The Option Investor Newsletter Tuesday 11-30-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com Published three times weekly, Sunday, Tuesday, Thursday evenings. ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 11-30-99 High Low Volume Advances Decline DOW 10877.80 - 70.10 11045.50 10873.60 966,560k 1,590 1,516 Nasdaq 3336.16 - 85.21 3424.61 3326.53 1,544,763k 1,823 2,339 S&P-100 738.74 - 10.55 751.51 737.71 Totals 3,413 3,855 S&P-500 1389.07 - 18.76 1410.59 1386.95 46.9% 53.1% $RUT 454.08 - 2.87 456.95 452.39 $TRAN 2909.72 + 9.53 2933.99 2899.91 VIX 24.95 + 1.26 25.29 23.36 Put/Call Ratio .53 ************************************************************* Entry Point? Now don't start whining about the drop in the markets today. We have been warning for some time that the Nasdaq will eventually pull back on profit taking. I have mentioned several times that the week after Thanksgiving would be stressful. Historically this week is a pause to refresh from a fourth quarter rally. On Sunday I suggested that a Nasdaq dip this week should be a buying opportunity. If you bought the dip yesterday then you are not a happy camper today. The -40 Nasdaq drop yesterday was only a teaser for what was to come. The -50 point drop this morning was the second act. The Dow was in rally mode and prepared to run into December and at +80 most of the morning it held the Nasdaq to a minimum loss. Unfortunately the top heavy Nasdaq was just too much for the Dow to support and the bleeding began in earnest around noon. The Nasdaq closed -85 at 3336 just +16 points from the next support level. The Dow fought valiantly to stay above 11,000 but it was not going to happen. After the profit taking on the Dow yesterday it was ready to roll today even after negative inflation reports this morning. This was a good sign and should help us going forward. The Nasdaq was up over +500 points in November and we have now given back -133 points in just two days. It is amazing how quickly traders can go from feast to famine. The Nasdaq was setting records every day and many traders were buying at any cost to prevent the tech rally from leaving them behind. Suddenly traders are fleeing in disgust and frustration. Hopefully OIN readers were ready to exit when the selling started and also are ready to re-enter when the rebound starts. The NASDAQ's next level of support at 3320 could be just the next stop in a larger drop. In my worst case scenario I have 3200 as the bottom but I do not see this happening. With the -133 point we have already dropped -3.8%. Analysts only expect a -5% (3295) to -7% (3225)drop in total. I think the bullish sentiment of the Nasdaq has not stopped. This is just the profit taking we have been expecting. The money is still coming off the sidelines and the smart money is just waiting for a sign that the bottom has been reached. The talking heads on CNBC never cease to amaze me. For the last two weeks they have been citing worries from traders that the Nasdaq had gone too far too fast and was due for a pull back anytime soon. Today they are uncovering rocks everywhere they go to "find out what is driving this market down." Every reason under the sun was used as the selling excuse today. 1. Year end portfolio adjustments. 2. Tax loss selling. 3. End of November portfolio adjustments. 4. Hedge fund selling/shorting. 5. Y2K concerns. 6. Fund managers locking in their yearly bonuses. 7. Traders off for Y2K (see below) 8. Profit taking? There are many traders and fund staff off this week. Their employers refused to let everyone off the normal week between Christmas and New Years and gave them this week instead. From the volume in the markets it does not appear they were missed! Fortunately those of us who study the market, instead of just report it, know that December is historically the third best month for gains. There is actually an old saying about the late November. "Bears have Thanksgiving, Bulls have December." So let the profit taking continue because the selling builds a better base for the December rally. The economic reports for the day consisted of the Chicago Purchasing Manager Report which came in at 56.8. The highlight of course was the prices paid component which zoomed from 65.4 in Oct to 70.9 today. Inflation anyone? Secondly the consumer confidence index soared as well for the first time in five months. Consumers are less afraid of Y2K, fully employed, and with the Fed is on hold until next year their retirement accounts are safe. Tomorrow will bring the NAPM report which should reflect the Chicago numbers today. A higher prices paid component will impact bonds and indirectly the market. Should the component be magically the same or lower then we could see a firming in the market. I do not however see any major rebound until after the Non-Farm Payrolls on Friday. With rumors that unemployment could possibly have fallen to something under 4%, traders will not want to make any big bets until the smoke clears. As a side note, did you notice that the advances beat the decliners on the NYSE today by a margin of 1597 to 1513? It was not a big win but with strong volume of 953 million shares it shows that the internals may be improving. This could be the first sign of any December strength. The silver lining to this cloud came after the market close today. Yahoo! was selected to be added to the S&P-500. YHOO had closed down -13.38 at $212.75 in regular trading but quickly jumped +$22 in after hours. The final trade in after hours was $234.81. The announcement powered the Nasdaq futures from a -5.00 to a +9.50 and brought the S&P futures back from a -4.90 to only -1.70 at press time. Will this be enough to stop the Nasdaq in mid drop? Who knows, but it can't hurt. Short sellers will be scrambling at the open to cover before all the buying by index funds drives up the prices even more. In after hours trading prices were up across the board with AMZN +2 to 87, BRCM +10 to 185, QCOM +3 to 365, etc. Keep your fingers crossed! If you have been moaning about high flying stocks and how you missed the boat last month then pack your luggage. Your new ship just came in. For the last 25 years the Nov/Dec/Jan period has had the strongest gains. Investors that took positions for this three month period had gains equaling the other nine months of the year. While the Y2K event could be an unknown for this December the fact remains that after today we have some really good entry points in many of the Nasdaq stocks. QCOM is resting right on strong support at $360. Look at a one minute chart of QCOM. It stopped dead at $360 an hour and a half before the close and failed to drop any farther. JDSU bounced strongly off support at $221 just before the close and went back to almost $229. YHOO bounced strongly off support at $210 but you will not catch this one at the open. YHOO is a split candidate for sure now. CMGI failed to touch support again at $145 at the close after spiking down to that point at the open. After the huge gains of the last week you could have gotten it today on sale for -$25 off it's high. BRCM bounced off support at $175 and closed at $180 almost -$35 off last weeks high. These prices may not hold depending on how strong the YHOO effect is tomorrow but I would venture to say they were very close to the bottom. WAIT for confirmation of a rebound but be prepared. With the YHOO announcement we could get a false bounce but maybe it will keep us afloat until after the Jobs report on Friday. That should be the green light for the December rally if it is going to happen. With Y2K fears easing we should have a good chance. Days like yesterday and today test the education and trading skills of even experienced traders. Everybody is looking for that next killer trade and caution is ignored. The first drop with a rebound behind it is bought with a vengeance and the problem begins. Be honest now. Did you buy the first dip on Monday? Did you buy the morning dip today? A "yes" answer to either of these questions is not bad. The million dollar question is "did you sell when the market started falling again?" A "no" answer here is a sign of an inexperienced trader and could be a costly mistake. If you held did you sit and watch the market/stock bleed dollars while you kept convincing yourself the next level, only $x from where you were, would be the bottom? If it broke that level, you would sell, right? Did you sell or did you pick another level a dollar or two lower and draw your line in the sand there? Did you then erase that line and the next and the next? Do you wish you had sold at that first number now? Of course you do and that is the lesson. You never know how far that next drop will go. Is this when Y2K rears it's head? Will the NAPM numbers tomorrow morning be bearish? Will the worry about the Non-Farm Payrolls on Friday knock us down a couple notches? The point - you never know and until you learn to play the cards the market deals you, you will be doomed to frustration, lack of success and loss of capital. Remember, "the mistakes you make are not as important as the lessons you learn from them." If you don't learn from these mistakes, you are doomed to repeat them. Good Luck, Sell Too Soon. Jim Brown Editor ********** STOCK NEWS ********** A Primer on Taxes and Options By S.P. Brown Everyone knows that there are two certainties in life: death and taxes. And when it comes to calculating and paying taxes, death often seems preferable, especially when calculating taxes due from investment transactions. /members/stocknews/113099_1.asp *************** Market Posture *************** As of Market Close - Tuesday, November 30, 1999 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,750 11,320 10,878 Neutral 11.12 SPX S&P 500 1,340 1,425 1,389 Neutral 11.30 * OEX S&P 100 700 755 739 Neutral 11.30 * RUT Russell 2000 430 450 454 BULLISH 11.12 NDX NASD 100 2,650 3,150 2,967 Neutral 11.30 * MSH High Tech 1,340 1,630 1,535 Neutral 11.30 * XCI Hardware 1,075 1,160 1,161 BULLISH 11.11 CWX Software 1,000 1,160 1,165 BULLISH 9.03 SOX Semiconductor 560 660 609 Neutral 11.30 * NWX Networking 650 800 752 Neutral 11.30 * INX Internet 525 675 609 Neutral 11.30 * BIX Banking 645 690 624 BEARISH 11.30 * XBD Brokerage 395 450 429 Neutral 11.30 * IUX Insurance 625 650 600 BEARISH 11.30 * RLX Retail 875 920 922 BULLISH 11.23 DRG Drug 375 395 387 Neutral 11.30 * HCX Healthcare 750 790 769 Neutral 11.09 XAL Airline 180 190 146 BEARISH 5.21 OIX Oil & Gas 285 315 300 Neutral 11.23 Posture Alert POSTURE ALERT! Technology stocks ended November in poor fashion, however, they did top off a solid month of gains. Losers for Tuesday were led by Internet (-5.98%), Morgan Stanley High Tech (-4.24%), Networking (-3.56%), and the NDX (-3.15%). Winners today were limited to Brokerage (+1.59%), Banking (+1.53%), and Airlines (+1.08%). With this week's action, there have been numerous changes to the posture board. Sectors that were lowered from Bullish to Neutral are