The Option Investor Newsletter Thursday 1-20-2000 1 of 2 Copyright 2000, All rights reserved. Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 1-20-2000 High Low Volume Advance Decline DOW 11351.30 - 131.80 11558.70 11275.00 1,106,357k 1,216 1,815 Nasdaq 4189.51 + 38.22 4164.65 4084.73 1,843,800k 2,067 2,110 S&P-100 783.33 - 6.99 797.17 779.66 Totals 3,283 3,925 S&P-500 1445.57 - 10.33 1465.71 1438.54 45.5% 54.5% $RUT 527.28 + 7.26 528.23 520.02 $TRAN 2784.31 - 53.73 2845.76 2768.32 VIX 24.16 + 0.89 24.89 22.69 Put/Call Ratio .50 ************************************************************* Earnings and splits, a volatile mix! The earnings headlines and a flurry of stock split announcements combined to power the Nasdaq to another new record high and the largest volume day ever. The big names are all lining up to wow investors with their record results and many are opting to through a stock split into the earnings fray as well. Notable earnings last night and today were IBM, AOL, GTW, LU, INKT, SUNW, ATHM, AMD and APPL. The excitement was rampant the open but the Dow faded fast and hit the low of the day just after 1:PM. The big winners this morning included IBM who announced a drop in earnings last night. IBM opened up +$7.00 and briefly traded well over $124 before closing under $120 for the day. IBM announced a -4% drop in revenues to $24.2 bln but proving "it is all in the call" they rallied today on their positive 2000 outlook. Another high flyer today was SUNW. SunMicro announced earnings of +$.21 beating the street by +.01 on record revenues of $3.55 bln. SUNW fell on the news in after hours trading but they had gained almost $30 since their low on Jan-7th. The big news today in my opinion was the deal announced with Enron (ENE). Enron has announced a deal to "trade" bandwidth between the major carriers much the same way they trade "energy" now. They announced a deal to buy 18,000 servers from SunMicro to power their regional data centers like Intel and Exodus. This was on top of an order from Digital Island (ISLD)for 5,000 servers earlier this week. Clearly SUNW has the right stuff and the heavyweights are beating a path to their door. Gateway (GTW) also announced after the bell today posting a +$.42 exactly inline with already reduced estimates. GTW had warned recently that the shortage of Intel chips had reduced their sales in the fourth quarter. They announced today that the supply problem had been solved by a new deal with AMD to supply high performance processors. AMD also announced results and blew away estimates with a huge gain. Posting a +$.43 vs whisper estimates of +$.05 on heavy sales. AMD felt the outlook was bright and they were positioned better than ever to take more market share from Intel. Intel was down -$4.44 on the news and after spiking over +$6.00 at the open AMD also closed down -$2.00 on post earnings profit taking. The bad boy on Wall Street today was Lucent who missed even the analysts downwardly revised numbers and posted only a +$.36 vs revised estimates of $.37. Lucent had closed around $54 and traded down to $52.50 in after hours. Lucent broke a string of 16 consecutive quarters of meeting estimates. The big winner was Apple Computer (AAPL) which traded as high as +$14 intraday on strong earnings of $1.03 compared to estimates of $.90. Apple gave half of the gains back but still finished up +6.94. Steve Jobs was the really big winner with the Apple board voting unanimously to "give" him a Gulfstream jet ($90 mln) including paying all the taxes and fees for him, and $870 mln in stock. WOW! Almost a $1 bln payday for Steve. Of course the shareholders were thrilled since he literally brought APPL back from the brink of oblivion and helped them post nine consecutive profitable quarters under his direction. APPL stock which closed today at $113 was trading close to $10 in 1997 just after Jobs took over. Good job, Jobs! Stock splits were like popcorn this week, popping up everywhere. Some of the major players were SEPR 2:1, PMCS 2:1, CRA 2:1, PEB 2:1, USAI 2:1, MUSE 2:1, QLGC 2:1, CTXS 2:1, CLZR 3:2, CBXC 2:1, ASMLF 3:1, NTLI 5:4, PRGN 2:1, NDN 4:3. The gold rush on splits was brought on by the huge gains in the last quarter and the soaring stock prices for these high flyers. Earnings season is the prime announcement time and this is going to provide us with dozens of great trading opportunities over the next month. If the market trades sideways or down these split runs may be the bright spots in an otherwise drab February. Bond yields stopped their drop at midday today and started creeping up towards the magic 7% again. After trading in the 6.75% range this morning, the yield fell to under 6.68% midday but rebounded back to 6.73% at the close. Oil prices continue to weigh heavily on the bonds as traders worry that the $30 bbl oil will eventually lead to higher inflation. The markets were watching and as earnings begin to fade the focus on the interest rates and the Feds policy will continue to move to the front burner. The markets were mixed with the Dow posting a -138 loss and the Nasdaq setting another record with a +38 gain. Still the familiar pattern of declines beating advancers and new lows beating new highs, returned on both major exchanges. The Nasdaq was up strongly +75 in early morning and then turned negative at midday. The turn around was nice but it was far from strong. The Dow continues to slide after reaching an intraday high well over 11700 on Monday. The Dow has now lost almost -400 points from that intraday high. We are continuing to bleed gains and it is likely to accelerate as we get closer to the Fed meeting. The market has already priced in a +.25% rate hike but the uncertainty surrounding the Fed should prevent any major gains before the Feb-1st meeting. On the bright side the Russell-2000 is going vertical. It has a great chart (below) and shows evidence of the broadening out of the rally into small caps. Should this trend continue any profit taking on the Dow/Nasdaq could be light. I am still cautious about the market direction once the earnings begin slowing next week. With the Fed meeting only a week away and the Employment Cost Index just before the meeting we could see the market continue to trend downward or trade sideways. One reader emailed today that he was sure losing a lot of money since I wrote about my bearish outlook on February last Sunday. Well, I am still bearish on February and the almost -400 points on the Dow this week was not a positive event on my charts. I have very rarely said "get out" or "stay out" of the markets. First, I do not have a crystal ball and most readers do what they want any way. I only tell you what I see developing. It is up to you to decide which way you want to play. History in the markets is a wonderful thing. It almost always repeats itself in one form or another. The stock market is probably the most over analyzed invention known to man and also the hardest to exactly predict. If we analyze history we can prevent the major trading disasters again. We may not buy exactly at the bottom or get out exactly at the top but we will not suffer large losses either. Trading is as much a money management game as any other table game I know. If you bet on long shots in poker very often you will go broke. If you hit 17 in blackjack you will lose more often than not. Sure there will be times when you get the 4 but the overall odds are heavily against you. In trading you need to invest heavily when the market is strongly in your favor and invest sparingly when the odds are against you. In blackjack, you would not continue to bet double or nothing after six blackjacks in a row. Trees do not grow to the sky and streaks do not run