' conference call following earnings. Now back on the rise as Holiday ecommerce season moves into high gear. I'm glad to see this one coming back, and expect that this will be a very profitable play by the time I take profits early in January. I see no reason that this December/ January will not repeat last year's dot com stock mania, though the winners will be a larger group, and any one stock will enjoy smaller gains. GTW, SNE, NOK. All major consumer electronics plays that I think will have terrific Holiday appreciation. GTW seems to be winning with a "clicks & mortar" marketing approach which is targeting the consumers missed by DELL's more tech savvy, online only marketing approach. SNE is extending the PC to all aspects of entertainment with a family of related products using innovative memory products. NOK is the dominant handset player and will expand its influence in other wireless products with their WAP network. I entered January calls on each of these three stock on Wednesday. My plan for these plays is to monitor them but not to actively trade them. Except for AMZN, they are all in the money. All of the plays are mostly intrinsic value. They aren't out of the money "lottery tickets." If they hit 100%, I will consider taking profits. The dollar amount in each play is about the same, and is small enough so that I can let them ride without too much concern. As long as most of them perform as I expect, the one or two losers in the bunch will not hurt my "New Years Portfolio" too much. I tend to think that the easy money has been made by call plays in this November run. December will be harder, particularly with end of November "window dressing," and other mutual fund driven dynamics in the first few weeks of December. So I expect more volatility. I plan to start trading my Short Term Option Portfolio again next week, after the December premiums have cooled off a little. Welcome to Renee, Lynda and Mary: I am glad to see the "Woman's World" column and I am sure they will add a lot to the team at the Option Investor. I've looked back at some of my columns and can see how some women would take offense to locker room humor. However, I think that the market is neither male nor female. I take a options & futures class with male and female business students at one of the country's top business schools, and we value each other's opinions, whether they are derived from logic, emotion, quantitative research, experience, sports/military analogies or a combination of those elements. My female classmates would be offended by the idea that they have to get special treatment as women. So, I think that the idea of more voices in the trader's corner makes sense. When I write about trading, I draw on certain aspects of my background which help me the most - the military, which has helped me to plan; and sports, which relate to the dynamic nature of the wins and losses in trading a financial instrument which moves very quickly. I would prefer that Jim not pidgeon hole me into the "macho Marine" category. I have many aspects of my background which do not come out in my columns such as my undergrad experience at Harvard, my experience working at a program for single mothers and their kids, my teaching experience, or my current law school experience. I could use the column to talk about how to spot mispriced ITM or OTM options using Black-Scholes, but my sense is that this is beyond what most reader's are looking for. I think most readers are looking for someone they can relate to -- another novice trader who goes through very emotional wins and losses. I hope Woman's World offers that to a broader range of our readers. Janar Joseph Wasito janar@OptionInvestor.com *************** A New Revelation...Again by Ryan Nelson Asst. Editor There comes a time in every trader's life where they ask themselves, What was I thinking? It just so happens that I ask myself that question a little more often than I like. But if those words have stumbled from your mouth as well then you can probably relate to the experience that I had these past two weeks. Actually, I call it a revelation because it opened my eyes to a mistake I had been making in trading my portfolio. Let me share with you my goal. My goal is to double my trading account every 6 months. I don't know if this is a good goal or a bad goal but I sleep well at night with my positions and that is what matters most to me. (Loss of sleep is a dead give- away that your current positions are out of whack with your investment objectives and risk tolerance.) So with a month and a half left on this go round, I was sitting pretty close to accomplishing my goal. With the bulls back on Wall Street the final turn to the finish line should be a piece of cake, right? Wrong, and let me tell you why. Despite using similar tactics in picking my investments, my trading style had changed and was betraying my strategy. I had gotten over anxious to complete my task and began jumping in and out of positions. I found my commission costs going up and my profits going down. The only goal I was fulfilling was helping Ned Johnson (owner of Fidelity Investments, my current online trading broker) in his race against Charles Schwab for online trading market share. At the end of the week, I looked back across my confirmations and realized that if I would have held anyone of my positions to my original strategy when I bought them, that I would have made good profits. Instead, I was impatient, undisciplined and emotional in my decisions. I was no closer to my goal and left wondering where had the magic gone. So I pondered my situation and thought to myself that if I only had more trading capital, I may not have felt it necessary to jump back and forth. That I could have held all the positions and made more money. What a solution, right? Ehhh! Still wrong. This is were the revelation occurred. In talking with Jim about the seemingly vast opportunities on one of those Nasdaq record-breaking days, (you know, the entire month of November) he said something that hit home to my situation. In summary, he said there is never enough capital to play all the positions that look interesting. Whoa, stop the press. The head gunslinger is basically saying that more bullets isn't the solution I needed. I guess that makes sense. Why would more bullets help if my aim is still off target? What I needed was to return to the basics that had gotten me to where I am. I felt like my eyes had just been opened, and frankly, to a principle I already knew. Besides how was I going to increase my capital to accommodate more plays. At last check, money still doesn't grow on trees and I would still have to limit my trades to only a few. And with spreading yourself over many positions, you can bring into play a whole new can of worms. That is not what I wanted to do. I wanted to return to my original strategy that had been working all along and that is exactly what I did this week. In a holiday shortened week, I looked to keep it simple. I dumped my VRTY since the split run was looking more like a split crawl. I allocated some money to GMST as it was clearing the resistance between $105 and $108. The post-split announcement sell-off had bottomed out and this split runner looked like it was gaining momentum. So I was in GMST with the stock passing $109. My goal was to see GMST at the $120 level ahead of the split in three weeks. The Nasdaq dumped on me on Tuesday but I was above my stops and didn't jump ship. Needless to say, I am very happy with the reward. When the stock open above $119 on Friday, I couldn't resist selling. That was a quick move and I will watch for a possible re-entry point if it dips down next week. Thanks to that Tuesday decline, I could easily see ETYS standing out as one of a few positive stocks on my screen. Sure enough, Wednesday morning it punched above $60 and I entered a position here. I missed most of the market action on Wednesday, but was extremely happy to see that Nasdaq had soared by 77 points. ETYS hit $70 on Friday before pulling back to near $67 on the close. I held over the weekend for the possibility of another strong open. It has gapped up nicely for three straight days. So two-for-two this week, and back on track. So there you have it. I had gotten off the path on one simple rule and was left twisting in the wind. Emotional trading and too many plays. It is seems amazing how important each rule and principle is but, at the same time, I have never won at black-jack with a 22. Coming close doesn't count for much sometimes. The point is that it is late while I write this and when I turn off the computer and jump into bed, I will be falling right to sleep. In my book, a solid trading plan executed with discipline translates to no loss of sleep. Maybe that should be my only goal from now on. Ryan Nelson ryan@OptionInvestor.com ***************** READERS WRITE ***************** I have been an investor for over 20 years but have only recently begun to trade equities options. I was a subscriber to another options newsletter for a year at the cost of $2900, but was barely able to produce enough positive results to barely pay for the subscription after subtracting the losing plays which were recommended. Many of the suggested plays went against my better judgement when critical factors such as sector movement and overall market direction were considered. I discovered your service about 2 months ago and subscribed immediately after a few days of monitoring the recommended plays while using the free 2-week trial. What I liked immediately was the inclusion of the background information on the plays which were being recommended, right up to the latest information on the companies available at the time the play was being recommended. I also like the teaching which is always a part of the newsletters. In the past 6 weeks I have been able to use your recommendations to build not only my confidence in playing options, but also to build my brokerage account which is dedicated strictly to options from $4000 to over $12000. My only negative comment relates to the persistent short term strategy which your newsletter promotes by recommending option plays which are at most 6 weeks or so from expiration. I have had a couple of plays expire worthless, and then move forward to impressive gains which were never realized. I have begun to buy options which are 80 - 100 days out to avoid this. I have also become more confident in making my own choices based on information I have gleened from other sources (Business Week, Investors Business Daily, Wall Street Journal) with success. Thank you for your great service. Keep up the good work - many of us are depending on you! May you enjoy and Happy and Joyous Thanksgiving from the bounty which the Lord has provided! John Martens ********* I have been trading options for several years, and have done well. I have also done some stock investing (not trading) and that has done well, too. As a technical VP at an internet company, I spent a *lot* of hours at the office when I would have rather been at home. Even more importantly, my family wanted me at home (i should be glad they agreed!). I had made a plan a while back that I would take a long time off and stay home when the right time became obvious to me. Events at work and in the market combined to give me both a reason and the means to do this early in 1998. After much spousal conferencing and much prayer, I decided to leave my job. The same week i decided to leave my job, I went to an investment and trading seminar in Dallas where I met Chris Verhaegh. While I sat in the seminar having "protect your capital" preached over and over, I lost $300k in the market. Why? There were 2 reasons. #1 was that I had failed to put into practice what I was learning. But it would have been hard to do that instantaneously, in any case. #2 was that I had strayed too far, too fast, from what I knew was my comfort zone. In the past, the vast majority of my options activity had been in LEAPS. LEAPS calls on large picks and shovels companies ( e.g. Cisco and Intel) had, quite literally, never failed to return a profit. In fact, profits of 300%-$1000% were not uncommon at all. But I was using small amounts of capital to keep total risk down. But in January, after making some successful short-term trades, I got caught in the downdraft and saw most of it evaporate while I tried to "hope it back up." But, as they say in my native Tennessee, "That dog won't hunt!" Since then, I have made only very select short-term trades, and almost all of them were based on OIN recommendations and my own followup research. But I have also returned to what I am still the most comfortable with, and that is LEAPS. The biggest difference there is that I am much more conscious of entry points (thanks to Jim), and of the dynamics of premiums (thanks to Chris). I also have a third line in the water some of the time - lottery tickets (albeit with improved odds). This overall stategy works very well for me for several reasons: + I didn't leave my job to immediately take another full time job, simply relocating my office to the house. While I can easily see taking what I am learning and putting it into practice with something more akin to Jim's glued-to-the-screen style, that just is NOT what I want to do right now. I want to do a gazillion home projects and help with school (our kids are home- schooled) and take some vacations. With LEAPS, you have a nice compromise of options leverage, and a degree of buy-and-hold freedom from the quote screen. Note that I always buy LEAPS at least 12 months out, and sometimes 24 months or more. Because of this, I am perfectly willing to buy deep OTM on my reliable "plugger" companies. + LEAPS allow you to capture long-term tax treatment on option profits, which is a pretty sweet deal. The sweeter deal is short-term trading index options, which the IRS treats as 60% long-term capital gains. I will probably branch into this next. + By putting smaller percentages (1-5%) of my assets into carefully selected short-term OTM calls, I am able to juice up my returns without seriously risking my future. For instance, I bought OTM calls on CSCO when they started to rebound after sharp-brief profit- taking recently. As Jim would say: entry point, entry point, entry point. Initially, I only buy 1/10 to 1/4 of my ultimate plan, and average up with positive market and sector movement. Although still risky, this is a far cry from buying XYZ at $0.44 just because it was at $10.00 a week ago. (don't do that!) Although I called these lottery tickets above, I don't really think they are in the same category. I hope this provides a little insight into how option risk, reward, and management intensity can be tailored to some different goals and lifestyles. Thanks for sharing your research and market savvy with us, and keep those newsletters coming! ND Newman ******* ASK OIN ******* The AskOin editor is on vacation this weekend. Please check back next Sunday for the next installment in this series. ****************** Market Sentiment ****************** Sunday, November 28, 1999 Bring on the Santa Claus Rally! The day for giving thanks turned in a nice rally for the NASDAQ, as technology stocks continued the buy high, sell higher fever. Looking ahead, many pundits are now calling for a correction, especially on the NASDAQ where the index has soared over 56% year-to-date! It may happen, but based on the sentiment readings that we are witnessing, we see further upside potential. One area of sentiment that we like to watch here at Pinnacle Capital is the level of short interest. Short interest is often considered an indication of the level of skepticism in the market. Traders who sell securities short, borrow shares and then sell them, betting they can profit by buying the stock back later at lower prices. Last month we highlighted how the NASDAQ's short interest increased by over 5% ending October 15. During this last month ending November 15, short interest increased another 1.4%, to set another record in pessimism. The total of short interest for the NASDAQ and NYSE now stands at 2.3 billion and 4.0 billion, both ALL-TIME HIGHS! What is the pain threshold for these short sellers? Your guess is as good as ours, but the day when these shorts start throwing in the towel, is the day when we get concerned for a market correction! However, based on the statistics above, shorts are still alive, and more than willing to play the game. Two of the crazier stories from Friday where shorts played a major role include the stocks of Telular (WRLS) and Ariel (ADSP). These two stocks closed up 435% and 244% on Friday alone, after being up significantly more intra-day. This speculation is just maddening; however, the reason we are talking about these two equities is that the short sellers were all over these stocks early in the game. They were more than happy to short ADSP at $10 the previous day. However, when the stock continued its strength, the shorts who ran for cover (and most of them did), only helped fuel the buying frenzy that caused these astronomical returns. What would you do if you shorted a stock on Wednesday at $10, and the next day it is at $50? Can you stomach holding this thing much longer even though the odds of a major retracement are great? Probably not! The bottom line is that short interest continues to surge, and as long as it does, you can expect more short squeezes and thus, more upside rallies! We continue to watch the S&P 100 with great scrutiny, and over the last week, the put buyers continue to rush in. Currently, the top 4 out of 5 open interest leaders for the OEX reside in the puts, with December 750 being the greatest. At the 750 strike, puts are actually greater than calls, which is very rare, and indicates extremely bearish sentiment. What this tells us is that the support for the OEX is building, and that the chance of a continuation in the rally is picking up steam. We will continue to monitor the OEX activity and inform you of any changes. Finally, the chance of a big pullback increases with every record- breaking day that we have. However, as long as the bears continue to participate in the market; like we have been witnessing, and the 30-yr Treasury doesn't get back into record highs, we should be in great shape for a Santa Claus Rally! BULLISH Signs: Cash Flow: The amount of money being poured into this market continues to be staggering. Volume: There is an old saying, that volume precedes price, and it couldn't be better exemplified that the last two weeks, where the Nasdaq has broken record after record. Short Interest: Short interest for the Nasdaq is at an all-time high, and increased another 1.4% from October. Short interest on the New York Stock Exchange rose 72,007,030 shares in the month ending Nov. 15 to a total of 4,061,057,060 shares. 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! Advance/Decline Line: The A/D line is looking significantly better than the past 6 months. Mixed Signs: Volatility Index (22.95): The VIX continues to prove that the high teens and low 20's are a good exit point for bullish positions. The low close of 18.13 was back on July 16, which was the top of the market at that time. BEARISH Signs: Interest Rates: The yield on the 30-yr Treasury is getting closer to the danger zone, and should it creep higher, it will definitely become a major obstacle for this market rally. Investor Intelligence: The rapid change from bearish to bullish sentiment has been too great, and may indicate a near term top in the market. Energy Prices: With the rapid rise in crude oil, everything from manufacturing to transportation will be affected by higher costs. These higher cost will be felt more 1-2 quarters out, and could put pressure on profit margins. OTM Call Analysis As we move closer to the December expiration cycle, Pinnacle is tracking the level of call buying (OTM) between 720-810 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% December Expiration Cycle OEX OTM Call Analysis (Open Interest December 720-810) Date Open Interest Change % Alert Friday, November 19 36,165 - Friday, November 26 55,598 +53.7% 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 (11/26) Overhead Resistance (750-760) 1.50 OEX Close 753.57 Underlying Support (730-745) 1.82 What the Pinnacle Index is telling us: Based on 11/26, overhead resistance has decreased significantly and is giving indications that we may run to 765. Underlying support is also increasing, which should give the market more strength. Put/Call Ratio Friday Tues Thurs Strike/Contracts (11/26) (11/30) (12/2) CBOE Total P/C Ratio .42 CBOE Equity P/C Ratio .32 OEX P/C Ratio 1.29 OEX Peak Open Interest Friday Tues Thurs Strike/Contracts (11/26) (11/30) (12/2) Puts 750 / 6,887 Calls 750 / 6,533 Put/Call Ratio 1.05 VIX 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 19, 1999 19.63 November 26, 1999 22.95 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 18, 1999 52.1 29.9 **************************** SEE DISCLAIMER IN SECTION ONE