Drug, Brokerage, Internet, Networking, Semiconductor, MSH, NDX, S&P 100 and S&P 500. Sectors lowered to Bearish from Neutral include Insurance and Banking. **************** OEX FLASH UPDATE **************** The Skybox Delivers for Index Option Traders Tuesday, November 30, 1999 While the S&P 100 sold off more than 2.5 percent since Thanksgiving, the OEX Skybox posted its third consecutive winning position for profits totaling $19,500 while posting one of its biggest trading period since its inception. /members/marketsentiment/113099_2.asp *************** Market Sentiment *************** Tuesday, November 30, 1999 The Internet Bubble is Bursting! The Nasdaq finally took one on the chin, closing down -85 on strong volume, and dragged the rest of the market with it. Some say it was a bout of profit taking, which was definitely due, however, some indicators may be indicating the end of the current bull run. Sentiment in the marketplace can change very quickly, and we are always quick to react. We've highlighted in the past that overall sentiment is key, and noted recently that we were discouraged with the fact that the Investors Intelligence Survey say a bullish jump from 39% to 52% in a matter of weeks. This was a cause for concern, but before we can continue on the uptrend in the market, we need more bears to join the ranks. Another issue that we were concerned about, but was swept under the rug by the major media outlets these last several weeks, was the current bump up in the yield on the 30-yr Treasury. This week, the major news sources started to highlight this issue, which has not helped this market. Based upon technical analysis, we view 30-yr Treasury as breaking support, and as such, it may soon be at new highs. If this scenario occurs, look for more damage in the equity markets. To add to the negative issues, is the volatility index (VIX, 24.95). With today's action, the VIX broke through the 50-day moving average. This has been a very accurate indicator in the past, and the violation of this moving average would suggest an end to the current bullish run. Finally, the Internet bubble must be bursting! The reason for this has nothing to do with technical analysis, fundamental analysis, insider information, research, demographics, or any other kinds of witchcraft. The reason for this title is that we noticed a dozen publications this weekend highlighting the fact that President Clinton will be shopping on the Internet this Christmas season. If these rumors of the President are true, then the Internet sector MUST BE 100% saturated, and everybody in the world must already be on it. However, we are sure that while the President is surfing the 'net, he may come across some good Monica jokes, or least find some "tasty cigars"! Sorry folks couldn't resist that barb (no hate emails please). Now to end on a positive note for the bulls, the selling today was very orderly again, and very similar to last week's selloff. If you recall from last week, we made up the losses very quickly. To be sure that the end of this current run is not over, we will need to see several things happen very shortly. We need to see the VIX break below 24.50, we need the 30-yr Treasury to get below 6.2%, and we need technology stocks to rally. If any of these scenarios occur soon, then let the party continue; if not, expect more downside pressure followed by a consolidation period. BULLISH Signs: Cash Flow: The amount of money being poured into this market continues to be staggering. 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. Mixed Signs: Volume: Tuesday's (11/30) volume was a top 5 record breaker, and is also the first down day to crack the top 5. BEARISH Signs: Moving Averages: All of the major indexes have broken their 10-day moving averages, suggesting more short-term selling pressure. Volatility Index (24.95): The VIX broke through the 50-day moving average, indicating that the current bullish run is over. Interest Rates: The yield on the 30-yr Treasury broke support, and may soon hit 52-week highs. Advance/Decline Line: The A/D line's continual break does not serve the best interests of the overall market. 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 Tues Benchmark (11/26) (11/30) Overhead Resistance (750-760) 1.50 1.15 OEX Close 753.57 738.74 Underlying Support (730-745) 1.82 1.98 What the Pinnacle Index is telling us: Based on 11/28, overhead resistance continues to decrease. Underlying support is also increasing, which should give the market more strength. Put/Call Ratio Friday Tues Strike/Contracts (11/26) (11/30) CBOE Total P/C Ratio .42 .53 CBOE Equity P/C Ratio .32 .46 OEX P/C Ratio 1.29 1.83 Peak Open Interest (OEX) Friday Tues Strike/Contracts (11/26) (11/30) Puts 750 / 6,887 750 / 9,394 Calls 750 / 6,533 750 / 7,185 Put/Call Ratio 1.05 1.31 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 Top? 19.63 November 30, 1999 24.95 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 Please view this in COURIER 10 font for alignment ************************************************* CHANGES THIS WEEK Daily Results Index Last Mon Tue Week Dow 10877.81 -40.99 -70.11 -111.10 Nasdaq 3336.16 -26.44 -85.21 -111.65 $OEX 738.74 -4.28 -10.55 -14.83 $SPX 1389.07 -8.79 -18.76 -27.55 $RUT 454.08 -1.99 -2.87 -4.86 $TRAN 2909.72 -8.97 9.53 0.56 $VIX 24.95 0.74 1.26 2.00 Calls Mon Tue Week STM 125.06 2.31 2.69 5.00 New, too many buyers! IBI 42.88 2.25 2.69 4.94 New, tis the season. CMGI 147.31 8.88 -8.19 0.69 More fantastic profits MSFT 91.03 -0.94 0.84 -0.09 MSFT maintains position SNE 184.19 5.81 -7.56 -1.75 Sony is always the giver VRTY 103.47 13.63 -15.66 -2.03 Dropped, the market taketh GTW 76.38 0.06 -2.75 -2.69 Drop hurts, but still ok VVTV 45.00 1.19 -4.00 -2.81 Right at the 10-dma HGSI 112.00 10.69 -14.19 -3.50 Quickens the pulse! MACR 65.75 0.13 -3.63 -3.50 Bullish on the shares SUNW 132.25 0.75 -4.56 -3.81 Dropped, profits locked in IMCL 36.38 -3.19 -1.63 -4.81 Looking for sector recovery GMST 112.75 -0.69 -5.06 -5.75 A second opportunity? EMC 84.00 -1.81 -4.81 -6.63 No longer at a crossroads NT 73.88 -1.69 -6.13 -7.81 Offers buying opportunity NOK 140.00 3.75 -12.50 -8.75 Sure enough, the gap fills QLGC 113.13 -4.63 -6.38 -11.00 We like nice and orderly VRSN 185.81 -1.38 -10.81 -12.19 Big gains = profit taking YHOO 212.75 -0.75 -13.38 -14.13 The future looks bright! BVSN 93.06 -4.63 -13.31 -17.94 Dropped, downgraded QCOM 362.31 -13.50 -8.94 -22.44 QCOM has strong support SDLI 162.75 -22.31 -1.69 -24.00 Good relative strength BRCM 179.06 -4.19 -23.88 -28.06 Did we say ugly at $180? JDSU 228.75 -13.88 -23.38 -37.25 Entry point, entry point! Puts CPTH 55.69 -1.38 -4.94 -6.31 New, system outage again RMBS 70.56 -5.56 -0.75 -6.31 A great day for entry! EK 61.88 -1.69 -0.94 -2.63 New, problems ahead?? WLP 57.56 -1.00 -0.50 -1.50 WLP tries to find support HWP 94.88 0.63 -1.13 -0.50 Dropped, too much good news GT 33.75 -0.88 0.50 -0.38 GT ventures to new depths BOW 49.00 0.09 2.03 2.13 Lives up to reputation CI 82.25 0.69 2.13 2.81 Dropped, bounces back ************************************************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millineum with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "subscribe@OptionInvestor.com" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 DISCLAIMER ********** This newsletter is a publication dedicated to the education of options traders. The newsletter is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The newsletter picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. The newsletter staff makes every effort to provide timely information to its subscribers but cannot guarantee specific delivery times due to factors beyond our control.
The Option Investor Newsletter Tuesday 11-30-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ************ WOMANS WORLD ************ Lessons My Daddy Taught Me - By Accident "Thank you, Daddy". That's one thing I wish I could say to him now. As a child, probably around 6, I would lay in bed next to him and look up at the financial times he was reading. I could barely read myself. I have no idea why I did that, except to be close to him. At this young age, I clearly remember him explaining to me, what the "bid" and "ask" was. He was a child of the depression, an orphan, very bright and an industrious man. I don't think he really understood what gifts he gave me, for the pain of his youth followed him through out his life. He was a hard worker, staying with the same company for >20+ years. My Dad was a numismatician and eventually opened a coin shop as a side business, which had started as a hobby. He had national coin shows, wrote newspaper articles and followed the gold & silver markets, which was used as a hedge against inflation then. "The Shop" became an after school job for me, mostly in lieu of a babysitter. I was just cheap labor doing nonsense things. But by high school, through osmosis, I had accidentally learned the economic relationships of gold, inflation, and the dollar. In high school, I pretended to buy Braniff stock, because I had fun on a trip I had taken. I followed that stock for years, as if I owned it. It's what we call paper trading today. It didn't do well. I remember how hard it was to find out information on it. Today, with the internet, research information is available to all. Later a mentor led me to the book "The Only Investment Guide You Will Ever Need" by Andrew Tobias. A Best Seller in 1979. As I look through this book now, I still feel it is an excellent basic financial book, to learn market lessons useful in playing options. His humor held my interest and helped my young mind learn. During a professional break, I sidetracked to get a securities license (series 7), dabbling in financial planning, before the days of certification. The Oct. '87 crash occurred during this time, which scared me half to death. I no longer trade for others I was young and I had followed the herd over the cliff. I did not know how to do my own research well. Nauseated, I left the markets completely for 8 years. I missed a good part of the early bull recovery, dismissing the rebound, waiting for it to crash again. Eventually, I decided to start studying, in order to revive my account. I started reading about options. I read the financial news and sold off the dead weight in my account. I still had no money, but I convinced myself that the little I had, was enough to play options. (In retrospect, I was nuts!) I read a very basic options book, then went to a seminar in order to "Double My Money...".