forever. Historically February has been rocky. Choose your own path. Good Luck, Sell too Soon Jim Brown Editor ***************************** SEMINAR UPDATE - IMPORTANT !! ***************************** The four day Option Investor Option Expo in Denver on March 25-28th is sold out! Because of the huge response we have decided to schedule another identical seminar the same week. The second seminar will start with the repeat of the Boot Camp refresher course on Tuesday March 28th and the three day advanced seminar will be on March-29-30-31st. (Wed/Thr/Fri) If you were thinking about going but had not made up your mind then this is your last chance. We were fortunate that the hotel had meeting rooms available and there will not be another Opportunity until next year. The four day Option Investor Seminar will be taught by 15 of the Option Investor staff and will have several well known "guest" speakers. The first day, Saturday March-28th is optional. This is a special Options Boot Camp session for newer traders who need to better understand the basic strategies before attending the Wed/Thr/Fri advanced classes. The four day seminar will focus on explaining in detail each of the option strategies you need to be a successful trader in all kind of markets. You will learn how to choose what strategy is right for you in every situation. You will learn how to make money in any market and recognize the difference. This is intensive instruction with real time, real life examples. We will use live examples and study real plays as they occur. Representatives will be available to answer your questions from many of the brokers, charting and quote services we use at OIN. The tax saving information you will receive in the tax classes will more than pay for the entire trip. This is our annual event and will not be repeated until 2001. You can lose more than the price of the seminar in only one trade. Why not invest the same money in education and profit from the experience the rest of your life? For more information click below. http://www.OptionInvestor.com/bootcamp/oinmain.html ***********************Advertisement*********************** *** WIN $8,764 *** Play CEO for a day and win $8,764 (the average daily pay of a Fortune 500 CEO); a free trip to California; and $1,000 in computer equipment! Just go to OfficeClick.com, the web site designed specifically for admins, and tell us how you'd do things if you were a CEO. http://www.officeclick.com/?MPC=0,8 *********************************************************** ********** STOCK NEWS ********** Lucent Acquires High-Speed Chip Maker By Cindy Christ Lucent Technologies (LU) Microelectronics Group said Thursday it would acquire Agere, an Austin, Texas-based manufacturer of high-speed, programmable network processors in a deal valued at about $415 million. Lucent will issue eight million shares of common stock to make the purchase, which is slated to close in June 2000. http://members.OptionInvestor.com/stocknews/012000_1.asp ************** Market Posture ************** As of Market Close - Thursday, January 20, 2000 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 11,000 11,350 11,351 BULLISH 1.13 SPX S&P 500 1,340 1,400 1,448 BULLISH 12.03 OEX S&P 100 700 750 783 BULLISH 12.03 RUT Russell 2000 430 450 527 BULLISH 11.12 NDX NASD 100 3,200 3,850 3,842 Neutral 1.06 MSH High Tech 1,650 1,900 1,892 Neutral 1.06 XCI Hardware 1,300 1,350 1,430 BULLISH 1.14 CWX Software 1,210 1,420 1,347 Neutral 1.07 SOX Semiconductor 640 660 813 BULLISH 12.21 NWX Networking 820 900 899 Neutral 1.07 INX Internet 665 800 749 Neutral 1.06 BIX Banking 645 690 522 BEARISH 11.30 XBD Brokerage 410 450 427 Neutral 11.30 IUX Insurance 625 650 569 BEARISH 11.30 RLX Retail 900 935 954 BULLISH 11.23 DRG Drug 380 400 362 BEARISH 12.07 HCX Healthcare 760 790 737 BEARISH 12.07 XAL Airline 180 190 138 BEARISH 5.21 OIX Oil & Gas 280 315 290 Neutral 1.06 Posture Alert The Nasdaq led the way again on Thursday, as the technology index closed up another +39, on massive volume of 1.85 billion. The Dow continues to languish as it closed down another -138 points on volume of 1.1 billion. The market once again looks a little top heavy, and many of the leading sectors are getting near the previous breakdown levels (INX, CWX, NWX, MSH, and NDX). For a true breakout to occur in some of these sectors, we need to get confirmation with "true" higher highs and good volume. Even though several sectors are close to bullish levels, at this time, there are no changes in posture. *************** Market Sentiment *************** Thursday, January 20, 2000 Is That Your Final Answer? The yo-yo that we call our stock market continues to be just that, a twisting, unforgivable, roller coaster going 90 miles-per-hour. Earnings season continues to crank out and the results so far have been stellar. However, we continue to watch many equities take the good news and promptly sell off. This buy-the-rumor, sell-the-news mentality is in full effect. Now, should you be one of the unlucky to own an equity that actually makes a mistake, the month of January will not go down as your favorite. Shareholders of Legato Systems (LGTO) are feeling that not-so-fuzzy feeling after the company's auditors recommended that they restate earnings. Not only did they restate the earnings, but they also took nearly half their market capitalization with it, as the stock tanked -23 7/8 or (44.5%) on the news. Another casualty today was the laser surgery maker Visx (VISX), which reported earnings in-line, and lost -13 (29%) just today, to close at 32 ¼, after hitting $90 less than 5 weeks ago. The point of these two examples is that trading stocks/options in the "goldilocks market" during the earnings run can be very dangerous, and with the market trading in nosebleed territory, anything less than perfect will get crushed. We've seen some of the biggest and best companies in the world (General Electric, Microsoft, AOL) come out with solid earnings and sell off after the fact. If big bellwethers like these can't hold on after earnings, then there is no need to be speculating on the long side just for an earnings surprise, because the surprise will be on you. On Tuesday, Pinnacle Capital highlighted the extreme positive sentiment in the OEX at the 800 benchmark. Not only did this level not break, but is had sold off dramatically. Several other leading sectors (NDX, INX, CWX, NWX, MSH) are showing signs of fatigue, and with the volatility index breaking it's 50-day moving average as well as the long bond breaking into new highs, we would not be surprised to see a failed rally. Several of these sectors are at the exact breakdown point from the 1st week of January, so should we see any weakness soon, we may see it compound. From the bulls' perspective, we need to see confirmation by having these indexes close at new highs on good volume, not the tweezer-tops that we witnessed today. There are still plenty of earnings left to help spark the market, however, with most of the biggest and best already reporting, we would not be surprised to see some weakness in technology in the near future. And that is our final answer! BULLISH Signs: Corporate Earnings: Major corporate earnings are coming out left and right, and so far, it looks to be another very solid quarter! Cash Flow: The cash that has been sitting on the sidelines was put to use today, as the Dow traded over a billions shares, while the Nasdaq traded 1.85 billion. Mixed Signs: None BEARISH Signs: Volatility Index (24.16): The VIX proved continues to prove that the low 30's are an excellent buying opportunity, and the high teens continue to be a great selling opportunity. The VIX recently bottomed at 20.14 on 1/14, and with today's action, we have crossed over the 50dma, suggesting potential weakness ahead. Interest Rates (6.727%): The yield continues to break new highs, with the next stop being 6.75-7.00%. The market has already priced a 25 basis point increase this February, however the market is also pricing in a 30% chance of a 50 basis point hike. Valuation: Low price to earnings stocks have been a safe haven so far in 2000, while high P/E stocks have gotten blistered. Is value coming back into play? Energy Prices: With the rapid rise in crude oil, everything from manufacturing to transportation will be affected by higher costs. These higher costs will be felt 1-2 quarters out, and could put pressure on profit margins. 