The Option Investor Newsletter 11-28-99 Sunday 3 of 6 LAST WEEKS CHANGE FOR THIS WEEKS PICKS: *************************************** Index Last Week Dow 10988.91-14.98 Nasdaq 3447.81 78.56 $OEX 753.57 4.27 $SPX 1416.62 -5.38 $RUT 458.94 -2.33 $TRAN 2909.16-50.07 $VIX 22.95 3.32 Calls Week BRCM 207.13 10.63 New, a possible split announcement? BVSN 111.00 13.51 Broadvisions view grows even wider CMGI 146.63 21.76 It was another great week for CMGI EMC 90.31 -0.88 Our play on EMC is at a crossroads GMST 118.50 13.88 Play kicked into high gear last week GTW 79.06 -1.56 GTW is close to a big breakthrough HGSI 115.50 16.13 New, creating a lot of warm fuzzies HLIT 68.50 -3.56 Dropped, but keep it on your radar IMCL 41.19 4.31 New, a successful secondary offering JDSU 266.00 52.19 In the middle of a short-term channel MACR 69.25 6.63 Positive technical & good volume MSFT 91.13 3.63 Microsoft is poised to move higher NOK 146.75 8.75 Waiting for the gap to be filled in... NT 81.69 2.18 A new twist on our options for NT! QCOM 384.75 17.69 Investors hold on for split approval QLGC 124.13 12.63 Split or not, the momentum continues! SDLI 186.75 42.63 Trading at the top of it's channel SNE 185.94 9.32 Sony, the gift that keeps on giving! SUNW 136.06 6.50 Split run resumes with heavy buying VRSN 198.00 27.94 Four consecutive new 52 week highs! VRTY 105.50 6.38 Only five days left for our split run VVTV 47.81 6.06 New, posts record sales for Q3 YHOO 226.88 8.12 A split candidate and enthusiasm Puts ALTR 58.50 -1.13 Dropped, semiconductors get a boost BOW 46.88 -5.50 New, a classical cyclical stock CI 79.44 -4.22 Cigna joins sector on a trip south GT 34.13 -2.88 New, it looks easier to drive downhill HWP 95.38 1.28 New, nothing to keep bulls on board KIDE 63.25 6.25 Dropped, short, sweet and over! RFMD 72.44 1.44 Dropped, a capitulation by the bulls RMBS 76.88 -5.25 A rather lack luster performance WLP 59.06 -5.50 New, WLP is looking a little sick STOCKS ADDED TO THE PICK LIST ***************************** Calls HGSI - Human Genome Sciences IMCL - ImClone Systems VVTV - Value Vision Intl BRCM - Broadcom Puts BOW - Bowater Inc HWP - Hewlett-Packard WLP - Wellpoint Health GT - Goodyear Tire *************************** 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 HLIT $69.00 (-3.69) The gap open trading strategy for the shares of HLIT remained consistent last week, as the stock continued higher earlier in the week, before starting to slide on Wednesday, and then again on Friday. Since the coverage of the stock a week or so ago, we got two or three trading opportunities to make a quick profit, but the upward trend seems to be consolidating. There was no reported bad news for the company, it looks like a case of profit taking. This is discouraging for a company in such a hot sector. The holidays should be sending it with the rest of the market. Watch for its 50 dma at $65 to be support. PUTS KIDE $63.25 (+6.25) It was short, it was sweet and it is over! KIDE gapped up at the open on Wednesday and managed to pick up nearly $12 before the close. Talk about a bounce! If you have played KIDE, you know that when KIDE makes a move, it makes it big. KIDE traded up another $9 in Friday's session, busted through its 10-dma, which is currently $59, and posted volume over three times the daily average. We noted in last Tuesday's write up that we were expecting a bounce right around $40 (it bounced off of $42), so hopefully everyone remembered to tighten their stops and made out well on our KIDE play. With the holiday shopping frenzy kicking into high gear, and the Pokemon clan gracing the lists of children worldwide, it is really no surprise that KIDE is on the tear once again. ALTR $58.50 (-1.13) With a bit of help from ABN AMRO, it looks as though the semis are off once again. ABN came out with a report estimating that the semiconductor industry will grow 25% in 2000 and 31% in 2001 before finally suffering a decline in 2003. The report mentioned Altera specifically as a beneficiary of the potential future upswing and apparently, that was exactly what investors needed to hear to restore their confidence in ALTR. ALTR made a solid bounce from $54 mid-week and has been on the move up since, thus ending our put play. RFMD $72.44 (+1.44) With a drop of over $3 on Monday, RFMD started the week on the right track, at least for put holders. Tuesday looked promising as well because the selling was coming in earnest with high volume (3.1 million shares). Unfortunately, Tuesday's sell off to a low of $63.50 looks like a fake out or at least a short-term capitulation by bulls. A strong rally on Wednesday with more volume than on Tuesday, tells us that the short term down trend may be over. With a follow through rally on Friday, it seems the safest way to trade RFMD right now is to not trade it at all. STOCK SPLIT CANDIDATES *********************** Current Split Candidates CMVT - Comverse Tech SNE - Sony Corp NOK - Nokia SFE - Safeguard CMGI - CMGI Inc. YHOO - Yahoo! SDLI - SDL Inc BRCM - Broadcom QLGC - QLogic HGSI - Human Genome VRTY - Verity Split candidates that are not current plays CHKP - Check Point MEDI - MedImmune DCLK - DoubleClick BRCM - Broadcom Corp FLEX - Flextronics International Ltd. STOCKS WITH UPCOMING SPLITS **************************** We don't list all splits available, only those we feel may have play possibilities. Symbol - Stock Splits/Date ADVP - Advance Paradigm 2:1 11-30-99 ex-date 12-01 ORBK - Orbotech 3:2 11-30-99 ex-date 12-01 VIGN - Vignette Corp 2:1 12-01-99 ex-date 12-02 OATS - Wild Oats 3:2 12-01-99 ex-date 12-02 PT - Portugal Tele 5:1 12-01-99 ex-date 12-02 BELFB- Bel Fuse 2:1 12-01-99 ex-date 12-02 BRCD - Brocade 2:1 12-02-99 ex-date 12-03 no optn TWTR - Tweeter Home 2:1 12-02-99 ex-date 12-03 no optn ACTU - Actuate 2:1 12-02-99 ex-date 12-03 no optn VRTY - Verity 2:1 12-03-99 ex-date 12-06 VRSN - Verisign 2:1 12-06-99 ex-date 12-07 SUNW - SunMicro 2:1 12-07-99 ex-date 12-08 AGN - Allergan 2:1 12-09-99 ex-date 12-10 CMTN - CopperMountain 2:1 12-09-99 ex-date 12-10 (KUA) NTRS - Northern Trust 2:1 12-09-99 ex-date 12-10 GDW - Golden West 3:1 12-10-99 ex-date 12-13 GMST - Gemstar Intl 2:1 12-13-99 ex-date 12-14 EXDS - Exodus Comm 2:1 12-14-99 ex-date 12-15 EMLX - Emulex Corp 2:1 12-15-99 ex-date 12-16 DTM - Dataram 3:2 12-15-99 ex-date 12-16 no optn BWE - BancWest 2:1 12-15-99 ex-date 12-16 ATML - Atmel 2:1 12-17-99 ex-date 12-20 ARBA - Ariba 2:1 12-17-99 ex-date 12-20 TVGIA- TV Guide 2:1 12-17-99 ex-date 12-20 IDPH - IDEC Pharma 2:1 12-20-99 ex-date 12-21 BEAS - BEA Systems 2:1 12-20-99 ex-date 12-21 NTAP - Network Appliance2:1 12-20-99 ex-date 12-21 MRCY - Mercury Computer 2:1 12-20-99 ex-date 12-21 MXIM - Maxim Integrated 2:1 12-21-99 ex-date 12-22 UNFY - Unify Corp 2:1 12-21-99 ex-date 12-22 CMRC - Commerce One 3:1 12-23-99 ex-date 12-27 XLNX - Xilinx 2:1 12-27-99 ex-date 12-28 ICGE - Internet Capital 2:1 12-27-99 ex-date 12-28 JDSU - JDS Uniphase 2:1 12-29-99 ex-date 12-30 HD - Home Depot 3:2 12-30-99 ex-date 12-31 WCOM - MCIWorldcom 3:2 12-30-99 ex-date 12-31 JNPR - Juniper Netwk 3:1 01-14-00 ex-date 01-18 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: ********************** IMCL - ImClone Systems $41.19 (+4.31) See biotech section for details Chart = http://quote.yahoo.com/q?s=IMCL&d=3m **** VRSN - Verisign Inc $198.00 (+27.94) See Internet section for details Chart = http://quote.yahoo.com/q?s=VRSN&d=3m Put play of the day: ********************** BOW - Bowater, Inc. $46.88 (-5.50 See put section for details Chart = http://quote.yahoo.com/q?s=BOW&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. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. *********** CALLS PLAYS *********** Hardware *********** GTW - Gateway Inc $79.06 (+0.06)(-2.50) Gateway is the #2 direct marketer of PCs in the US only behind global leader, Dell Computer. Instead of using resellers, Gateway takes orders via phone or Web site and ships directly to the computer user saving the customer markup costs. They develop, manufacture, and support a broad product line of desktop and portable PCs, digital media PC's, servers, workstations, and other PC-related items. The company has also expanded into the Internet access market (gateway.net) and is continuing to add new Gateway Country showrooms across the US. Its array of customers include individuals, businesses, government agencies, and educational facilities. Chairman and founder, Ted Waitt, still owns 41% of the company. We first added to GTW to our call list last weekend as a potential momentum play. Technically we saw GTW sweep to daily lows around $76 - a point that by the way just recently marked overhead resistance. The subsequent upswing signaled to us the beginning of an uptrend and thus we saw "buying opportunity". Beyond that, the rotation into the hardware sector with two of its leaders IBM and HWP spiking up following earnings announcements and news events further sparked our interest. On Monday we watched GTW open strong and slam into strong resistance at the $80 mark. The channeling pattern this week between firm support at $76 and overhead opposition has indeed provided various points of entry. However it'd be less risky to see GTW break through $80 and make a run for the 52-week high at $84 (set on November 15th) before opening new plays. Be careful, while we have no qualms about GTW's fundamentals, if the market decides to pullback this week, $75 may not hold it up and we could see $70 (we know - that sounds drastic. just wait for a close over $80 if you're squeemish). In the news this week, Fidelity Investments and Gateway announced a cooperative agreement. Existing and potential Fidelity clients will receive discounts on Gateway PCs. Fidelity's position is to enhance the benefits of the Web and fidelity.com as a user friendly investing alternative. On Tuesday Mike Mata, VP of e-commerce and Business Development for Gateway announced the launch of Esource, customized Web sites for large institutions, educational buyers, and corporate customers to track and choose their purchases. Many believe this move is overdue when compared to Dell's existing Premier Page service. BUY CALL DEC-75 GTW-LO OI=1691 at $7.25 SL=5.50 BUY CALL DEC-80 GTW-LP OI= 910 at $4.50 SL=2.75 BUY CALL DEC-85*GTW-LQ OI= 944 at $2.63 SL=1.25 BUY CALL JAN-80 GTW-AP OI= 765 at $7.75 SL=6.00 BUY CALL JAN-85 GTW-AQ OI= 381 at $5.75 SL=4.00 wait for dips to sell puts SELL PUT DEC-75 GTW-XO OI= 830 at $3.00 SL=4.50 SELL PUT DEC-80 GTW-XP OI=2819 at $5.25 SL=7.00 (See risks of selling puts in the play legend) Picked on Nov 21st at $79.00 P/E = 55 Change since picked +0.06 52 week high=$84.00 Analysts Ratings 12-8-1-0-0 52 week low =$36.12 Last earnings 09/99 est= 0.34 actual= 0.35 surprise +2.9% Next earnings 01-21 est= 0.49 versus= 0.41 Average Daily Volume = 2.58 mln Chart = http://quote.yahoo.com/q?s=GTW&d=3m **** SUNW - Sun Microsystems, Inc. $136.06 (+10.31)(10.25)(P2W+13.50) Sun Microsystems is the leading provider of high quality hardware, software and services for establishing enterprise wide intranets and expanding the power of the Internet. Sun is the leading maker of UNIX-based, number crunching workstation computers, storage devices, and servers for powering corporate computer networks. With more than $11 billion in annual revenues, the company sells its products to a variety of different markets, and can be found in more than 150 countries and on the World Wide Web. Hardware stocks took off again on Friday, after news of an agreement between DELL and Research in Motion, a relative unknown on the scene. Looking at a chart on SUNW is like looking at a chart of the Nasdaq. Unbelievable! The stock paused briefly this week to consolidate part of run up from $100. Investors continue to look for tech stocks and SUNW provides plenty of liquidity. Thus after several days of going sideways, the holiday week gave SUNW the push it needed to break above $130 and away it went. A lot of this is pure momentum, but plenty of players have their sights on the stock split. The ex-date is coming soon on Dec. 8th which is a week from Wednesday. With such a strong move up and many traders expecting a possible dip in the Nasdaq this week, we recommend targeting shooting any new plays. For those already profitable, be sure to adjust your stops to suit your own level of risk. For the majority if SUNW's move it has been using the 5 dma as support. Expect the stock to return to this level at $130.50 which would also retest the old resistance. Stronger support is at the 10 dma of $127. With such an extended run, split players may start leaving early - this may be your only week to play. Be careful and watch the Nasdaq. Looking at the option activity going into the last trading days before the stock split on 12/09, the out of the money December Calls (140,145,150) continue to see a lot of action, with traders placing bets looking for higher prices. A very bullish indication. BUY CALL DEC-130*SUX-LF OI=4729 at $10.75 SL= 7.50 wait for dip BUY CALL DEC-135 SUX-LG OI=3302 at $ 7.75 SL= 6.00 BUY CALL DEC-140 SUX-LH OI=4203 at $ 5.63 SL= 3.38 BUY CALL JAN-135 SUX-AG OI=1968 at $12.88 SL=10.25 BUY CALL JAN-140 SUX-AH OI=3220 at $10.38 SL= 7.75 Picked on Nov. 7th at $109.69 P/E = 92 Change since picked +26.37 52 week high=$138.25 Analyst Ratings 9-12-3-0-0 52 week low =$ 34.50 Last earnings 10/29 est= 0.31 actual= 0.33 Next earnings 01/20 est= 0.40 versus= 0.34 Average daily volume = 11.8 mln Chart = http://quote.yahoo.com/q?s=SUNW&d=3m **** SNE - Sony Corp $185.94 (+9.32)(+0.13)(+11.81)(+4.94) Sony is a consumer electronics and multimedia entertainment company. It sells products like TVs, VCRs, MiniDisc systems, stereos, digital camcorders, DVD video players, and the PlayStation home video game system. It is also in the process of strengthening its position in the music and image-based software markets. Some of Sony's entertainment assets include Columbia TriStar Motion Picture, Columbia TriStar Television, Sony Pictures Studio, and Columbia and Epic record labels. Other high-tech products include flat-screen TVs, digital TVs, CD-ROMs, and digital cellular telephones. Sony is the gift that just keeps on giving! After Sony finished it's bout with the profit takers in the week before last, it resumed its beautiful positive momentum run with ease. Sony gained over $9 for the week and closed on Friday at the high of the day, posting nice volume for the shortened trading session. Therefore, we look to be very well positioned heading into next week. The problem, of course, is finding an entry point! If you aren't in yet, your best bet is to wait for intraday dips to hop on board. Sony has support at it's 10-dma of $180. There is no resistance in site, as SNE closed just pennies short of its all time high set Friday. There was plenty of good news for Sony last week. The Sony Electronics Unit has given the go ahead for authorized dealers to resume Internet sales, including televisions, DVD players and camcorders. There had been a restriction placed on such sales while Sony went through and reviewed various service and support issues. Sony debuted their redesigned PlayStation Web site last week, which promises to have more, new and better features for PlayStation fans. Sony also announced plans to increase their digital camera production output by an approximate 30% by launching production in Shanghai. The Federal Trade Commission has asked for additional information from both Sony and Time Warner in regards to the proposed merger between Columbia House and CDNow. Sony has stated that they remain committed to the deal and are working to provide resolutions to any issues raised by the FTC. When the merger is completed, Sony and Time Warner will own 37% each of the newly formed company. And of course, there is that yearly phenomenon known as holiday shopping, which Sony is sure to benefit from. BUY CALL DEC-175 SNE-LO OI=212 at $14.00 SL=11.25 BUY CALL DEC-180 SNE-LP OI=379 at $10.25 SL= 7.50 BUY CALL DEC-185*SMW-LQ OI= 47 at $ 7.25 SL= 5.25 BUY CALL JAN-180 SNE-AP OI=193 at $15.00 SL=11.75 SELL PUT DEC-175 SNE-XO OI= 55 at $ 2.06 SL=3.00 (See risks of selling puts in the play legend) Picked on Nov 7th at $164.69 P/E = 56 Change since picked +21.25 52-week high=$186.00 Analysts Ratings 0-1-0-0-0 52-week low =$ 65.50 Last earnings 10/99 est= N/A actual= N/A Next earnings 01-00 est= N/A versus= N/A Average Daily Volume = 176 K Chart = http://quote.yahoo.com/q?s=SNE&d=3m **** EMC - EMC Corporation $90.31 (+0.93)(+6.69)(+8.93) Memory hardware and software is their primary focus. EMC Corporation is the #1 maker of mainframe computer disk memory hardware and software. EMC makes memory storage and retrieval systems for larger mainframe computers as well as UNIX and Windows NT systems, using redundant array of independent disks or (RAID). With an emphasis on overseeing a corporation's Internet data, EMC continues to boost its presence in software and related services. About 80 percent of EMC's revenue comes from storage hardware. Over the last 5 years EMC's earnings have increased an average of 30 percent annually. EMC competes in the market place with IBM, Compaq and Hitachi. Our play in EMC is at a crossroads. Since November 18th, EMC has traded in a narrow $3 range. At this point the $90 area has proven to be a tough nut to crack. Traders seem to want to bid the price of the hardware maker higher, but there has been no volume to push EMC to the next level. EMC did inch higher in light holiday trade Friday. A company named "Research in Motion", signed a partnership agreement with Dell. News of the agreement did lend support to the hardware sector. EMC is reaching a point where it will either breakout to make new highs or begin to fall under its own weight. One interesting point to consider with the Nasdaq continuing to make new highs, EMC has struggled to break through overhead resistance. Should we see a correction in the major indices, EMC will probably see some overdue profit taking as well. If the self feeding-frenzy continues in the markets after the holidays, then the chances are good that EMC could push through the $90 level and continue higher. As we mentioned EMC and the broader markets are due for a pullback or correction. You shouldn't fight the trend, but you should exercise prudence when entering a new play or adjusting your stops on an existing position. The $87 area has provided some support for EMC. If we see a bounce off that support area, with good volume then we would look to add a new play. If EMC breaks through the $90 level, please make sure there is better than average volume behind it prior to entering a new play. As