(joke!) It was so exciting. On the last day of the seminar, I placed my first trades while in class. I was so proud of myself, bravely following the teachers (herd). I remember it VERY clearly about 11:00 a.m. on Dec 6, 1996. Only a couple of hours later, my options began moving quickly, just as they said they would. It was the day I learned who Alan Greenspan was, for he then gave a speech using the words "irrational exuberance". It was my first lesson in volatility, inflated premiums, the Fed and how fast you can loose money. If I was to stay in, I had to learn how to play. Obviously, this was lesson ONE. By March 31, 1997, I had continued to place losing trades and dropped my account -42%. Looking back, it was a time of interest rate uncertainty, similar to this year and the only other bad losing period I have had. I had not yet learned how to "play the Fed". I knew nothing about the stocks I was picking. Then one day, I heard about Pfizer's experimental drug Viagra. Being in medicine, I could suddenly relate to how valuable this product would be on the market and to the company. A similar thing happened with IBM. which I also related to. By June I had regained my losses and the rest of the year was a winner. My PFE bought @ 5 were sold for 28 1/5. This was lesson TWO. What I had learned was to play things I understood, play companies I knew something about and only things I could relate to. Play where I had an edge on the next guy. We all have an edge, that gives us a second sense about the right play. Start with your own knowledge base & interests and become a sponge to news about those companies. Play this inherent strength, until you can learn to understand basic technical analysis. Never buy an option on a company you know nothing about. This one change put me in winning positions for years to come. I have continued to add to my knowledge base. Lesson THREE. My question to you is, just when did I start learning how to play options and the financial markets? Did I begin learning in 1996, with this first trade? Or did I begin learning while in bed with my Daddy, at age 6? My point of course, is never think your children are too young (or you are too old) to learn. Everything you do, read or hear, that is even remotely associated with finance, will add to their knowledge. Can anyone say Pokemon? My Dad had NO IDEA what foundation he was laying for me. Imagine if we all spent just a little bit of time, explaining simple concepts of wins and losses with kids. Imagine if they dissected our mistakes, or went to a basic seminar. It may well resurface years later. It may be the best gift you could possibly give them. For me, the early lessons from Dad, beginning at age 6, certainly was a life long gift. Thank you Daddy, for giving me a head start. I love you, miss you and wish you were still here, to see me now. You were the smart one!!! Renee renee@OptionInvestor.com ***************** TRADERS CORNER ***************** Down at the Pool Hall Down at the local Irish Bar, over a pint of Guinness, I am formulating my plan for December... Situation. It looks good, but we are skating on thin ice. To borrow a militaristic metaphors, this month's bestrewn with landmines. The first is end of November window dressing, which may result in some December 1st reshuffling and volatility as fund managers rebuy losers and sell off the winners which they bought at the last minute so that they could put them in their top ten holdings statistics. Next, comes end of the year tax selling for institutions. I need further details on the dynamics of this. Of course, the overall trend should remain bullish, with Holiday ecommerce buzz in everyone's cyber stocking. But a close look at last year's December should provide a cautionary tale. I remember it as my first month of dabbling in option trading, and the saws of the intraday teeth were sharp in the charts. Mission. The goal is to make money. I plan to skin the beast in two ways -- short term (1-3 day) trades; and January 1, 2000 trades. Execution. My plan is to take positions in 3-5 options at a time. My competitive advantages are the newsletter picks, execution by my broker, patience & discipline. I am going to be very disciplined about target shooting both December and January Calls at support levels with Preferred Trade's "buy to open," market order, stop on stock, at the suggested support level in the newsletter write ups. For instance, I would have loved to use this method to get a fill on NOK Calls when it dipped to support at 130 before shooting up to 139 last week. In November, I simply bought baskets of 5 to 10 newsletter call plays and held them for extended periods of 3 to 7 days. That worked in a steadily ramping market, yielding several 100+% plays. I exited those plays with limit sell orders, but had no downside protection. December won't be so easy. This month, I expect to be in plays for 1 - 3 days and to take whatever profit I can get. I plan to exit my plays with a combination of trailing stops, which I move up behind the plays, and limit sells which I monitor closely. As well, I have a list of stocks (SUNW, YHOO, SNE, NOK, GTW, AOL, MSFT) that I want to have open call positions on when Y2K rolls around. So, for those stocks, I am trading January options, and I will try to "pay for" a few open contracts with a successful trade that leaves me with both a profit and the remaining contracts which I hold until the new year. Here's how that might work: 1. Buy 5 YHOO Calls on a dip at a support level 2. YHOO advances 15 points, then drops 5 3. Exit 3 of the YHOO Calls for a 66% profit with a trailing stop, holding 2 for a more prolonged Jan 1st play I have my principal back, as well as a position that I can let run into the new year and YHOO earnings (note also MSFT, AOL, and other earnings in January). Finally, I plan to avoid OEX plays. Looking back at October and November, I have lost money on OEX plays. I am just not good enough to play a specific stock and time the overall market too. So, I am going to avoid losing money in those plays. Did you ever notice what makes a good pool player? Restraint and tact. Good players don't hit the ball as hard as they can or show off. They hit the ball only as hard as they need to, often just barely dropping the ball in the hole with a well placed shot. Their shots often leave the cue ball well positioned for the next shot. That's what a good option trader will do with his capital. Take the 15% on an AOL trade, put it back in the portfolio, and take another 25% profit on NOK. Christine, one of our local club members, has been shaving 30% gains off of each end of DELL's oscillation with puts and calls -- one profitable trade after another. Good pool players also respect their opponents, always shake hands, make friendly conversation, and keep their cool. In our game, our opponent is Mr. Market, the collective will of all of the players out there, from the new online broker customer with $1000 to Mary Meeker. Winning and losing is very emotional, but you can't afford to let any single day or week take you out of the game, or you should invest in mutual funds. Along with tact, humility makes a good pool player -- if you ever think you are unstoppable (and we all feel that way after a 150% trade), then watch out. Your next trade will probably be a disaster. So too, good pool players appoach every shot with a humble attitude. All the past great shots don't mean a thing. This shot is the only one that counts. Good Lord, give me the humility to hit the ball just hard enough and at the right angle to barely sink it. That's how every trade should feel. That's why I've started to follow the advice of one of the most successful traders in our local club -- when you have a great streak, take a week off. Don't give it right back to the market. When you do get back in, approach it with humility. Famed investor Peter Lynch wrote in One Up On Wall Street that his classical education was one of the most important tools in his investing kit. So too, one of the best descriptions of the trader mentality comes from a poem by Rudyard Kipling which was a favorite of one of my battalion commanders. The title of the poem is "If," but it may as well be an "Ode to Volatilty" -- If you can dream--and not make dreams your master, If you can think--and not make thoughts your aim; If you can meet with Triumph and Disaster And treat those two impostors just the same; If you can bear to hear the truth you've spoken Twisted by knaves to make a trap for fools, Or watch the things you gave your life to, broken, And stoop and build 'em up with worn-out tools: If you can make one heap of all your winnings And risk it all on one turn of pitch-and-toss, And lose, and start again at your beginnings And never breathe a word about your loss... Anyway, these are many of the qualities which I think are required to be successful in this dangerous game of option trading. Good Luck. Janar Joseph Wasito email@example.com ************* READERS WRITE ************* Earlier this year, I sent you an note of thanks as a new subscriber who quickly made a killing ($24k turned into $58k) with your recommendations and my research. I told you I would be with you forever and that I was able to give more to my church than I ever have. I can't tell you how much I appreciate your expanded educational format. I am learning so much more from you and your staff....and I am becoming profitable again. My real purpose for this letter is to encourage all of your subscribers (especially those who have recently hit the tech motherlode) to share some of their profits with their church, school, or charity. With all the rush of Christmas buying, we need to reach out to those who have so much less than we do. For those who need more of a reason, most donations are deductible. Again thanks for what you are doing for me, my family, and my Church. Mike **** Did 2 trades on aol for November. 