The Option Investor Newsletter Tuesday 12-07-99 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) ************************************************************ 12-7-99 High Low Volume Advances Decline DOW 11106.60 - 118.40 11253.40 11106.60 1,085,860k 1,046 2,025 Nasdaq 3586.92 + 40.91 3589.06 3532.41 1,564,357k 1,992 2,138 S&P-100 756.10 - 6.65 765.09 755.82 Totals 3,071 4,163 S&P-500 1409.17 - 14.17 1426.81 1409.17 42.4% 57.6% $RUT 465.70 - 0.05 467.29 463.63 $TRAN 2886.16 - 19.36 2929.93 2886.16 VIX 21.38 + 0.32 22.33 21.14 Put/Call Ratio .51 ************************************************************* Yahoo! Is that what you yell as the cliff crumbles below you? The only story today if you were long Nasdaq stocks was the incredible run by Yahoo. Closing up +67.19 it was trading after hours down -10.44 at $337. The driving force of course was the addition of YHOO to the S&P-500 after the close today. In just the last week YHOO has gone from $210 on Nov-30th to as high as $353 today. A tremendous +$143 in one week. If you were in this play you are probably sipping champagne and getting ready to celebrate Christmas early. I hope you sold today as this type of hype is totally unsustainable in the real world. The market cap of YHOO rose over 50% in one week to $90 billion yet not one new product or service was added. While YHOO would be a tempting short target for tomorrow it could be several days before the slide begins. Many funds will wait until the hype dies down before opening their positions. Nothing requires a fund to buy before the inclusion date. Over 1.7 mln shares were traded after hours. When a stock is added to the S&P it impacts the weighting of all the other stocks in the index. Essentially, fund managers must sell some of the other 499 stocks as they buy YHOO in order to balance their holding to match the S&P weighting. MSFT and GE, the two biggest S&P components will have millions of shares sold across all the funds. The S&P may see some pressure due to the selling for rebalancing and any pullback on YHOO from the +$143 gain. In reality part of the market weakness today was due to funds selling stocks in advance of the YHOO event. YHOO is now trading at a multiple of 117 to sales and each Yahoo visitor is valued at over $2500. Next time you hit their site, you decide if your visit was worth $2500. If your 60 second visit is not worth $2500 then what is it worth? $50, $100, $250? If you picked the high number of $250 then YHOO should only be worth $33.80 per share. But of course my math may not count. Schoeder analyst Arthur Newman raised his price target on YHOO today to $350 claiming that YHOO was worth a premium in the Internet portal market but "the only question is how much". He left his "outperform" rating on the stock, which is only barely a recommendation. While YHOO was exploding off the charts the rest of the market was very mixed. Some other Internet big name stocks were down as investors took profits. AMZN -1.69, EBAY -12.74, PHCM -8.13, ATHM -4.50, SUNW -2.44. There were some big winners on the other end of the scale. RHAT +$52, JNPR +$43, CMRC +34.50, EXDS +20.69, ARBA +17, SFE +14.63, VRSN +12.39, RNWK +10.75, CMGI +9.97. It was a mixed market as traders seemed to run from stock to stock as each rose and fell dozens of points intraday. A little frothy here at the top? The four pillars of the Nasdaq, DELL, CSCO, INTC, MSFT only managed a total of +.75 for a gain today. Could it be that the Nasdaq string of records is tiring? The NYSE lost -118 points on over 1 bln shares of volume. This is not a good sign. Volume precedes price and high volume on a down day could be an omen. The Dow leaders all led down today with KO, GM, MMM, CAT, PG, JNJ, MRK all posting solid losses. Advancers beat decliners by 2:1 on the NYSE and were flat on the Nasdaq. We are obviously seeing two markets here. The stock market and the tech market. The Dow weakness today came after great economic numbers were announced this morning which should have propelled the Dow upward, not downward. The productivity numbers were revised upward to +4.9% from +4.2% and were the strongest in seven years. The unit labor costs actually went down -0.2%, the biggest decline in two years. With economic reports so favorable the Fed may as well cancel their meeting scheduled for 12/21 and just take a long holiday break. The odds of a rate hike this year are zero. The PPI on Friday would have to be a blow out for the Fed to take any action. The continued Nasdaq rally has silenced even the noted bear, Barton Biggs. He said today that the rally was a bubble and now officially a mania but was so strong it could continue for some time. When Barton says the market can go up for some time to come, we must be close to the top. He has been wrong for so long that a change in attitude could be the capitalization the market has been expecting. With the Nasdaq up +63.6% YTD every Nasdaq stock must have had huge gains for the year, right? Did you know that only 2221 of the 4500 Nasdaq stocks have gone up this year? 2371 have actually gone down YTD. The S&P looks the same with only 43% up compared to 57% down. So if only 48% of the Nasdaq has gone up this year how can the Nasdaq be up +63%? The answer is the way the index is weighted. Only ten stocks make up 34% of the entire index. The biggies of course are CSCO, MSFT, DELL, INTC and in ninth and tenth place are YHOO, up +178% for the year and QCOM, +1439% for the year. With 100% to 1400% gainers in the top ten it is amazing to think it is only up +63%. The PC sector took a hit today with a downgrade of Gateway. Analysts said slow delivery of chips from Intel would impact earnings and cause them to only meet estimates. Rumors that employees were grumbling at the Christmas party that they were not going to make bonuses due to slow sales did not help either. After the close today International Data Corp lowered its growth forecast for the entire sector for the fourth quarter. DELL, IBM, GTW, CPQ, HWP are all being hurt by chip shortages and memory shortages caused by the earthquake and the Intel problems. They lowered the growth forecast to +17% from +20%. They also claimed that 4th qtr PC orders were slowing due to a freeze on new purchases until after Y2K. This is not going to set well with the tech sector tomorrow. Where do we go from here? I wish I had a crystal ball. There is a lot of support under the Nasdaq. Every dip is met with strong buyers waiting in the wings. We will probably see some post-YHOO let down but who knows how far down will be. I would watch the market breadth and look for any pullback to be a buying opportunity. Just wait for it to bounce before starting a new position. We still have the Y2K uncertainty which could be contributing to the bad breadth and until the Dow recovers the Nasdaq will not be stringing many more records together. The Dow and Nasdaq may disconnect from time to time but they always come back together. Patience is the key word today. Pick your next entry point very carefully! Good Luck, Sell Too Soon. Jim Brown Editor ********** STOCK NEWS ********** Internet IPOs Show Strong Aftermarket Performance By Cindy Christ With only two weeks left until Christmas, IPO shoppers are lining up their carts to haul in what's left of this year's hottest deals. As 1999 draws to an end, expectations are still high for record profits from the new issues market, which has had a spectacular run this year. Through the end of November, nearly $96 billion has been raised through 502 new issues. Compare that to 1993, a record year, when roughly $58 billion was raised. /members/stocknews/120799_1.asp *************** Market Posture *************** As of Market Close - Tuesday, December 7, 1999 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,750 11,320 11,108 Neutral 11.12 SPX S&P 500 1,340 1,400 1,409 BULLISH 12.03 OEX S&P 100 700 750 756 BULLISH 12.03 RUT Russell 2000 430 450 466 BULLISH 11.12 NDX NASD 100 2,650 3,150 3,205 BULLISH 12.03 MSH High Tech 1,340 1,630 1,710 BULLISH 12.03 XCI Hardware 1,075 1,160 1,252 BULLISH 11.11 CWX Software 1,000 1,160 1,264 BULLISH 9.03 SOX Semiconductor 560 660 668 BULLISH 12.07 * NWX Networking 650 800 833 BULLISH 12.03 INX Internet 525 675 713 BULLISH 12.07 * BIX Banking 645 690 580 BEARISH 11.30 XBD Brokerage 395 450 440 Neutral 11.30 IUX Insurance 625 650 604 BEARISH 11.30 RLX Retail 875 910 913 BULLISH 11.23 DRG Drug 375 395 364 Neutral 11.30 HCX Healthcare 750 790 719 Neutral 11.09 XAL Airline 180 190 149 BEARISH 5.21 OIX Oil & Gas 285 315 291 Neutral 11.23 Posture Alert Yahoo led the Nasdaq to another all time high on volume of 1.5 billion, while the Dow and S&P's divergence from technology continues. Leaders Tuesday include Internet (+4.12%), Brokerage (+2.80%), and Networking (+2.12%), while sectors on the downside were led by Banking (-3.10%), Healthcare (-2.73%), and Semiconductors (-2.10%). With this week's action, we have upped Internet and Semiconductors to BULLISH from Neutral, and have lowered the Drug and Healthcare sectors to BEARISH from Neutral. *************** Market Sentiment *************** Tuesday December 7, 1999 The Energizer Nasdaq! Another new high on good volume propelled the Nasdaq into stratospheric territory while the Dow and S&P are left watching the dust. Yahoo led the pace, as it has been for this last week, rocketing up another +67 as fund managers fight for the stock with all the short sellers who continue to run for cover. This continued strength in the sector is fueling other technology stocks to higher highs as bears continue to throw in the towel. This trend seems to be continuing, as most evidenced by moves today in Yahoo and Ciena, and as such, we thought it would be appropriate to show the highest short interest stocks for your benefit. Below is a list of the largest short interest issues on the NYSE and Nasdaq. Largest Short Positions NASDAQ Rank Nov. 15 Oct. 15 Change 1 Dell Computer 50,910,477 50,795,305 115,172 2 Cisco Sys 45,476,522 41,913,992 