always assess the potential risks and rewards prior to placing an order for a new play. For the more pessimistic bulls, if the markets correct sharply (as it is prone to do) EMC could see $80. Good enough reason to play with stops. In other news, the chat rooms are full of talk of a split for EMC, but there is no news to substantiate the rumors. They do have the shares available, and are approaching the area where they split earlier this year, but at this point only wishful thinking. Two analysts recently downgraded EMC from a strong buy to a buy, yet left the 12-month price target near $115. BUY CALL DEC-80 EMB-LP OI=2495 at $11.38 SL=8.75 only on dip BUY CALL DEC-85*EMB-LQ OI=3412 at $ 7.38 SL=5.50 BUY CALL DEC-90 EMB-LR OI=3977 at $ 4.13 SL=2.50 BUY CALL DEC-95 EMB-LS OI=1328 at $ 2.06 SL=1.00 if breaks up wait for dips to sell puts SELL PUT DEC-85 EMB-XQ OI=1210 at $ 1.75 SL= 3.50 (See risks of selling puts in the play legend) Picked on Nov 14th at $82.69 P/E = 90 Change since picked + 7.62 52 week high=$90.38 Analysts Ratings 15-8-3-0-0 52 week low =$33.00 Last earnings 09/99 est= 0.27 actual= 0.29 surprise +7.4% Next earnings 01-25 est= 0.31 versus= 0.24 Average daily volume = 5.87 mln Chart = http://quote.yahoo.com/q?s=EMC&d=3m **** GMST - Gemstar International $118.50 (+13.87)(+4.25) 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. Our split run play in GMST kicked in to high gear this week as the momentum we were looking for returned. GMST splits 2:1 on December 13th. Monday after a bounce off the support at $106 shares of GMST surged for the balance of the holiday week to a new high at $119.38 before closing at $118.50 on Friday up $13.87 for the week. Considering it was a holiday week the volume on the move has been solid. Open interest in the December 115 calls increased substantially as well, indicating players were jumping on board this train. A helping hand for our play came in the form a split announcement from TV Guide, Tuesday after the close. In early October, Gemstar agreed to purchase this rival, for about $9.2 billion. TV guide will split 2:1 on December 17th before being acquired by GMST. Technically GMST could be a bit over- extended and we could see some of the traders that bought GMST stock less than two weeks ago at $100 take some money off the table. Should we see any selling in the major indices this week, GMST would certainly not be immune to any profit taking as well. GMST would see intraday support near $110 give or take $2. Any bounce off those areas would be viewed as an opportunity to either add to or initiate a new position in GMST, as there appears to be more room to the upside for Gemstar before the split. GMST has been a profitable split play at this point, so adjust your stops accordingly to protect the profits in your account. Should the momentum continue higher, enter a new play only on strong volume, and keep your stops close. No other news at this time. BUY CALL DEC-110 GST-LB OI= 638 at $13.38 SL=10.75 BUY CALL DEC-115*GST-LC OI=4766 at $10.13 SL= 7.50 BUY CALL DEC-120 GST-LD OI= 168 at $ 6.88 SL= 5.00 wait for dips to sell puts SELL PUT DEC-105 GST-XA OI=1302 at $ 3.63 SL=5.50 SELL PUT DEC-110 GST-XB OI= 75 at $ 4.63 SL=6.50 SELL PUT DEC-115 GST-XC OI= 114 at $ 6.25 SL=8.00 if drops, risky! (See risks of selling puts in the play legend) Picked on Nov 18th at $104.88 P/E = 157 Change since picked +13.62 52 week high=$119.38 Analysts Ratings 6-0-0-0-0 52 week low =$ 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 = 1.24 mln Chart = http://quote.yahoo.com/q?s=GMST&d=3m *********** BIOTECH *********** HGSI - Human Genome Sciences, Inc. $115.50 (+16.50) Human Genome Sciences develops drugs and diagnostic products based on human genes. The company also researches non-human genes, including those of bacteria, fungi, and viruses, which could prove useful in the creation of vaccines and antibiotics. Although HGS has no marketable products, it has several in clinical testing. HGS has formed collaborations with SmithKline Beecham, Takeda Chemical Industries, Merck and The Institute of Genomic Research. these firms pay HGS to develop products for cancer, heart disease, arthritis and Lou Gehrig's disease. HGS has one-third of a joint venture developing gene therapy for vascular diseases, and has discovered a protein that could treat AIDS and other immune disorders. As of mid June 1999, HGS had filed patent applications that describe the medical uses of more than 6,450 newly discovered human genes. What is driving up the price of HGSI? Good question. One cannot deny the phenomenal momentum of this stock. Recently there have been two news items that may have influenced this rally. First, and probably causing only a minor influence, Needham initiated a buy rating on the company on November 23. The most significant news item occurred on October 27th. The Board of Directors called for a special stockholders meeting seeking the authorization to increase the number of common shares from 50 million to 250 million. The meeting is scheduled for December 16th. The implication of such a large increase in common stock is a obviously a stock split. Visions of Sugar Plum Fairies are dancing in the heads of investors. Even though, as we all know, a stock split changes absolutely nothing about the fundamentals and prospects of a company, it just human nature to think you are getting something for nothing. With potential for more than a 2:1, investors are lining up for all of that potential holiday cheer. Who are we to fight them? After all, emotions drive markets and with potential blockbuster discoveries and a pending split, HGSI is creating a lot of warm fuzzies. Technically, HGSI had a very good Friday. Although the volume was not particularly good due to the holiday week, HGSI was able to rally as high as $125.75, a new high. Even though it pulled back to $115.50 it still managed to close in new high ground. Resistance is at Friday's high. Support is at $111. Major support is in the $100 area. BUY CALL DEC-110*HQI-LB OI=30 at $12.00 SL= 9.50 BUY CALL DEC-115 HQI-LC OI= 0 at $ 8.75 SL= 6.75 volume = 113 Fri. BUY CALL JAN-115 HQI-AC OI= 2 at $13.88 SL=11.25 caution - low OI Picked on Nov 28th at $115.50 P/E = N/A Change since picked + 0.00 52-week high=$125.75 Analysts Ratings 1-3-2-0-0 52-week low =$ 28.75 Last earning 10/25 est=-0.42 actual=-0.42 Next earning 02/11 est=-0.68 versus=-0.55 Average Daily Volume = 403 K Chart = http://quote.yahoo.com/q?s=HGSI&d=3m *** IMCL - ImClone Systems $41.19 (+4.31) ImClone Systems Inc., is a biopharmaceutical company dedicated to the development of novel treatments for cancer and cancer related disorders. Through its novel research and development programs, ImClone is developing a pipeline for potential products for cancer. Its innovative approaches have led to three distinct development programs: cancer therapeutics, cancer vaccines and anti- angiogenesis agents. Each of these programs has resulted in product candidates, some of which are advancing through clinical studies. ImClone Systems, Inc. was the beneficiary of a successful secondary offering on November 19th. Presumably, the 2.75 million share offering at $32 per share will give IMCL a cash infusion enabling the company to continue moving its products through clinical trials. One of the lead underwriters of the offering, Prudential Securities, increased their price target to $45 per share in the near term and spoke of a $100 target within two years. Although it is not uncommon for an underwriter to write glowingly about a company after participation in an offering it is nevertheless a positive for the company to receive support from one of Wall Street's big boys. Prudential has a lot of investors, and with the biotechs heating up, IMCL could be one of the winners. On Friday, IMCL's shares broke above resistance at $39.50 completing a usually bullish cup-and-handle pattern. The implication of this pattern is that IMCL shares could continue to rally, especially without much overhead resistance. Aggressive investors could initiate bullish positions if IMCL starts moving up on Monday. Less aggressive investors might want to wait and see if IMCL can pull back and test the support at $39.50 before initiating any positions. IMCL has strong support at the price of $35. However, with the current chart pattern it seem unlikely that IMCL will test that support any time soon. Chart lovers can see that IMCL has been climbing its 5 dma (currently at 38.19). A break in this support could result in a quick drop to its 10 dma (also at $35). BUY CALL DEC-35 QCI-LG OI=813 at $7.63 SL=5.75 BUY CALL DEC-40*QCI-LH OI=677 at $4.63 SL=2.75 BUY CALL JAN-40 QCI-AH OI= 81 at $6.75 SL=5.25 Picked on Nov 26th at $41.09 P/E = N/A Change since picked +0.00 52-week high=$41.75 Analysts Ratings 2-4-1-0-0 52-week low =$ 8.19 Last earning 11/16 est= 0.21 actual= -0.44 Next earning 3/31 est=-0.17 versus= -0.34 Average Daily Volume = 677 K Chart = http://quote.yahoo.com/q?s=IMCL&d=3m *************** Internet *************** VRSN - Verisign Inc $198.00 (+27.94) VeriSign provides Internet-based trust services that authenticate and protect data so secure transactions and communications can be conducted over the Internet, intranet, and extranets. Websites, enterprises, government agencies, and even individuals use VeriSign's digital ID's (digital certificates) with the encrypted information as cybersafeguards for such activities as e-mail, home banking, and credit card transactions. Visa represents 14% of total sales. After following stellar earnings on October 21st, sheer momentum was driving VRSN upward to new levels. Then on November 11th Verisign announced a 2:1 stock split and the fire was rekindled. However this week truly marked the take-off point with gains of $27.94, or 16.4%! The stock has invariably stretched into new territory and on Friday, VRSN set its fourth consecutive 52-week high! So it now stands that $202.50 is officially overhead resistance. You'd normally expect a little back filling after such enormous leaps, but its possible investor's slap-happy enthusiasm may not let up with just 6 trading sessions left in this VOLATILE split play. VRSN's split takes affect on Tuesday, December 7th. The 10-dma ($178.27) has risen and positioning itself slightly below near-term support at $180. There's no crystal ball to see if VRSN will return to this level; therefore you may have to target shoot for an intraday low that is in line with their risk tolerance if you decide to open any new positions. Let's bring you up-to-date on the news. On November 11th when the Board of Directors announced the 2:1 stock split, the company also separately announced a partnership with Telia, Sweden's largest telecommunications company, to provide digital certificate and public key infrastructure (PKI) services in the Nordic and Baltic regions. In other news the e-commerce industry was given the word that the US Senate passed legislation allowing digital signatures to have the same legal standing as those written on paper. For those searching for an analyst view point, on November 18th David Zale of Sands Brothers & Co reiterated a Strong Buy rating for VRSN and issued a price target of $250! BUY CALL DEC-190*XVR-LR OI=313 at $20.25 SL=15.75 BUY CALL DEC-195 XVR-LS OI= 96 at $17.75 SL=14.00 BUY CALL DEC-200 XVR-LT OI=315 at $15.25 SL=12.00 BUY CALL JAN-195 XVR-AS OI= 21 at $27.38 SL=21.50 BUY CALL JAN-200 XVR-AT OI= 53 at $25.13 SL=19.50 Picked on Nov 23 at $187.00 P/E = N/A Change since picked +12.00 52 week high=$202.50 Analysts Ratings 5-12-3-0-0 52 week low =$ 9.68 Last earnings 09/99 est= 0.02 actual= 0.03 surprise +50.0% Next earnings 01-25 est= 0.05 versus=-0.06 Average Daily Volume = 1.35 mln Chart = http://quote.yahoo.com/q?s=VRSN&d=3m **** CMGI - CMGI Inc. $146.63 (+21.75)(+23.38) They invest in the future of the Internet. CMGI develops and operates Internet and direct marketing companies as well as venture funds focused on the Internet. They assist in the internal development and the operation of their majority owned subsidiaries within the CMGI Internet Group. CMGI has a stake in more than 40 Internet Companies including Lycos and Raging Bull. They also own 83% of search engine AltaVista. They have a majority interest in Engage Technologies, ADSmart, NaviSite and MyWay.com. Services include Web Hosting, ad serving, and traffic analysis. Located in Andover, MA, CMGI competes in the marketplace with Safeguard Scientifics,ICGE, and SOFTBANK. Shareholders in CMGI had another great week. CMGI which invests in, develops and operates a number of funds, whose primary focus is the Internet saw $21.75 added to the price of its stock this week. There was news and rumors galore, actually a little something for everyone. The previous week the gains in CMGI came on the news of the agreement involving China and its entry into the World Trade Organization. This week CMGI announced they were launching a new business to business venture fund. The new fund is expected to build on the success of the CMGI's current funds, and their strong track record in B2B investments, and could reach up to $1 billion in capital. Rumors of a split announcement and a merger with 24/7 Media also helped propel CMGI higher this week. 24/7 Media(TFSM) is said to be the target of a potential merger deal for CMGI. The talks between CMGI and TFSM have been an on again-off rumor for sometime. CMGI has beefed up it's holdings in other online advertising companies this year. As for a stock split they do have the available shares. Shareholders of CMGI did enjoy a 2:1 split in late May. The stock was trading near $175 when news of a split came out last March. CMGI will hold their annual stockholders meeting December 17th, just two days after they report earnings. It could be a perfect time to announce a split, however as of now it's all speculation. Whatever the reason, CMGI has caught on fire in the last 10 days and appears to be moving higher. Keep in mind CMGI has shot up over $45 in the last two weeks. For those of you that entered our play in CMGI adjust your stops to protect your profits. Intraday support for CMGI can be seen at $145, $140, and near $135. If you are considering a new play, consider not only your risk profile but also the fact that CMGI can be a very volatile stock and may not be for everyone. There is no other significant news on CMGI at this time. BUY CALL DEC-140 GCB-LH OI=3706 at $15.00 SL=11.75 BUY CALL DEC-145 GCB-LI OI= 830 at $12.75 SL=10.50 BUY CALL DEC-150*GCB-LJ OI=3740 at $10.00 SL= 7.50 BUY CALL DEC-160 GCD-LL OI=2063 at $ 7.13 SL= 5.25 Picked on Nov 21st at $124.88 P/E = 36 Change since picked +21.75 52 week high=$165.00 Analysts Ratings 4-6-0-0-0 52 week low =$ 16.34 Last earnings 07/99 est= 4.08 actual= 4.24 surprise +3.9% Next earnings 12-15 est=-0.17 versus= 0.38 Average daily volume = 4.41 mln Chart = http://quote.yahoo.com/q?s=CMGI&d=3m ******************************* CALLS CONTINUED IN SECTION FOUR ******************************* SEE DISCLAIMER IN SECTION ONE
The Option Investor Newsletter 11-28-99 Sunday 4 of 6 CALLS CONTINUED *************** Internet cont. *************** VVTV - Value Vision International $47.81 (+4.31) Value Vision International, Inc. owns and operates the third largest and fastest growing home shopping network and a companion Internet shopping website, both which are being re-branded as SnapTV and SnapTV.com, respectively, as part of a wide-ranging direct e-commerce strategy the Company is pursuing with NBC Internet (NBCi). The moves are expected to position SnapTV and NBCi as the leaders in the ongoing convergence of television and the Internet, combining the promotional and selling power of television with the purely digital world of e-commerce. Value Vision, which is approximately 40% owned by GE Equity and NBC, offers live programming 24 hours per day, 7 days a week. On Tuesday VVTV came out with record sales for the third quarter as they soared to $67 million, 84% higher than the comparable prior-year period. The principal contributor to this improvement was the company's television home shopping operations, and going forward the company is reporting on-going strength in core operations, and they look to expand efforts of new product offerings. As we go into the holiday season, the retail sector, especially the Catalogue and Mail order companies are going to receive a lot of attention. VVTV seems to be stepping up as the leader in the space. On Friday the stock hit another 52 week high of $47.88 on heavy volume, 2 times more than average. We expect the upward momentum to continue as we approach the Christmas and New Year season, we look to add to positions here, or on dips. Mild support levels seem to be holding up at the 45.00 level. Be very careful here. We like the looks of VVTV but there is an eerie similarity between it and a chart of the Nasdaq. VVTV has been climbing its 5 dma (currently at $45.00) with the occasional dips to its 10 dma (currently at $42.75) before recovering. Any major selling in the Nasdaq could pull VVTV down with it. Play with stops. In the news, major league baseball legend Pete Rose, the games all-time hit king will appear on VVTV on Sunday promoting sports memorabilia, during a prime time special. This should draw increased attention to the company. BUY CALL DEC-45 UVR-LI OI=633 at $5.00 SL=3.25 BUY CALL DEC-50 UVR-LJ OI= 0 at $2.50 SL=1.25 vol=32 on Fri. BUY CALL JAN-45 UVR-AI OI= 33 at $5.88 SL=4.38 BUY CALL JAN-50 UVR-AJ OI= 20 at $4.50 SL=2.75 vol=180 on Fri. Picked on Nov. 28th at $47.81 P/E = N/A Change since picked +0.00 52 week high=$ 47.88 Analyst Ratings 1-0-0-0-0 52 week low =$ 4.19 Last earnings 11/23 est= 0.02 actual= 0.06 Next earnings 01/00 est= 0.06 versus= 0.06 Average daily volume = 424 K Chart = http://quote.yahoo.com/q?s=VVTV&d=3m **** YHOO - Yahoo! Inc $226.88 (+8.13)(+21.81) Yahoo! Inc is a global Internet media company that offers an online guide to web navigation, a branded network of comprehensive information, communication services, and shopping access to millions of users daily. Over 32 mln users visit the Web site each month. Yahoo! operates in the black with the bulk of its revenues derived from advertisements commissioned by its list of about 3800 clients. YHOO is a split-candidate play powered by investor enthusiasm which typically surrounds this high-flying Internet at this price level. Historically the company has announced stock splits when the share price reaches $200 to $220 and this week YHOO surpassed those marks! Recall YHOO recently split 2:1 on February 5th, 1999. Now it was previously thought that YHOO did not have enough shares to authorize another split. We have found new data that contradicts that viewpoint. It appears that YHOO has 900 mln shares authorized and only 263 mln outstanding. Therefore, this Internet blue chip could announce a split if it wants to. Either way, we might see one with a shareholder meeting likely to occur in April or March. The earnings report is expected on January 12th. However e-holiday momentum is also a factor in the stock's recent rise. The arrival of the holiday season is starting to pump up the e-tailers. Since YHOO is in a similar position to Amazon.com (AMZN), American Online (AOL), and eToys (ETYS) which all have a loyal audience, they are among the top picks for a profitable holiday quarter. In the trading arena this week, YHOO established a near-term support level at $218 - $220 level just above the trailing 10-dma ($215.92) and consistently powered higher. On Friday, YHOO hit an intraday high of $235.25 before selling off in the afternoon. Not to worry the downdraft was on low volume indicating the selling was simply due to some investors taking a little cash off the table ahead of the weekend. Actually Friday's afternoon reprieve was a blessing if you were waiting