1. On october 29,bought 5 contracts of AOL Dec $130 calls, paid $10 1/4. Sold the 5 contracts of AOL Dec $130 calls on Nov.9 for $20 7/8, 2. On Nov 12,bought 5 contracts of AOL Jan $145 calls, paid $16 7/8. Held over the split,sold the 10 contracts of AOL Jan $72 1/2 calls on Nov 26 for $14 1/4. Net profit for the month $10,862.65 I have been a subscriber to your newsletter for 16 months now Jim, and it is still the best by far for information and play picks for trading. Keep up the great work. Rob **** Dear Jim: Do you have access to my options account ? Are you looking at my trades? How do you know I made all those mistakes ?! Thanks for your great articles. You have a way of getting your message across like no one I have seen. Thanks, SK **** jim, just wanted to thank you for the article in options 101. i have only been trading for six months so i have a lot to learn. what i like is the fact that although i understand many of these strategies, i havent had much of a chance to put them to use. exiting a losing play for me is much easier than exiting a winning play - probably because i have had more experience with the former. your article hit home with me in a BIG way. (especially the part about irrational judgment and emotion while in the play). On Friday I actually was able to use good judgment in a play in GMST after riding it up from 110 to 119. I saw the top and got out. the point is - even if it wasn't the top it was MY top, and that's what it's all about. I can't begin to tell you how much I value this newsletter - you have an awesome staff. Hope you had a good Thankgiving and here's wishing you and yours the best. LIZA (a VERY satisfied subscriber) PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** BVSN $93.06 -13.31 (-17.94) Those downgrades can kill you. Thanks to a downgrade from Prudential Securities from Accumulate to Hold, investors turned their backs on BVSN, sending it tumbling into the basement and taking out every previous level of support - a week and a half worth of gains wiped out on volume almost twice the ADV. While there is some longer-term support at this level, there are also plenty of broken bones from the fall down the stairs. Healing will take some time. Thus we too no longer share the vision and are turning out the lights on this play tonight. SUNW $132.25 -4.56 (-3.81) The good news continued to flow in the shares of SUNW. Before the market opened this morning the shares were upgraded by Merrill Lynch. Merrill raised the price target from $155 to $165, this had the shares immediately soaring to a new 52-week high of $140.19 before falling back on heavy profit-taking to close the day at $132.25. As the Nasdaq goes, so goes SUNW. The tech sector has been so strong that the weakness in the Nasdaq going down over 85 points is not a big surprise. At this point we will choose to close out our positions due to the major sell-off, and the stock split right around the corner. After the spike up this morning, those traders who have been riding the split run had seen enough, and locked in profits. Looking at the Nasdaq technicals, it looks as though more profit-taking could take place in the next few days and that would possibly take the shares of SUNW with it. VRTY $103.47 -15.66 (-2.03) The Market Giveth and the Market Taketh Away - quickly and without reverence to any open positions. Yesterday momentum and split traders were cheering loudly. VRTY spiked to a new 52-week high at $123 and closed up $13.63 ahead of its 2:1 split this Friday, after the bell. But today we got a severe reality check of what HIGH-RISK AND VOLATILITY can really mean when an Internet heads south. At first it seemed like a typical back-fill to potential new support around $111-$112, but then the bottom fell out. Surely stop losses came in handy this afternoon. With the stock split so close and the wild intraday activity this week, we're exiting the play this evening. On Monday, the company announced Timex Corporation chose the award-winning software, Verity's Information Server, to connect its online customers with information retrieval on the Timex Website. PUTS: ***** HWP $94.88 -1.13 (-0.50) HWP has had plenty of positive news the past two days. HWP has entered into agreements with two of the Web's powerhouses. Monday, HWP struck up a marketing deal with AOL that will boost AOL's printing capabilities and gives HWP products greater visibility on AOL's shopping pages. The goal is to make it easier for AOL subscribers to print pages off of their website while improving output and providing more options. The deal includes joint marketing efforts. HWP will install a feature on AOL that reminds users to purchase an ink cartridge online when the supplies get low. HWP's other announced deal is with Amazon.com. It is a broad agreement in which Amazon will use HWP systems in its Web infrastructure as well as offer HWP products to its customers by featuring HWP products in its electronics store. Despite the good news, HWP's stock price has fallen. The drop off in price is due mainly to the selling pressure placed on the tech stocks overall, with most of the drop in HWP happening in the last hour of trading on Tuesday. But the stock sold off grudgingly and was actually one of the stronger tech stocks on a relative strength basis. We do not want to fight all of that good news and our removing it from the put list. CI $82.25 +2.13 (+2.81) As you know, put plays can be tricky. They can be extremely profitable as well. CI gave us a chance to make a small profit depending on your entry point. The sector has seen a 8% correction in the last 2 weeks and had a bit of a bounce today. CI headed lower Monday only to bounce off its 50-dma at $78, and bouncing back to close near its high of the day at $80.13. Today the bounce continued as CI climbed to its 10-dma near $83. We are dropping CI for now, because of the strength of its recovery. The fundamentals really haven't changed for the Insurance company or the industry. We wouldn't be surprised to see the recent downdraft continue in CI but for now, there are better opportunities elsewhere. ***************** PICK NEWS - CALLS ***************** NT $73.88 -6.13 (-7.81) One of the more stable properties in the optical networking business gets whacked 10% in two days, and we're keeping it? Yes. This is still the same company that expects 20% revenue growth next year with increasing margins to boot; the same company in which ABN AMRO reiterated their Buy rating yesterday and raised their price target from $80 to $100; and the same company that traded at $68 on November 7th when we picked it. The fundamentals grew stronger and funds were buying. We consider the current level a buying opportunity. The sell-off in the latter half of the day was way overdone as volume increased substantially. The highest volume however occurred into the close where the price reversed and moved back up again off the low of $73.50. Support is really strong at $70.50. Target shoot to your risk tolerance, or you can wait for a move back over $75 (with volume and after amateur hour) to take a position. Oh yes, they also announced the purchase of a 5% stake in Spain-based Radiotronica S.A., a networking company with whom they have already have a relationship in Spain, Morocco and Latin America. Remember too, you can leverage your returns by an additional 30% if you play the CLFY options. (NT is buying CLFY) NOK $138 -12.50 (-8.75) Sure enough, that gap open from Friday filled in, taking NOK into the $136 range before it bounced back $3 into the close. Support is now really strong at $135. You can cross your fingers and hope to target shoot it, but we think it's priced well here since buying volume really cranked in a half-hour before the close. If you want to be a bit safer, confirm the move back over $140 before taking a position. That's where it appears some panic selling set in that started the tumble to $135. NOK is still the leading handset manufacturer in the world, and personal electronics are making popular gifts this holiday season. In short, the fundamentals remain the same, but the bloated feel is gone. Feel free to participate in this post-Thanksgiving sale. QCOM $362.31 -8.94 (-22.44) Even into the close, $360 held strong as support. Also, no matter how you slice it, the lows are getting higher with resistance at $390. In short, the two-week chart is forming a nice pennant or ascending triangle on lower volume, which usually signals a coming breakout. We can't guarantee it of course, but a 4:1 split shortly following the December 20 shareholders meeting, plus a possible announcement on the disposal of their handset business will make a great catalyst for the breakout run to begin prior to that date. Heck, even as just a pure momentum play, QCOM is now at the bottom of the historic channel. We are not suggesting you back up the truck, but there appears to be a good entry at this level. Keep in mind that when China opens its markets, within one year of completion of the wireless infrastructure, there will be 30 mln CDMA customers planting a small fee in Qualcomm's pocket for the use of the technology. An added note for the gutsy, you may want to consider selling ITM puts too. Just don't do it without knowing the risks of selling puts. JDSU $228.75 -23.38 (-37.25) With a loss like this, why keep it? Simple. Entry point, entry point, entry point. We've been waiting for one of these; now we've got it. Today's loss takes us all the way back to the bottom of the long-term channel, where we find support at $220. Thank goodness, finally, some sellers emerged, and on huge volume too (2.3 times the ADV). There may be a bit more to be shaken out of the price, but support is really good at $220. Particularly impressive was the reversal off $221 following the downdraft, with increased volume into the close. While not a recommendation to back up the truck, if you've been looking to get into this trade in anticipation of their 2:1 split on December 30, it's time to get active about it. You can target shoot in the $215 to $225 range. If nothing else, this might earn you a quick profit on a small bounce, but $215 may be tough to hit. From the news, take note that Phillips Electronics filed to sell 150K shares of JDSU. In the grand scheme of things, it's nothing, especially since they were free to do so since November 19 - nobody noticed then, and it's a non- event now. If you hear or see it in the headlines, you'll know not to panic. SDLI $162.75 -1.69 (-24.00) From Sunday: "We should expect a pullback after 8 straight days of new record highs. Nothing goes up forever in a straight line. 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." No kidding!! SDLI suffered a large majority of its loss yesterday. Today's -$1.69 seems like an afterthought. Frankly, given the profit-taking in the technology sector today (especially with its optical brethren, NT and JDSU), we could have seen the selling continue. In a show of good relative strength, that didn't happen, and volume remained strong, with near term historical support in the $160 range. Here's another one where we think we've hit a good entry point. If you want to target shoot the channel, you'll have to set your sites at $155, but it's possible SDLI will never get there. This is still only for the itchy-trigger-fingered. Otherwise, you'll need to wait until SDLI gets back over $172 to confirm the breakout of the trading range (in which case, we suggest you may want to try a more conservative play instead). HGSI $112.00 -14.19 (-3.50) Volatility continues to quicken the pulse of traders of this biotech. The stock had rallied yesterday and made a nice follow through once it took out Friday's high of $125.75. After reaching a new high of $132.50 the stock pulled back a little to $126.19 on the close. With a close in new high territory, some follow through to the upside was expected. We got that follow through right at the open but then the selling began in earnest. This was due to some unfriendly comments towards Amgen which put a damper on the sector. Profit-taking ruled the afternoon and HGSI managed to close just above its $110 support. Watch your stops if HGSI continues down. The $110 level should provide solid support for HGSI. If it does not, we will likely be done with HGSI. We are looking for a market and sector rebound to lead HGSI back up. Resistance will be at $120 and again at the old closing high