3,562,530 3 Intel 36,698,561 37,586,522 -887,961 4 Microsoft 34,243,978 31,735,669 2,508,309 5 Qwest Comm Int 29,457,369 25,238,901 4,218,468 6 Amazon.com 29,256,028 36,919,383 -7,663,355 7 MCI Worldcom 28,310,350 25,113,459 3,196,891 8 E*trade Group 28,307,031 26,757,152 1,549,879 9 Oracle Corp 24,307,926 22,742,493 1,565,433 10 Nextel A 24,110,466 23,975,398 135,068 11 Comcast A spc 20,030,890 14,711,898 5,318,992 12 Global Crossing 19,884,422 24,942,658 -5,058,236 13 Peoplesoft Inc 17,304,258 18,263,768 -959,510 14 Ameritrade Hldg A 16,728,961 14,715,342 2,013,619 15 Globalstar Tel 16,094,145 14,038,347 2,055,798 Other Notables: Yahoo 14,201,884 12,586,194 1,615,690 Ciena Corporation 5,551,676 4,228,239 1,323,437 AtHome Corporation 13,392,536 17,379,044 -3,986,508 Ebay 5,564,312 6,068,850 -504,538 CMGI 10,393,116 11,700,164 -1,307,048 Apple Computer 7,399,852 6,872,607 527,245 NYSE 1 Vodafone ads 76,979,365 70,579,714 6,399,651 2 AT&T Corp 72,210,559 69,827,674 2,382,885 3 Abbott Labs 58,930,283 64,192,454 -5,262,171 4 Walt Disney 58,608,964 57,653,168 955,796 5 Wal-Mart Stores 44,265,243 40,581,231 3,684,012 6 Lucent Technologies 39,467,209 48,657,236 -9,190,027 7 BP Amoco 34,850,708 21,928,039 12,922,669 8 EMC Corp 33,677,063 31,910,872 1,766,191 9 Kmart Corp 33,612,739 35,746,082 -2,133,343 10 Infinity Bdcst 32,317,790 30,820,865 1,496,925 11 Columbia/HCA Hlth 32,113,932 31,164,094 949,838 12 America Online 31,676,556 32,234,882 -558,326 13 Sprint PCS 30,048,117 20,798,545 9,249,572 14 Time Warner 29,732,970 32,870,409 -3,137,439 15 Citigroup 28,740,718 20,713,749 8,026,969 16 Nortel Netwk 27,494,276 16,171,863 11,322,413 17 Compaq Computer 26,060,644 20,309,720 5,750,924 Some of your favorite stocks may be on this list, and if any of them report a positive news event, watch out above, especially for the Nasdaq issues. If this index keeps going on pace, the energizer bunny will be looking for a new job, as the energizer Nasdaq will become the new spokesperson! At least our pink friend will help out next month's employment data as he searches for a new position. BULLISH Signs: Cash Flow: The amount of money being poured into this market continues to be strong. 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. S-Squeeze: News events continue to squeeze the shorts, as lately evidenced by Yahoo's incredible run. Mixed Signs: Volatility Index (21.38): The VIX is trading once again near its previous lows. Another quick reversal at this benchmark will likely presage an intermediate top. BEARISH Signs: 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% Friday, December 03 66,323 +83.4% The Power of Sentiment Analysis It has often been said that the crowd is right during the market trends but wrong at both ends. Measuring and evaluating the sentiment of the crowd, therefore, can give savvy option traders a decided edge. Pinnacle Index OEX Friday Tues Benchmark (12/3) (12/7) Overhead Resistance (770-800) 35.30 9.14 Overhead Resistance (750-765) N/A 0.76 OEX Close 767.48 756.11 Underlying Support (730-745) 1.65 2.43 What the Pinnacle Index is telling us: Based on 12/7, overhead resistance (750-765) is very light, while overhead (770-800) is heavy but decreasing. Underlying support is also building strength. Put/Call Ratio Friday Tues Strike/Contracts (12/3) (12/7) CBOE Total P/C Ratio .52 .51 CBOE Equity P/C Ratio .38 .42 OEX P/C Ratio 1.67 1.38 Peak Open Interest (OEX) Friday Tues Strike/Contracts (12/3) (12/7) Puts 750 / 9,697 750 / 11,174 Calls 750 / 8,315 780 / 8,466 Put/Call Ratio 1.16 1.32 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 December 7, 1999 21.38 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 November 26, 1999 53.0 28.7 Please view this in COURIER 10 font for alignment ************************************************* CHANGES THIS WEEK Daily Results Index Last Mon Tue Week Dow 11106.65 -61.17 -118.36 -179.53 Nasdaq 3586.92 25.38 40.91 66.29 $OEX 756.10 -4.73 -6.65 -11.38 $SPX 1409.17 -9.96 -14.17 -24.13 $RUT 465.70 1.17 -0.05 1.12 $TRAN 2886.16 -23.28 -19.36 -42.64 $VIX 21.38 0.24 0.32 0.56 Calls Mon Tue Week YHOO 348.00 27.81 67.19 95.00 Dropped, what a run! CMGI 178.06 7.94 10.06 18.00 CMGI continues to run BRCM 224.50 13.75 3.00 16.75 Has something to prove NOK 171.81 19.94 -4.63 15.75 A big gain on Monday! QCOM 398.88 10.31 4.13 14.44 QCOM breaks out! GMST 128.50 5.06 6.31 11.38 Split run keeps going... SDLI 193.75 15.50 -4.75 10.75 Money managers galore! PRGN 90.13 10.75 -1.63 9.13 New, another new high JDSU 259.75 3.25 5.31 8.56 Let volume be your guide STM 137.75 5.50 0.88 6.38 Another new 52-week high USWB 50.06 2.00 1.88 3.88 New, looks to outperform NT 84.00 3.94 -0.13 3.81 Now that's more like it! VOD 52.75 3.63 -0.25 3.31 The deal may still go! MXIM 95.28 2.63 0.34 2.97 In the right direction AOL 79.75 2.63 -1.25 1.63 Holds leading position TIF 81.25 0.06 1.50 1.56 The bulls go shopping! MACR 77.25 4.06 -3.44 0.63 New 52-week high! SNE 183.63 -2.00 2.50 0.50 Has established pattern EMC 94.50 -1.25 0.25 -0.75 May give room for entry ANSR 31.63 -0.50 -1.38 -1.88 Has a new cheerleader VVTV 43.56 -2.06 -0.44 -2.50 Dropped, remains weak MSFT 93.00 -0.69 -2.44 -3.13 Dropped, defies good news HGSI 126.00 -5.69 2.38 -3.31 Tests and holds support MEDI 121.13 -7.13 -3.25 -10.38 Dropped, we can't wait VISX 52.00 0.38 -36.13 -35.75 Still on our play list! Puts PGR 75.19 -1.75 -1.75 -3.50 You cant insure investors JCI 49.25 0.81 -4.00 -3.19 JCI goes for the fake out GT 30.31 -1.44 -1.06 -2.50 Keeps on rolling down KIDE 48.25 -3.81 2.50 -1.31 Smaller, shorter bounce BOW 48.19 0.00 0.19 0.19 Looking for a break EK 61.38 1.19 0.06 1.25 A little bottom fishing? ************ WOMANS WORLD ************ THANK YOU LORD! Tweaking Yahoo A Little More WOW!! What can I say? Talk about a fun ride and an early Christmas! Intuition? Not completely. Let me share with you how I thought through YHOO, when I bought into the closing sell-off Friday, my buying today and what I'm thinking from here. First of all, for anyone who has YHOO profits since last week, lock those babies in, NOW!! That means take your profits out of the plays, sit back, pay off your credit cards and relax a little. Better to be safe, then sorry. This was a rare event. Tomorrow is uncertain. Secondly, please realize that the newer you are to option trading, the harder it usually is to successfully trade short term or intra day plays. Although learning option principles is imperative, learning how to read the market and interpreting what you hear on the news, is the key. It is similar to buying groceries. You will have either a meat & potato or a gourmet meal, depending on the knowledge base of the cook. The shorter the trade, good entry points become even more critical, as do real time quotes, intra-day charts and indicators. Needless to say, you must watch these closely. Last Friday, I felt fairly confident in my buying decision, even though YHOO was selling off into the close. I received an email asking how I knew to do this, because the reader had bought puts at the close. Well, my thinking centered around the continued strength of YHOO's blow out earnings and growth. Being included in the S & P is a major event for any stock, but especially this one, since many fund managers don't touch internets. I saw this as a forced upon purchase, by people who are normally more conservative...the S & P crowd versus the internet crowd. I knew the majority of these players, would be purchasing shares this week, probably on Tuesday. YHOO channeled most of the day Friday, which usually means there will be a break out, either up or down. I had thought I missed the dip, but it was given back to me at the close. I took it. If I was right, it would be an excellent entry. When a stock sells off into the close, closing lower than the open & the high of the previous day, it can gap DOWN the next morning. This is the more common occurrence. But, all major Fed news was already out, that could possibly damage the markets between Friday and today. To me, the only real threat of risk appeared to be normal profit taking from last weeks gains. When I weighed that against all the money that was going to be chasing YHOO Monday and Tuesday, I decided I was at a higher risk by not playing it. I figured a lot of people would jump in on the dip and cause an immediate run up Monday. I felt I had limited risk because any dip would be met by forced buyers. So, I played my instincts based on a "news play" instead of technicals. Also, I remembered the markets reaction to AOL inclusion last year. On Monday, I watched it for 1/2 day and felt good. I took some profits on YAHOO, AOL & QCOM, in order to free up a little money to trade YHOO intra-day on Tuesday. After that, I went to the hospital to "work". This morning, I first bought Jan 270 (ITM) at the early rotation dip and sold them an hour or so later for a decent profit, when things quieted down. I started bouncing between my 1 min and 5 min Qcharts, carefully observing volume, candlestick movements, stochastics, MACD and a directional movement indicator I use. I tweaked my preferences on all of these to give me a more sensitive, intra-day feel, of the motion. I watched the volume and saw that they sold when it hit the upper Bollinger Band and volume would increase on the buy side, when it hit the lower Bollinger Band. I decided if I believed in my own theory, I needed to play it. So, when all my indicators showed "oversold" and I saw buying coming in, I placed a limit order to buy 5 contracts of the December 290 (ATM) (YHOO= 292), @ 19 3/4. It took a while, but they took it. It was a good entry. Those babies were 60 going into the close (203+%) . I don't even remember what I paid for the Jan 270 in the morning, at this time. The day just became a big blur to me. The worse part of the day, was realizing these nice intra-day gains, just cost me a big time short term capital gains tax. By the way, my original Jan 270 contracts bought @ 3 1/4 for Blow & Go, closed at 83 (a 2,454% gain!). Yes, take profits!! Really great traders, can go in and out several times a day, churning large number of contracts with minimal point swings to their favors. I did not do this. I only had a few round turns this morning. Most of my money was already in contracts bought last week. Still, I have no complaints. I have years to perfect those skills. There was a time when I always lost money on 30 day trades and would never attempt intra-day. I am more confident now because I have learned basic technical analysis skills, which anyone can do with minimal, evening or weekend reading. Having real time quotes and a great brokerage help too. Now what?? Well, this part of the party is over for YHOO. This was a once in a lifetime event for YHOO. Take your gains and be happy. I could be wrong but I will be expecting a period of profit taking and lull in the stock to start, once the S & P buying pressure is over. That may start as early as tomorrow. Who knows? If you take your profits now, you won't have to worry. I have no idea how long that lull will last. I will let the markets tell me. It could be anywhere from a few hours, to a few days, to a week. Just keep in mind, YHOO is WAY beyond its split territory. There is no rule that says it must only be reported at earnings, it could come earlier......and then there is the question of how much of a split we get. Remember? With earnings due around January 11th, I doubt that traders will stay out long or a big dip to occur because they are ready for the second party to begin. It is probable that YHOO pushed Nasdaq up today. All other market factors were down. With the YHOO buying pressure relaxing Wednesday and the CPI coming out on Friday, we may get a soft Nasdaq market this week. I will not buy YHOO on a sell off into a close this week. But if all markets close down and YHOO closes below the previous days highs, I will be watching for an entry, maybe Wednesday or Thursday. That's my idea at this time. Also, until YHOO gives me a clear feeling that the profit takers are finished & the buyers are back ready for earnings, my attention will focus on QCOM. I am looking for more entries now, because it is REALLY itching badly to break out of the chains that bind it. Once it closes above that 402+ area, watch out! I am hoping for an entry with a soft market, later this week. But, it may not give me that gift. Well, this is how I did it and this is why I narrowed my focus to only a few plays. Even now, I see how I could have tweaked it a little bit more. Renee renee@OptionInvestor.com ************* READERS WRITE ************* Date: Sunday, December 05, 1999 3:00 PM Subject: General Comment re: Making $50,000 out of $10,000 in one year Disclaimer: I have not turned my account $10,000 into $50,000 YET. Thats only $1000/week. It does not surprise me that people will doubt that this can happen, but to them I say this: In todays world accountability is everything. I believe that Jim is in error in telling everyone that if they do EXACTLY what he says they will turn their account into $50,000 only in that he didn't tell them the sacrifice of time and energy that will be involved. If you want something, you have to go and get it; that is, you have to work for it. Expecting OI to hand you $50,000 for your $10,000 is somewhat absurd. If this were the case, I would be giving OI all my money and I would be retiring tonight. Anyone purchasing and following this letter still has the obligation to due diligence in all the recommendations given in the newsletter. I have found on many occasions that I have disagreed with a position or two that they have put out there to play, mostly it is due to comfort level with a stock that I do not understand the underlying business. Jim might say buy this, but I don't play them. That's OK. OI gives you enough valuable information and the market has been so cooperative that you could have turned $10,000 into $100,000 if you were able to follow the market and buy and sell as recommended in this newsletter. Take a stock like QCOM, 10 contracts of the 220s would be worth over $150,000 right now. 3 contracts, if purchased with a $30 premium, would be worth around $50,000. Wealth does happen. OI tracks and gives you these stocks to play right now as it is happening and much more. They take the fear of knowing which way the market is moving away from the subscriber by flat out telling you the chance of it going up or going down. They are more accurate than the weather forecaster, and they constantly give you the disclaimers that you need to keep you reins tight on postions, because you can lose them quickly. While it doesn't surprise me that people would write about that comment, it never ceases to amaze me how people can expect $40,000 from their $350 subscription. If you are only slightly dilligent, and made $10,000, thats 100% return. Try getting a 100% return from a broker or mutual fund. If you are losing money on your plays, then you are not being diligent in getting out of positions. One thing that I have learned from this game is this, You will not win all the time. In fact, you will not win a lot of the time. The key is getting out quickly when a trade goes against you , that is cutting your losses and riding your winners. Winners can turn into losers at one stroke of one mans tongue (be in Greenspam, Balimar etc) , so you have to be monitoring your positions fastidiously so you can cut your losses and save your profits. Options are not a buy and hold game, I try to not keep many positions open over weekends simply because of the time decay in my options. Sometimes it is better to just get out and re-enter them if you think the reward is still there. There truely has never been a better time than right now for options traders, the market volatility has led to fantastic gains. Thank you OI for this insightful newsletter, I have earned and learned more in 3 months from this newsletter than I could have earned/learned from multiple stock trading seminars and books. I look forward to the newsletter as an opportunity to learn from those with greater experience than I, and to pick up tips for turning my $10000 account into $50000 next year. I hope to parlay this knowledge into a larger house down the road. Thanks again. mark 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: ***** YHOO $348.00 +67.19 (+95.00) When Carolyn Luther Trabuco, Internet analyst from First Union Securities, raised her 12- month price target to $350 from $240 she stressed that it could likely be a one-week objective. Well, she hit the bulls-eye as did Arthur Newman, analyst from Schroder & Co who also raised his price target to $350. Yesterday YHOO surged $27.81, or 11% on news of its growing global presence. A report by research firm, MMXI Europe BV named Yahoo! as the #1 ISP in Europe. After the bell today YHOO was officially added to the S&P 500. Consequently every single index mutual fund that tracks the S&P will be forced to buy shares of YHOO over the next several weeks. Today's huge upswell was a result of the money managers filling their portfolios combined with short sellers trying to cover their positions getting the big squeeze. Even still at these prices YHOO is extremely inflated and could easily get the rug pulled from under its feet. Therefore, we're exiting the play this evening to avoid the EXTREME VOLATILITY we anticipate in the near-term. Final tally = over $136 gained from the recommendation on Nov 16th. MSFT $93.00 -2.44 (-3.13) The product news and promising joint ventures that hit the press today couldn't wash away the bad taste of "violated anti-trust laws" which scorned Microsoft in yesterday's headlines. We warned resistance was very strong at the $95-$96 and even expected a little recoil. However after watching MSFT return to its 10-dma ($92.61) in defiance of today's positive news events we're exiting the play tonight. MEDI $121.13 -3.25 (-10.38) We did not have much time to get to know MEDI. The stock seems to be getting sold much harder than the rest of the biotechs, most of whom have suffered a little profit taking this week. The concern here is that MEDI may have run out of gas and will need some time before attempting a move on its old highs. We do not want to sit and wait holding very pricey options. There was no news reported about MEDI over the past couple of days. For those of you who are still trading MEDI be alert to the support at $117. MEDI tested this level for the second time in a week and bounced quite nicely off of it today. If MEDI continues to hold this support it might prove to be a profitable entry point. VVTV $43.56 -0.44 (-2.50) VVTV in the past had been a good stock to buy on dips for a quick trade near the $44.50 level, but on Monday profit-takers stepped in to sell-off the shares to close the day at $44. The selling pressure continued today as the stock remained weak trading as low as $41.13, passing through major support levels. The uptrend has now been broken, and the technicals shows the stock now in the developing stages of a downtrend. A bounce could be on the horizon, but we will choose to move away from the shares at this point. It was mentioned this morning on Bloomberg by a well known analyst that VVTV would be a good stock to buy at these levels. This could be true, but it looks like your classic case of you buy, while we sell. PUTS: ***** No dropped put plays today. ************************************************************* 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 12-07-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ***************** PICK NEWS - CALLS ***************** MXIM $95.28 +0.34 (+2.97) Maxim is heading the right direction, following up on last Thursday's expansion breakout. The stock has since formed a new channel, accelerating away from the 5 and 10-dma's. The stock set a new record, hitting $95.88 during intraday trading on Monday. For now, support is sitting at $95 and again at $93. The stock consolidated at $93 for most of Tuesday