for a slight pullback before jumping into the play. Although YHOO's volatility does offers daily entry points even during a climb. Despite the volatility, YHOO has been in a tight range as it bounces off its 5 dma (currently resting right above it now). If YHOO breaks the 5 dma, like during a Nasdaq sell-off, first stop will be the 10 dma and not the mild support at $220. It was encouraging to see YHOO so handily beat its old closing high back in April. At the moment, overhead opposition is at Friday's daily high ($235.25), however you can almost taste a new 52-week high in the near future. The $244 level hit (intraday) during the "Hoorah" of April is merely 17+ points (7%) away! Remember to confirm the stock's direction next week along with the market sentiment and plan entry points carefully. Continuing in the spirit of the holiday season, Yahoo! is providing shoppers with online consumer safety tips with viewing on the home page of shopping.yahoo.com. In other news this week Yahoo! signed a marketing agreement with 1-800-FLOWERS.com providing subscribers with direct access to the popular flower and gift site. BUY CALL DEC-220 YMM-LD OI=4851 at $16.13 SL=12.50 BUY CALL DEC-230*YMM-LF OI=5239 at $11.25 SL= 9.00 BUY CALL DEC-240 YMM-LH OI=3267 at $ 7.25 SL= 5.50 BUY CALL JAN-230 YMM-AF OI=4347 at $22.13 SL=17.25 BUY CALL JAN-240 YMM-AH OI=4862 at $18.00 SL=14.00 Picked on Aug 15th at $212.56 P/E = 1116 Change since picked +14.32 52 week high=$244.00 Analysts Ratings 13-14-4-0-0 52 week low =$ 9.68 Last earnings 09/99 est= 0.09 actual= 0.14 surprise +55.6% Next earnings 01-12 est= 0.15 versus= 0.07 Average Daily Volume = 7.73 mln Chart = http://quote.yahoo.com/q?s=YHOO&d=3m **** BVSN - Broadvision $111.00 (+13.50)(+9.00)(+5.00)(+9.94) Broadvision's software helps companies become e-commerce powerhouses. Their depth in One to One Internet software provides the tools for all facets of the online transaction, including ordering, payment, fulfillment, customer service and billing. It also allows users to collect, track and manage customer visits, then create customer profiles accordingly. Trophy Customers include Oracle, American Airlines, Credit Suisse, Ernst and Young, Hewlett Packard, Home Depot, Motorola, Vodafone and WalMart. Insiders own 46% of the company. BVSN's view is growing wider by the day. Now providing over 400 of the largest "brand name" businesses with end to end e-tail and customer interactive services, BVSN is catching the holiday spirit. With more people expected to transact business online than ever before this holiday season, BVSN stands to benefit as the software provider that makes it happen. Technically, BVSN closed at a new high of $111, but has twice encountered resistance at $113-$114. From Tuesday and Wednesday last week, support formed at $106; the next level down is $100. On "Daytrader Friday" support was found at $110. Volumes have come back a bit too (still above the ADV), indicating the frothy enthusiasm may be temporarily over. Enthusiasm without the froth is still good. We're inclined to target shoot from $102-$106, but you should pick your own level of risk. BVSN has also been a recent 3:1 splitter. The announcement was made at $133. Though we are not there yet, as we get closer to that number, BVSN could again entertain a split. Still keep your guard up. BVSN has almost doubled in the last month, making it susceptible to a big pullbacks should the rest of the market decide it's time for a 10% correction, following this almost uninterrupted recent run. Make sure the market is going in your favor before starting a new play and use a trailing stop to protect your profits if BVSN starts to backslide. In the news, BVSN was named as a Fortune e-50 company in the November 15 issue of Fortune, which certainly raises the visibility. Not much else making the news on this one. Be vigilant in your news monitoring. If you don't see news, it generally means they aren't making any, and the next bit could be negative. BUY CALL DEC-105*BDV-LI OI=411 at $13.38 SL=10.75 BUY CALL DEC-110 BDV-LH OI=286 at $11.13 SL= 8.75 BUY CALL DEC-115 BDV-LC OI= 83 at $ 8.63 SL= 6.50 BUY CALL JAN-110 BDV-AH OI=123 at $17.13 SL=13.50 BUY CALL JAN-115 BDV-AC OI= 74 at $15.13 SL=11.75 Picked on Nov 7th at $83.50 P/E = 615 Change since picked +27.50 52-week high=$114.69 Analysts Ratings 5-16-1-0-0 52-week low =$ 6.63 Last earnings 09/99 est= 0.13 actual= 0.16 Next earnings 1-27 est= 0.16 versus= 0.08 Average Daily Volume = 1.5M Chart = http://quote.yahoo.com/q?s=BVSN&d=3m ***** MACR - Macromedia Inc. $69.25 (+6.62) Macromedia is a leading provider of Web authoring and production software for professional Web developers. Its products range from Dreamweaver, the market-leading professional Web authoring environment, to Flash, the industry standard for high-impact, vector-based Web sites that deliver motion, sound, interactivity and graphics. MACR is a big name when it comes to web based development tools. Just to make sure, they are hiring an advertising agency to establish that fact. With a lot of enthusiasm for stocks in the Internet software sector, MACR finished the holiday week with a +2.13 gain on Friday. MACR is looking very bullish technically. It hit a double top at $50 in April and later in May. Suddenly near the first of October, its stock explodes off its 30 dma and breaks the $50 barrier. Spending the next couple of weeks consolidating, it quickly powers higher with a string of new acquisitions and strategic partnerships. Again, it powers through $60 only to fall back and consolidate to its 30 dma before exploding again. Does anyone detect a pattern? All of MACR's longer term moving averages are finally begin to point up and it looks like we are in a stage two ascent. Some chartist could argue we are in the middle of a wide ascending channel. Whatever the case, the short term technical outlook is bullish with a great case of higher lows. Conservative players should wait for a close above $70, while patient ones can target shoot support at $64 if we get a Nasdaq pull back. In recent news, MACR is currently involved in a new web site to be launched in January called StanLee.Net, a comic Website that is suppose to be the next Amazon.com for comic books. Well we don't know about that, but the street is buying the story, a number of brokerage houses are rating the stock a strong buy. They have also recently hired a well known Advertising agency To help establish there brand name. Furthermore looking at the option activity, the December 70 Calls had open interest of 319 contracts on Tuesday, today the open interest is 1363, traders are placing bets that the shares are going higher in the near term. BUY CALL DEC-65 MRQ-LM OI= 349 at $ 8.50 SL= 6.50 BUY CALL DEC-70*MRQ-LN OI=1363 at $ 5.50 SL= 3.75 BUY CALL JAN-65 MRQ-AM OI= 30 at $12.88 SL=10.63 BUY CALL JAN-70 MRQ-AN OI= 39 at $ 9.63 SL= 7.50 Picked on Nov. 23rd at $67.56 P/E = 113 Change since picked +1.69 52 week high=$70.31 Analyst Ratings 5-4-1-0-0 52 week low =$24.25 Last earnings 11/13 est= 0.31 actual= 0.19 Next earnings 01/26 est= 0.15 versus= 0.12 Average daily volume = 907 K Chart = http://quote.yahoo.com/q?s=MACR&d=3m ********* SOFTWARE ********* MSFT - Microsoft Corp $91.13 (+5.13)(-3.19) Microsoft is the #1 software company in the world. They develop, manufacture, license, and support a broad range of software products including Windows operating systems, server applications, the popular MS Office suite, and a Web Browser. The company is presently involved in anti-trust issues with the government. CEO and co-founder, Bill Gates still owns 15% of Microsoft. Our call play is based on the recent move by US District Judge Thomas Penfield Jackson to appoint a mediator, Richard A. Posner, Chief Judge of the 7th US Circuit Court of Appeals in the government's antitrust case against Microsoft to negotiate an out-of-court settlement. Jackson didn't want "divergent views" to destroy the current rapport "between the states and the Justice Department so far has been, I think enormously helpful. And I would like to see it continue. I would not like to have to deal with divergent points of view." Investors were pleased too that talks would likely resume and started to put their money back into MSFT. The first sign of MSFT's renewal was on Friday November 19th when it traded up $1.06 (1.3%) on strong volume after succumbing to a monopoly and bully lashing. The stock hit bottom as it played tag with the 200-dma (then @ $85-$86), but this week's rise places it firmly at the first line of defense. The next battle maybe a tough one. MSFT finally cleared all of its moving averages only to land at the bottom of a lot of congestion. Looking at the chart, we could see a move to $95 or $96 but beyond that may require an out-of-court agreement with the gov't. The recent sessions have provided lots of intraday action extending many different opportunities for entry into this news-driven momentum play. As the Nasdaq rages on and the end of the monopoly skirmish seems to be coming to a timely close, MSFT is poised to go higher in the near-term as long as the good news keeps on coming. The New York Times reported on Thursday that Microsoft and its government opponents have been called to appear in Chicago this Tuesday to begin private settlement talks. A source close to the case said Judge Posner is "expected to assess quickly the chances of a settlement between the two sides" and that an agreement would most likely happen "by the end of January, or it won't happen". Many know Microsoft has been accelerating its investments into the cable TV industry both on the domestic front and internationally. Presently the company is negotiating a deal to acquire a 60% stake in Titus Communications Corp, Japan's 2nd largest cable TV operator, which is owned by MediaOne Group (UMG) for approximately $957 mln. It's likely an agreement will be reached quickly. In other news, Microsoft and partners Softbank and Global Crossing (GBLX) announced the completion of a joint venture company, Asia Global Crossing. Together they will construct an undersea network called East Asia Crossing to link Japan, China, Singapore, Hong Kong, Taiwan, South Korea, Malaysia, and the Philippines to provide advanced network-based telecommunications services to businesses and consumers throughout Asia. BUY CALL DEC-85 MSQ-LQ OI=15006 at $7.50 SL=5.75 BUY CALL DEC-90*MSQ-LR OI=28024 at $3.50 SL=1.75 BUY CALL DEC-95 MSQ-LS OI=34594 at $1.38 SL=0.75 BUY CALL JAN-90 MSQ-AR OI=35621 at $6.38 SL=4.75 BUY CALL JAN-95 MSQ-AS OI=23553 at $4.13 SL=2.50 SELL PUT DEC-85 MSQ-XQ OI=16144 at $0.88 SL=1.50 (wait for dip) SELL PUT DEC-90 MSQ-XR OI=11470 at $2.00 SL=3.75 (See risks of selling puts in the play legend) Picked on Nov 21 at $86.00 P/E = 60 Change since picked +5.13 52-week high=$100.75 Analysts Ratings 14-17-3-0-0 52-week low =$ 54.62 Last earnings 09/99 est= 0.34 actual= 0.38 surprise +11.8% Next earnings 01-19 est= 0.42 versus= 0.36 Average Daily Volume = 26.8 mln Chart = http://quote.yahoo.com/q?s=MSFT&d=3m **** VRTY - Verity Inc $105.50 (+6.37)(+5.81) Verity develops knowledge retrieval software products for corporate internet and extranets, online publishers and e- commerce providers, OEMs and independent software vendors. Verity makes software capable of accessing information stored in multiple formats and locations. The company's software simplifies data management information to index, classify, search, and retrieve data. Verity has a large corporate clientele ranging from chip makers to Internet publishers which include Cigna, Toshiba, CNET, and EDGAR online. VRTY is a split run play that's quickly approaching its pay date - there's only five trading left! The stock is splitting 2:1 after the bell on Friday December 3rd. Earlier this month we watched VRTY break out on the upside after being added to the S&P 600 Small-Cap Index on November 5th and begin trading well above October's $75 resistance level, but unfortunately on dissipating volume. Now granted volume has yet to reflect the typical enthusiasm which usually earmarks a profitable split run nonetheless VRTY clearly broke through the psychological $100 barrier. This week VRTY made a valiant charge towards $110, just missing the target on Tuesday as it swept up to $109.25 on moderate volume. If you used the consolidation period at strong support ($100-101) mid-week to enter the play - Congratulations! On Friday VRTY bullishly advanced $5.50, or 5.5% in a straight up ascent from the open. The 10-dma ($98.68) is still nicely tucked under near-term support and remains a good point of reference for a stop loss. There are no news events to report that would have affected trading this week, however remember the 2:1 split is this Friday. Verity's earnings are expected to follow around December 15th therefore it's possible we may not see a post-split decline. No matter it's still recommended to exit your positions before the close on Friday. You can always jump back into another position after VRTY goes ex-div on Monday December 6th AND you've confirmed definitive upward direction. Remember cash is king! BUY CALL DEC-100*YQV-LT OI=682 at $13.50 SL=11.00 BUY CALL DEC-105 YQV-LA OI=483 at $10.75 SL= 8.50 BUY CALL DEC-110 YQV-LB OI=114 at $ 9.00 SL= 6.75 BUY CALL JAN-105 YQV-AA OI= 1 at $13.63 SL=11.00 BUY CALL JAN-110 YQV-AB OI= 22 at $14.50 SL=11.50 Picked on Nov 21st at $99.13 P/E = 95 Change since picked +6.37 52-week high=$109.25 Analysts Ratings 5-1-0-0-0 52-week low =$ 15.62 Last earnings 08/99 est= 0.21 actual= 0.32 Next earnings 12-15 est= 0.23 versus= 0.18 Average Daily Volume = 312 K Chart = http://quote.yahoo.com/q?s=VRTY&d=3m ******* Telecom ******* SDLI - SDL, Inc. $186.75 (+19.25) SDL's products power the transmission of data, voice and Internet information over fiber optic networks to meet the needs of telecommunications, dense wavelength division multiplexing (DWDM), cable television and satellite communications applications. They enable customers to meet the bandwidth needs of increasing Internet, data, video and voice traffic by expanding their fiber optic communications networks much more quickly and efficiently than would be possible using conventional electronic and optical technologies. SDL's optical products also serve a variety of non-communications applications, including materials processing and printing. Anybody have a nosebleed yet? Friday's gain of $18 is amazing. It's also a bit dangerous since the gain came with only half the ADV. Granted it was a short day, but the institutions left this one on the bench while the daytraders got most of the action. Technically, SDLI is trading at the top of its channel and we should expect a pullback after 8 straight days of new record highs. Nothing goes up in a straight line for long. The nearest support is all round numbers like $180, $170, then $160. All of these are shaky at best since any close on Friday over $168 would have been a record - everything above it is blue sky and can quickly evaporate. SDLI is another hot player in the optical equipment/networking sector and is rumored to have an interest in acquiring ETEK, which if actually announced, might not be so great for our play since most acquiring companies lose price while the "acquirees" gain. So why does SDLI keep gaining? Perhaps because it too is a candidate for acquisition from a bigger player - the rumor here is CSCO - again, a completely unconfirmed rumor. No matter what the reason, the sector is consolidating and there will be more buyouts. SDLI should continue to be a great play as long as the volume remains high and the sector remains hot. Still you need to have an itchy trigger finger to get in on any bounces (that's been tough the last few days) and to get out if the trade goes against you (more likely based on history). This play should only be attempted by extremely risk tolerant types - it's about as far a way from a bond payment as you can get. CSFB came to the party on Wednesday with a new price target of $210 and a Buy rating. SDLI could also be a split candidate, but management has split the stock only once before at roughly $72. SDLI is two and a half times that now. They need more shares authorized to make it happen anyway, and so far have not filed a proxy statement to get shareholder approval. Though the stock price currently screams for a split, management appears reticent to do so right now. Earnings are not until February, which would be a likely time for an announcement. ***High time value risk*** Like QCOM, this play may fit your profile for covered calls too. Selling the DEC-180 (ITM) produces a 10.8% return through December 17 if called. Just watch the downside if the speculative frenzy ends. ***No January strikes yet*** - plus low volume at these high levels - >>be careful with these stops... adjust them to your risk profile. BUY CALL DEC-170*YSL-LN OI=21 at $31.25 SL=24.50 look for dip BUY CALL DEC-175 YSL-LO OI=31 at $28.13 SL=22.00 BUY CALL DEC-180 YSL-LP OI= 0 at $25.50 SL=20.00 wait for OI Picked on Nov 23rd at $167.50 P/E = 249 Change since picked +19.25 52-week high=$189.25 Analysts Ratings 8-9-0-0-0 52-week low =$ 10.69 Last earnings 10/99 est= 0.18 actual= 0.22 surprise = 22% Next earnings 02-09 est= 0.25 versus= 0.14 Average Daily Volume = 804K Chart = http://quote.yahoo.com/q?s=SDLI&d=3m **** NT - Nortel Networks $81.69 (+0.44)(+8.69)(+3.75)(+6.87) Here come 'Ol Flat Top; he come groovin' up slowly. What this has to do with the new era of communications, we don't know. But the bandwidth enabling capability of NT equipment is causing the Internet to "Come Together" (the Beatles song used in NT's TV commercials) with PC's, TV's, local area networks, plus wireless and fiber data/voice communications systems everywhere. NT makes the equipment that makes the electronic convergence possible. With over $19 bln in sales, they are number #2 behind competitor Lucent in size. Canadian telecom firm, BCE owns 40%. The U.S. accounts for over 50% of sales. NT practically stood still this week despite some favorable analyst coverage, including a SoundView price target upgrade to $110. Even so, it still eked out a new closing high the day after Thanksgiving. Now the number one producer of optical networking gear ahead of Lucent took the week off for consolidation. Volume fell off too. Notice the relationship? No volume = no gain. Support is at $77(10dma), then $75. You can target shoot here or wait for a breakout over $82.50 (with volume) to take a position. NT is also a possible splitter once it reaches $88, but don't base the play on that. Here's a new twist. We don't usually list options of acquired companies, but in the case of NT buying CLFY (Clarify is a designer and manufacturer of front office e-business software solutions. The transaction will close in the first quarter of 2000), we have an opportunity to leverage the play. NT is paying 1.3 shares for every CLFY share, which means that for every $1 gain in NT, CLFY will move up $1.30, thus we list CLFY strikes too. Though NT and CLFY track closely, don't play the CLFY angle unless you monitor NT for a good entry too. Not much on news, but NT did announce a single platform that can accommodate both voice and DSL in the same software and node solution. If you were paying attention, Wednesday was a great entry point - but it took faith that the 10 dma would hold. Looking at Wednesday intraday... it fell in the morning and climbed slowly all day. This doesn't mean that we don't have a good entry now, but watch the overall market. NORTEL STRIKES: BUY CALL DEC-75 NT-LO OI=1777 at $8.75 SL=6.50 BUY CALL DEC-80 NT-LP OI=2436 at $5.25 SL=3.50 BUY CALL DEC-85*NT-LQ OI=1896 at $3.00 SL=1.50 BUY CALL JAN-80 NT-AP OI= 907 at $8.00 SL=6.25 BUY CALL JAN-85 NT-AQ OI= 273 at $5.75 SL=4.00 CLARIFY STRIKES: (CLFY = $102.94) - CAUTION - low volume BUY CALL