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 Thurs Benchmark (1/14) (1/18) (1/20) Overhead Resistance (800-820) 7.82 8.67 10.72 OEX Close 797.52 795.68 783.33 Underlying Support (770-790) 1.20 1.38 1.40 What the Pinnacle Index is telling us: Based on January 20, like we have mentioned, direct overhead was building and continues to build. To see the OEX sell off from just under 800 was almost expected. Support continues to be light but is building up slowly. Put/Call Ratio Friday Tues Thurs Strike/Contracts (1/14) (1/18) (1/20) CBOE Total P/C Ratio .42 .44 .50 CBOE Equity P/C Ratio .31 .35 .41 OEX P/C Ratio 1.83 .83 .92 Peak Open Interest (OEX) Friday Tues Thurs Strike/Contracts (1/14) (1/18) (1/20) Puts 700 / 10,484 750 / 11,862 700 / 10,699 Calls 800 / 22,600 800 / 22,217 800 / 21,477 Put/Call Ratio 0.46 0.53 .50 Please view this in COURIER 10 font for alignment ************************************************* CHANGES THIS WEEK Daily Results Index Last Tue Wed Thu Week Dow 11351.30 -162.26-71.36 -138.06 -371.68 Nasdaq 4189.51 66.54 20.48 38.22 125.24 $OEX 783.33 -1.84 -5.37 -6.98 -14.19 $SPX 1445.57 -10.01 0.76 -10.33 -19.58 $RUT 527.28 5.90 6.56 7.26 19.72 $TRAN 2784.31 -38.02-15.57 -53.73 -107.32 $VIX 24.16 -1.47 -0.04 0.89 -0.62 Calls Tue Wed Thu Week MSTR 287.81 13.44 23.63 22.81 59.88 What a week! JDSU 238.88 3.50 16.25 26.94 46.69 Good to be smart AFFX 232.50 6.00 9.50 30.25 45.75 Like clockwork HGSI 211.50 9.50 -1.00 18.38 26.88 Keeps on moving! NTAP 115.00 24.44 -9.63 6.50 21.31 Upward momentum EXDS 125.00 18.00 -0.16 1.16 19.00 Plenty of news SEPR 140.50 4.13 -3.00 13.25 14.38 A nice boost TQNT 143.19 4.75 1.38 7.06 13.19 Very strong day LVLT 98.13 5.31 2.81 3.25 11.38 Gotta love it! MFNX 67.88 3.88 3.81 3.06 10.75 Great chart! PCS 108.00 2.81 4.94 2.50 10.25 New, sprinting! ANAD 80.50 -0.94 6.81 1.63 7.50 Three times! EMC 116.75 -0.34 4.00 1.63 6.25 Answers clearly LSI 78.56 6.50 -0.69 0.00 5.81 One more push? CMVT 152.81 -3.94 1.63 6.81 4.50 Buyer interest! GMST 80.50 7.56 -1.75 -2.13 3.69 Consolidation? AMGN 71.81 0.75 2.94 -0.19 3.50 Dropped VOD 55.44 4.63 0.00 -2.56 2.75 Entry point? ADI 99.44 -2.88 2.94 -2.00 -1.94 Sheer momentum! NOK 179.75 5.13 -1.38 -0.25 -4.31 Will it rally? VIGN 196.13 -2.69 -4.25 2.13 -4.81 Breakout coming? INTU 76.38 -4.63 -2.25 1.88 -5.00 Dropped Puts RLM 66.88 -2.38 0.88 -5.13 -6.63 New, more product WCOM 43.38 -2.06 0.56 -1.69 -3.19 Go, baby, go! FD 46.25 0.06 -0.13 -1.56 -1.94 It's a sale! CMGI 120.56 -5.63 6.06 -1.81 -1.38 CMGI falls back SBC 41.00 -0.88 -0.56 0.44 -1.00 Dropped IIJI 85.38 -1.50 0.13 1.25 -0.13 A little time ISLD 80.00 4.88 -1.00 -1.00 2.88 Dancing shoes ICGE 152.25 5.25 11.63 1.88 18.75 Risky! ************ WOMANS WORLD ************ There is no Womans World article tonight, as Renee is on vacation. ************** TRADERS CORNER ************** There is no Traders Corner article tonight. 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: ***** INTU $76.38 +1.88 (-5.00) As we warned earlier in the week, INTU was being kept on a short leash. INTU had slipped under near-term support ($80) on Tuesday. This wasn't a good sign. Over the past two days there was unfortunately no significant upward movement. Consequently for lack of upward movement and for violation of its 10-dma (77.12) we're dropping the stock from our call list. AMGN $71.81 -0.19 (+3.50) AMGN is looking positively boring in comparison to the Human Genome stocks, despite a nice effort to break through resistance and establishing a new high. If AMGN was working on the "project" in any way the stock would probably be $180. Today, it almost seemed like they were selling AMGN to buy Genomics stocks. The technical picture for AMGN is still very solid. By taking out the $70 resistance and closing comfortably above it today, AMGN is still in a solid uptrend. However, our capital might be put to better use in something a little stronger. Holding support at $70 is critical and we could get a mini-rally of a couple points if the stock can trade above today's new high of $74.50. Earnings are expected after the close on Tuesday. PUTS: ***** SBC $41.13 +0.56 (-0.94) We said SBC seemed to be looking for a bottom. We believe the telecom company just may have found what it was looking for. Although it is not our practice to pick tops or bottoms, the lack of any follow-though selling, the stiff resistance seen at $40 and the bounce higher tells us its time to let this put play go. SBC jumped up $0.56 today, but the volume behind the move is what is a bit concerning. SBC saw over 10 million shares change hands for the session. The long-term downtrend could continue, however today's bounce suggests their may be more upward movement. Depending on your entry point SBC did give us a chance to make a small profit. Sometimes a small profit is better than none at all. For now we will concentrate our efforts elsewhere. ***************** PICK NEWS - CALLS ***************** ADI $99.44 -2.00 (-1.94) Sheer momentum continues to push ADI to higher-highs. Yesterday and today ADI stretched into new territory bucking the negative pressure of the DOW. Although mild profit-taking did occur in today's afternoon session following the stock's record peak at $104. The downdraft however provides players with solid entry points just above the 5-dma ($98.91). This technical indicator has so far acted as support during the recent uptrend and unless there's an earth- shattering event, ADI is still poised to climb further upward. In the industry, Silicon Laboratories announced they have filed for an $80 man IPO. ANAD $80.50 +1.62 (+7.50) It's done it three times this week, can ANAD finish off the week with another all-time high? Wow! That would make seven consecutive new highs. But let's return to earth for a moment. When will Anadigics balloon deflate a bit? This is a good question. Remember traders always want to take a little cash off the table at some point. The strategy is to get out of your call positions before that happens. Near- term support evolved at $79 and $83.06 now serves as overhead resistance. Take notice that today is the first time ANAD really sagged intraday. Be careful at this level. There's only five days left to play this run. Earnings are confirmed for next Friday January 28th, before the bell. LVLT $98.13 +3.25 (+11.38) You've got to love this earnings' run. At the beginning of the week we were looking for LVLT to simply show strength above $90 and it didn't let us down. Near- term support is now higher at $94 and $95. The rapid movement has also out-paced the 5-dma technical which is much lower at $91.75. The stock is clearly making a charge for its 52-week high at $100.13, the psychological hump. Today however, $98 acted as a resistance level that is until the last trade when LVLT tagged $98.13. Still be prepared for some opposition especially after the huge gains. Don't get impatient, there's a couple more weeks left before earnings. LVLT is confirmed to report on February 3rd, before the bell. AFFX $232.50 +30.25 (+45.75) The ego trip continues for research analysts. Like clockwork, all you have to do is raise the target price of a high flyer and it will do its best to hit the new target that day. Such was the case for the shares of Affymetrix. This morning, the Biotech analyst from CSFB raised the target price for AFFX to $250. The stock got as high as $244.38 before a little profit-taking. Today's volume was very strong at over two times ADV, which is another good sign that the stock could continue its rally tomorrow. In Tuesday's report we mentioned that a strong close above $200 could result in a nice rally. With plenty of opportunities to enter a position yesterday and today many subscribers could be sitting on some huge profits. Intraday support was established at $223. If the stock is going to take a look at $250, it will have to break above $235 and then $244.50. Trading above these levels might be good entry points for momentum traders. Considering the volatile nature of this stock it would be advisable to watch it closely and perhaps to use trailing stops. Never let a winner turn into a loser. MSTR $287.83 +22.83 (+59.88) Do you believe in psychological support and resistance levels? Take a look at the high print of $300 on MSTR for evidence of this phenomenon. When we mentioned on Tuesday that it looked like MSTR had established a nice support level at $219 giving it a base from which to launch itself higher we had no idea that the stock would be one of the absolutely best NASDAQ performers of the past two days. Volume finally picked up a little today. Yesterday, MSTR announced a partnership with Active Research, a provider of Web based Market Research services, resulting in an innovative new kind of market intelligence service. MSTR seems to trade very true to the technical norm of rallying nicely after taking out resistance. With 30 point ranges becoming commonplace for this stock you need a very well defined trading plan when entering a position. Pick your exit points and have the discipline to stay with them. Support is at the old breakout point (two days old!) of $250. Strength tomorrow could result in a test of $300 pretty quickly. Reminder: Earnings will be reported next Thursday. TQNT $143.19 +7.06 (+13.19) A very strong day for TriQuint. Shares of this leading Semiconductor company broke above three days worth of resistance at $138.88. Breaks above triple-tops are very bullish and the stock did not disappoint, ploughing convincingly into new high ground. Everyday, TQNT is looking more and more like a must own stock for Tech Fund managers, and with volume picking up, we may be seeing institutional buyers. We could see a few more days of strong buying in the stock as long as the overall market stays strong. Do not forget what the sentiment was like two weeks ago. TriQuint might be a good candidate for using trailing stops. If you get out you can always get back in at the next support level. You can not go broke taking profits. Intraday support was established at $141. Further down we can find support at the breakout point of $138. Resistance is the new high of $146. GMST $80.50 -2.13 (+3.69) Please allow us to give ourselves kudos for a good call. Hey, it happens sometimes. In Tuesday's update we noticed that GMST looked a little overbought in the very short-term and that a gap up on Wednesday might be a good opportunity to take some quick profits before a subsequent pullback into the mid to high $70's. No dust on that crystal ball. Gemstar's high for the week occurred on the open yesterday at $88.50. Today GMST pulled all the way back to $76.75 before a nice comeback to $80.50. Now what? We are not sure if this pullback was the end of a very short-term consolidation. If GMST can test today's low again then we will have more confidence that it is ready to resume its uptrend. A move above today's high of $83.50 might be the confirmation we need to get GMST moving again. In a developing story that needs to be monitored closely, Gemstar filed a patent infringement suit against TiVo alleging that TiVo's deployment, marketing, offers to sell and sale of personalized video recorder devices contain an unlicensed interactive program guide. Gemstar is seeking an injunction and monetary damages. CMVT $152.81 +6.81 (+4.50) Taking a bit of a breather, CMVT posted a fairly quiet inside day yesterday with volume only about half the ADV. Today was a different story as CMVT moved up strongly at the open, found support at $149 (old resistance) and then moved up strongly into the close for almost a $7 gain. It looks like buyers are starting to get interested again as volume moved up to the daily average. Remember that the primary catalyst for this play (other than momentum) is our anticipation of a split announcement. Our next resistance point is the 52-week high of $155.88, and support seems to be forming near $149. Below that, we have strong support at $144 which is further supported by the 10-dma at $142. New positions can be considered either on continuing strength or an intra-day pullback. In the news yesterday, Ulticom, a subsidiary of CMVT that provides network signaling software, filed for an IPO with the Securities and Exchange Commission. Lehman Brothers will serve as the lead managing underwriter. ******************************************** PICK NEWS - CALLS - CONTINUED IN SECTION TWO ******************************************** ************************Advertisement************************* 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 millennium 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 http://www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to Contact Support 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 Thursday 1-20-2000 2 of 2 Copyright 2000, All rights reserved. Redistribution in any form strictly prohibited. ***************************** PICK NEWS - CALLS - CONTINUED ***************************** EMC $118.63 +1.63 (+6.25) So much for resistance! Yesterday, EMC moved up to $116 early and danced around this resistance (support?) level for the rest of the day. This morning, the answer became clear as buyers pushed the price up to $120 before the sellers arrived. Dropping with overall market weakness, EMC showed us that $116 is now support as it bounced smartly from that level at 1:00pm EST. Volume was strong (20% over the ADV) as EMC made its way back up to $120 (new resistance) before giving some of its gains back at the close. An intraday pullback will probably be your best strategy for opening new positions, as EMC will likely remain strong with earnings on the horizon (Wednesday before the open). For those of you with open positions, keep your stops in place in case the NASDAQ decides to take a rest. Continuing the long history of cooperation between the two companies in serving the Storage Area Network (SAN) market, Qlogic announced that their QLA2200 Fibre Channel host bus adapters have joined the ranks of connectivity solutions that have met EMC's rigorous interoperability testing. VIGN $196.13 +2.13 (-4.81) Is the breakout coming? Showing us a pattern of higher-lows and obeying support at the 10-dma (currently at $188), VIGN looks like it is getting ready to surge higher. Volume has been light (about half the ADV) all week as VIGN has consolidated its recent gains, gathering its strength for another move up as earnings approach. We still do not have a date, but the company is telling us to expect them at the end of the month. With the light volume, it has been encouraging to see buyers appear whenever VIGN gets close to support, and we expect another strong move up when the buyers return in force. Any pullback near the 10-dma is buyable, but don't get complacent about