before a major upmove at the end of the day, setting a new closing record and maintaining a string of 5 straight up days. Volume has been good to heavy. A test of $100 is looking more and more likely. The split is set for Dec 22nd. AOL $79.75 -1.25 (+1.63) AOL jumped $2.75 yesterday on news it holds a leading position in the global market according to a research survey by MMXI Europe BV. Today AOL opened strong at $81.94 but finished on the downside. One factor in today's overall trading was the negative pressure from the DOW as well as AOL's obvious exclusion from the AT&T (T) and MindSpring (MSPG) non-binding access deal. In a letter to the FCC, AT&T outlined a plan to give high-speed Internet access to rivals when its exclusive agreement with ExciteAtHome expires in June 2002. However, in another letter sent to MindSpring it appears that AOL is not necessarily a party to the agreement. We're keeping AOL on our call list in anticipation of a holiday run- up. Our goal is to target shoot an intraday entry around $75 and then ride it back up. ANSR $31.63 -1.38 (-1.88) After flying up 46.5% last week, we cautioned to be on the look out for profit-takers. The stock is indeed experiencing some consolidation now but remains firm at $31.50, its daily low on both Monday and Tuesday. Volume was also moderate indicating ANSR isn't a prime candidate for a panic sell. Plus ANSR has a new cheerleader. Yesterday Hambrecht & Co initiated "research coverage" on ANSR stating "the company has world-class management, works with blue chip clients, and has assembled a complete service solution. AnswerThink offers most, if not all, services offered by the Big 5 but is much more nimble, economical for clients and attractive for employees". Resistance is just overhead at $36.62, the 52- week high set in May 1998. Technically the outlook is promising as it hasn't fallen apart over the past two days and is holding above $28 (recent opposition) and its rising 10-dma ($27.65). We're looking for another momentum breakout in the near-term. SNE $183.63 +2.38 (+0.50) Sony spent Monday setting the table (note the chart) for a nice gap up at the open on Tuesday. SNE traded up, hitting it's head at $185 in the morning and found some resistance at $184 in today's afternoon session. SNE has support at its 10-dma of $183.50. Being that SNE closed just pennies above this level, we will want to see it hold heading into tomorrow. If needed, SNE has further support at its 5-dma of $182.25 and $180. Resistance is still looming ahead at $185 and $190. Sony has established a bit of a pattern lately with an up day followed by a down and should this continue, this may end up being your best bet for a new entry. Watch for support levels to hold before entering on a down day. Sony announced plans to increase production of their cathode ray tubes for TVs in the US and the UK by the end of next March and plan to increase production capacity from 20% to 30%. On Monday, Sony announced that they have reached sales of 70 million units for their world wide shipments of the Sony PlayStation. This is the best in the industry. BRCM $224.50 +3.00 (+16.75) Apparently, every time Broadcom is given a new price target, BRCM feels like it has something to prove. For example, on Oct 15th, Kaufman Brothers reported a 12-month price target of $140. On Nov 1st, BRCM traded up to over $140, just two weeks later. Perhaps they meant 1/2 month? On Nov 3rd, Adviser.com reported a Long-Term price target of $180. Long-Term? BRCM blew through $180 just over one week later! Now Dean Witter has provided us with a $250 price target and BRCM seems to have its heart set on getting there and getting there fast. BRCM has established a pattern as of late, gapping up at the open in a run fueled by exuberant investors, and usually tagging the high of the day early in the session. Then the profit-takers emerge and usually end up bringing BRCM back down to hit the low of the day. Once the profit-takers have been satisfied, BRCM, apparently worn out from the morning "activities", settles into a narrow trading range for the remainder of the session. This pattern has been excellent for providing us with great opportunities for points of entry on the pullbacks. BRCM traded to a new all time high of $227.88 within the first 30 minutes of the open and this level is now serving as resistance. $220 managed to hold BRCM throughout today's session and we look for this level to hold as support going forward. Broadcom has further support at its 10-dma of $202 backed by support at $200, if needed. Take advantage of the pullbacks for new entries. HGSI $126.00 +2.38 (-3.31) Monday's action started with a little profit-taking. HGSI gapped higher but then tested minor support at $120.50, down over eight points at the time. HGSI managed a small rally into the close, finishing down just under $5.50 for the day. HGSI dropped again early on Tuesday and successfully tested the $120.50 support. It is encouraging that this support held with no selling below it. In the news, HGSI filed to offer $150 million in convertible subordinated notes due 2006. The company expects to complete the offering this month. The offering may compete for investment capital with the common stock for the rest of this month. It is not negative news but it could slow things down a little while it is being digested. Today's close near the intraday high was encouraging and we will give HGSI a little time to break out above resistance at $133. Keep those stops and watch the support at $120.50 (also the 10-dma) closely. VISX $52.00 -36.13 (-35.75) Yes, VISX is still on our play list. First off, let me just say that hopefully everyone has read over the top ten rules for trading options and did not enter a new play on the day following the newsletter. Granted, it is sometimes warranted but with Monday's ugly opening, it didn't look good from the start. Alright, onto our VISX play. Last night, it was announced that the International Trade Commission had rendered an "Initial" Determination in favor of Nidek in the patent infringement lawsuit, saying that Nidek did not violate the Tariff Act of 1930. VISX opened down $37.75 at $50.38 and traded in a fairly tight range throughout the day before trying to make a bit of a late day comeback and closing at $52. This comeback is part of what decided in favor of keeping VISX. Today, we saw a good deal of institutional buying throughout the day, indicating that many see this as an overdone reaction and nothing more than a great buying opportunity. VISX weathered 5 downgrades in one day and now that these are dealt with, VISX should have some room to recover. We don't want to give up the bounce just becuase VISX slammed us initially. Warburg, Dilon and Read have opted to maintain their Buy rating on VISX, stating that the fundamentals of the company remain in tact. VISX still controls 70 percent of the laser vision correction market. Another point to note is that the fat lady is not singing just yet. VISX has stated that they will ask the commission for a full review of the Initial Determination. Besides, VISX has other lawsuits against Nidek that are more important to the future of the business than this suit. Overall, we see today's dramatic decline as an overly emotional reaction to a story who's final chapter has yet to be written. Obviously, exercise caution, confirm direction before entering and use your stops but tomorrow we should know if VISX wants to rebound. The longer VISX holds above $50, the more likely we will see a good bounce to recover some of today's lost money. CMGI $178.06 +10.06 (+18.00) The run in CMGI continues. Just exactly what kind of run we aren't sure, but it's a run none the less. We could be in the middle of an earnings run as CMGI announces earnings in a week. On the other hand we could be experiencing a run where investors expecting a split announcement. The annual stockholders meeting is scheduled for December 17th. What ever the reason CMGI has added $17.91 to the price of their stock so far this week. Volume the first two days has been about average. CMGI broke through $170.75 Monday but fell back to close just shy of the of the resistance level. Today CMGI, opened over $6 higher and bounced off the $170 area indicating the next leg up is in motion. The Internet stocks were led higher today by Yahoo, which went into the S&P 500 at the close of business today. There has been no major news behind the moves so far this week. CMGI has split twice in the last 12 months and would appear to be setting up for another announcement. As for our play we see intraday support at $173 and a bounce off that area should provide a good entry point for adding to or initiating a new play. GMST $128.50 +6.31 (+11.38) Our split run play in GMST keeps moving along very nicely. For the week GMST has gained over $11 and should finish the split run in fine style. GMST splits 2:1 on December 13th, after the close. If you have not taken a position in GMST the clock is ticking as we will be closing out ahead of the split. There has been some concern among investors that the proposed deal between GMST and TV Guide may not go through due to federal antitrust issues and differences in the corporate cultures of the two companies. It may not have been a big concern to shareholders of GMST stock however, TV Guide shareholders did voice concerns. At PaineWebber's annual media conference in New York, TV Guide President and CEO Peter Boylan, rejected speculation that there are problems with the planned sale. If you have a position in our split run, intraday support for GMST can be found at $125. We would consider your profit expectations and move your stops up accordingly. EMC $94.50 +0.25 (-0.75) Shares of EMC have seen a bit of a pullback so far this week. EMC did fall to a low of $93.50 in each of the past two sessions, yet still managed to recover late in each of the sessions. With the strength seen in the Nasdaq the first two days of the week, we would like to have