of $126.19. MACR $65.75 -3.63 (-3.50) Today the Internet stocks took a beating across the board, with Web developers like MACR that have established a nice uptrend for the last few months seeing the hardest hits today as traders decided to lock in profits. We had warned to be on the look out for an inevitable Nasdaq sell-off, and that is exactly what we got. MACR finished the session off of the lows of the day at $65.75. The stock traded as low as $63.50, we had recommended in Sunday's write-up to look for a target entry around the $64 level. If you jumped in here, you are in good shape and we expect the overall market to bounce back. But start looking to get your stops in to avoid the downside risk. We continue to remain bullish on the shares, just cautious in current market conditions due to today's sell-off. MACR should continue to benefit from the build out of broadband capability by the likes of Worldcom and AT&T, this will allow them to provided a broader array of Internet-based services. Aggressive traders who are not currently in a position should continue to target shoot going forward, look for another trading bounce near $64 level if the selling continues. VVTV $45.00 -4.00 (-2.81) We saw the shares of VVTV sky rocket once again today to hit another 52-week high at $50.50 due to the positive news in the sector and the Nasdaq powering forward in early morning trading. The Media sector had investors attention this morning as the newest of Web portals formally launched its business. Unfortunately, the shares of NBC Internet fell in the afternoon, as the profit-takers stepped up to the plate in a big way across the board. The leading Internet stocks in there respective space like America Online, Double Click, and VVTV have seen astronomical gains this last few months and traders decided to lock in some profits today. VVTV managed to hold up at mild support levels at $45, but going forward we are being very cautious, seeing that the Nasdaq chart and VVTV's chart is very similar. If the profit-taking has not ceased, then we could see more downside over the short- term. Aggressive traders could possibly look for a bounce near the $44.50 (10-dma) level for a trade, but make sure it bounces first. Enter with caution. IMCL $36.34 -1.63 (-4.81) On Monday, Merrill Lynch started coverage of IMCL with an Accumulate rating. There were two major positive comments to be found in the research report. The company's main product looks promising. C225, a monoclonal antibody now in Phase II and Phase III trials. Although its efficacy has not yet been proven, it is intended for use in the treatment of head, neck and colon cancers. Also, Merrill said that ImClone has a strong balance sheet with over $120 million in cash and marketable securities. Currently the company is cashflow negative and is unlikely to make money until 2002. As far as the trading goes, IMCL had an ugly opening by dropping all the way to $33.63. That turned out to be a great entry point though. It recovered to trend up from that point. The nice feature is that it held up well while the Nasdaq was falling and managed to close above the 10-dma (if even by only nine cents). If the sector can recover tomorrow, this will look like a great entry point. MSFT $91.03 +0.84 (-0.09) Despite the strong downdraft in the tech stocks MSFT managed to maintain its current position above the 10-dma ($88.67). This is a bullish sign especially considering the Nasdaq tanked 85 points today. So far this week support is still firmly established at $90, a level that represents an entry to this play. But remember this momentum play is purely driven by positive news events surrounding the anti-trust case. A strong bounce on volume would give better evidence of a run towards $95 or $96. Talking of news, today marked the first day MSFT met with mediator, Judge Posner, to discuss negotiations regarding the anti-trust issues. The talks are private so "mums the word" and no comments were released. GTW $76.38 -2.75 (-2.69) There was no doubt where GTW was headed today. Down, down, and down. Share price dropped 3.5% by the end of the trading session placing GTW dangerously below its 10-dma ($78.78). Now granted the Nasdaq was negative +80 points and from a bull's point of view, GTW still held firm at its $76 support level. Although recall from Sunday's write-up that if the market continues to pullback we could see GTW tumble to the proximity of $70. Yes this may sound drastic, but be prepared with stop losses. And again if you're a more conservative player, wait for a close over $80 for confirmation. There were rumors today that Chairman and CEO, Ted Waitt, may step down from his reign as CEO before the end of the year. Jeff Weitzen, the current president and COO, would be the likely successor. Gateway had no comment or announcement according to Fortune Magazine. VRSN $185.81 -10.81 (-12.19) VRSN traded narrowly yesterday in a tight range between $194.31 and $201 bucking the Internet downslide. It's likely the news of a joint effort with Trintech Group, a leading provider of electronic payment infrastructure, to provide financial institutions an integrated solution for the issuance of secure virtual credit cards helped keep VRSN propped up. Today however, VRSN was a prime target for profit-taking bearing in mind the $27.94 (16.4%) in gains last week. But on the bright side, this pullback places VRSN just above near-term support at $180, an optimum entry point if you're risk tolerance allows for it. Beware of post-split depression! VRSN splits 2:1 after the bell on Monday so the play would be a quick in and out. Look at a chart and you'll see that after last summer's 2:1 split VRSN declined for a few weeks. YHOO $212.75 -13.38 (-14.13) First stop...10-dma! Well almost. Today YHOO plunged. It slipped through the 5-dma - an indicator it's been bouncing off on its recent ascent - and drove right on past mild support at $220 and the 10-dma ($219.61). Nevertheless, we have confidence YHOO will recover when the markets return to "raging bull" mode. This call play is based on holiday momentum and 'tis the season to buy online sentiment. On Monday, Yahoo! reported a five-fold increase and record sales on the day after Thanksgiving. This data is a comparison to last year's numbers indicating more people are shopping online. Couple this great news with recent information that Yahoo! does have plenty of shares for another stock split (900 mln shares authorized and only 263 mln issued) and it's likely the anticipation and excitement surrounding YHOO should grow in the near-term. NEWS ALERT: YHOO is up "big time" in after-hours trading after being added to the S&P 500 Index replacing Laidlaw Inc (LDW)!! BRCM $179.06 -23.88 (-28.06) Did we say entry points at $180 if things get ugly? Well, welcome to ugly and then some. Though the past two days have been a little rocky, (okay, so that is a bit of an understatement) the profit-taking we have seen is a healthy and unfortunately, necessary part of playing any big mover. Keep in mind, BRCM was at just $138 at the beginning of this month, so some rampant profit-taking is not at all out of line. There may be quite a few investors out there who were looking for a split announcement with the shareholders meeting last week. As we mentioned on Sunday, BRCM is known for lagging announcements, which is why we aren't giving up just yet. Apparently, some investors aren't as patient and have decided to jump ship. The beautiful thing about all of this is ENTRY POINTS!!! Going forward, BRCM has some solid support right around $176. Broadcom did manage a small bounce at the end of today's session, a good indication heading into tomorrow. A breakthrough $180 will be another indication of returning positive momentum. BRCM has further resistance at its 10-dma of $191.50. In the news today, BRCM was named as one of the 34 stocks in the new Lehman Brothers "Virtual Economy Portfolio", which is aimed at providing exposure to the success of the Internet while protecting its investors from the volatility. BRCM, provides protection from volatility? Hmmm... SNE $184.19 -7.56 (-1.75) Being the gift giver that Sony is, SNE decided it was time to give us some points of entry. Sony made a big move up on Monday, offering a gain of $5.81 and tagging a new 52-week high of $192. The profit-takers ruled Tuesday's market and moved in on Sony at the open. SNE spent the majority of the day in a battle of buyers versus sellers, right around $187.50, before finally succumbing at the end of the session and dipping to close just pennies shy of the low of the day. Of course, we will want to see a bounce and a reclamation of positive momentum before entering a new play, but this dip has truly provided a wonderful opportunity for possible entry. A breakthrough and some consistent trading above $187.50 will serve as a good indication of a return to SNE's positive momentum run. Sony has support at its 10-dma of $181.50 and further support at $180 if needed. EMC $83.69 -4.81 (-6.63) Well we are no longer at a crossroads, with EMC. EMC finally broke out of its narrow range that we mentioned Sunday. EMC finally fell under its own weight today. This morning Barnesandnoble.com announced it had selected EMC Enterprise Storage Network to manage its e-commerce growth. Apparently the news did little to support the price of the company's stock. EMC ended the day with a poor showing Monday after making a new high at $90.75 only to fall back into its recent trading range by day's end, closing down $1.19 for the session on light volume of 3.4 mln. shares. This morning investors were clicking on the sell button right from the start. On the bright side, EMC was able to find support late in the day at a previous support level near $83. The selling may not be over as right now the chart looks weak, but it could provide us with a great re-entry point for the hardware company. the next level were EMC could find support is near $80. Volume on the decline was basically orderly and quite frankly overdue. EMC has been good to us so far and given us several good profitable opportunities. Wait for a bounce off support and a rebound in the major indices before considering a new play. QLGC $113.13 -6.38 (-11.00) Nice and orderly that's the way we like to see a pullback. Granted in the first two days of the week we have seen QLGC give back $11 of its recent gains. The decline has come on lighter than average volume which, once complete, should clear the way for buyers to step in and bid the price back up. If you entered a play in QLGC you should have been stopped out with either a small profit or a small loss depending on your entry point. As we mentioned Sunday QLGC should find support near $110. The 30-dma tonight sits at $109.17 as well. The Semiconductor sector broke an intraday level of support near $615 and has a bit to go before finding its next level where buyers step in. With the Technology stocks leading the way in today's