the quiet trading in VIGN this week. It is still a volatile internet, so keep your stops in place. Yesterday, Adero, Inc., the leader in global Internet content distribution, announced a partnership with VIGN in which the Vignette StoryServer 4 will be deployed across the AderoWorld Service network. VOD $55.63 -2.38 (+2.75) Round 8, and Mannesmann comes out swinging! Not content simply to reject VOD's latest buyout offer, Mannesmann spokesman Manfred Soehnlein called it "wholly inadequate". There are also rumors that Mannesmann is close to striking a deal with French conglomerate Vivendi that could help fend off VOD's buyout bid. With the dynamics of this ongoing battle, it has been encouraging to see the strength in VOD shares. Volume has been about average and the sellers have not been able to push the price down to the top of the gap up on Tuesday ($55). VOD tested $55.50 early in the day today and the bears were able to bring prices close to that level again by the close. Whether this is a good entry point or the beginning of another trading range remains to be seen. Consider entering new positions if VOD bounces at support between $54-55, but stand aside if this level is violated on a closing basis. NOK $179.75 -0.75 (-4.31) ZZZZZZZZ. NOK is putting our feet to sleep as volume is falling to the floor and the price remains flat. While there has been enough volatility between $175 (strong support) and $185 to make small profits, timing an entry on a gapping ADR is difficult at best. NOK really needs to get the lead out soon if it is going to start an earnings run at all. The confirmed date is February 1 BEFORE the open (approx. 5:00 a.m. ET). NOK could also announce a split (over $150 is the historical range), but that likely won't come until the conference call gets started at approximately 8:00 a.m. ET. Low volumes may be indicative of a coming rally any day now, and earnings could be the catalyst. While we fully expect a big move in NOK on that basis, consider getting into the play only when you see the volume start to increase again. Tomorrow doesn't count since options expiration could artificially inflate the volume as contracts are settled. However, if you are inclined to accept more risk, consider buying intraday dips. JDSU $238.88 +26.91 (+46.69) It's good to be smart. It's even better to be lucky. Not only has news of JDSU's acquisition of ETEK helped to drive the price up, but today a Wall Street Journal article noting that JDSU is poised to expand the Internet, and the announcement of an extension of a multi-year supply agreement with Lucent have both acted to flip the switch for JDSU. With earnings on tap for January 26 and volume at almost three times the ADV today, JDSU is definitely on a run. Buying activity at the end of the day was fierce as JDSU closed at a new high, $0.13 short of its all-time trading high (also set today). Options expiration day is typically supportive of stocks and we could see the trend continue. Beware though. This is a lofty gain even for this volatile stock. Assuming traders have figured out the earnings run pattern (ala YHOO), JDSU could sell off prior to earnings, or become more volatile yet as the date nears. That's not a prediction, but a reminder to be nimble in getting out of the trade if it moves against us. EXDS $125.00 +1.16 (+19.00) After an $18 jump on Tuesday from news that they were teaming up with Foundry Networks to speed up clients' Internet connections, EXDS needed a rest. Volume though still remains well above the ADV, telling us the buyers are still hanging around. News continues to come from the company highlighting new partnerships. Today they announced that they would partner with Anderson Consulting to provide services to the financial industry. Mild support comes at $122. A bit further down the chart, it's at $113 and $110 - not much in between. Earnings are scheduled January 26, wherein EXDS could announce a split too. Barring any bad news from the market, or a bout of profit-taking stemming from traders' recognition of a pattern of selling off before earnings (see YHOO), we expect EXDS to continue climbing into January 26. It's volatile so keep your stops tight, and consider buying intraday dips for the best entry if your risk tolerance allows it. MFNX $61.00 +3.88 (+10.75) The Tasmanian Devil's on the loose! Meanwhile, the wild goose chase continues with MFNX's IR department. The latest is that earnings will "likely be in early March - check back with us in mid-February". All we can say is don't base your play on an earnings run. Furthermore, MFNX has the propensity to announce earnings in mid-session. Thus you should consider exiting the play if MFNX announces early, say by February 7 like Zack's has listed. No matter, it's still a great looking chart as MFNX whirls through its ninth day of sequential gains on volume well above the ADV of 2.8 mln shares. The action has been steady and without much volatility on its ascent. Though today, there was definite selling action into the close. Finally MFNX may stop to breathe, giving us a good buying opportunity. The difficulty is that there is no discernable support to pick as a target for shooting. While it moves in roughly $2 increments, $60 appears to be the nearest thing resembling support. Otherwise you can pick a target that suits your risk. Just wait for the bounce with renewed buying interest and avoid the temptation to catch the falling knife. HGSI $211.50 +18.38 (+26.88) As the broader markets exhibited a tug of war, HGSI just kept moving higher. HGSI gained $18.38 to finish the day at $211.50. Volume was strong with over 1.1 million shares changing hands. Its hard to tell exactly what motivated buyers today, as investors poured money into the Biotech sector and technology stocks. Our interest in HGSI, is the 2-for-1 split the company's stock on Jan 31st. Our advice at this point, is move your stops up. Intraday support is seen at $207.75. The next level would be down at $195. HGSI did gain 9.5% today, so a brief pullback would not be out of the question. A bounce off either support level would provide an opportunity to add to, or enter a new position. HGSI did announce Wednesday, Phase II human clinical trials of a drug called Repifermin. Repifermin is being tested for the treatment of mucositis associated with bone marrow transplantation for the treatment of cancer. SEPR $140.50 +13.25 (+14.38) Our earnings run play received a nice boost today, as SEPR's board of directors announced a 2-for-1 stock split this morning. On the news SEPR turned what was already a good day into a great day, adding $13.25 to close at $140.50. The split will be payable Feb 25th. SEPR is scheduled to report earnings Jan 28th, before the market opens, so we have time for this play to continue. Although earnings aren't expected to be that solid, investors seem to be betting more on future expectations of new products and developments. The biotech sector was up today over 3%, as investors continued to take money out of blue-chip stocks and buy the Drug and Biotech sectors. Recent upgrades and the split announcement have helped propel this stock to new highs. $136 and $132 should provide good support for SEPR, should we see a retracement. The volume today was strong at 1.1 mln shares, and we expect the trend to continue higher. NTAP $115.00 +6.50 (+21.31) After a brief pause Wednesday, shares of NTAP resumed the upward momentum today. NTAP gained $6.50 on volume of 2.1 million shares. The computer networking sector has had a great week, as investors continue to rotate out of blue-chip issues and buy technology stocks. This morning analysts at PaineWebber reiterated their Buy rating on NTAP. Their 12-month target price was