DEC- 95 QCY-LS OI= 0 at $ 9.88 SL= 7.50, $7.94 ITM BUY CALL DEC-100*QCY-LT OI= 50 at $ 7.38 SL= 5.50 BUY CALL DEC-105 QCY-LA OI= 17 at $ 6.63 SL= 5.00 BUY CALL JAN-100 QCY-AT OI= 4 at $13.13 SL=10.50 BUY CALL JAN-105 QCY-AA OI= 2 at $ 8.63 SL= 6.50 Picked on Nov 7th at $68.81 P/E = 489 Change since picked +12.88 52-week high=$82.19 Analysts Ratings 12-12-3-0-0 52-week low =$22.06 Last earnings 09/99 est= 0.26 actual= 0.28 surprise=7.7% Next earnings 1-26 est= 0.44 versus= 0.36 Average Daily Volume = 4.0M Chart = http://quote.yahoo.com/q?s=NT&d=3m **** NOK - Nokia $146.75 (+13.25)(+11.25)(+6.37) Finnish Phone Firm, Nokia is the world's number one maker of wireless cellular phones, ahead of Motorola, Ericsson and Qualcomm. In addition they make wireless networking equipment, PC monitors and workstations, digital satellite and cable network systems, and set-top boxes. However mobile phones make up 80% of their $18.5 bln in annual sales. Return on equity is an industry smokin' 43%, and they currently sit on $3.3 bln cash, or slightly over $3 per share. Only a hunch, but do you think they'd make a great candidate to purchase QCOM's handset business? Another day, another gap open. What's a target shooter to do? Simple. . .wait for Friday's big $4 gap from $140-$144 to fill in. Friday being a short trading day, we think the action was daytrader inspired, despite a new all-time closing high. On the old resistance = new support theory, look to target shoot in the $140 range; after that $135-$136. What's causing the run in the first place? In short, NOK is the largest mobile phone producer in the world and Christmas is coming soon. With the world rapidly adapting to wireless and literally dumping their land- based systems, NOK is producing far more handsets than they had projected just last year, and the trend looks to continue. We also (almost reluctantly) have to put NOK on the split list now that it trades over $140. The trick is that it has to hold here and then move up. We know it's easy to disregard caution in this type of a market. While we expect the gains to keep coming, it is entirely dependent on volume. If it dries up, you'll want to be sure to have a trailing stop in place. While not a guarantee, it's the only protection we have against misfortune should the market decide its time for a correction following the record setting pace of November. Not much in the news this week, except that NOK will be co- branding with Infospace to provide Web portal information to wireless phones. BUY CALL DEC-135 NAY-LG OI=1725 at $14.88 SL=11.75 BUY CALL DEC-140*NAY-LH OI=1882 at $11.50 SL= 9.00 BUY CALL DEC-145 NAY-LI OI=1086 at $ 8.00 SL= 6.25 BUY CALL DEC-150 NAY-LJ OI= 0 at $ 6.13 SL= 4.25 wait for OI BUY CALL JAN-140 NAY-AH OI= 972 at $16.25 SL=12.50 BUY CALL JAN-145 NAY-AI OI= 610 at $13.88 SL=10.75 Picked on Nov 14th at $122.25 P/E = 121 Change since picked +24.50 52 week high=$147.12 Analysts Ratings 13-8-0-0-0 52 week low =$ 47.81 Last earning 10/99 est= 0.52 actual= 0.57 surprise = 9.6% Next earning 01/28 est= 0.66 versus= 0.58 Average Daily Volume = 2.8M Chart = http://quote.yahoo.com/q?s=NOK&d=3m **** QCOM - Qualcomm Inc. $384.75 (+17.69)(-10.94) QUALCOMM Incorporated is a leader in developing and delivering innovative digital wireless communications products and services based on the Company's CDMA digital technology. The Company's major business areas include CDMA phones; integrated CDMA chipsets and system software; technology licensing; and satellite-based systems including OmniTRACS® and a 6.4% interest in Globalstar(TM). Headquartered in San Diego, Calif., QUALCOMM is included in the S&P 500 Index and is a 1999 FORTUNE 500® company. With CDMA as the new standard for wireless protocol transmission, QCOM will earn a fortune from licensing the technology over the next few years. While they sell the equipment needed to run the systems, they also get paid by selling the code with every new CDMA phone, much the same way that MSFT gets paid for almost every new PC. Even when they sell the handset division, the announcement of which is expected by year-end (perhaps at the December 20 shareholder meeting), they will still collect the fee for every handset sold with CDMA capability. Technically, QCOM has been consolidating nicely on low volume. It indicates that nobody is particularly interested in dumping the shares at these lofty heights. Who'd want to with a 4:1 split expected to be approved by shareholders on December 20 (while not guaranteed, the split would likely be immediate)? Support is hard to peg, but is moving up. Just in the last week, it came as low as $345 on Tuesday and $380 on Friday (short day). We would expect Friday's gap to be back-filled down to $375 in a re-test of old resistance becoming new support. Only a suggestion, but $375 might make a good target. Of course, if the market decides to retrace some of the November gains, all bets are off. For the unexpected surprises (and they will occur), keep a trailing stop in place to protect your profits The news is a bit old, however, China will adopt CDMA as the new standard for wireless transmission under the new trade agreement. When that happens, there are estimated to be 30 mln new subscribers within the first year. That's bigger than AT&T's wireless division and fractionally less than Vodaphone and Airtouch combined. With the announcement of the sale of the handset division (December 20?), there's added horsepower for a price move over and above the split news. HIGH PREMIUM ALERT !! Another good strategy for this play would be to go long the stock and write covered calls at or out of the money. The premiums are so inflated that even an at the money contract can yield roughly a 7% return until December 17. TRADING CAUTION If QCOM takes a sudden unexpected turn for the worst, all OTM strikes will likely vanish into thin air. Obviously, it has shown amazing strength so far and investors continue to throw money at it with wild abandon... this will not last forever. This play is not for everyone. Higher strikes are only listed for those willing to take the risk. BUY CALL DEC-370*AAF-LN OI=2066 at $37.00 SL=29.00 wait for dip BUY CALL DEC-380 AAF-LP OI=1766 at $31.75 SL=24.75 BUY CALL DEC-390 AAF-LX OI=1956 at $27.00 SL=21.00 BUY CALL DEC-400*AAF-LY OI=2627 at $22.00 SL=16.50 BUY CALL DEC-420 AAF-LV OI= 505 at $15.13 SL=11.00 BUY CALL JAN-370 AAF-AN OI= 655 at $58.00 SL=45.25 BUY CALL JAN-380 AAF-AP OI= 769 at $53.25 SL=41.50 LOTTERY TICKET PLAY Just for fun, we thought we would list the highest strike available. The DEC-500. It is unbelievable that it has an OI of 1801. Rest assured that if you buy this one, you'd better count on a 99.999% chance of losing money. This is merely for the gambling type. GAMBLE CALL DEC-500 AAF-LA OI=1801 at $2.50 SL=???? Picked on Nov 16th at $330.00 P/E = 303 Change since picked +54.75 52-week high=$406.13 Analysts Ratings 6-8-4-0-0 52-week low =$ 24.50 Last earnings 11/99 est= 0.88 actual= 0.91 Next earnings 01-19 est= 0.95 versus= 0.33 Average Daily Volume = 6.4 mln Chart = http://quote.yahoo.com/q?s=qcom&d=3m **** JDSU - JDS Uniphase $266.00 (+52.19)(+13.81) Uniphase Corporation is a fully integrated optical electronics company that designs, develops, manufactures and markets fiber optic telecommunications components and modules and laser subsystems. The Company's telecommunications products include semiconductor lasers, high-speed external modulators, transmitters, fiber Bragg gratings and optical modules for fiber optic networks in the telecommunications and cable television industries. Based in the Silicon Valley, California, they employ approximately 6260 people worldwide. Customers include Lucent, Nortel, Cisco and Ciena. American Express owns 10% of the common shares "Dear God, please let there be one more company like Intel to invest in, and I promise not to mess it up this time". Here's your big break. UNPH makes the laser modules and pumps (in addition to other components) that split a fiber optic strand into many different, potentially unlimited channels. Effectively they do for light what Intel does for electrons. Their components are critical to the development of optical networks. Now would somebody please show us an entry point? Egad, this one's been hard to hit. Wednesday we had one opportunity after the opening to get in at $240 before the run to $256 by the close. Friday, volume remained solid, pushing the price all the way up to $272.50 before day-end profit taking zipped it back to $266. Technically, we are in the middle of the short-term channel and at the high end of the longer-term channel. In either case, support is in the $247-$250 range. We urge you not to chase it at these lofty levels; wait for a pullback since missed money is better than lost money. There is still a full month until the 2:1 split. That said, there still appears to be plenty of cash waiting to be put to work, which will drive volume, and thus, the price. As long as funds are buying, a major retracement is unlikely. If you take a position, be sure to set a trailing stop to protect the profits (but choose carefully, our suggested stops may be too close for you). JDSU again added another optical company to its stable by agreeing to buy Britain's SIFAM. Their components split, combine and filter light on optical fibers. It will cost them about $100 mln. This follows their recent agreements to buy EPITAXX for $400 mln, and OCLI for $2.8 bln. ***No January strikes available*** BUY CALL DEC-260 UQD-LL OI= 528 at $21.38 SL=16.75 BUY CALL DEC-270*UQD-LN OI=1482 at $16.38 SL=12.75 wait for dip BUY CALL DEC-300 XXZ-LT OI= 215 at $ 7.13 SL= 4.00 see note. BUY CALL JAN-270 UQD-AN OI= 272 at $28.38 SL=21.00 BUY CALL JAN-300 XXZ-AT OI= 73 at $17.13 SL=12.00 TRADING NOTE: JDSU trades like a rocket. Thus all of these premiums are inflated. As soon as this stock turns, premiums will deflate like a balloon. When it finds a bottom, that is when to buy. When it is rocketing like this - it is time to sell calls (covered or naked - it is up to your account and risk profile). Wait for a dip or consolidation of some kind to go long this thing. At this point, traders start looking at round numbers like $300 as targets. Be careful, just because there is a lot of volume and OI for such OTM strikes doesn't mean the stock will EVER reach that price. Picked on Nov 21st at $213.81 P/E = N/A Change since picked +52.19 52-week high=$273.62 Analysts Ratings 13-13-0-0-0 52-week low =$ 26.31 Last earnings 10/99 est= 0.25 actual= 0.29 surprise = 16% Next earnings 01-24 est= 0.30 versus= 0.14 Average Daily Volume = 2.6 mln Chart = http://quote.yahoo.com/q?s=JDSU&d=3m ***** BRCM - Broadcom, Corp. $207.13 (+10.63) Broadcom Corporation is a leading provider of highly integrated, silicon solutions that enable broadband digital transmission of voice, data and video content to and throughout the home and within the business enterprise over existing communications infrastructures, most of which were not originally intended for digital transmission. Using proprietary technologies and advanced design methodologies, Broadcom designs, develops and supplies integrated circuits for some of the most significant broadband communications markets, including the markets for cable set-top boxes, cable modems, high-speed office networks, home networking, direct broadcast satellite and terrestrial digital broadcast, and digital subscriber line ("DSL"). BRCM started November with a close at $138 and here we are, over $69 later in just four weeks. Why the big move up? Could there be a possible split announcement in the near future of BRCM? That's what we are thinking. BRCM just recently held a special shareholders meeting on November 22 to vote on an increase of authorized shares from 200M to 400M, one good indication of an upcoming split. BRCM has a two-time history of lagging split announcements, so the fact that they did not announce at the recent meeting does not deter our play. It is possible that BRCM could announce a split early as next week. There may be rounds of profit taking, since BRCM has made such a big climb in a relatively short period of time. This has potential to offer some nice points of entry, so keep an eye out. As far as support goes, the psychological levels look to be providing the majority, i.e., $200 and $190. BRCM's 10-dma is all the way down at $188.50, which could serve as further support if needed. BRCM hit it's head a few times on a resistance level of $210 throughout the session last Friday. Watch for a breakthrough here. One thought being spread around lately is that BRCM has seen a lot of institutional buying. This is pretty hard to prove at the moment. Whatever your opinion, BRCM makes some wild swings and is not for everyone. Conservative players should wait for a break out above $210 and patient investors may see an entry point at $190 (or even $180 if things get ugly). Play with stops. Broadcom announced last Wednesday that they are working on a chip that will increase the data throughput in a home network and plans to have the chips ready to ship out during the first half of next year. BRCM is also scheduled to present at the upcoming Internet Stocks Forum on December 4th in Santa Clara. The semiconductors were boosted by a report issued by ABN AMRO last week. The report estimated a fairly substantial period of growth for the semis over the next three years. BUY CALL DEC-200 RDZ-LT OI=567 at $20.00 SL=15.50 BUY CALL DEC-210 RDW-LB OI=131 at $15.25 SL=12.00 BUY CALL DEC-220*RDW-LD OI= 97 at $11.25 SL= 8.75 BUY CALL JAN-220 RDW-AD OI= 13 at $21.75 SL=16.50 Picked on Oct 17th at $207.13 P/E = 258 Change since picked +0.00 52-week high=$215.25 Analysts Ratings 6-13-1-0-0 52-week low =$ 42.50 Last earning 10/99 est= 0.21 actual= 0.26 Next earning 01-26 est= 0.27 versus= 0.13 Average Daily Volume =2.08mln Chart = http://quote.yahoo.com/q?s=BRCM&d=3m ***** QLGC - QLogic Corporation $124.13 (+12.63) The competition in their industry is very stiff, yet they lead the market in Fibre Channel host bus adapter market. Located in Costa Mesa, California - QLogic Corporation makes integrated circuits and adapter boards that connect peripheral devices to computers. Their imput/output subsystems handle data flow between computers and peripheral devices such as hard disk, tape, and CD-ROM drives. QLogic has expanded its product line to include the higher-performance fibre channel standard. They also make chips for the mass storage and server markets. Sun Microsystems is one of QLGC's better known customers, although about 40% of their sales are outside the U.S. Their top competition comes from Adaptec, Cirrus Logic and Emulex. Split announcement or not, we are looking for the momentum to continue in QLGC. After making a high around November 11th, the semiconductor industry and shares of QLGC, have consolidated and traded lower. Tuesday, QLGC bounced off the recent lows and headed higher with conviction (buying volume). The volume the first two days of the week was about 30% higher than the ADV for QLGC, suggesting this move up may be for real, rather than a head fake. The proof will come this week, when the vacationing holiday traders return to the market place. Will they return ready to buy, or will they want to put some money in their pockets? This is always the $64,000 question. QLGC and the many stocks in the sector appear to be setting up to move higher, however if the buying frenzy that we've seen in the Nasdaq slows down, the tech stocks will take a break. With stockholders recently approving an increase in the number of authorized shares from 50 mln. to 150 mln., we have been looking for a split announcement, which may or may not come. QLGC does not report earnings again until the third week of January and they may wait until then. QLGC has split twice this year, with the last announcement coming in mid July, with QLGC trading near $134.00 level. As for our play in QLGC, we would view any further momentum to the upside as an opportunity to buy calls, as long as it is supported with good volume. Should traders come back ready to sell, intraday support will be found near $120, and $115 with stronger support at $108 or its 30 dma. Prior to entering a new play in QLGC check the direction of the major indices, the semiconductor sector and the stock itself. Tuesday QLGC announced that its ISP2200 intelligent Fibre Channel processors and FAS466 Fast Architecture SCSI Processors have been implemented in the Digi-Data Fibre Sabre Family of RAID Controllers. The advanced features and high performance of Qlogic's chips enable the Digi-Data Fibre Sabre RAID Controllers to address the high performance segment of the computer mass storage market. BUY CALL DEC-115 QLC-LC OI=359 at $14.00 SL=11.25 on a dip BUY CALL DEC-120*QLC-LD OI=407 at $11.00 SL= 8.75 BUY CALL DEC-125 QLC-LE OI=644 at $ 8.88 SL= 6.75 BUY CALL DEC-130 QLC-LF OI=412 at $ 6.50 SL= 4.75 carefully Picked on Nov 23rd at $119.00 P/E = 114 Change since picked + 5.13 52 week high=$135.63 Analysts Ratings 3-4-1-0-0 52 week low =$ 23.25 Last earnings 09/99 est= 0.31 actual= 0.35 surprise +12.9% Next earnings 01-20 est= 0.36 versus= 0.19 Average daily volume = 845 K Chart = http://quote.yahoo.com/q?s=QLGC&d=3m ******************************* SEE DISCLAIMER IN SECTION ONE