seen EMC move higher. Technically, EMC is due for more of a retracement and it may be just around the corner. Although EMC bounced off the $94 area it could appear as though we have a new buying opportunity. We would be careful about entering a new play as it feels as though EMC is somewhat overextended and could find the $90 area again prior to another move up. If you hold a position in EMC and haven't taken some money off the table, we would suggest moving your stops near the lows of the week. As we said Sunday, you can always buy it back. A bounce off the $90 area could provide a good point for a new entry. VOD $52.75 -0.25 (+3.31) VOD provided us with a great entry point on Monday. Shares of the telecom company gapped up $1 higher right out of the gate on expectations that the Mannesmann deal may not be dead in the water after all. VOD has been a little sluggish recently compared to others in its industry and has to make up some ground. Last night Bel Atlantic and Vodafone won the backing of a venture from the U.S. Justice department. They are seeking buyers for overlapping phone operations in 15 states to satisfy U.S. conditions for clearing their joint venture. The joint venture will create the largest U.S. wireless phone company with more than 21 million customers, compared to 12 million for AT&T. Investors showed their approval today as VOD hit a high of $53.25 before settling at $52.75 down $0.25 for the session. VOD has gained over $3 for the week and we may see some profit-taking set in before any further moves higher. Intraday support for VOD now is seen at $52. Should we see VOD decline further the next area of support is down near $49. On continued strength accompanied by solid volume we would enter a new position but would keep your stops close, as the broader markets are long overdue for profit-taking and it could come at any time. STM $137.75 +0.88 (+6.38) STM, Europe's second biggest computer chip maker, continues to strike deals and the price continues to follow. Today it was announced that Scientific Atlanta and STM are joining to develop advanced high-speed Internet Protocol. This is on the back of yesterday's 3-year partnership announcement with Synopsys to develop an advanced system level design solution for complex Systems on a Chip (SOC). The $SOX Semiconductor Index gave back 14.28 points today, but remains up over 10 points for the week and this helped to drive the prices higher for STM. The main forces driving the upward momentum was the good news for the company, the buying pressure remained strong in late trading and we got the breakout we were looking for. STM closed at another 52-week high $137.75. The $SOX tried to rally this afternoon, but even with the rally fading, STM powered ahead. Volume was still average and we are cautious on STM here. There is some support at the $134 level but in reality, we would like to tighten our stops and start looking for an exit if STM reverses course. MACR $77.25 -3.44 (+0.63) MACR gapped up at the open of trading today pushing the shares up to another 52-week high of $82.75 before the profit-takers stepped up to the plate to take some of Monday's gains off of the table. We were looking to target shoot our way in above $77.50 this week, and traders that were aggressive were able to get in and out for a quick profit. The volatility will no doubt continue this week with a bias to the upside and higher-highs. With the Streaming Media Conference starting today, this should have MACR and other ISP's and Tech developers in the spotlight. Going forward any new positions taken above the $77.50 level should be followed up with tight protective stops. TIF $81.25 +1.50 (+1.56) Although the price surges took a break on Monday, there were no major sellers stepping up to the plate as the shares advanced slightly $0.06. Today the bulls returned for another round of buying that remained steady and strong all day, closing the day at another 52-week closing high at $81.25. The ascending pennant formation that was noticed on the charts came through as the move to the upside continued on average volume. The volume will have to continue to hold up strong for us to see higher-highs, so protect yourself and take profits according to your risk tolerance. Going forward, we would like a bounce off $80 for a solid entry point. NT $84.00 -0.13 (+3.81) That's more like it. NT has the volume picking up again and continues moving to new highs. $79 remains the most solid support, but over the last 2 days of trading, $82.50, $83.50, and $84.50 have provided support, while (surprise!) $85.50 has provided resistance. You can target shoot at your level of comfort down to $79. But with all this cash coming into the market, it's not likely to see that level again until the market does a nosedive, or NT offers up some lousy news (not immediately likely given the current telecom environment). For those just joining this play, NT in now the #1 producer of optical networking equipment ahead of Lucent and Cisco, and is poised to grow total revenues next year by 20% (music to a fund manager's ears). Margins are increasing too. Of course, if we could figure out a way to cram 1.6 Terabits of data per second down a single strand of optical fiber, we'd be a formidable competitor and we'd solve an e-mail capacity problem too! Until then, we'll just have to enjoy playing their options. Remember too since NT is buying CLFY, it's possible to earn a 30% greater return playing CLFY options in buyout sympathy. NOK $171.81 -4.00 (+15.75) OK, so today didn't look so hot by itself. But can we really complain in light of the +$20 move yesterday. What was that about? It was about continuous analyst upgrades and earnings/price target revisions following NOK's analyst conference last week, wherein its chairman said growth estimates of 25%-35% had been revised upward to 30%-40% through 2001. He also effectively said that NOK would meet its growth targets a year early through the same period. That's like a third year of revenue for the price of two. Hello revenue stream. Is it any wonder that analysts have rushed for the upgrade button? New price targets from three major brokerages all exceed $220, and NOK is in split range again. Did we also mention they are a candidate (though not guaranteed) to purchase Qualcomm's handset business? The only real support after yesterday's gain is $170, or the opening breakout number of $165. But with upgrades like this, like cockroaches, more are sure to follow. We think the move is more than just a temporary spike, and thus, will not retrace much lower (barring market meltdown). Just in case, use a trailing stop to protect the loot. QCOM $398.88 +4.13 (+14.44) The breakout over $390 we'd been waiting for (actually $392) occurred yesterday and continued today, but on much fewer shares than the ADV. While that was initially a concern to us because a breakout without volume is considered weak, the fact is that at $400 per share (doubled in the last 60 days, up 1450% in 1999), it's tough to trade as many shares if your trading account isn't growing at the same rate. If you think about it, the ADV should be falling just because the stock is more expensive. QCOM could come back a bit to test $390 one more time. That would give us a buying opportunity before the shareholder meeting on December 20, wherein shareholders will vote a share increase enabling the 4:1 split to happen. QCOM would also likely announce a buyer of their handset business. Intraday support is at $397. $390 (old resistance) after that, then $385. Due to rapid time decay of DEC strikes, you may want to consider the JAN strikes. For the well initiated, selling puts at support ($390) can add to the returns. Look for the momentum to pick up into December 20th, but protect your profits with stops in case the market doesn't cooperate. You can always buy back in later. JDSU $259.75 +5.31 (+8.56) JDSU continues to trade in the ascending pennant formation. Man, is it getting squeezed. Support, both historical and ascending channel, is at $255. Resistance is not far away at $263 for a near-term breakout, then $273 for a "blue sky" breakout. If shorts feel threatened, a covering squeeze could be the catalyst for a bigger move. Remember, JDSU is splitting 2:1 on December 30th, and doesn't appear ready to run hard just yet, although now is a good time to scale into a position while the daily volume remains below the ADV. Just watch the time premium decay. If you can handle the $$$, you may want to look at January strikes since the Decembers won't get us through the split anyway. Short-term traders won't need to sweat this as much. Again, for the intestinally fortified, experienced traders can consider selling ATM or OTM puts to boost the return. Be careful of Mr. Correction in the process. Gravity can take over at a moment's notice. Confirm market direction before playing - let volume be your guide. SDLI $193.75 -4.75 (+10.75) Well, we got out pennant breakout, but on low volume. It would have been more convincing with big volume. Although with a $15 gain yesterday, is it any wonder that some profits were taken off the table today? $191 offered solid support today, but the real strength of the play was in yesterday's high buying volume ascent to $196. Money managers appeared all over it like flies on...well, you know. Unfortunately, it fell almost as fast as it rose until the funds came back for more sending SDLI back to close at its high of the day, $198.50. Some profit-taking today could be expected just like in NOK. We want to send out a word of caution here. $200 is a huge psychological barrier for this issue, and volumes have been weak lately compared to weeks past. If the market hiccups, SDLI could move south pretty quickly. It's not as well known or universally loved like JDSU. News is harder to come by as well. It's rapid gains make it susceptible to valuation downgrades too. Of course, a split announcement would clear up all that in a hurry. Sadly, while the price screams