adjusted to $150. The rate NTAP has moved recently the $150 level could be reached by the end of the month. Although we may see a pullback in the Nasdaq, and NTAP, we believe the current philosophy among investors and traders is to stay in the technology issues. Support is found at $108 and $102. Wednesday Veritas Software and NTAP announced the availability of a fully integrated and qualified high-availability application solution for NTAP's storage appliances. LSI $78.56 +0.00 (+5.81) The Semiconductor sector did see a gain today, even though LSI struggled a bit on the session. After a decline to $75.63 on Wednesday early in the day, shares of LSI did recover and spent most of the day consolidating. Volume for the chipmaker dropped today to 1.4 million shares, and simply appears as though investors are catching their breath. The upgrade from Merrill Lynch Tuesday, should help the company in the near-term. Our earnings play has three more trading days to run before LSI reports earnings. Analysts are looking for EPS to come in at $0.43, compared to breaking even a year ago. We believe LSI has the ability to make one more push to the upside prior to Tuesday's earnings announcement. Intraday support is seen at $78 and $76. Should we see a bounce off those levels, that would provide a good entry point for a last minute entry. We will drop this play on Sunday, due to the next publication coming out Tuesday evening. If you have a position in this play, remember you will want to exit by the close of business Tuesday. **************** PICK NEWS - PUTS **************** WCOM $43.38 -1.69 (-3.19) Go, Baby, Go! WCOM doesn't seem to have any reserve strength to call on as it continues to bleed. Merger and revenue concerns continue to plague this Telecom giant, as it looks ready to test the lows from last Tuesday, near $41. Being pushed out of the Magellan Fund's top 10 on Tuesday didn't help either. Volume was heavy again today and closing very near the low of the day doesn't paint a pretty picture for WCOM. The 10-dma, which has been providing resistance, is now down at $45.50, and a southward bounce from there is buyable. Just beware of the rogue news event or analyst upgrade and keep your stops in place. IIJI $85.38 +1.25 (-0.13) Alright, so IIJI felt more like "hanging out" around $85 instead of $80. We are going to give IIJI some more time to make up its mind as to what direction it is going to head. We saw volume less than half the daily average backing today's move up, which is indicative of the continuing lack of investor interest in this stock. IIJI's 10-dma, currently at $96.75, could continue to provide resistance as it has done in the past. Proceed with caution. Until we see a drop below $80 backed by a pick up in volume, we are definitely going to want to hold off on new entries. Even if we do see a move below this level, do not forget that we have yet another near term support level to conquer at $80. If we get the go ahead to play, be sure to use your stops. ISLD $80.00 -1.00 (+2.88) Yesterday afforded us some nice opportunities for new entry with a trading range pushing $8. Today, Digital Island once again put on its dancing shoes and did a nice little number across $80 throughout the session. It did a bit of late day dipping, however, this move was not at all impressive, as ISLD quickly came right back up to close smack dab on $80. ISLD has turned the overhead opposition of its 5-dma, which is now at $79.50, into support. ISLD does have some resistance overhead at its 10-dma of $85.50. At this point, we are not recommending any new entries until we see a drop below $80 backed by a pick up in volume, as the volume backing today's decline was very weak. FD $45.94 -1.88 (-1.94) It's a sale but there are not a lot of buyers! After what looks to have been roughly three sessions of consolidation, FD decided today was the day to take the plunge. FD opened at its high for the day and it was pretty much all downhill from there. FD traded right through its 50-dma at $46.50 and headed even lower to flirt with its 100-dma at $45.50. It was a rough day overall for the retail sector with the RLX down nearly 21 points. FD spent some time trading around $45 back in the beginning of December so we are at a level of support which as we mentioned above is backed by FD's 100-dma. Use caution at this point as FD has additional support right around $43. FD looks to have some solid resistance right around $48. Should FD make a move up, watch for this level to hold FD down and take advantage for possible new entry points. New entries may be a bit risky at this current level because of the amount of support backing FD. ICGE $152.25 +1.88 (+18.75) It doesn't get much riskier than this play so watch yourselves. When you look at ICGE and the Nasdaq, relative strength is good for ICGE. They accomplished breaking resistance of $150. Today's trading can result in two things. The first would be if ICGE retreats back to $150 and bounces up again (the old resistance becomes support theory) that the next step for ICGE is an upward trend. That may take ICGE up to the next resistance level right around $170. The second result could be there was not a lot of volume backing that breakout over resistance, which would indicate that buyers are not that aggressive. Obviously this is what we are expecting. ICGE follows closely behind CMGI which isn't doing so well even with such good market conditions. So we might not be looking at an upward trend, but one in the other direction. Support is at down at $130 still. The break above the 10-dma is always a warning sign for put plays so don't enter any new plays until ICGE falls back below that level. The 10-dma is at $148.50. CMGI $120.56 -1.81 (-1.38) Despite a strong open at old support, CMGI quickly yielded. It fell back to its first line of opposition at $119 and $120, trading relatively flat for the remainder of the session. Nevertheless CMGI is still tucked under the 30-dma ($125.37) and is just a 15.4% slip away from the 50-dma ($101.97). The next line of resistance to crack is the $112.50 mark which represents Tuesday's and Wednesday's intraday low. For those readers just joining us, CMGI is a HIGH-RISK put play so know your tolerance for volatility. Today CMGI announced one of its majority owned companies, Engage, a tracker of online customers' tastes, is acquiring Adsmart, an Internet ad buyer, and Flycast, an Internet ad seller, in a $2.6 bln internal stock deal. The strategy is to form a single organization to deliver online advertising and marketing. The deal is expected to be closed during the 2Q of 2000. As a result of this pact CMGI's holdings will exceed $11 bln dollars, an astonishing eight-fold increase from last year. ****************************** NEW CALL PLAY/PLAY OF THE DAY ****************************** PCS - Sprint PCS Group $108.00 +2.50 (+10.25 this week) Sprint PCS operates the largest 100 percent digital, 100 percent PCS nationwide wireless network in the United States, already serving the majority of the nation's metropolitan areas including more than 4,000 cities and communities across the country. Sprint PCS has licensed PCS coverage of nearly 270 million people in all 50 states, Puerto Rico and the U.S. Virgin Islands. Sprint PCS is a wholly owned tracking group of Sprint Corporation. Sprint is a global communications company at the forefront in integrating long distance, local and wireless communications services and one of the world's largest carriers of Internet traffic. Sprint built and operates the United States' only nationwide all-digital, fiber optic network and is a leader in advanced data communications services. We are looking for a nice sprint from PCS as it heads