The Option Investor Newsletter 11-28-99 Sunday 5 of 6 ***** LEAPS ***** All hail the Nasdaq. Despite a quick pullback on Tuesday to the 10-dma, this market continues to show us its resilience. You can began to see the optimism grow when you notice that despite a stock remaining flat on the week, the 2001 options are not decreasing and the 2002 are actually rising. This would lead one to believe that the VIX becomes even more of a factor when trading LEAPs. You're best bet is to be buying when the market has corrected and the VIX is high and thus the premiums have decreased. Of course, this is standard procedure in the options world, but becomes even more important when dealing with LEAPs. Short-term options will rarely increase while the stock is flat. That situation usually results in death by time decay. So even though we are at a situation where the VIX is low and premiums are high, we are waiting for a nice short-term sell-off to do some buying. Remember, we have all kinds of time to sit back, be patient, and wait for the perfect buying opportunities. If there is one thing to remember about trading LEAPs, it is that when fear is high, it's time to buy! SYMBOL SINCE LEAPS SYMBOL PICKED PRICE EMC 11/07/99 JAN-2001 $80 ZOH-AP at $26.63 $15.38 JAN-2002 $90 WUE-AR at $30.25 $19.00 DELL 11/07/99 JAN-2001 $50 ZDE-AJ at $ 8.00 $ 7.00 JAN-2002 $50 WDQ-AJ at $12.38 $11.25 GPS 11/07/99 JAN-2001 $40 ZGS-AH at $ 9.13 $ 5.75 JAN-2002 $45 QGS-AI at $10.00 $ 7.88 IBM 11/07/99 JAN-2001 $100 ZIB-AT at $21.88 $13.63 JAN-2002 $110 WIB-AB at $25.25 $16.50 WMT 11/07/99 JAN-2001 $70 ZWT-AN at $ 6.25 $ 6.50 JAN-2002 $75 WWT-AO at $ 9.38 $ 9.75 LU 11/14/99 JAN-2001 $80 ZEU-AP at $15.38 $12.88 JAN-2002 $90 WEU-AR at $18.75 $16.13 CSCO 11/14/99 JAN-2001 $80 ZCY-AP at $26.38 $19.13 JAN-2002 $90 WIV-AR at $29.13 $22.00 SLR 11/14/99 JAN-2001 $85 ZSR-AQ at $19.88 $21.75 GE 11/21/99 JAN-2001 $150 ZGR-AU at $15.13 $16.25 JAN-2002 $150 WGE-AU at $24.63 $25.50 GTW 11/21/99 JAN-2001 $90 ZWB-AR at $17.63 $17.75 JAN-2002 $100 WGB-AT at $23.38 $22.50 To review the play description on any of our current plays, go to the LEAPS section for the date the play was added New Plays NT - Nortel $81.69 In watching old Northern Telecom for the past couple of years, you always wondered why they never received the same respect towards valuation as their main competitor Lucent. Appartently, the times are a chaning, including NT's name which is now Nortel. In a study released last week, it shows NT is now ahead of LU in market share for the U.S. optical Internet market. And the valuation has now caught up as momentum is picking up. So with two major companies dueling it out for business, you may wonder why both are worthy of LEAP status. That's easy. We are still in the relatively early stages of this Internet revolution and both companies should capitalize. With the recent rise from $60 to $80, support and resistance is undefined. As we mentioned above, we really need a good 3 to 5 day selloff to bring premiums back down and enable us to open a position. So keep your eye out for buyable dips. BUY LEAPS JAN-2001 $75.00 ZOO-AO at $22.25 BUY LEAPS JAN-2002 $75.00 WNT-AO at $30.25 Drops There are no dropped LEAPs this week. ***************** 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. **** RMBS - Rambus Inc. $76.88 (-5.25)(-5.88) 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. Some of the semis had a strong week and Rambus decided to participate a bit in the rally. RMBS traded up in the last two sessions, however, it has provided a rather lack luster performance when compared with its fellow sector members. RMBS had a nice day on Wednesday, gaining $1.38. RMBS gapped up at the open on Friday, however, the positive momentum waned a bit as RMBS only saw a $0.50 gain. So the question is, what now? RMBS has found some support at $74, and as we mentioned in Tuesday's write-up, this is a crucial area for the continuation of our put play on RMBS. We were looking for a drop and some consistent trading below this level last week, which we saw a small amount of on Wednesday, however, the drop was short-lived. Put traders should be cautious as RMBS is trading less than $3 from $80. Both $80 and its 200 dma ($79) should act as significant resistance. If RMBS breaks through either on the upside, then we'll need to seriously re-evaluate the put position. A report issued by ABN AMRO on Tuesday was most likely a factor in last weeks move up. It estimated that the semiconductor industry would grow by 25% in 2000, 31% in 2001 and 28% in 2002. The report also predicted a 4-year cyclical sector pullback in 2003. BUY PUT DEC-80*BNQ-XP OI=3428 at $7.00 SL=5.25 BUY PUT DEC-75 BNQ-XO OI= 899 at $4.63 SL=2.75 Average Daily Volume = 1.81 mln Chart = http://quote.yahoo.com/q?s=RMBS&d=3m **** BOW - Bowater, Inc. $46.88 (-5.50) Bowater Inc., manufactures, sells and distributes newsprint, directory paper, un-coated groundwood specialties, coated groundwood paper, market pulp and lumber. Bowater is the #1 U.S. maker of newsprint and became #2 in the world after it's purchase of Canadian company Avenor. Bowater now has the capacity to churn out about 3 billion tons of newsprint a year. The company operates eight pulp and paper mills and three sawmills in Canada, South Korea and the U.S. Bowater is a classic cyclical stock. By their nature cyclical stocks are extremely sensitive to interest rates for two reasons. In theory, when interest rates go up the economy will slow down due to fewer investments because of the cost of money. Because cyclical stocks are mostly involved in commodity products a slower economy normally means that there are fewer purchases of these products. Also, cyclical stocks tend to carry a relatively large amount of debt, due to large equipment, land and/or acquisition costs. Bowater is currently facing not only an economy with rising interest rates but also is facing a review of it's long term debt ratings by Moody's for a possible downgrade. A Moody's downgrade would increase the cost of capital for Bowater. This would be a painful blow to a currently unprofitable company. Earnings estimates for FY 99 are -$0.30. However, they are expected to be profitable next year with estimates calling for $2.82 in profits. As always, we are much more concerned with the immediate outlook for OUR profit opportunities! Moody's chief concerns lie in the possibility that Bowater will continue to remain in an aggressive acquisition mode, which could further stress debt protection measurements that are already significantly weakened from the effects of cyclically low pricing. The recent bad news from Moody's and a complete disinterest in cyclical stocks from Wall Street, leads us to believe that the downtrend may continue in Bowater's shares in the near future. On the cautious side, it is possible companies such as Bowater may be seen as a safe place to be should we experience a meltdown in the averages. Today, Bowater's stock closed below $47, which was support. Any trading below $45, where major support lies, could indicate a quick drop to $40 and maybe into the thirties. BUY PUT DEC-50*BOW-XJ OI=71 at $2.13 SL=1.00 BUY PUT DEC-45 BOW-XI OI=57 at $0.63 SL=0.00 BUY PUT DEC-40 BOW-XH OI=76 at $0.38 SL=0.00 RISKY!! Average Daily Volume = 345 K Chart = http://quote.yahoo.com/q?s=BOW&d=3m *** HWP - Hewlett Packard Co. $95.37 (+1.75) Hewlett-Packard Co. is the #2 computer company worldwide (behind IBM). It is a leading provider of computers, peripherals, imaging equipment and computer related services. More than half of HP's sales comes from outside the U.S. To further fuel its growth, HP is restructuring itself as an Internet specialist providing Web hardware, software and support to corporate customers. HP was among the hardest hit technology stocks during the September-October correction. The value of HP's shares were nearly cut in half from a high of 114 to an intraday low of 67 on October 27th. Since the low HP has enjoyed a more than 50% retracement of the sell-off. There are three factors contributing to this rally. 1). The strong market has dragged HP up. HP is included in most major buy programs due to its large capitalization and membership in the Dow Industrials. 2). The overwhelmingly positive reception by Wall Street for the IPO of spin-off Agilent Technologies. On the day of the IPO, HWP shares rallied 14.25 points. Most of this gain can be attributed to the fact that HWP still retains an 80% stake in Agilent Technologies. 3). Plus, that same day (Nov. 17th), HWP reported surprisingly strong earnings beating "The Street" by $0.02. The effect of all three of these positive events could be abating. The Dow Industrials rally has been relatively weaker than the NASDAQ's. But even it it wasn't, HWP's stock has just risen too far too fast. If the Dow Industrials correct any time soon, HWP could be one of the hardest hit issues in the index. After the initial euphoria, the shares of Agilent have pulled back to $41, about halfway between its IPO price and its subsequent high. It would not be surprising if Agilent tested the support of its IPO price of $30. Lastly, upon closer inspection, HP's earnings might not have been as spectacular as had been previously perceived. It seems that HP was a beneficiary of lower taxes. (How come the billion dollar corporations get all of the tax breaks?) There was one news item that may keep the bulls on board. Flush with cash from the Agilent IPO, HP announced an authorization of the repurchase of $2 billion worth of its outstanding common stock. That amount included $700 million left over from earlier authorizations. Technically an excellent entry point for a bearish position in HWP would be when HWP trades below support at $92.75. Be cautious of any breaks above resistance at $98.50. BUY PUT DEC-100 HWP-XT OI= 278 at $6.38 SL=4.75 BUY PUT DEC- 95*HWP-XS OI=1108 at $3.50 SL=1.75 BUY PUT DEC- 90 HWP-XR OI=1860 at $1.63 SL=0.75 Picked on Nov 27th at $95.38 P/E = 29.15 Change since picked +0.00 52-week high=$118.44 Analysts Ratings 7-9-12-0-0 52-week low =$ 59.00 Last earning 11/21 est= 0.73 actual = 0.75 Next earning 02/00 est= 0.77 versus = 0.92 Average Daily Volume=4.80 mln Chart = http://quote.yahoo.com/q?s=HWP&d=3m *** WLP - Wellpoint Health $59.06 (-5.50) Wellpoint Health Networks serves about 32 million individuals in the U.S. through HMOs, PPOs, and special networks such as dental, vision and mental health plans. The company operates as Blue Cross in California and UNICARE through the rest of the nation. Wellpoint also sells life insurance and third party administration to self-employed businesses. In 1997, they acquired the group health and related life business of John Hancock Mutual. Wellpoint is looking a little sick. WLP flirted with $100 back in June and then fell into a perfect downward trend. WLP bottomed at $48.25 in the beginning of October and tried to find it's legs to make a run back up. It was doing a fairly good job until mid-November, when WLP made a downward turn right along with the healthcare sector. Despite a recent upgrade from ING Barings from a Buy to a Strong Buy on November 16th, WLP has continued it's descent. The overall daily volume has been dwindling, apparently right along with investor interest. WLP bid farewell to its 10-dma, which is currently $63, mid month and this level now serves as resistance. WLP had some support at $60, however, managed to trade and close below this level in Friday's session. At this point, WLP could very well be cleared for a healthy fall. Of course, confirm continuing negative momentum before entering a new play. A teaser announcement was made in regards to WLP's possible purchase of Rush Prudential Health Plans, the largest health maintenance organization in Chicago, for an estimated $290 million on November 21. Neither company involved was available for comment and there has been nothing released pertaining to this deal since, but is something to keep an eye out for. Especially since the "buyer" normally goes down. One warning: both the 30 dma and the 50 dma have converged at $59.00. This could potentially be very strong support. Traders should wait for WLP to close below it before initiating positions. BUY PUT DEC-60 WLP-XL OI= 10 at $3.25 SL=1.50 BUY PUT DEC-55 WLP-XK*OI=1004 at $1.25 SL=0.50 Average Daily Volume = 648K Chart = http://quote.yahoo.com/q?s=WLP&d=3m *** GT - Goodyear Tire and Rubber Co. $34.13 (-2.88) 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. Have you ever heard tires screaming on their way downhill? Well, if you haven't take a look at GT's recent trading pattern and listen up! This is a picture perfect downward trend! We were playing GT as a put not too long ago and we dropped it because it looked as though it had hit it's bottom. Little did we know... After being de-listed from the Dow Jones Industrial Average and a sour earnings report, GT has really struggled. GT did manage a short rally mid-month, but then made a sharp turn and decided it was easier to drive downhill. When we played GT last time, we were waiting for a breakthrough of $35 to confirm continuing negative momentum. GT finally made a break for it on the November 23rd and closed below $35 on the 24th. Being that GT has sunk to and closed to a new 52- week low, other than the psychological levels, i.e., $30, $20 etc..., support is nearly impossible to find. GT has not traded this low since 1995! Ouch! The long time elusive $35 now serves as resistance. In the news, as part of an effort to purchase eight new factories, GT announced 1,400 layoffs and a shutdown of plants in Italy and Argentina. BUY PUT DEC-40*GT-XH OI=491 at $5.75 SL=3.75 BUY PUT DEC-35 GT-XG OI=108 at $1.81 SL=0.75 Average Daily Volume = 924K Chart = http://quote.yahoo.com/q?s=GT&d=3m **** CI - Cigna Corporation $79.44 (-4.31)(+0.38) They are one of the largest investor-owned insurance organizations in the United States. CIGNA is also one of the premier companies in the financial services industry. Its primary segment is health care. Although the trend in the industry leans towards managed care, about half of the premiums come from indemnity insurance. Their CIGNA Healthcare unit has about 6 million HMO members. The company also sells group life, accident, and disability coverage, insurance and retirement plans. The sector is headed south and so is the price of CIGNA stock. Actually CI began to consolidate late last week and began to rollover last Friday. CI made a feeble attempt to move higher early in the week. Tuesday anti-tobacco lawyer Richard Scruggs, and a group of attorneys, filed a national lawsuit seeking class action status against five health maintenance organizations (HMO's). CIGNA topped the list of the nations largest HMO operators named in the lawsuit, charging them with violating U.S. anti racketeering laws. This will probably be tied up in the courts for years, and may or may not have any merit, but it didn't take long for CI and the Insurance sector to fall apart. CI lost $4.31 for the week and the chart is ugly. As we have mentioned there is a gap in the chart for CI between $75 and $79. As most technician know gaps usually get filled at some point or another. CI could find support near the top of the gap at $79. Should we see the weakness continue it may not stop until it hits $75.00. Intraday resistance can be found near $81.00 should some brave souls decide to step in and buy this stock. If we do see a bounce up to resistance, followed by further weakness, we would look to buy puts or add to existing positions. As with any play always assess the potential for profits and the risks prior to entering a trade. Be careful of the 50 dma at $78 and the 30 dma at $76. In an attempt to bolster investor confidence, Aetna and other big U.S. Health Insurers said Tuesday, they expect to see the price of their stocks begin to rise through the end of the year as they get the premium increases from employers they need to increase profits. The news didn't help the price of stocks in the industry at least for this week. BUY PUT DEC-75 CI-XO OI= 30 at $1.13 SL=0.00 caution, low OI BUY PUT DEC-80*CI-XP OI=185 at $3.38 SL=1.75 BUY PUT DEC-85 CI-XQ OI=143 at $6.50 SL=4.75 Average daily volume = 1.01 mln Chart = http://quote.yahoo.com/q?s=CI&d=3m ************************ SPREADS/STRADDLES/COMBOS ************************ Markets Slumber To Open The Holiday Season.. Equity markets ended mixed Friday in a brief, low volume session as the majority of investors adjourned for the holiday weekend. Wednesday, November 24 U.S. equity markets closed higher Wednesday as the Nasdaq moved to yet another record in a pre-holiday rally. The index jumped 77 points to 3,420. The composite of technology stocks is over 50% higher for the year. The Dow climbed 12 points to 11,008 and the S&P 500 index rose 12 points to 1,417. In the broader market, losers edged out winners 8 to 7 on light volume of 737 million shares on the NYSE. The 30-year U.S. Treasury bond weakened 4/32, driving the yield up to 6.21%. Tuesday's new plays (positions/opening prices/strategy): Etek Dynamics ETEK DEC55P/DEC60P $0.43 credit bull-put Kent Elect. KNT DEC20C/DEC22C $2.00 debit bull-call AT&T Corp. T JAN46C/JAN50C $2.25 debit diagonal AT&T Corp. T JAN46C/DEC50C $3.25 debit bull-call Etek was our big winner on Wednesday, opening $3 higher on news that Credit Suisse First Boston started coverage of the company with a "buy" rating and a $90 price target. CSFB outlined Etek's plan to expand the breadth and depth of its products through a focus on new acquisitions that will enhance their manufacturing capabilities. The only opportunity for a favorable entry (on a simultaneous order basis) came during the initial consolidation at 9:45 AM. The stock price closed at $80. KNT traded in a small range for most of the morning but the disparity in option prices was less favorable than originally quoted. The spread debit was adjusted at the open and the best observed price was $2.00. AT&T was up right from the start after the Wall Street Journal posted the news that the telephone company will issue a tracking stock for its wireless business. Once again, the spread positions were less favorable with smaller upside potential. Portfolio plays: Technology stocks rallied again today but most analysts ignored the advances, saying they were not paying too much attention to the big gains because of the thin trading volumes. Higher crude oil prices hurt the transportation and airline issues but gave a lift to oil service shares. Meanwhile, rising bond yields again put pressure on the bank and brokerage stocks while utilities rebounded after reaching new lows for the year Tuesday. Internet issues led the way as traders speculated on increasing levels of online shopping during the holiday season. Analysts believe this year will be the first real example of the power of the web with regard to retail sales. Companies that can take advantage of the trend will dominate the new era of E-tailing. There were some favorable moves in the Spreads/Combos portfolio and lower priced stocks continued to lead the section. Autoweb (AWEB) climbed $1.75 to a midday high near $14 as the technical rally moved into high gear. Our new diagonal spread offered the first exit opportunity with a closing credit of $3.12; a profit of $0.75 on $2.38 invested for one week. Echelon (ELON) was the early exit candidate on Monday and now we are planning to adjust the spread to the $12.50 strike for increased upside potential. The stock priced moved $0.75 higher, closing on the edge of the (neutral outlook) profit range at $13.75. Toys-R-Us (TOY) edged back above the $17 mark but it may not hold there for long. The current profit to close the (JAN17C/DEC17C) position is $0.50. Network Associates (NETA) rebounded slightly, climbing $0.88 to remain above $25; possibly a new support area. Our bullish play (DEC12C/17C) will achieve maximum profit at expiration with the current price. In the long-term portfolio, Sun Micro (SUNW) has again exceeded all expectations, rocketing another $7 to the $135 range as the pre-split rally begins in earnest. Today's move put the stock at a new all-time-high and there is no indication of any weakness. The bullish LEAPS/CC's position is hopelessly behind the profit curve at the $115 strike and our only option was to adjust the spread to the new support level (near $125) at a cost of $8.25. Another of our recent bullish issues is Cabletron (CS) and today we made the move to the DEC-$20 strike for a small increase in upside potential. The new position (LJAN15C/DEC20C) has a debit of $4.50. General Motors (GM) is the other stock that requires daily monitoring (for a break-out above $75) but we have yet to make any adjustments in the current spread. Polaroid (PRD) has managed to hang on to the edge of the precipice near $19 but a favorable outcome appears highly improbable. In the absence of significant change in character, we expect to close the play in the next few weeks. Banking and Brokerage stocks have faltered on profit-taking but today they recovered slightly. Ameritade (AMTD), Net@Bank (NTBK) and TD WaterHouse (TWE) all moved up during the session. E*trade Group (EGRP) was the only portfolio issue that failed to finish in the black, losing $0.62 to end at $31.28. Our bullish spread (APR25/JAN30) is profitable at the current price. Youth Networks (NETS) and 3Com (COMS) were two of the other issues that climbed higher in today's session, but the majority of the portfolio was mired in a post-rally consolidation. Thursday, November 25 Happy Thanksgiving! Friday, November 26 Equity markets ended mixed Friday in a brief, low volume session as the majority of investors adjourned for the holiday weekend. The Dow Jones Industrials lost 19 points to close at 10,998 as profit-taking in the final few minutes erased earlier gains. The Nasdaq rose 27 points to 3,447 and another record close. The S&P 500 index finished relatively unchanged at 1,416. In the broader market, winners outpaced losers on extremely thin volume of 312 million shares on the NYSE. The benchmark 30-year U.S. Treasury bond fell 13/32, driving the yield to 6.24%. Portfolio plays: The holiday-shortened session provided some volatile activity in many of the technology issues and our newest position was one of the leaders on the NYSE. Shares of AT&T (T) rose $4.25 to end at a recent high near $58 as speculation on a new