decline we will watch the $110 area for QLGC, and see if the semiconductor company can consolidate or recover from the weeks declines. If so, it could provide us with a new entry point for our play. We are still anticipating a split announcement to come out QLGC headquarters, which was the other reason for adding QLGC to our play list. For now we will remind you patience is a virtue, and it will be extremely important to wait for a good entry point. GMST $112.75 -5.06 (-5.75) A second opportunity is what we are now looking for in our split run play in GMST. As we suggested Sunday shares of GMST were getting a little over-extended and were due for a bit of profit taking. After making a high at $122 in the first hour of trading Monday, GMST began to run out of gas. GMST lost $0.69 Monday, but closed near the low of the day. This morning traders decided to take some money off the table from the opening bell. GMST closed just off the lows of the day which indicates there may be more of a move to the down side. The $112 area is a minor support level. Stronger daily support lies near $110, could provide us with a second opportunity to join in on a split run for GMST. The volume the past two days has been below normal indicating this is profit-taking and not a change of trend, yet. The 10-dma for GMST is at $110.75. We are expecting further declines tomorrow followed buy a bounce. Watch the $108 to $110 area for a possible entry point. Prior to entering a new play wait for a confirmation of a bounce. Yesterday analysts at SG Cowen initiated coverage of GMST with a Strong Buy rating. The 12-month target price was listed as $160. CMGI $147.31 -8.19 (+0.69) CMGI gapped up at the open Monday morning offering us fantastic profits since being added to our play list. If you hadn't taken some money off the table late last week, we would hope you used yesterday's surge to do so. CMGI hit $170.75 late yesterday morning on the news that its Internet venture, Alta Vista Web network would acquire the remaining shares in an online investor site Raging Bull. Alta Vista, which is majority-owned by CMGI said it agreed to acquire Raging Bull in a stock-for-stock exchange. You should remember the on Nov 16th CMGI closed at $103.75. We can't blame investors that bought shares of CMGI, less than two weeks ago for taking some of their money off the table. The selling may not be over yet, although it did close near the $144 level of support. With the NAPM report coming out tomorrow and the employment report coming out Friday, CMGI could still be vulnerable to selling pressures. The question is where will the buyers step in and begin to drive the price back up? If you took your profits, and we hope you did, we will watch for a new entry point in CMGI, but we may need to have patience. Before entering any new play confirm the direction of the major indices and the stock itself prior to placing an order. ******************************** Plays continued in section three ******************************** ************************************************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millineum with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***************************** SEE DISCLAIMER IN SECTION ONE
The Option Investor Newsletter Tuesday 11-30-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. **************** PICK NEWS - PUTS **************** BOW $49.00 +2.03 (+2.13) Bowater is living up to its reputation of being a defensive stock. We were concerned about this possibility in the initial report on Sunday. The story has not changed and the stock still looks weak technically. It is likely just making a technical rebound that should end with resistance at $50. That said, be very careful. Even though the stock is in a downtrend, volume has been very good the past two days. If the overall market continues down more, money may go into the shares of perceived safety stocks, which BOW is. When the selloff in the more popular stocks ends, look for BOW to resume its downward course. As always, be mindful of your stops. A close above $50 could indicate more gains in this stock and send us packing on any new plays. WLP $57.56 -0.50 (-1.50) It was a rough day for the Healthcare sector with the HCX index losing over 17 points. WLP did participate in the decline, though not as enthusiastically as we would have liked. We mentioned in Sunday's write up that WLP was approaching some support at the 30 and 50-dma levels, right around $59. WLP broke through both of these levels with little effort, giving us the go ahead for new entries. WLP continues to maintain its picture perfect downward trend and because WLP has exhausted the moving average supports, is now seeking support at the psychological levels, the next one being $50. This level has provided strong support in the past so it will be imperative to exercise caution and tighten stops as we approach this level. $57 managed to hold WLP up throughout the majority of today's session and provided the spring for WLP's mid-day bounce. We need to see a reversal and some trading below this level heading into tomorrow to confirm continuing negative momentum. GT $33.75 +0.50 (-0.38) Goodyear managed to find some positive momentum and tried to make a run up at the open this morning. One thing to note is the huge volume posted by GT today. Over 2.1 million shares were traded versus the 900K norm. We believe this was merely a case of nervous investors looking to GT for a defensive play in a down market. When the market takes off again, GT will most likely find itself left on the side of the road once again. GT has plenty of resistance up ahead, the closest being it's 10-dma of $36. GT has yet to establish any kind of solid support and is still poised for a continuation of its downward trend. GT set a new 52-week low today at $32.19 and we will want to see some trading below this level to confirm direction. Use caution as we venture to new depths. RMBS $70.56 -0.75 (-6.31) It continues to be rough waters for the Semiconductor sector with the SOX down over 17. Rambus continues a struggle all its own dropping yet another $6 so far this week. What a great day for entry points! RMBS offered a trading range of over $6, at one point spiking all the way up to just over $76. RMBS spent the afternoon flirting with $71 before finally dropping to close near the low of the day. Timing a new entry could be tricky as we approach $70. RMBS has sought and found support at this level before, as it did today, and though RMBS seems to have little problem breaking through support levels as of late, it will be important to exercise caution and tighten your stops. RMBS has resistance at it's 50-dma which is currently at $75. ************** NEW CALL PLAYS ************** STM - STMicroelectronics $125.06 +2.69 (+5.00 this week) STMicroelectronics is a global independent semiconductor company, that designs, develops, manufactures and markets a broad range of semiconductor integrated circuits and discrete devices used in a wide variety of microelectronics applications, including telecommunications systems, computer systems, consumer products, automotive products and industrial automation and control systems. The shares of STM were halted during today's trading session due to an order imbalance. There were just too many buyers stepping up to the plate around 11 am. The stock was halted at $122.88, but when trading resumed the shares had traded as high as $132.00. This buying interest was sparked by three leading analysts and six Semiconductor CEOs examined the Semi- conductor sector in the latest issue of "The Wall Street Transcript". It was noted going forward that Texas Instruments, LSI Logic, and STM to name a few would benefit in the future, because they provide "SOC" or System on a Chip. This technology will continue to capture more of the value, and inevitably better profits. Looking at the technical picture we see that the stock has been on a strong uptrend for well over a month, and we would look to enter the stock at current levels $125.06, and on any pullbacks. Aggressive traders could look for a bounce near $120-$121 for a entry point if the profit taking continues. A major breakout would be prices confirmed above the 52-week high of $132. Examining the overall Semiconductor sector at this point we would be cautious, the $SOX index closed the day near the low at $609.39 down over 18 points. Be careful over the near-term and watch the index for trading direction. Although, there maybe a follow through of selling over the next few days, we are expecting a turnaround, due to the positive outlook going forward in the sector. There is still a healthy appetite for the high tech stocks and good prospects for the sector world-wide. If the sector can turn around, then STM should really be ready to rock. BUY CALL DEC-115 STM-LC OI= 35 at $12.50 SL=10.00 low OI BUY CALL DEC-120*STM-LD OI=560 at $ 9.00 SL= 6.75 BUY CALL DEC-125 STM-LE OI= 1 at $ 6.25 SL= 4.50 just opened BUY CALL JAN-125 STM-AE OI= 11 at $11.50 SL= 9.25 low OI Picked on Nov 30th at $125.06 P/E = 74 Change since picked +0.00 52-week high=$129.00 Analyst Ratings 12-2-2-0-0 52-week low =$ 31.88 Last earnings 11/13 est= 0.43 actual= 0.46 Next earnings 01-25 est= 0.56 versus= 0.42 Average daily volume = 1.00 mln Chart = http://quote.yahoo.com/q?s=STM&d=3m **** IBI - Intimate Brands Inc, $42.88 +0.25 (+2.50 this week) They operate over 1,850 specialty names under the name of Victoria's Secret and Bath & body Works brand name. Intimate Brands is a leading retailer of intimate apparel and personal care products. IBI distributes intimate and fashion apparel internationally through the Victoria Secret Catalogue. IBI was formed in 1995 and was owned by The Limited, which currently holds an 84% state in the company. They operate over 825 Victoria Secret Stores and over 1000 Bath & Body Works store across the United States. The company's catalogue circulation is over 406 million and accounted for 20% of Intimate Brands sales in fiscal 1999. 