toward a stellar beginning to February. Not only do we get an earnings announcement on February 1st, we also have a 2:1 stock split on February 4th. We are looking for these two upcoming events to provide us with a nice run to finish out January. PCS looks to have its eye on breaking through its 52-week high of $114.44. PCS looks to have some support right around $101 where its 5 and 30-dmas are working to converge. PCS has some additional support in the neighborhood of $98, if needed. PCS has immediate resistance at $110, though we do not expect this to be too much of an issue. After that, we could be cleared for a nice run. Try and time new entries toward the early part of the day, as PCS has established a pattern of moving steadily up throughout the session. The weekly trend on this stock looks good, barely succumbing to the Nasdaq pullbacks. Note: We will only be holding this play up to the earnings announcement on the first. As if the earnings announcement and the upcoming stock split were not enough. Today, Paine Webber increased their price target on PCS from $110 to $160 citing several sector wide factors including an increase in expected 2000 net subscriber addition. BUY CALL FEB-105*PCS-BA OI=381 at $8.50 SL=6.50 BUY CALL FEB-110 PCS-BB OI=777 at $5.88 SL=4.00 BUY CALL FEB-115 PCS-BC OI=418 at $4.13 SL=2.50 SELL PUT FEB- 95 PCS-NS OI=130 at $1.88 SL=3.50 (See risks of selling puts in play legend) Picked on Jan 20th at $108.00 P/E = N/A Change since picked +0.00 52-week high=$114.44 Analysts Ratings 9-8-7-0-1 52-week low =$ 25.56 Last earning 10/99 est=-1.24 actual=-1.31 Next earning 02-01 est=-1.45 versus=-1.43 Average Daily Volume = 2.40 mln Chart = http://quote.yahoo.com/q?s=PCS&d=3m ************* NEW PUT PLAYS ************* RLM - Reynolds Metals $66.88 -5.13 (-6.63 for the week) Reynolds Metal is the #3 aluminum producer in the world. RLM may be best known for its aluminum foil, but they also serve customers in the aluminum fabricating, packaging and consumer, construction, distribution, and automotive markets. The company has over 100 operations in 24 countries. In the future, it's expected that Reynolds Metal will be acquired by Alcoa (AA) pending a decision by the governments anti-trust regulators. A steady downtrend preceded Reynolds' solid earnings yesterday, but today's descent was piercing. RLM spiked down $5.13, or 7.1% on investors' concerns that Alcoa's decision to boost aluminum production by 7% by the end of the year could drive down prices and profits of other aluminum companies. For Alcoa the decision is two-fold. First, the demand for product naturally increases with the recovery of Asian economies and it's simple preparing for the inevitable. Second, this move could put a favorable light on the Reynolds' acquisition endeavor; hence indicating the company isn't trying to bully the aluminum market with low production and higher prices. RLM however was already suffering a $10, or 12.2% loss from an $82 high on January 10th. This news was another nail in the coffin. Today RLM penetrated the 50-dma ($69.80) and is heading for the 200-dma ($62.88). Take a look at a six-month chart and notice that $58 has served as bottom support when the stock was down in the trenches in September, October, and November, but before that support is firm $62 and $63. This level is our first goal. Look for a negative market sentiment to aid the stock's demise. BUY PUT FEB-70 RLM-NN OI=2806 at $5.38 SL=2.75 BUY PUT FEB-65*RLM-NM OI=2285 at $2.75 SL=1.50 Average Daily Volume = 480 K Chart = http://quote.yahoo.com/q?s=RLM&D=3m ************************ COMBOS/SPREADS/STRADDLES ************************ Solid Earnings Propel Technology Issues Higher.. Blue-chip stocks moved lower Wednesday as rising bond yields and earnings reports unnerved wary investors. The Dow ended 71 points lower at 11,489 while demand for Internet stocks drove the Nasdaq composite index to a new record high at 4,151. The S&P 500 index was relatively unchanged at 1455.90. Trading volume on the Big Board reached 1 billion shares with winners beating losers 1,517 to 1,510. The 30-year Treasury closed up 12/32, pushing its yield down to 6.71%. Tuesday's new plays (positions/opening prices/strategy): Agco Corp. AG MAY15C/FEB15C $0.75 debit calendar Pride Intl. PDE APR17C/JAN17C $1.68 debit calendar Global Marine GLM FEB20C/JAN20C $0.00 debit calendar Our new calendar spread plays were a mixed lot with two of the positions offering favorable entries while the third failed to produce the required net debit. Target prices on both Agco and Pride were at or near the suggested entry points but the short option in the Global Marine position was well below Tuesday's closing quote of $0.31; the recommended debit was unavailable. Portfolio plays: Technology stocks continued to shine in what appears to be a market of no limits and small-cap issues performed well with the Russell 2000 up 1% to 520. The group has surged over 5% since last week and a number of our positions on lower priced stocks are trading at maximum profit. The top performers in that category include: Geron Corporation (GERN), up $1.31 at $20; Marketing Services Group (MSGI), up $2.06 at $19.75; P-Com (PCMS) up $1.62 at $14.12 and our new bullish issue Splash Technologies (SPLH), which rallied $1.81 to close at $14.25, a 52-week high. Economically sensitive issues have been negatively impacted by the rising interest rates but financial stocks were beginning to show some resilience after a number of companies reported better-than-expected earnings. Personal computer stocks also rallied Wednesday and that affected a number of our hardware issues. Cohu (COHU) was the leader in that group with a $5 move to a new all-time high at $41.50. Needless to say, our bullish position is at maximum profit. Helix (HELX) enjoyed a nice rally, also climbing to a new all-time high at $57.62. Our new debit spread returns maximum profit above $45. Two of our LEAPS/CC's issues, Sun Microsystems (SUNW) and Solectron (SLR) also traded higher during the session. Among other sectors, transport stocks slumped while major oil issues moved higher amid a continued cold weather snap in the Northeast. Crude oil closed up $0.60 at $29.45 per barrel. Our top oil stock, Exxon-Mobil (EXOM) rose $1 to $85.75, just above the sold strike in our bullish LEAPS/CC's play. One of the recent losers, United Airlines (UAL) reported favorable earnings after pre-warning of lower revenues. The company earned $1.92 a share, beating estimates of $1.75 per share. Investors however were not impressed and the stock ended relatively unchanged near $63. In the long-term portfolio, Proctor and Gamble (PG) made the news after Warner-Lambert announced they are in preliminary talks with the global foods and consumer goods producer. Sources familiar with the situation said the talks were about P&G possibly buying the drug maker and its merger partner, American Home Products. The stock recovered $1.56 to close just above $115 on the news. Our long-term position is profitable above $110. Thursday, January 20 The Nasdaq rallied to a new high Thursday while blue-chip stocks slumped as investors moved back into market-leading issues. The Nasdaq composite closed 38 points higher at 4,189 on its busiest day ever with volume at record levels. The Dow Jones industrial average dropped 138 points to 11,351 as profit-taking exacted a heavy toll. The broader S&P 500 index slipped 10 points to 1,445. Declining shares beat advances 18 to 12 with more than 1 billion shares traded on the NYSE. There were 125 stocks at new lows and 95 at new highs. The U.S. Treasury 30-year bond weakened late in the day, falling 8/32 to push the yield up to 6.74%. Portfolio plays: A number of