tracking stock continued to circulate. The phone giant declined to comment on a news report that it is considering a huge initial public offering of their wireless unit but analysts say the plans are already in place. Our bullish debit spread is profitable and the well-known issue appears to be headed for a new trading range near $65. The other winner from Tuesday's section, Etek Dynamics (ETEK) added $2 to finish at a new all-time (closing) high of $82. The issue is now $20 above our sold strike in the (bullish) December credit spread. Excite@home (ATHM) continued to climb following a recent technical breakout and the next target is $60. All of our bullish debit (and diagonal) spreads are comfortably ITM and will remain profitable with the stock in the current price range above $55. The majority of our small-cap issues are performing well and the big surprise today was Toys-R-Us (TOY). The stock moved up $1.25 to a 120-day high of $18.62 after CEO Michael Goldstein said he's comfortable with fourth quarter and year 2000 earnings estimates. The position has already offered a favorable exit opportunity but the rally provides a chance for additional profit with a bullish adjustment to increase the upside potential of the current spread (JAN17C/DEC17C). Echelon (ELON) is another issue that has climbed unexpectedly in recent days and the current position has a very limited profit range above the current price. If you decide not to roll-up, the current spread can be closed for favorable return. Talk.com (TALK) made a nice move today, climbing $0.88 to end at $18.31. Our diagonal spread achieves maximum profit at $17.50. MessageMedia (MESG) rallied $1.19 on light volume, and the stock appears to be preparing for an attempt at the all time high near $21. Our ITM debit spread can now be closed for a $2.00 credit. Computer Associates (CA) was our focus in the long-term portfolio, up only $1.15, but now trading near an all-time-high at $66. The recent sector upgrade has increased investor interest and the BOP (buying pressure) is up significantly. With support at $62, this issue has excellent upside potential. Our old favorites Motorola (MOT) and Solectron (SLR) both rebounded during Friday's session and it appears they are safely entrenched at their new levels. Of course Sun Microsystems (SUNW) also moved higher, but that's not a newsworthy item considering the incredible recent rally. Adobe (ADBE) has started to falter slightly and it will be interesting to see where the first support level begins to have a noticeable effect on the stock price. The most recent bottom exists near $70. Questions & comments on spreads/combos to ray@OptionInvestor.com ********** NEW PLAYS ********** LCOS - Lycos $64.00 *** Ready To Go! *** Lycos is a leading Web media company and owner of the Lycos Network, one of the most visited hubs on the Internet reaching one out of every two Internet users. The network is a unified set of Web sites that attracts a diverse audience by offering a variety of services including leading Web navigation resources, homepage building, a web community and shopping center. LCOS is dedicated to helping each individual user locate, retrieve and manage information tailored to his or her personal interests. Lycos is on the move financially, reporting earnings that met the Street's estimates with a 126% increase in year-over-year first quarter revenue amid a global expansion of its services and distribution. The CEO attributed the strong performance to the company's expanded "depth and breadth" of its services and distribution throughout the world. Lycos recently became one of the web's first full-service e-commerce portals with the launch of LYCOShop, an integrated shopping destination. Lycos has also expanded its distribution of product offerings by extending its partnership with IBM and forming alliances with other companies such as America Online. Last week, Lycos announced it would buy Gamesville.com, one of the most popular online gaming sites, for $207 million in stock. Gamesville.com has 2.2 million members who compete with other players in electronic games over the Internet. The addition of Gamesville to the Lycos Network increases revenue, grows their average daily usage by 20% and adds depth to marketing efforts. After the announcement, PaineWebber raised their 18-month target for LCOS to $135 a share based on the company's growth strategy including the other recent acquisitions, Sonique and Quote.com. Technically, LCOS has exited a lateral consolidation to the top side and should take out the October high as several short-term buy signals are still evident. With this week's quick move up, price support is now centered around $55.00. PLAY (conservative - bullish/debit spread): BUY CALL JAN-47.50 QWL-AW OI=256 A=$18.38 SELL CALL JAN-55.00 QWL-AK OI=1798 B=$12.25 INITIAL NET DEBIT TARGET=$6.00 ROI(max)=25% B/E=$53.50 - or - PLAY (aggressive - bullish/debit spread): BUY CALL JAN-47.50 QWL-AW OI=256 A=$18.38 SELL CALL JAN-57.50 QWL-AY OI=1093 B=$10.62 INITIAL NET DEBIT TARGET=$7.62 ROI(max)=31% B/E=$55.12 Chart = http://quote.yahoo.com/q?s=LCOS&d=3m ****************************************************************** DLP - Delta Pine And Land $26.62 *** Monsanto Buyout? *** Delta Pine And Land is a commercial producer of cotton planting seed in the United States. It also breeds and distributes other seed products; sorghum and soybean, and distributes hybrid corn planting seed acquired from others under non-exclusive license agreements. The ongoing saga of the DLP merger has option buyers in a frenzy and implied volatility and volume moved higher last week on new concerns about the previously agreed-upon marriage with Monsanto. The Wall Street Journal reported recently that Monsanto has been holding talks with several companies, including Pfizer about a full or partial sale of the company. The WSJ also said the Swiss drug maker Novartis AG had emerged as a serious suitor. Both of the companies declined comment about a possible deal but Pfizer said it may be interested in acquiring Monsanto's pharmaceutical (Searle) unit, if it were available separately. The MTC deal has also been mired in a lengthy antitrust review process and most investors have long since fled the scene for greener pastures. With the incredible premium disparities in option pricing and the possibility of a new player in the deal, we thought it would be interesting to participate in one of the the more favorable spread positions. Two candidates are offered, depending on your personal outlook for the underlying issue. PLAY (conservative - neutral/calendar spread): BUY PUT FEB-30 DLP-NF OI=980 A=$6.75 SELL PUT DEC-30 DLP-XF OI=1250 B=$5.37 INITIAL NET DEBIT TARGET=$1.25 TARGET ROI=50% - 0r, if you are Bearish on the issue - PLAY (aggressive - bearish/diagonal spread): BUY PUT FEB-30 DLP-NF OI=980 A=$6.75 SELL PUT DEC-25 DLP-XE OI=3525 B=$3.12 INITIAL NET DEBIT TARGET=$3.50 TARGET ROI=43% Chart = http://quote.yahoo.com/q?s=DLP&d=3m ****************************************************************** CHB - Champion Enterprises $9.63 *** Cheap Speculation *** Champion Enterprises is a leading producer of manufactured housing and mid-size commercial vehicles. The company's housing operations and markets are located throughout the U.S. and in western Canada. They also offer commercial vehicles that are marketed throughout the U.S. and Canada. The Internet now affects almost all facets of commerce and this company has finally made the move to online advertising. Champion and Homestore.com (HOMS), the leading real estate destination on the Internet, recently announced an agreement to list Champion's homes on the world wide web. The agreement will allow Champion to display its line of homes and services in 125 major markets on HomeBuilder.com beginning in January 2000. Champion's home models will be featured on maps in targeted, geographic regions where they are available and independent retailers in those areas will be linked directly to the web-site. Champion intends to be at the forefront of initiatives such as this to introduce their homes to more consumers and broaden the long-term market. After a series of recent failures, the stock price appears to be establishing a base near $8 and the long-term outlook is moving to a bullish stance. The small disparity in option premiums will allow us to speculate on the eventual outcome of the share value in a conservative, long-term position. PLAY (conservative - bullish/calendar spread): BUY CALL APR-10 CHB-DB OI=174 A=$1.50 SELL CALL DEC-10 CHB-LB OI=104 B=$0.31 INITIAL NET DEBIT TARGET=$1.06 TARGET ROI=50% The basic premise in a calendar spread is simple; time erodes 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. 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. Chart = http://quote.yahoo.com/q?s=CHB&d=3m *************************************************************** - READER'S REQUEST - This week I received two requests for conservative, bullish plays on well-known companies with upcoming stock splits. While these candidates are not necessarily my choices for the best available positions, they both offer favorable (low risk) spreads on issues with solid technical trends and excellent (short-term) momentum. 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 underlying stock. *************************************************************** TVGIA - TV Guide $64.12 *** Reader's Request *** TV Guide is a global diversified media and communications company that operates three primary business units, TV Guide Entertainment Group, TV Guide Magazine Group, and United Video Group. TV Guide markets and distributes products in the United States to over 100 million cable and satellite homes every week. TV Guide Magazine and TV Guide Channel are the largest print and electronic guidance products in the world. The company also develops and sells other products and services to cable, satellite system operators, data communication networks, radio networks, and companies worldwide. TV Guide announced today that its Board of Directors had approved a two for one split of its Class A and Class B Common Stock. The stock split will be affected in the form of a stock dividend of one additional share of common stock for each share outstanding on December 17, 1999, to holders of record on December 3, 1999. It's the third two-for-one stock split in just over three and a half years and investors have shown their appreciation, driving the share value to close at a new all-time-high on Friday. Much of the recent rally came after the news that TV Guide and Gemstar International (GMST) announced a merger agreement under which TV Guide will become a wholly owned subsidiary of Gemstar. TVGIA is now back in the stage II climb after a brief rest and consolidation period last week. Though the issue is overextended, the current up-trend is showing no signs of retreat. Short-term support exists near $58, which would be the bottom of its current regression channel and recent consolidation. PLAY (conservative - bullish/debit spread): BUY CALL DEC-45 UQK-LI OI=43 A=$19.75 SELL CALL DEC-60 UQK-LL OI=30 B=$6.75 INITIAL NET DEBIT TARGET=$12.75 ROI(max)=17% B/E=$57.75 Chart = http://quote.yahoo.com/q?s=TVGIA&d=3m ****************************************************************** VRTY - Verity $105.50 *** Reader's Request *** Verity develops, markets and supports knowledge retrieval software products for application developers, corporate Intranet users and e-commerce sites. Their technology enables organizations to manage text-based information residing on the networks, making corporate content reusable across intranets, the internet and CD-ROMs. Their products also enable application developers to embed search and retrieval functionality into their own commercial applications. Verity's board of directors has authorized a two-for-one split to be accounted for as a stock dividend. The split will be effected by distributing to each stockholder of record on November 17, 1999 one share of Verity's common stock for each share of common stock held. The company expects the shares resulting from the split to be distributed by the transfer agent on December 3, 1999 and the shares of outstanding common stock will increase to 30,200,000. Verity's split run began back in mid-October, a few days after the issue had set a new all-time-high in the $75 range. Now the stock is undergoing a very impressive rally as it continues its stage II climb. Intermediate-term support is at the 30 dma (exp), near $86, also the bottom of a three month regression channel. In the short term, the issue is showing no weakness and new support appears to be developing around $100. PLAY (conservative - bullish/credit spread): BUY PUT DEC-80 YQV-XP OI=107 A=$1.25 SELL PUT DEC-85 YQV-XQ OI=260 B=$1.88 INITIAL NET CREDIT TARGET=$0.75 ROI=17% Chart = http://quote.yahoo.com/q?s=VRTY&d=3m ***************************** SEE DISCLAIMER IN SECTION ONE *****************************
The Option Investor Newsletter 11-28-99 Sunday 6 of 6 COVERED CALLS ************* Covered-Call Exit Strategies... One of our readers requested an educational narrative concerning the proper management of "in-the-money" covered-call positions. A rise in share value is the ultimate goal of stock ownership but with the covered-write, a significant short-term move can provide additional opportunities for profit. When the share price of the underlying stock moves above the strike price of the short option, the complexity of the position changes along with the risk factor of early exercise. For long-term investors, the tax consequences of assignment can also pose a difficult problem; how to adjust the overall position for maximum return while retaining ownership of the underlying stock. If the share value rises substantially after the initial position has been established, you have several choices: you can do nothing, get called-out and accept the original return that was established when the play was opened; if the option is priced near parity, you can close the play early; or, you may also choose to adjust the position to match the revised outlook for the underlying issue by "rolling" the call up (or forward) to a higher strike price. In closing the position early, an experienced trader evaluates the cost of commissions verses an increased annualized return. A "net" order (net credit) can be used in closing a covered write to ensure a proper exit. Similar to a "Buy-Write", you would place an order to "sell the stock and buy-to-close the sold call for a specific net credit at a price relatively close to parity. When you roll up (buy-back the current sold call and sell a higher strike call), you increase the profit potential of the position. The catch is, you surrender downside protection. Your new downside break-even point will be increased by the amount of debit required to complete the transaction (the cost of the closed position minus the premium received for the new position). Thus when one rolls up, a debit is incurred and this is usually considered a negative move (placing more money at risk) by many traders. Generally it is more beneficial to roll to a future expiration date as it reduces the debit required for the new position. It is normally not advisable to adjust to a higher strike if a 10% correction in the underlying stock price cannot be withstood (though this percentage may not be applicable to volatile Internet stocks). As expiration nears and the time value premium disappears from the written option, you should also consider rolling forward to reduce the likelihood of early assignment and increase the overall profit potential of the position. You can buy-back the short option and sell a new, longer-term call at the same strike price or move to a different series, consistent with your outlook for the underlying issue. With deep in-the-money calls, the time value premium often vanishes long before expiration. However, as long as there is time premium left in the call, there is little risk of early assignment (you are also earning time premium by remaining with the original position). As the option price (bid) falls to parity or a discount, there is a considerable probability of exercise by arbitrageurs; floor traders who do not pay commissions for trading. When this situation occurs, you should endeavor to roll-forward or adjust the position in some manner that prevents a monetary loss through early assignment. The key is to evaluate the risk-reward outlook of all the possible scenarios and construct a position that fits your trading plan and your future outlook for the underlying issue. Good Luck! SUMMARY OF PREVIOUS PICKS ***** Stock Price Last Mon Strike Opt Profit ROI Monthly Sym Picked Price Price Bid /Loss ROI ITIG 10.00 16.00 DEC 10.00 1.25 *$ 1.25 14.3% 8.9% ABTE 10.75 10.19 DEC 10.00 1.63 *$ 0.88 9.6% 8.4% MESG 17.63 17.88 DEC 15.00 3.63 *$ 1.00 7.1% 7.8% ALGO 15.25 15.00 DEC 12.50 3.75 *$ 1.00 8.7% 7.6% FSII 10.44 9.34 DEC 10.00 1.81 $ 0.71 8.2% 7.1% WSTL 8.00 10.75 DEC 7.50 1.06 *$ 0.56 8.1% 7.0% BTOB 18.38 20.31 DEC 15.00 4.63 *$ 1.25 9.1% 6.6% SATH 12.44 12.69 DEC 10.00 3.00 *$ 0.56 5.9% 6.4% CYCH 8.38 11.25 DEC 7.50 1.44 *$ 0.56 8.1% 5.8% FLAS 10.75 9.44 DEC 7.50 3.63 *$ 0.38 5.3% 5.8% ICGX 20.50 20.63 DEC 17.50 3.88 *$ 0.88 5.3% 5.8% CRUS 13.94 13.88 DEC 12.50 2.19 *$ 0.75 6.4% 5.5% PILT 18.50 22.00 DEC 15.00 4.38 *$ 0.88 6.2% 5.4% RRRR 14.75 28.88 DEC 12.50 3.25 *$ 1.00 8.7% 5.4% WAVX 13.19 12.88 DEC 10.00 3.88 *$ 0.69 7.4% 5.4% DRIV 22.75 28.25 DEC 20.00 4.25 *$ 1.50 8.1% 5.0% DIGE 14.44 18.38 DEC 12.50 2.75 *$ 0.81 6.9% 5.0% PILT 15.94 22.00 DEC 12.50 4.25 *$ 0.81 6.9% 5.0% BEAM 20.13 19.38 DEC 17.50 3.38 *$ 0.75 4.5% 4.9% PRGY 25.38 29.00 DEC 22.50 4.50 *$ 1.62 7.8% 4.8% LTXX 16.00 18.56 DEC 15.00 2.06 *$ 1.06 7.6% 4.7% IVIL 28.38 27.25 DEC 22.50 6.75 *$ 0.87 4.0% 4.4% TOPP 9.81 10.69 DEC 7.50 2.75 *$ 0.44 6.2% 3.9% DGII 13.56 17.00 DEC 12.50 1.69 *$ 0.63 5.3% 3.8% JDAS 11.63 14.88 DEC 10.00 2.13 *$ 0.50 5.3% 3.8% MOGN 13.44 12.03 DEC 12.50 1.63 $ 0.22 1.9% 2.0% AND 8.38 6.94 DEC 7.50 1.38 $ -0.06 -0.9% 0.0% *$ = Stock price is above the sold striking price. Comments/Observations on Open Positions: Fsi International (FSII) continues to consolidate and is entering an initial support area; technical indicators remain bullish. Topps Company (TOPP) appears to be weakening, though still well above our recommended sold strike. Mgi Pharmaceuticals (MOGN) is nearing the bottom of its trading range ($11.50) on low volume; the overall outlook still bullish. Andrea (AND) has made a large move down to support and is oversold in the short term; monitor the position closely. NEW PICKS ********* Definitions: OI - Open Interest CB - Cost Basis (Price paid - Prem rec'd, the break-even point) RC - Return Called RNC - Return Not Called (Stock Price Unchanged) Sequenced by Company ***** Stock Price Mon Strike Option Opt Open Cost RC RNC Sym Price Symbol Bid Intr Basis AWEB 12.25 DEC 10.00 UWB LB 2.63 272 9.62 4.0% 4.0% COOL 14.50 DEC 12.50 QOO LV 2.44 1371 12.06 3.6% 3.6% EMIS 16.88 DEC 15.00 MTQ LC 3.38 1163 13.51 11.1% 11.1% MESG 17.88 DEC 15.00 MUG LC 3.50 326 14.38 4.3% 4.3% ONEM 19.94 DEC 17.50 ONU LW 3.25 80 16.69 4.9% 4.9% VUSA 14.38 DEC 12.50 UAS LV 2.63 367 11.75 6.4% 6.4% BNYN 15.81 JAN 12.50 QYN AV 4.13 622 11.68 7.0% 7.0% SATH 12.69 JAN 10.00 SQR AB 3.38 17 9.31 7.4% 7.4% Sequenced by Return Not Called ***** Stock Price Mon Strike Option Opt Open Cost RC RNC Sym Price Symbol Bid Intr Basis EMIS 16.88 DEC 15.00 MTQ LC 3.38 1163 13.51 11.1% 11.1% VUSA 14.38 DEC 12.50 UAS LV 2.63 367 11.75 6.4% 6.4% ONEM 19.94 DEC 17.50 ONU LW 3.25 80 16.69 4.9% 4.9% MESG 17.88 DEC 15.00 MUG LC 3.50 326 14.38 4.3% 4.3% AWEB 12.25 DEC 10.00 UWB LB 2.63 272 9.62 4.0% 4.0% COOL 14.50 DEC 12.50 QOO LV 2.44 1371 12.06 3.6% 3.6% SATH 12.69 JAN 10.00 SQR AB 3.38 17 9.31 7.4% 7.4% BNYN 15.81 JAN 