for it, management appears reluctant to do so, at least until the next earnings announcement in February. High premiums make for good covered call material or selling puts. If you do the latter, watch it like a hawk. **************** PICK NEWS - PUTS **************** GT $30.31 -1.06 (-2.50) My goodness, you would think that GT is headquartered in San Francisco, California rather than Akron, Ohio! GT seems to have no problem finding hills and just keeps right on rolling down them. GT lost nearly $1.50 in yesterday's session and just over $1 today. GT did make a bounce at $30 today, however it was small and short-lived. GT quickly found resistance at $30.50 and the many investors that hopped on board at the bounce (GT posted volume nearly two and half times the average) seemed a little disenchanted by the end of the session. They key to continuing our put play on GT is going to be a breakthrough of $30 and on good volume. GT has resistance at its 5-dma of $32 and further resistance at the 10-dma of $33. KIDE $48.25 +2.50 (-1.31) KIDE made a bounce again from the 100-dma of $142.50 midway through today's session. This is the same place it bounced two weeks ago but the bounces are getting smaller and the rallies are getting shorter. After trading as high as $51.88, KIDE had already started to roll. And as KIDE approached the close, the sellers were coming back in. This was a great day for our put play! Why? Entry points! We see KIDE resuming its downward trend and expect that KIDE may very well pick up the momentum on the way down to finally break through the 100-dma. As we have practiced in the past, tightening stops as we approach this level will be important to prepare for possible bounces. JCI $49.25 -4.00 (-3.19) Johnson Controls barely managed to close on Monday above Friday's intraday high, up over $0.75 for the day. Ordinarily this would be a cause for concern, technically speaking but it didn't break above the 10-dma so we knew we were looking at an entry point if JCI rolled over. And it looks like the value investors got faked out! Today, JCI suffered a very steep drop of over $4, despite the fact that there was not any major news today. The volume was heavy too. Perhaps today's drop was a delayed reaction to Friday's news of a big raise for the CEO. It is more likely that JCI is suffering from more end-of-the-year portfolio shuffling which tends to impact downtrending stocks. The only negative news that this writer could find was a downgrade of Dana Corp (DCN) by Lehman. Dana Corp is in the same industry group as JCI. On the positive side, JCI announced the delivery of its 6 millionth Homelink Universal Transceiver. This device for automobiles allows for multiple remote operations; home security, lighting, garage doors etc. After today's collapse you have to go all the way back to October of 1998 and January of 1997 where you will find significant support in the $44-$46 range. This area may provide a good exit point for a put position. EK $61.38 +0.06 (+1.25) Kodak started the week on solid footing. There were not any reprecussions from the comments from marketing chief, Carl Gustin. If you remember, he was quoted as saying that digital imaging does not offer any advantages over traditional photography, other than ease of sharing. Investors may have been more focused on the announcement that Kodak has completed their labor cuts which should result in $100 million in annual savings. News items that have a direct impact on a company's earnings tend to influence the underlying shares. The job cuts are old news and now that they have been completed, perhaps a little selling of the news is in order. The most likely scenario for Kodak's two day rally is a little bottom fishing. When the market sells off, some investors turn to value stocks like EK. Today's action was uninspiring with a range of less than one point. Watch for any rallies above $62.25, where resistance has been formed for the past two days. A test of this level without a break above it could be a good place to initiate a put position. On the downside, we would like to see EK trade below $60 for confirmation that the downtrend is still intact. BOW $48.19 +0.19 (+0.19) Sleepy yet? With Bowater trading in one point daily ranges some sort of stimulant may be needed to watch this issue. A tightening of trading ranges usually indicates that a stock is entering a period of consolidating. The stock is still in a downtrend and it is more likely that when the stock breaks from this consolidation phase it will break to the downside. However, we will be watching the stock very closely to make sure it is not making an important bottom here. A test of $46.19 seems likely. If the selling does not pick up soon and break through support, we will consider dropping this put recommendation. Even though we did not pay much premium for these puts, we still can not wait too long. $47.81 has been support for the last three trading days. We need the stock to trade below this support and to test its lows at $46.19 to maintain this position. A nice market shake-out should do the job. ************** NEW CALL PLAYS ************** PRGN - Peregrine Systems Inc $90.13 -1.63 (+9.13 for the week) Peregrine Systems provides an integrated suite of packaged infrastructure management application software to businesses. Its primary products include the inaugural ServiceCenter, a helpdesk software; AssetCenter, a solution for managing equipment procurement and tracking inventory; and FleetAnywhere designed for managing fleets of vehicles. Other services include training, consulting and support. Chairman John Moores has a 22% stake in the company. What started this solid run? The Strong Buy reiteration by analyst David Breiner of Volpe Brown Whelan & Co and his upgraded price target of $90 from $49. His words alone were the catalyst that launched PRGN upwards $16, or 25% on November 24th. Since the initial breakout near-term support has evolved at $80 and is more firmly established at $70. The momentum then kicked back into gear on Monday. PRGN traded on more than double the normal volume and met the analyst's price target of $90 with a $10.75 advance. The gains extended immediately at the bell today. PRGN opened strong at $96.75 to set another new 52-week high and beating yesterday's record close. Trading activity remained strong throughout the day as it consistently consolidated in the $87 to $90 range. PRGN is a pure momentum play. Therefore a broad market rally and any good news are important factors to consider in planning your strategy. Peregrine announced on Monday the immediate availability of a management option that allows users of its InfraCenter for Workgroups to resolve its own support problems thereby reducing help desk calls. On November 30th, the company announced that United Airlines purchased its FleetAnywhere software solution for use in 39 of its worldwide locations. BUY CALL DEC-90 GQP-LR OI= 0 at $ 5.13 SL= 3.25 Big volume today BUY CALL JAN-85 GQP-AQ OI= 19 at $12.75 SL=10.25 low OI BUY CALL JAN-90*GQP-AR OI=695 at $ 9.50 SL= 7.25 BUY CALL JAN-95 GQP-AS OI= 0 at $ 8.63 SL= 6.50 New Strike Picked on Dec 7th at $90.13 P/E = N/A Change since picked +0.00 52-week high=$96.75 Analysts Ratings 10-1-1-0-0 52-week low =$11.44 Last earnings 10/99 est= 0.15 actual= 0.16 Next earnings 01-20 est= 0.16 versus= 0.11 Average Daily Volume = 666 K Chart = http://quote.yahoo.com/q?s=PRGN&d=3m **** USWB - USWeb Corp. $50.06 +1.88 (+3.88 this week) USWeb seeks to transform businesses in the digital economy and create sustainable market leadership for its clients. As the leading Internet professional services firm, USWeb has created a new standard for success in the digital economy-Time-to-Value. Time-to-Value means USWeb applies extensive insight, experience and scale to deliver break through results quickly. Coverage was initiated by Legg Mason on USWB with an Outperform rating on Monday. This was on the back of Friday's news that USWB would be offering a new service for customers looking to outsource there Internet setup and management needs. Customers will pay a monthly fee from $25,000 to $75,000 dollars to have USWB design, host, or operate there Internet applications. This will help company's to avoid paying the start up cost of building there own system. The shares of USWB have been on a steady climb this month reaching a 52-week high today of $50.13 backed by strong volume. Looking ahead, we like the stock at current levels. The technical picture for the stock is very strong with prices, volume, and the moneystream converging in a hot sector-Internet software and services. Look for the uptrend to remain steady as long as the Nasdaq continues to break records. The volatility in the shares should allow traders to target shoot there way in above current levels or on a pullback to support levels near $48. Internet advertising and services firms should be in play, as Agency.com in the space is due to go public this week. That could put other cyber-advertisers like Razorfish and USWB in the spotlight. BUY CALL DEC-45 QWB-LI OI= 837 at $6.00 SL=4.25 BUY CALL DEC-50*QWB-LJ OI=1264 at $2.88 SL=1.38 BUY CALL JAN-45 QWB-AI OI= 497 at $8.63 SL=6.63 BUY CALL JAN-50 QWB-AJ OI= 949 at $5.88 SL=4.13 Picked on Dec 7th at $50.06 P/E = N/A Change since picked +0.00 52-week high=$50.13 Analyst Ratings 10-6-1-0-0 52-week low =$17.00 Last earnings 11/27 est= 0.13 actual= 0.15 Next earnings 01-24 est= 0.16 versus= 0.07 Average daily volume = 895 K Chart = http://quote.yahoo.com/q?s=USWB&d=3m ****************************** NEW PUT PLAY / PLAY OF THE DAY ****************************** PGR - The Progressive Corp $75.19 -1.75 (-3.50 this week) In business since 1937, Progressive is one of the nation's largest auto insurers. Progressive offers all types of vehicle insurance and property-casualty insurance through 30,000 independent agencies, the Internet and through affiliate programs. PGR is a holding company for 82 subsidiaries. PGR also has one mutual insurance