'Tis the season to be jolly, and shareholders of IBI are hoping for jolly good holiday shopping season. Since reporting earnings in early November IBI has began to climb the ladder to higher prices. The earnings picture was solid with IBI meeting the street estimates at $0.15 per share. The company has taken an aggressive stance in closing unprofitable stores to improve the bottom line. Lower inventory costs and less clearance merchandise help raise profits from the previous year. Another feature aiding IBI is the Victoria's Secret web sight which has been enhanced to push sales to an estimated all time high. Investors seem to approve bidding the price of IBI stock about 10% higher in the last week. Monday IBI gapped through a resistance level at $42 and seems to be gaining momentum. Retailers nation wide reported increases in sales for the 1st shopping weekend of the holiday season, and are expecting 1999 to be a banner year. Analysts approve of the company's outlook too. Today Hambrecht & Quist reiterated their buy rating for IBI. Recently IBI has received several reiterations and upgrades with the 12-month price target ranging from $45 to $53 per share. In considering a new play in IBI look for continued momentum to the upside. Less aggressive traders may want to consider waiting after Friday's employment report to enter a new play. No other news at this time. BUY CALL DEC-35 IBI-LG OI= 75 at $8.25 SL=6.25 BUY CALL DEC-40*IBI-LH OI=440 at $3.63 SL=1.75 BUY CALL DEC-45 IBI-LI OI=519 at $1.00 SL=0.00 High Risk! Picked on Nov 30th at $42.88 P/E = 27 Change since picked +0.00 52-week high=$52.38 Analysts Ratings 10-13-6-0-0 52-week low =$23.81 Last earnings 10/99 est= 0.15 actual= 0.15 surprise +0.0% Next earnings 02-09 est= 1.14 versus= 0.93 Average Daily Volume = 464 K Chart = http://quote.yahoo.com/q?s=IBI&d=3m ************* NEW PUT PLAYS ************* CPTH - Critical Path Inc $55.69 -4.94 (-6.31 for the week) Critical Path Inc provides e-mail hosting services to ISPs, Web hosting companies, Web portals, and corporations. They maintain about 5 mln e-mailboxes for about 180 clients. Their customers include E*Trade, Network Solutions, Surfree, @Work, and TABNet. CPTH is currently expanding overseas in Europe, Africa, and Asia. The mail must get through...e-mail that is! But that hasn't been the case at Critical Path, who is ultimately responsible for e-mail delivery to over 6.7 mln mailboxes within firms such as USWest, Spring, and E*Trade. All month the company has been plagued with "slow downs" and "sporadic service" according to sources close to company operations, but the outage to 1.2 mln mailboxes on Monday, November 22nd at around 10:45am was the clincher. Share prices went on the decline. In total CPTH has lost $21.69, or 28% since that event despite positive comments by senior e-commerce analyst, Rick Juarez, from BBRS. On November 24th he stated "we believe that the news about Critical Path's unfortunate service interruption earlier this week, was minor in that only one of nine clusters was affected" and "we view the recent pullback in shares of Critical Path as a good buying opportunity for savvy investors". With all that said, investors continued to cut the stock down. Today CPTH dropped another 8% and slipped under the 50-dma ($58.36) prompting us to add CPTH to our put list. But this will be a quick play. Support is at $51 and then again at $45. Go with the momentum but look to have your stops pull you out of the way on any bounce. BUY PUT DEC-60*UPA-XL OI=529 at $8.63 SL=6.50 BUY PUT DEC-55 UPA-XK OI=135 at $5.63 SL=3.75 BUY PUT DEC-50 UPA-XJ OI= 62 at $3.38 SL=1.75 Average Daily Volume = 923 K Chart = http://quote.yahoo.com/q?s=CPTH&d=3m **** EK - Eastman Kodak Company $61.88 -0.94 (-2.63 this week) Eastman Kodak Company is engaged in developing, manufacturing, and marketing consumer, professional, health and other imaging products around the world. The company has four operating segments: Consumer Imaging, Kodak Professional, Health Imaging, and Other Imaging. Primarily all of these divisions are in the business of selling photographic supplies and equipment. Their main competitor is Fuji. Is Kodak a pioneering technology company on the cutting edge of new product development? Or is it the proverbial "buggy whip" company, doomed to be left behind? Kodak is probably neither. However, there are serious concerns among institutional investors about Kodak weaning itself off of a primarily commodity business. As the price of film goes down so go the profits. On November 18th, Paine Webber cut its target price to $78 from $85, stating "We believe that Kodak needs to convince investors that it can win in a digital world." The share price of Kodak peaked in September at just over $80. It has been in decline ever since. Kodak's shares are likely to be on the sell candidate list of money managers during any sell programs. If Kodak can trade below $60.75, it could trigger even more selling. Resistance is sitting at $65 and that would make a nice entry point. This is a company that has been known to warn of profits too. We are now entering the warning month for Q4 and EK is always a stock to watch for a possible disappointment. BUY PUT DEC-70 EK-XN OI=818 at $8.38 SL=6.25 BUY PUT DEC-65*EK-XM OI=849 at $3.63 SL=1.75 Average Daily Volume = 1.01 mln Chart = http://quote.yahoo.com/q?s=EK&d=3m ********************** PLAY OF THE DAY - CALL ********************** QCOM - Qualcomm Inc. $362.31 -8.94 (-22.44 this week) 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. Sunday's Write Up 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. Tuesday's Write Up Even into the close, $360 held strong as support. Also, no matter how you slice it, the lows are getting higher with resistance at $390. In short, the two-week chart is forming a nice pennant or ascending triangle on lower volume, which usually signals a coming breakout. We can't guarantee it of course, but a 4:1 split shortly following the December 20 shareholders meeting, plus a possible announcement on the disposal of their handset business will make a great catalyst for the breakout run to begin prior to that date. Heck, even as just a pure momentum play, QCOM is now at the bottom of the historic channel. We are not suggesting you back up the truck, but there appears to be a good entry at this level. Keep in mind that when China opens its markets, within one year of completion of the wireless infrastructure, there will be 30 mln CDMA customers planting a small fee in Qualcomm's pocket for the use of the technology. An added note for the gutsy, you may want to consider selling ITM puts too. Just don't do it without knowing the risks of selling puts. BUY CALL DEC-370*AAF-LN OI=2176 at $21.38 SL=16.50 BUY CALL DEC-380 AAF-LP OI=2042 at $17.63 SL=13.75 BUY CALL DEC-390 AAF-LX OI=2135 at $14.00 SL=11.25 BUY CALL DEC-400*AAF-LY OI=3162 at $10.75 SL= 7.75 BUY CALL DEC-420 AAF-LV OI= 697 at $ 6.63 SL= 4.75 BUY CALL JAN-370 AAF-AN OI= 650 at $43.00 SL=33.50 BUY CALL JAN-380 AAF-AP OI=1185 at $38.25 SL=30.00 Picked on Nov 16th at $330.00 P/E = 303 Change since picked +32.94 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 ************************ COMBOS/SPREADS/STRADDLES ************************ The Law Of Gravity Prevails.. Monday, November 29 Equity markets faltered Monday as treasury yields climbed to new highs, making bonds more attractive as investments. The Dow lost 40 points to close at 10,947, recovering from a 100 drop earlier in the session. The Nasdaq composite slid 26 points to finish at 3,421 on extreme volume of 1.5 billion shares. The S&P 500 index drifted down 8 points to 1,407. In the broader market, declining issues trounced advancers by a margin of 5 to 2 on active trading of 870 million shares on the New York Stock Exchange. The 30-year U.S. Treasury bond was down 31/32, raising the yield to 6.31%. Sunday's new plays (positions/opening prices/strategy): CHB Champion APR10C/DEC10C $1.06 debit calendar DLP Delta P&L FEB30P/DEC25P $3.50 debit diagonal DLP Delta P&L FEB30P/DEC30P $1.25 debit calendar LCOS Lycos JAN47C/JAN55C $5.75 debit bull-call TVGLA TV Guide DEC45C/DEC60C $13.25 debit bull-call VRTY Verity DEC80P/DEC85P $0.68 credit bull-put The markets fell quickly in the first few minutes of trading and by 9:40 AM, the DOW was down 90 points. LCOS and VRTY were both moving lower with the early bearish trend and we made adjustments to the spread targets in the these bullish plays. Near 10 AM, the LCOS position traded at our new price but unfortunately, it eased down another $2 before the day's end and a much better entry was available to those with patience beyond the market consolidation. The VRTY credit spread was active with an opening trade of thirty contracts at $0.68. Our revised target was slightly higher but we were unable to achieve a better price. Later in the session, VRTY gapped-up over $13 as pre-split momentum investors moved into new bullish positions. The split is expected on 12/3 and earnings are due 12/15. VRTY was recently forecast to have multiple increases in future earnings and analysts are now anticipating a meaningful and sustainable price appreciation over the next year. Delta And Pine Land was our volatility candidate but the spread prices were inflated for most of the morning session. Eventually, the premiums moved back into line and both targets were available. Champion traded in a small range, up only $0.06 during the day and the suggested debit of $1.06 was easily achieved. One of the OIN readers participated with a four contract position. The TV Guide spread traded well above our suggested entry price and there were no favorable opportunities to open the play. Portfolio plays: Today the market showed the first signs of consolidation as Bond yields moved up along with speculation of new inflation on strong consumer spending. Fears that a prosperous shopping season could give the Fed a reason to raise interest rates weighed heavily on investors. The dollar's weakness against the Japanese yen also continued to drive down bond prices amid worries of money flowing to Japanese investments. Analysts are awaiting economic data that may offer an indication of future inflation and Friday's report on non-farm jobs will have a significant effect on their outlook. Among the best performers in our Combos portfolio, AT&T (T) moved up $2.43 (and was the NYSE's volume leader) after an upgrade from Salomon Smith Barney. The brokerage raised its rating and price target on the phone giant's shares and called the stock cheap at current levels. The rest of the telecom group didn't fare as well with recent favorites Talk.com (TALK) and 3Com (COMS) both moving lower on profit-taking. Other sectors in the Spreads Section that suffered included Banks, Brokerages, Computer Hardware/Software and Internet Service Providers. Lower-priced stocks were included in the sell-off but there was one standout among the small-cap positions. Internet retailer Shop-At-Home (SATH) moved up to a mid-day high of $14.25, boosted by strong sales at the start of the holiday buying season. Our calendar spread traded at a credit of $1.50, a favorable early-exit opportunity. In the long-term portfolio, Oil major Exxon (XON) rose $1.38 to $79.38 after news that the Federal Trade Commission is expected to approve the company's $82 billion merger Tuesday. Our current LEAPS/CC's position is short at $80 and we expect the stock price to remain in that range for the next few weeks. Two of the market bellwethers moved higher during the session. General Motors (GM) and Johnson & Johnson (JNJ) rallied against the trend as traders rolled short-term capital into safety issues. As you may remember from last week, GM has been on our watch list for a break-out and the opportunity to roll to a higher strike may occur at any time. A bullish outlook will require a move to January options to avoid an increase in the current debit, but it will also place us in a neutral position. Sun Micro (SUNW) continues to amaze and astound as the pre-split rally continues. Traders now expect the issue to eclipse the $140 barrier before the 2-for-1 split on 12/8 and it appears that SUNW will be the leading performer in the LEAPS/CC's portfolio for the second consecutive year. Tuesday, November 30 Markets tumbled as inflation-fearing investors sold for profits ahead of Wednesday's key economic report on manufacturing activity. The Dow Jones Industrials fell 70 points to 10,877 and the Nasdaq composite dropped 85 points to 3,336. The S&P 500 index slid 18 points to 1,388. 