our portfolio positions continued higher in today's session even as investors sought refuge from falling blue-chip issues. Once again, small-cap stocks were the leaders and well known companies were at the top of the list. Globalstar (GSTRF) climbed $4.62 to close at $45 on optimism about plans to expand its network. The satellite company is talking to investors as it prepares to sell 7 million shares to finance capital spending and marketing. Globalstar would raise about $313 million from the sale and hopes to be the first satellite-phone company to make a profit after rivals Iridium and ICO Global Communications both filed for bankruptcy last year. Our new bullish diagonal position is near maximum profit with two months remaining until expiration. In a widely unexpected move, Legato Systems (LGTO) fell $23.88 to $29.75 after the network storage software company missed Wall Street's profit expectations. The issue was the most actively traded Nasdaq stock and fortunately, our current play was bearish (and now it appears, profitable). Unisys (UIS) was a surprise winner today, rising over $3 on news that the technology behind its award-winning e-action Natural Language Speech Assistant (NLSA) has been recognized with the grant of a United States Patent. NLSA is the only cross-platform, end-to-end solution for the rapid deployment of speech-based applications for electronic business and other mission-critical requirements. Our bullish spread position returned $8 on $4.88 invested for just two months. Cohu (COHU) and Helix (HELX) also continued their winning ways adding gains to yesterday's all time highs, and today's unexpected $2 rally in Tekelec (TKLX) pushed our new debit spread position into profitable territory after just one week in play. In the long-term portfolio, Computer Associates (CA) led the way with a $5 rally to end at $69 on rumors of favorable quarterly earnings. The company will Webcast the results on January 27 and the program will be a live broadcast of the quarterly securities analyst meeting. CA will also provide supplemental financial data relating to its earnings report, scheduled for next Wednesday. The move was perfectly timed with tomorrow's expiration and our transition to February options. Cabletron Systems (CS) was also on the move, climbing $1.31 to $27.50 after it has reached an agreement for Flextronics International (FLEX) to take over its manufacturing operations (in New Hampshire and Ireland) in a deal valued at $100 million. In addition, Compaq Computer (CPQ) agreed to pay $123 million to Cabletron to cancel a pact that required the giant PC maker to resell Cabletron's networking equipment. Compaq had signed a deal last summer to buy $300 million worth of Cabletron equipment a year. The PC manufacturer was planning to resell CS's products under its own name, but wanted out of the agreement after deciding to exit the networking business. Our bullish LEAPS/CC's play is at maximum profit above $22.50. The recent incredible rally in the stock market has provided the Spreads/Combos portfolio with its most profitable month since inception and we expect another solid performance in February. We have a few adjustments to make before expiration and the expected volatility will provide an excellent opportunity to boost our potential profit in many of the current positions. A summary of January's results along with the complete list of portfolio plays will be posted in next Tuesday's edition of the OIN. Questions & comments on spreads/combos to Click here to email Ray Cummins ********* NEW PLAYS ********* Friday will certainly be exciting as investors move to lock-in profits and option traders exit positions and roll forward to next month's plays. Rather than try to outguess the market's direction after tomorrow's key session, we decided to ride the wave of the January effect with two conservative positions on bullish, small-cap issues. **** WDC - Western Digital $5.56 *** On The Rebound! *** Western Digital designs, develops, manufactures and markets a range of hard drives for the desktop PC market, the high-end hard drive market and for the emerging market for hard drives specifically designed for audio-visual applications. WDC is one of the world's largest independent makers of hard disk drives and they also produce devices for corporate computer networks. Well known computer companies account for the majority of their sales and those include Compaq , Dell, Hewlett-Packard, and NEC. Today Western Digital said it expects to report a quarterly net loss of $0.55 to $0.58 a share, well below analysts' forecasts. Analysts had been expecting a loss of almost $1.00 for the fiscal second-quarter. Western Digital said it attributed its operating performance to increased pricing and demand conditions in the PC desktop hard-drive business, improved operating efficiencies, cost cutting, and a successful a product recall begun in September. The company also reported it would exit the market for enterprise hard drives used in network and workstation computers, thus decreasing losses associated with that sector of its business. The company is due to report the actual results on January 25 but the news is already factored into the stock and there may be a favorable entry opportunity in the next few days. We will watch for consolidation in the issue and try to achieve a cost basis near the recent support (November-December highs) at $4.25. PLAY (conservative - bullish/covered-combo): BUY STOCK - WDC ASK=$5.62 SELL CALL FEB-5 WDC-BA OI=5287 A=$1.00 SELL PUT FEB-5 WDC-NA OI=939 B=$0.50 OVERALL COST-BASIS=$4.50 COMBINED ROI(approx)=15% Chart = http://quote.yahoo.com/q?s=WDC&d=3m **** TERA - Tera Computer $6.62 *** Cray Competitor *** Tera Computer designs, develops and markets high performance general purpose parallel computer systems. Tera's Multithreaded Architecture System addresses a wide range of scientific and engineering applications, such as simulation and visualization of complex mechanical and biochemical systems, and emerging commercial applications such as computer-aided design and visualization, information-on-demand and database mining. Their multithreaded system architecture represents a breakthrough in high performance computing that will enable the company to offer systems with several times the price/performance of currently available commercial high performance computer systems. Tera's prospective customers include government agencies, supercomputer centers and research laboratories that are expected to use the MTA system for a variety of applications, including research in the fields of biology, chemistry, environmental science, materials science and physics. The market for complex scientific research systems is HOT and the recent break-out above resistance near $5.50 signals the return of this forgotten leader in supercomputing technology. The relatively long time frame provides us with a low risk position that can profit in the short-term with a continued upside movement and the potential for reward is excellent. PLAY (conservative - bullish/diagonal spread): BUY CALL JUN-5.00 QIP-FA OI=3253 A=$2.50 SELL CALL FEB-7.50 QIP-BU OI=23 B=$0.56 INITIAL NET DEBIT TARGET=$1.81 TARGET ROI=35% Chart = http://quote.yahoo.com/q?s=TERA&d=3m ************************Advertisement************************* 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 millennium with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************ See Disclaimer in section one ************
Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.
Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.
To ensure you continue to receive email from Option Investor please add "firstname.lastname@example.org"
Option Investor Inc