company affiliate. Too bad Progressive can not insure its shareholders from declines. Actually, it could through the use of derivatives but I digress. A large part of the bearish story for PGR is technical. After dropping below strong support at $89 on Nov 17th on almost three times normal volume, PGR has dropped almost every day for two weeks. Surely, the biggest factor influencing the stock of PGR has been the rise in interest rates. Financial companies, especially those that deal mostly with individuals are at a greater risk by an increase in rates. When insurance rates go up, people stop buying. Please allow a little idle speculation here. Is it possible that Progressive stock is under distribution due to Millennium concerns? If there is any civil unrest, the major property insurers could be in big trouble. We do not foresee any major problems with Y2K. But perception is everything and if investors are fearful of potential civil unrest then they definitely will not be buying the shares of Progressive. Another influence applying pressure on Progressive is end-of-year portfolio adjustment. It is a common theme in all of our put plays right now and PGR is commonly affected. Entry into a put position can be made on any small intraday rally. Be wary of the stock trading above resistance of $79. We feel that this downtrend could continue for the rest of the month. We are recommending some January options because December expires next week. BUY PUT JAN-80*PGR-NP OI=74 at $7.38 SL=5.75 BUY PUT JAN-75 PGR-NO OI=24 at $4.63 SL=2.75 Average Daily Volume = 328 K Chart = http://quote.yahoo.com/q?s=PGR&d=3m ************************ COMBOS/SPREADS/STRADDLES ************************ Technology Stocks Continue To Dominate The Market.. Monday, December 6 U.S. markets ended mixed Monday as blue chip issues fell while the technology sector moved higher. The Dow slid 61 points to 11,225 after climbing 297 points last week. The technology-heavy Nasdaq index set a new record high, rising 25 points to 3,546. The broad market S&P 500 index fell 10 points to 1,423 as declining issues led advances on both the New York Stock Exchange and the Nasdaq. NYSE declines outnumbered advances 1,959 to 1106 on volume of 913 million shares. The benchmark 30-year U.S. Treasury bond rose 7/32, pushing its yield down to 6.25%. Sunday's new plays (positions/opening prices/strategy): Agco AG FEB12C/JAN15C $1.50 debit diagonal Fortune FO JAN35C/DEC35C $0.68 debit calendar United UAL LJAN60/DEC70C $15.50 debit LEAPS/CC's United UAL LJAN75/DEC75C $10.00 debit LEAPS/CC's C.R. Bard BCR DEC60P/DEC55P $4.31 debit bear-put Delta & Pine DLP DEC30C/DEC20P $1.62 credit strangle Cygnus CYGN DEC12C/DEC7P $0.00 credit strangle The first session of the week began on a sour note as our quote server (Interquote) fell victim to the limitations of the telecom infrastructure. Some of the phone lines that provide data to the system were down for most of the day. As a result, most of our option pricing information came from delayed sources or time and sales reports. Though we cannot guarantee the absolute accuracy of the quotes, most of the new positions were available at (or near) the suggested target prices. United Airlines (UAL) was the first candidate and unfortunately, the stock price began to drop right from the open. Our first move was to lower the target debits on both positions. The issue fell to morning lows near $68, and favorable entries were achieved. The C.R. Bard spread offered less opportunity for profit. The best observed debit (on a simultaneous order basis) was $4.31. Agco was somewhat more cooperative, offering a brief opportunity for entry at the target price before the issue moved higher near the middle of the session. Fortune Brands options were active with over 100 contracts in each series during the session. Our entry debit was slightly higher than the suggested debit but it was a favorable price (discounted) for the position. Our two credit strangles were disappointing. The Delta & Pine Land position offered a much lower credit than we suggested in the play recommendation and Cygnus did not trade at all. Trading was halted before the open due to the FDA advisory committee meeting on their GlucoWatch, a device to painlessly record blood sugar. The FDA is expected to conduct a thorough review of the product as it will be the first device to provide this information directly to patients. If it is approved, the share value of the stock will rocket but if it is rejected the stock price will plummet. There were favorable debit straddles and credit strangles on this issue and it will be interesting to see where the stock price eventually finishes. Portfolio plays: Internet and telecom shares dominated the market today and one of the major announcements affected both sectors. Cable television companies on Monday welcomed AT&T's (T) agreement to share its high-speed Internet lines, arguing the deal proved that additional government regulation was not needed. Operating from the same set of facts, Internet service providers (ISPs) and consumer groups said the pact reflected a desperate need for new federal rules imposing the shared access principles sooner, more broadly and on all cable companies. Both groups were active on the news and it appears the infrastructure will soon be shared. One of our other telecom plays, Motorola (MOT) needed no assistance with its rally. Shares of the stock rocketed with wireless industry issues as the prospects for wireless services improve and handset sales climbed. Falling service prices, increased worldwide network coverage and faster-than-expected phone sales, particularly Web-ready handsets have contributed to the recent boom. The realization that wireless networks will serve as high-speed Internet platforms is one of the major driving forces behind the industry's growth. Our position in Motorola (MOT), a bullish LEAPS/CC's spread, was adjusted higher with the move. The short option is now in January (at $125) with a total debit of $22.50 in the spread; LJAN100C/JAN120C. Another of our LEAPS issues made a significant move. Solectron (SLR) rose $4 to close at a new high near $95. As we said on Friday, our bullish spread was in dire need of an adjustment and today we rolled to a higher strike on the position (LJAN70C/JAN85C) for a $15.50 debit. Positions on Sun Microsystems (SUNW) and Exxon - Mobil (EXOM) were also moved into January (and higher) as both of the bullish stocks continued their winning ways. The big rallies in the Internet group were a mixed blessing. Lycos (LCOS) and other U.S. online networks climbed after a new report showed they remain popular with residential users in Europe's top three markets. Many of the peripheral companies also participated in the move but Excite@home (ATHM) fell $4 after AT&T (T) said it would open its cable systems to other Internet service providers. The two have an exclusive agreement that expires in 2002 and now the benefits of that covenant may not be realized. For investors, the worry is that ATHM's $18.6 billion market cap is based in part on exclusive contracts with its cable partners. Without exclusive agreements, it will be difficult for @Home to maintain and grow a substantial subscriber base. With that type of character changing news, we decided to take the safe (and profitable) exit, closing all of our bullish positions in the issue. We also had some activity in the small-cap group. Silicon Graphics (SGI) rallied $1.12 after announcing that Texas Tech University has selected SGI's processor/server for their new high-performance computing center. The system provides both the computational and the visualization functionality to enable the scientific studies associated with more than sixty Ph.D. programs, as well as a broad spectrum of government and private-sector projects. Our bullish calendar spread benefitted from the news but the issue will have to be monitored for a continued upward move as the profit margin will decrease rapidly. Autoweb (AWEB) moved $2.50 higher after a recent consolidation near $10. The rally provides a second early exit opportunity on the bullish diagonal spread with $3.38 credit for the position. On the down side, our recent spread on Cheap Tickets (CTIX) was hit hard after the company said its fourth quarter earnings will be lower than expected. Officials said the prolonged fare war in the airline industry is hurting profits and they anticipate a big downfall in revenues this quarter. The stock fell $6, leaving our bullish calendar spread high and dry at $22.50. One of the early exit options was a move to the bear-call (credit) spread, but the risk of new losses (if the stock rebounds) were fairly high with regard to the potential reward. The long option was closed for a credit of $0.50 to limit losses. Another of our calendar spread stocks has begun to lose momentum and it is time to take profits on the play. Occidental Petroleum (OXY) fell through the bottom of its three month trading range today and we suspect the drop will continue as crude-oil prices consolidate. The current position (JAN22C/DEC22C) was closed for a credit of $0.38, a $0.88 profit for the play. Tuesday, December 7 The Nasdaq closed at a new record high as Yahoo soared to $348 in a frenzied session of all-out buying. Back in the real world, most blue-chip stocks fell lower and the Dow industrial's dropped 118 points to 11,106. The S&P 500 index retreated 14 points to 1,409. Declining issues led advances 2,024 to 1,048 in heavy trading on the NYSE. The 30-year Treasury bond rose 1/2, dropping the yield to 6.20%. Portfolio plays: We had some new names in the winners list today as the technology group dominated the market. Unisys (UIS) moved up over $2 as the company announced a number of new contracts and agreements. They also received Microsoft's prestigious Industry Solution Award for their FBA Navigator. Monday's news that Kellogg Company agreed to extend its original outsourcing agreement with UIS for five years also contributed to the rally. 