12.50 QYN AV 4.13 622 11.68 7.0% 7.0% Company Descriptions ***** AWEB - Autoweb.com $12.25 *** Internet Speculation *** Autoweb.com is the leading consumer automotive Internet service, guiding consumers through every stage of vehicle ownership. From research and buying, to enjoying, maintaining and selling, AWEB delivers what consumers want. Autoweb.com works with over 5,000 Member Dealers and other commerce partners to provide the best experience at every stage of vehicle ownership. Autoweb.com has announced several agreements in the past few weeks as they try to solidify partnerships and acquisitions. The technical picture continues to improve and the stock appears ready to emerge from a four-month base. The recent rally had heavy volume support and a top-side resolution is the most likely outcome. DEC 10.00 UWB LB Bid=2.63 OI=272 CB=9.62 RC=4.0% RNC=4.0% Chart = http://quote.yahoo.com/q?s=AWEB&d=3m ***** COOL - Cyberian Outpost $14.50 *** E-commerce *** Cyberian Outpost is a leading global Internet-only retailer of computer products to the consumer and small office/home office marketplace. The company's online store features a fun, easy to navigate interface with competitive pricing. Outpost.com is now one of the most widely known and used e-commerce sites and has received recognition from numerous publications. New contracts and agreements will provide online revenue and the company plans to target more business-to-business sales. Technically favorable and the company expects to become profitable in the near future. DEC 12.50 QOO LV Bid=2.44 OI=1371 CB=12.06 RC=3.6% RNC=3.6% Chart = http://quote.yahoo.com/q?s=COOL&d=3m ***** EMIS - Emisphere Technologies $16.88 *** A New Drug *** Emisphere is a biopharmaceutical company specializing in the oral delivery of therapeutic macromolecules and other compounds that are not currently deliverable by oral means. The Company has two drugs in human clinical trials using its unique carrier technology and has strategic alliances and ongoing feasibility studies with several pharmaceutical and biotechnology companies, including Novartis and Eli Lilly. EMIS's most clinically advanced product is oral heparin which is designed to capture and expand the existing $2 billion coronary anti-thrombosis market. Emisphere has complete control over the product and recently completed a $2 million share offering to fund a portion of the Phase III trials. They are also seeking a partner to assist in expanded clinical development and global marketing. DB Alex Brown started coverage of EMIS with a "buy" and set a $25 price target. We favor the cost basis near the October lows (share offering) as Emisphere approaches the neckline of a long term double bottom. Further research required! DEC 15.00 MTQ LC Bid=3.38 OI=1163 CB=13.51 RC=11.1% RNC=11.1% Chart = http://quote.yahoo.com/q?s=EMIS&d=3m ***** MESG - MessageMedia $17.88 *** New Entry Point *** MessageMedia is a leading provider of e-mail-based customer relationship management and direct marketing services. MESG offers a comprehensive suite of outsource messaging services for information delivery, e-commerce services, permission-based direct marketing, ongoing customer communications and real-time customer feedback solutions using industry standard Internet protocols. A strong earnings report at the end of October initiated the current rally. The launch of SupportView, a real- time web-based customer survey and decision support system spurred a price jump on Thursday. MESG's overall uptrend has remained intact with the July high becoming the next target. DEC 15.00 MUG LC Bid=3.50 OI=326 CB=14.38 RC=4.3% RNC=4.3% Chart = http://quote.yahoo.com/q?s=MESG&d=3m ***** ONEM - OneMain.com $19.94 *** Internet Speculation *** Based in Reston, Virginia, OneMain.com is one of the largest independent Internet service providers with approximately 561k subscribers. OneMain.com provides Internet access and related services throughout the U. S. to individuals and businesses predominantly serving smaller metropolitan markets and rural communities. OneMain recently started 'geographic' web pages for its customers which will provide customized local content with links to information and entertainment in their surrounding area. For the third successive quarter, OneMain has exceeded published analyst estimates for revenue, subscribers and cash flow. OneMain has rallied above a four month base after a post IPO sell off. Favorable speculation with a cost basis near the support area. DEC 17.50 ONU LW Bid=3.25 OI=80 CB=16.69 RC=4.9% RNC=4.9% Chart = http://quote.yahoo.com/q?s=ONEM&d=3m ***** VUSA - Value America $14.38 *** Stage I Base *** Value America is a brand-direct and factory-authorized marketplace for technology, office and consumer products. With over 30 product categories, Value America offers customers superior value on products from more than 3,000 of the world's most trusted brands. Through unique multi-media product demonstrations, customers are provided with thorough product information, allowing them to make informed and confident buying decisions. Value America reported that its revenues increased 269% last quarter, with gross margin increasing 110%. Recent agreements were announced with Federal Express and Ask Jeeves. On Wednesday, a new CEO was named at the same time Wolf Schmitt (retired Rubbermaid CEO) was named new Chairman of the Board. I can almost hear the take-over rumors being formulated! Value America is showing improving technical strength as it appears ready to exit a technical basing pattern. DEC 12.50 UAS LV Bid=2.63 OI=367 CB=11.75 RC=6.4% RNC=6.4% Chart = http://quote.yahoo.com/q?s=VUSA&d=3m ***** Y2K Plays (January Positions) ***** BNYN - Banyan Systems $15.81 *** Stage II (IPO) Rally *** Banyan Systems designs, develops and markets standards-based networking directory and messaging products that help people communicate across enterprise networks and the Internet. They are a pioneer in the computer networking field, and offer a range of software products, professional services and several intra-net solutions. Switchboard, their wholly owned Internet based network filed to raise $60 million in a public offering. Switchboard.com allows users to search for information about people and businesses around the United States. Banyan has been in a strong stage II climb and is nearing a multi-year high. We favor the support area above our sold strike as investors speculate on the Switchboard.com's IPO. JAN 12.50 QYN AV Bid=4.13 OI=622 CB=11.68 RC=7.0% RNC=7.0% Chart = http://quote.yahoo.com/q?s=BNYN&d=3m ***** SATH - Shop At Home $12.69 *** New Uptrend? *** SATH sells specialty consumer products, primarily collectibles, through interactive electronic media including broadcast, cable and satellite television and, increasingly, over the Internet. Shop At Home Network reaches over 56 million unique cable and satellite households and is the Nation's 15th largest television broadcaster with stations in San Francisco, Boston, Houston, Cleveland, Raleigh and Bridgeport, which is licensed to the New York market. Shop At Home reported record revenues this quarter and recently announced a new weekday sales record. Lots of news on collectibles.com, Shop At Home's new web site, appears to be drawing the interest of investors. The technical picture has turned bullish as Shop At Home has moved above this Summer's consolidation (head-n-shoulders bottom?) area. We favor a strike price below the October/November range for those interested in a high probability of a favorable return. JAN 10.00 SQR AB Bid=3.38 OI=17 CB=9.31 RC=7.4% RNC=7.4% Chart = http://quote.yahoo.com/q?s=SATH&d=3m ***** NAKED PUT SECTION ***************** Stock Buying Basics: Planning And Participation... Momentum investors and speculators compete daily in a frenzied race for immediate performance but participating in this chaotic style of trading will seldom produce regular profits. Managing a winning portfolio requires planning, patience and good judgment. Learning when to buy and sell requires a solid understanding of technical analysis and market trends. It is also important to use consistent, well-known trading techniques. Before you open any position, it is important to evaluate your personal risk/reward attitude and develop a trading plan based on that outlook. Once you have established a comfortable style of investing, you must decide how to divide your portfolio among all the different types of financial instruments. Most investors find that a combination of investments will provide the best balance of risk and reward while accomplishing their specific objectives. If stock ownership is one of your primary investment tools, you must learn to evaluate how each individual position contributes to your long-term plan. Does the stock compliment your portfolio? Is this a company you want to own right now or in the future? Are you willing to pay the current price for the issue? Experienced investors will assemble a collection of favorable candidates and identify the best entry opportunity for each issue through chart reading and technical analysis. The ideal time to buy is when a stock is moving out of a defined base into a dynamic stage II pattern. The breakout above the top of the resistance area (and the long-term moving average) should occur on impressive volume. In stage II, the 30-week MA generally starts turning up shortly after the breakout. The initial rally is usually followed by at least one pullback. That decline brings the price back close to the breakout point, offering another excellent opportunity to enter the position. The less it retreats, the more strength inherent in the move. The potency of the pattern becomes evident as each successive peak eclipses the previous one and the lows on corrections are also progressively higher. As long as all of these gyrations continue to occur above the moving average, the trend remains intact and long positions should be maintained until the target exits are achieved. After the trend is well established and favorable profits are guaranteed, the primary objective is to manage the position for maximum return while avoiding potential losses. That will be the subject of next week's discussion. Good Luck! *** WARNING!!! *** Occasionally a company will experience catastrophic news causing a severe drop in the stock price. This may cause a devastatingly large loss which may wipe out all of your smaller gains. There is one very important rule; Don't sell naked puts on stocks that you don't want to own! It is also important that you consider using trading STOPS on naked option positions to help limit losses when the stock price drops. Many professional traders suggest closing the position when the stock price falls below the sold strike or using a buy-to-close STOP at a price that is no more than twice the original premium from the sold option. SUMMARY OF PREVIOUS PICKS ***** Stock Price Last Mon Strike Opt Profit ROI Monthly Sym Picked Price Price Bid /Loss ROI FLAS 10.06 9.44 DEC 7.50 0.75 *$ 0.75 27.2% 19.7% NSPK 16.38 17.00 DEC 12.50 0.50 *$ 0.50 13.2% 14.4% STRX 7.63 7.00 DEC 5.00 0.44 *$ 0.44 22.3% 13.9% DGII 14.88 17.00 DEC 12.50 0.50 *$ 0.50 12.3% 13.3% PILT 21.31 22.00 DEC 15.00 0.56 *$ 0.56 11.6% 12.6% ONSL 24.00 26.63 DEC 17.50 0.63 *$ 0.63 11.6% 12.6% NSPK 15.50 17.00 DEC 12.50 0.50 *$ 0.50 13.5% 11.7% BNYN 12.75 15.75 DEC 10.00 0.38 *$ 0.38 13.0% 11.3% MSGI 16.94 19.44 DEC 12.50 0.50 *$ 0.50 12.9% 11.2% COOL 9.56 14.50 DEC 7.50 0.31 *$ 0.31 14.0% 10.1% ITVU 64.50 60.63 DEC 45.00 1.25 *$ 1.25 8.8% 9.6% CTIX 20.13 17.56 DEC 15.00 0.38 *$ 0.38 8.6% 9.4% NVDA 32.00 38.25 DEC 22.50 0.75 *$ 0.75 10.5% 9.1% MLTX 16.19 25.94 DEC 12.50 0.50 *$ 0.50 13.4% 8.3% XCED 31.63 29.25 DEC 22.50 0.63 *$ 0.63 9.1% 7.9% AMTD 28.19 24.50 DEC 20.00 0.44 *$ 0.44 7.2% 7.9% MTSN 15.56 16.88 DEC 12.50 0.31 *$ 0.31 8.9% 7.8% IONA 21.38 35.00 DEC 15.00 0.56 *$ 0.56 11.6% 7.2% TUTS 39.69 43.88 DEC 30.00 0.81 *$ 0.81 9.3% 6.7% MRVC 31.00 30.56 DEC 22.50 0.38 *$ 0.38 5.8% 6.3% NPIX 37.44 37.25 DEC 20.00 0.50 *$ 0.50 6.3% 5.4% LTXX 18.56 18.56 DEC 15.00 0.31 *$ 0.31 7.4% 5.4% *$ = Stock price is above the sold striking price. Comments/Observations on Open Positions: So far, so good! Positions that are consolidating remain within an overall bullish pattern. NEW PICKS ********* Definitions: OI - Open Interest CB - Cost Basis (break-even point if put exercised) ROI - Return On Investment Sequenced by Company ***** Stock Price Mon Strike Option Opt Open Cost ROI Opt Sym Price Symbol Bid Intr Basis Expired CDNW 17.00 DEC 15.00 NWQ XC 0.50 81 14.50 9.4% CMDX 65.19 DEC 40.00 CKU XH 0.63 50 39.37 4.6% HEPH 16.50 DEC 12.50 HUP XV 0.38 47 12.12 10.3% IVIL 27.25 DEC 22.50 IIU XX 0.94 306 21.56 13.3% NPIX 37.50 DEC 22.50 XMQ XX 0.69 148 21.81 8.4% PDLI 40.75 DEC 35.00 PQI XG 0.44 25 34.56 4.0% RNBO 18.13 DEC 15.00 BQO XC 0.44 110 14.56 9.6% ZOMX 36.06 DEC 30.00 ZMQ XF 0.81 74 29.19 8.8% Sequenced by ROI ****** Stock Price Mon Strike Option Opt Open Cost ROI Opt Sym Price Symbol Bid Intr Basis Expired IVIL 27.25 DEC 22.50 IIU XX 0.94 306 21.56 13.3% HEPH 16.50 DEC 12.50 HUP XV 0.38 47 12.12 10.3% RNBO 18.13 DEC 15.00 BQO XC 0.44 110 14.56 9.6% CDNW 17.00 DEC 15.00 NWQ XC 0.50 81 14.50 9.4% ZOMX 36.06 DEC 30.00 ZMQ XF 0.81 74 29.19 8.8% NPIX 37.50 DEC 22.50 XMQ XX 0.69 148 21.81 8.4% CMDX 65.19 DEC 40.00 CKU XH 0.63 50 39.37 4.6% PDLI 40.75 DEC 35.00 PQI XG 0.44 25 34.56 4.0% Company Descriptions ***** CDNW - Cdnow $17.00 *** Sony/Time Warner Merger *** Cdnow is an Internet retailer of CDs and other music products. The company is one of the main sources for CDs and music-related products on the Internet. Cdnow.com offers an excellent selection, competitive pricing and personalized merchandising. CDNW climbed higher last week on increased speculation after the Federal Trade Commission asked Time Warner/Sony for information in connection with the proposed deal with Columbia House. The new entity would be owned 37% each by Sony and Time Warner and 26% by CDNW. Time Warner and Sony remain committed to the merger and it is expected to close in the first quarter of next year. DEC 15.00 NWQ XC Bid=0.50 OI=81 CB=14.50 ROI=9.4% Chart = http://quote.yahoo.com/q?s=CDNW&d=3m ***** CMDX - Chemdex $65.19 *** A B2B Business? *** Chemdex is a leading provider of e-commerce solutions to the life sciences industry, with a large number of suppliers and products available through the company's services. Chemdex provides life sciences enterprises, such as biotechnology and pharmaceutical companies and academic and research institutions, researchers and suppliers to efficiently buy and sell research products through a company marketplace. CMDX is considered the leading B2B firm in the industry and CMGI's Internet venture has a large stake in this consumer-oriented Web business. CMGI plans to create a fund based on Internet firms that help businesses work together and CMDX is one of the core components of that group. DEC 40.00 CKU XH Bid=0.63 OI=50 CB=39.37 ROI=4.6% Chart = http://quote.yahoo.com/q?s=CMDX&d=3m ***** HEPH - Hollis-Eden Pharmaceuticals $16.50 *** Speculation *** Hollis-Eden Pharmaceuticals is a development-stage pharmaceutical company engaged in the advancement of products for the treatment of infectious diseases and immune system disorders. The company is currently testing its lead drug candidate, HE2000, in HIV/AIDS patients and anticipated progress with the AIDS-fighting compound has sparked active trading. HEPH said earlier this month that it will present results from preliminary studies on testing of their compound in early December along with additional findings from a U.S. trial. Short interest is a major player in this issue and it obviously requires serious due-diligence. DEC 12.50 HUP XV Bid=0.38 OI=47 CB=12.12 ROI=10.3% Chart = http://quote.yahoo.com/q?s=HEPH&d=3m ***** IVIL - iVillage $27.25 *** E-commerce *** iVillage provides an easy-to-use, comprehensive online network of sites tailored to the interests and needs of women using the Internet. iVillage.com consists of 15 content specific channels organized by subject matter and several shopping areas. This quarter's earnings showed a 30% increase in membership and 150% increase in revenue from last year. Wit Capital recently began coverage on iVillage with an Outperform, stating a price target of $31 to $35. A speculative target-shooting entry for an issue with signs of a technical bottom: BOP reversal; successful test of intraday lows in November (short term "W") and a rebound on increased volume. DEC 22.50 IIU XX Bid=0.94 OI=306 CB=21.56 ROI=13.3% Chart = http://quote.yahoo.com/q?s=IVIL&d=3m ***** NPIX - Network Peripherals $37.50 *** An Old Favorite *** Network Peripherals designs, develops, manufactures, markets and supports client/server LAN solutions with leading edge networking technologies. Its integrated solutions incorporate high performance network adapters, network operating system software drivers, concentrators, client/server switching hubs and network management software. The earnings are out and the forecast looks great as new contracts will likely contribute $8-$10 million in revenue in FY 2000. They also plan to start shipments into the distribution channel, as demand increases for their stackable Gigabit Ethernet switches. DEC 22.50 XMQ XX Bid=0.69 OI=148 CB=21.81 ROI=8.4% Chart = http://quote.yahoo.com/q?s=NPIX&d=3m ***** PDLI - Protein Design Labs $40.75 *** Pharmaceutical *** Protein Design Labs is engaged in the development of human and humanized antibodies and other novel compounds to prevent or treat certain disease conditions, including viral infections, autoimmune diseases, inflammatory conditions, and cancers. In early November, PDLI recently reported an operating loss of $0.03 which was much better than the expectations of a $0.21 loss. PDLI also recently announced the initiation of a Phase III clinical trial of its SMART(TM) (humanized) M195 Antibody for the treatment of acute myelogenous leukemia and favorable results using Zenapax® in renal transplantation. We favor the long-term outlook and $35 is a fair price for the issue. DEC 35.00 PQI XG Bid=0.44 OI=25 CB=34.56 ROI=4.0% Chart = http://quote.yahoo.com/q?s=PDLI&d=3m ***** RNBO - Rainbow Technologies $18.13 *** Internet Security *** Rainbow provides Security Solutions for the Information Age. The company is a leading developer, manufacturer and supplier of software protection solutions, and a leading provider of network license management, Internet and information security. Rainbow continues to develop products and new state-of-the-art website security and authentication solutions. They are also expected to become one of the leading players in this growing industry. The support near $14 should provide a reasonable safety net for any short-term consolidation. DEC 15.00 BQO XC Bid=0.44 OI=110 CB=14.56 ROI=9.6% Chart = http://quote.yahoo.com/q?s=RNBO&d=3m ***** ZOMX - Zomax $36.06 *** Entry Point *** ZOMX is a top outsource service provider to software publishers, computer manufacturers and multimedia products producers. These services include call center/customer support; E-commerce; DVD authoring services; CD and DVD mastering; CD, DVD, diskette and cassette replication; graphic design; print management; assembly; packaging; warehousing; inventory management; distribution and fulfillment; and RMA processing. Zomax reported blow-out third quarter earnings and expects continued strong sales and earnings in the fourth quarter of 1999. With the continued rise in share price, can another split (last one in August) be far behind? A reasonable cost basis for target-shooting a new entry point. DEC 30.00 ZMQ XF Bid=0.81 OI=74 CB=29.19 ROI=8.8% Chart = http://quote.yahoo.com/q?s=ZOMX&d=3m ***************************** SEE DISCLAIMER IN SECTION ONE *****************************
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