40 stocks finished at new highs with 296 at new lows as advancing issues outpaced declines on heavy volume of 953 million shares on the NYSE. The benchmark 30-year Treasury bond rose 8/32, pushing the yield down to 6.29%. Portfolio plays: There were some amazing moves in the portfolio today, both good and bad depending on your position. The bad news is not exactly terrible so we will review it first. Verity (VRTY) was pummeled by profit-taking, falling $15 to $103 after Monday's huge rally. E-Tek Dynamics (ETEK) lost $7.50 to close at $75 with no public news or announcements. AT&T (T) fell $4.12 as investors sold-off the stock after the recent climb, disregarding the news they had won a major contract to provide telecommunications services to a large corporation. The nation's #1 long-distance company landed $510 million in contracts from car-maker General Motors and GM's spin-off Delphi Automotive Systems to build and manage networks that will enhance their electronic commerce capabilities. Lycos (LCOS) endured a second day of selling, down $3.75 to $55 even as analysts reiterated "buy" ratings for the stock. Excite@home (ATM) fell another $2.75 to break the $50 mark, a recent support range for the previously bullish issue. The last of the big losers were Nvidia (NVDA) and Pixar Animation (PIXR), both down over $2 after technology issues finally succumbed to the market-wide correction. On the bright side, InterVu (ITVU) moved up almost $4 after some positive comments on the tremendous long-term growth potential of Webcasting. ITVU is a technology provider for on-demand video and audio content over the web and interest in the company's services is increasing. Well-known companies are adopting their technology to deliver content over the Internet and as the pipeline expands, so will demand, and ITVU is positioned to exploit this growth. A few of the small-cap issues afforded traders with low risk havens in today's sell-off. The leaders in that group were: Able Telecom (ABTE), up $0.50 to $10.12 and perfectly positioned in our March (neutral) calendar spread; Proxymed (Pill), up $0.38 and starting to recover from the recent drubbing; Youth Networks (NETS), with a nice bounce to $24 from recent technical support at the 40 dma; and Td Waterhouse (TWE) with a small rally after falling to recent lows near $16.75. Today TWE announced a plan to allow customers to apply online for mortgages, loans and other services under an agreement with Mortgage.com (MDCM). In the long-term portfolio, Computer Associates (CA) was the only positive issue, finishing up slightly after a session of trading near a new all-time-high. Other stocks in this section fell with the broad market sell-off but very few of them are in danger of a technical failure. Adobe Systems (ADBE) is one of the exceptions and as we said last week, it will be interesting to see where the first support level begins to have an effect on the stock price. In our case, we decided not to test fate, rolling out and down to a neutral position; LJAN80C/JAN80C. The credit for the move was $7 and our new cost basis is $7.50. General Motors (GM) is the other issue that requires daily monitoring as it has been testing resistance near $75 during the last week. The past history of the stock reflects a solid comfort level at the current price and we expect it to remain in small trading range if the rally fails in the area below $75. Straddles: The straddles section has been of little interest lately as most of the market movement continues to be in the technology sector, and not in the majority of our positions. The Nasdaq composite index has moved to record highs as investors consumed by revenue growth continue to overcrowd the computer, telecom and Internet sectors. The Dow's recent rally has been plagued with faltering transport issues and that's where many of the favorable straddle candidates existed in past months. Oil prices have dominated the group for weeks but the pricing pressures may be subsiding in the short-term. Straddle issues showing signs of volatility include Federal Express (FDX) and Continental Airlines (CAL). Brokerage issues have also been active and Donaldson, Lufkin and Jenrette (DLJ) recently concluded a $15 move at technical resistance near $55. One of the lower-priced issues that continues to outperform is Mylan Laboratories (MYL). The stock is trading at recent highs and the straddle credit is now at $6.75, a $2.00 profit with five months remaining until expiration of the position. Many of the issues in the portfolio have provided favorable exit opportunities in the past few months but for now, the excitement appears to have moved to the high profile technology stocks. The difficulty in playing new positions in this group is the recent volatility, which raises option premiums and reduces the number of favorable straddle candidates. As the high-flying issues begin to consolidate, option premiums will contract and straddle plays in the technology sector will emerge. This week's Nasdaq sell-off has provided the necessary correction and we expect to offer some new candidates in the Sunday edition. Questions & comments on spreads/combos to ray@OptionInvestor.com ********* NEW PLAYS ********* With the high flying Nasdaq now experiencing a major sell-off and the current uncertainty in the broad market, we decided to search for some well-known issues that have suffered recent large losses in share value. These companies have been to the bottom (or they are close to it now) and the current market conditions will have less effect on their movement. The plays are based on the current price or trading range of the underlying issue and the technical history or trend. The probability of profit from these positions is higher than other plays in the same strategy based on the small disparity in option premiums. Current news and investor sentiment will have an effect on these issues so review each play and make your own decision about the future outcome of the stock price. **** SGI - Silicon Graphics $9.38 *** On The Rebound? *** Silicon Graphics provides computing solutions that range from cost-effective high performance desktop workstations to database and compute servers to Cray Research supercomputers. SGI systems enhance the productivity of organizations engaged in technical, scientific, corporate and entertainment applications across a wide range of industries. Originally founded in 1982 by Jim Clark (whose other companies include Netscape and Healtheon/WebMD), SGI has been through the ringer in the past few months. The initial fall from grace came with the loss of their chairman and chief executive to Microsoft. In September, Richard Belluzzo was named the new chief of MSFT's Internet division and SGI's ship started to sink quickly. Since then, the company has been pummeled as new graphics advances by personal-computer makers have dissuaded would-be purchasers of high-performance SGI workstations. Another of their oldest and most well-known problems was the purchase of technology pioneer Cray Research. SGI paid $767 million for the leading provider of multimillion-dollar computers used in big government and other high-level sciences, in 1996. SGI is now on the verge of selling the company for under $100 million to a high-tech group called Gores Technology, a privately held entity based in Los Angeles. Despite all the bad news, SGI has recently announced a portfolio of new products and services including a Linux Version of IRIS Performer, their flagship high-performance graphics software toolkit on IRIX and the industry's First 2GB Memory Modules for Unix-Based Desktop Workstations. They have also introduced some much-anticipated software upgrades for their high performance Onyx2 workstations and the technology is expected to compete with the leading products in the market. All of the excitement has led to increased interest in the SGI options (one buyer purchased 4,000 DEC-$10 calls on Monday) and the option premiums are well above historical levels. We will participate in the recent bullish volatility with an aggressive horizontal position. PLAY (aggressive - bullish/calendar spread): BUY CALL FEB-10 SGI-BB OI=5649 A=$1.56 SELL CALL DEC-10 SGI-LB OI=4830 B=$0.50 INITIAL NET DEBIT TARGET=$0.93 TARGET ROI=25% Chart = http://quote.yahoo.com/q?s=SGI&d=3m **** REV - Revlon $10.25 *** Is There A Future For Revlon? *** Revlon together with its subsidiaries, operates in a single business segment with many different products, which include an extensive array of glamorous, exciting and innovative cosmetics, skin care, fragrance, personal care and professional products. Revlon is one of the world's best known names in cosmetics and is a leading mass market cosmetics brand. The Company's vision is to provide glamour, excitement and innovation through quality products at affordable prices. The list of law firms is long and distinguished and the claims against Revlon are numerous. Most of the filings allege that certain officers and directors of the company misrepresented or omitted material information concerning revenues and results of operations. Of course these actions supposedly caused Revlon's debt securities prices to be artificially inflated along with the stock price. With the claims of foul play, most of the major officers have stepped down honorably and a house-cleaning is now in progress. Whether or not the company can rebound from such severe financial problems remains to be seen but a base appears to be forming in the $10 range. With the worst of the news in the past, Revlon may be able to sustain a small rally through the holidays as retail sales experience a seasonal surge. Their financial future is less than favorable but most traders believe the company will dispatch some of its key holdings before attempting the road to recovery. A small disparity in the January option premiums will allow us to speculate on the short-term movement of the issue. PLAY (speculative - bullish/debit spread): BUY CALL JAN-7.50 REV-AU OI=110 A=$3.12 SELL CALL JAN-10.00 REV-AB OI=861 B=$1.43 INITIAL NET DEBIT TARGET=$1.50 ROI(max)=66% B/E=$9.00 Chart = http://quote.yahoo.com/q?s=REV&d=3m ************************************************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. 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