3Com Corp (COMS) climbed $2 to end near a recent high at $43. The move came as the company announced that it has signed an agreement to acquire LANSource Technologies, a leading vendor of data and fax-over IP software applications. COMS intends to strengthen its position in the growing market for enhanced Internet Protocol based voice and data services, an area projected to grow to $2 billion by 2002. The deal also provides 3Com with technology and expertise to accelerate its development of integrated unified messaging for the IP telephony market. Internet stocks participated in the rally and leading our Nasdaq group, Verity (VRTY) rocketed $7 in a post-split rally to end near $56. Verity develops knowledge retrieval software for the Internet and their products benefit online publishers, e-commerce providers and independent software vendors. TV Guide (TVGIA) bounded over $7 after positive comments (from their president and CEO) at the 27th annual PaineWebber media conference in New York. Peter Boylan said that TV Guide's strong brand familiarity gives it an edge in the new digital media industry and the magazine's strengths, such as the largest weekly readership in the world will boost its success. The online brokerages came back to life as E*Trade Group (EGRP), Ameritrade (AMTD) and TD Waterhouse (TWE) rebounded from recent slumps. All three issues made favorable moves as the sector rose with the rally in Internet financial stocks. In the straddles portfolio, we had a new profitable position this week as Williams Companies (WMB) broke to a recent low with the falling oil issues. The credit for the Jan-$40 straddle reached $8.88 and we expect it to move higher in the next few days. Mylan Laboratories (MYL) continues to climb in the bullish market trend and the credit for the APR-$17.50 straddle is near $7.25, a $2.62 profit for the position. Allegheny Teledyne (ALT) was also in the news, now trading under the new name, Allegheny Technologies (ATI). The company recently completed the spin-offs of Teledyne (TDY) and Water Pik (PIK) and changed its name with the transition. ATI also completed a one-for-two reverse split creating new option symbols and valuations for the underlying stock. You should consider these in future decisions for the outcome of the neutral April position. The majority of our portfolio issues succumbed to profit-taking after the incredible gains in the past few weeks. Many of these stocks are due for significant corrections and we will try to keep you advised of any changes in outlook for the negative positions. This can become very difficult at times with the large number of portfolio plays. Please remember the ongoing narrative is simply a service we provide to help new traders understand how various plays might be opened and closed. It is not intended to substitute for your own trading techniques nor does it replace your duty to manage the positions in your portfolio. Questions & comments on spreads/combos to ray@OptionInvestor.com ********* NEW PLAYS ********* SBC - SBC Communications $54.93 *** LEAPS/CC's *** SBC Communications provides services and products through many subsidiaries: the Telephone Company, Southwestern Bell Mobile Systems, SBC International, Southwestern Bell Yellow Pages and Telecommunications, along with SBC Media Ventures. Their group of products includes landline & wireless telecom services, sales of advertising and publication of directories, sales of customer premises, private business exchange (PBX) & wireless equipment, and cable television services. SBC is the #1 local telephone company in the U.S. and like many of the industry leaders, it may soon issue tracking stocks for its wireless telephone and international businesses. AT&T's (T) recent rally came primarily after they announced a new tracking stock for their wireless division. The CEO said a tracking stock would be a good way to unlock the value of SBC's wireless unit. SBC has 12 million wireless customers and its network covers 131 million potential customers in the United States. The good thing for SBC investors is that they would not spin-off that type of business completely since it affects one of the primary ways they generate revenue; selling packaged telephone services. SBC also recently completed its $61 billion acquisition of Baby Bell, Ameritech and they are currently looking for more merger candidates in Europe and in the wireless business. SBC already has operations in several countries, and officials have said the company would like to make some sort of deal within the next few months. No specific targets have been named but the negotiations are in progress. Once again, their goal in any agreement is to deliver good value to the shareholders and this may eventually be accomplished by linking the European telecom markets and possibly entering a joint venture to acquire transatlantic cable capacity. From a technical point of view, SBC has moved above the recent resistance area (near $50) on strong volume and the divergences in money-stream and time-segmented volume suggest a bullish move is forthcoming. We are going to play the long position deep-ITM to allow an early exit in the event of a significant rally or a negative character change in the next few months. A disparity in option pricing will help us enter the play at a discount. PLAY (conservative - bullish/diagonal spread): BUY CALL JAN01-40 ZFE-AH OI=8709 A=$17.75 SELL CALL JAN00-55 SBC-AK OI=3470 B=$2.50 INITIAL NET DEBIT TARGET=$15.00 TARGET ROI=50% Aggressive traders should consider selling the DEC-$55 option at $1.00 for short-term (time) premium. We will watch the prices for that position in tomorrow's session. Chart = http://quote.yahoo.com/q?s=SBC&d=3m **** CD - Cendant $18.50 *** On The Rebound! *** Cendant is one of the foremost consumer and business services companies in the world. The company was created through the merger of CUC International and HFS Incorporated in December 1997. Cendant provides membership-based consumer, travel and real estate services. Their businesses provide a wide range of complementary consumer and business franchises including hotels like Days Inn and Ramada, rental car agency Avis and real estate brokerages Century 21 along with Caldwell Banker. The news of the settlement reached far and wide as CD agreed to pay almost $3 billion to close the class-action lawsuit that accused them of defrauding shareholders. The settlement should resolve one of the largest shareholder lawsuits in the history of the market. Even though the agreement will cost CD a charge of $1.8 billion in the next quarter, most analysts agree it will be beneficial as the company can now focus on future business. Cendant has a number of new and unique opportunities including the upcoming initial public offering of CompleteHome.com. This prolific Internet real estate portal is currently growing faster than its main rival, Homestore.com. and is expected to become public in the spring of 2000. Analysts agree with the positive future outlook for the company and a number of them have set short-term targets well-above the current price. The most recent recommendation comes from Salomon Smith Barney; a "buy" rating with a target of $30. S & P Market Scope and Jefferies also have bullish outlooks for the issue based on expectations that future EPS will ahead of current targets. An incredible amount of option interest has provided a number of possible positions. We will opt for the simplest approach with favorable premium disparities in both suggested plays. PLAY (very conservative - bullish/debit spread): BUY CALL JAN-12.50 CD-AV OI=500 A=$6.12 SELL CALL JAN-17.50 CD-AW OI=10881 B=$2.06 INITIAL NET DEBIT TARGET=$3.88 ROI(max)=29% - or - PLAY (conservative - bullish/calendar spread): BUY CALL JAN-20 CD-AD OI=19471 A=$1.06 SELL CALL DEC-20 CD-LD OI=6581 B=$0.25 MAXIMUM INITIAL NET DEBIT=$0.68 TARGET ROI=25% Chart = http://quote.yahoo.com/q?s=CD&d=3m ****************************************************************** - VOLATILITY PLAYS - These plays are based on the current price or trading range of the underlying issue and the recent technical history or trend. The probability of profit from these positions is also higher than other plays in the same strategy due to implied volatility extremes or disparities in option pricing. Market sentiment and upcoming events will have an effect on these positions so review each play and make your own decision about the future outcome of the stock price. ****************************************************************** COHU - Cohu $29.25 *** Momentum Play *** Cohu designs and manufactures electromechanical systems handlers that physically maneuver semiconductors in place for testing and interface directly with electronic test equipment which performs the electrical test of the semiconductor devices. Other products include television cameras, microwave radios and metal detectors for industrial and hobbyist use. Cohu made a big move last week, climbing $4 after an upgrade and new coverage from Adams Harkness. Analysts initiated COHU with a "strong buy" rating and the investors flocked to join the rally. The technical breakout was awesome on excellent relative strength and heavy volume. Buying trends indicate there is good demand at this level and accumulation should increase in the coming weeks. If you favor the long-term trend for the issue, there is a small disparity in the February call options that will allow you to enter a bullish play at a discount. We favor a short position in the December call to reduce the cost of the initial spread. Plan to close the sold position if the stock moves above $30 in the short-term (before expiration). PLAY (aggressive - bullish/diagonal spread): BUY CALL FEB-25 QCH-BE OI=255 A=$6.12 SELL CALL DEC-30 QCH-LF OI=21 B=$1.00 MAXIMUM NET DEBIT TARGET=$4.88 ROI TARGET=40% Chart = http://quote.yahoo.com/q?s=COHU&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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