The Option Investor Newsletter Sunday 1-23-2000 1 of 5 Copyright 2000, All rights reserved. Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com Entire newsletter best viewed in COURIER 10 font for alignment ****************************************************************** MARKET STATS FOR LAST WEEK AND PRIOR WEEKS ****************************************************************** WE 1-20 WE 1-14 WE 1-07 WE 12-31 DOW 11251.71 -471.20 11722.98 +200.42 11522.56 + 25.44 + 91.36 Nasdaq 4235.40 +171.13 4064.27 +181.65 3882.62 -186.66 + 99.84 S&P-100 779.78 - 17.74 797.52 + 14.03 783.49 - 9.34 - 2.73 S&P-500 1441.36 - 23.79 1465.15 + 23.68 1441.47 - 27.78 + 7.81 RUT 533.95 + 25.84 508.11 + 19.80 488.31 - 16.44 + 26.81 TRAN 2751.49 -140.14 2891.63 - 73.09 2964.72 - 12.48 + 89.50 VIX 22.66 + .53 22.13 - 1.07 23.20 - 3.51 + 3.59 Put/Call .47 .42 .50 .51 ****************************************************************** A tale of two markets! The picture painted by the two major market indexes last week was as different as night and day. Your view of the markets was probably colored by which market you follow and how many characters in your stocks symbol. The Dow came off three weeks of advances to lose -471 points. The Nasdaq continued to recover from the recent weakness to post yet another record high close. The markets did exactly the opposite because of a polarization of investor sentiment across all sectors. The consumer groups, cyclicals, materials and most hard goods sectors were dumped as investors who had been waiting for the great "broadening of the market" finally gave up and started throwing money at the tech express. The Internet revolution is changing the way we research and value companies. The tech cycles of boom/bust four times a year may even be coming to an end. It looks like tech, tech, tech. A new cycle may be forming that has techs always up and everything else always down. That sounds stupid but the stocks your father bought are just not producing the gains that the tech/Internet sector has attained. Investors are fleeing fund groups that are value based and pouring that money into the aggressive growth tech funds and the many Internet funds popping up every week. Fund managers are forced to buy techs or lose customers. Dozens of tech/Internet funds turned in record one year results and many gained over 100% last year. This liquidity driven tech rally is changing the way we look at market cycles. Fund managers have previously known that they could own tech stocks for only six months of the year and make a great return. They would buy in Oct, sell in Feb, buy in Mar, sell in July. Life was much simpler then. The cycles were as predictable as the sunrise. This paradigm is about to be tested. The normal February sell off is showing no signs of an early appearance. While the chart patterns are almost identical from this year to last year, the weakness you would expect to see creeping into tech stocks a week before the big event is nowhere to be found. There are a few Internets that are not taking part in the rally but they number just a handful. Every dip is met with buyers and most fund managers are either praying for another 10% (even 5%) correction or have simply given up on waiting and are buying heavily to avoid the missed train syndrome. With the speculative bubble stage evolving into the "we must have been valuing them incorrectly" stage, even the hard core bears are quietly withdrawing from the spotlight to nurse their crippled brokerage accounts. Many have actually admitted that the tech rally could continue for years based on the technology improvements and giant leaps in consumer acceptance of the new Internet generation. Many feared the Internet explosion would eventually run out of capital due to over supply of new and crazy Internet ideas with no chance of success. Instead millionaires are being created every day as new companies are started with just an idea and within months are hugely successful. The stockholders who were lucky enough to get an allocation at IPO time are now plowing those windfall profits back into the next name they can't pronounce IPO. Two years ago, nobody had ever heard the names Akamai, Arriba, Kana, Foundry, Redback, Redhat, Epiphany, etc and now they are throwing money at companies they can't even pronounce and some they can't even buy yet through their online broker. Companies like Pacific Cyberworks (PCCLF) and Softbank, the Asian equivalents to CMGI and ICGE, are not recognized as valid symbols by many online brokers. There are 20 IPOs next week and the largest one is John Hancock at 102 million shares. Ironically this old, established, well respected company will probably be on the bottom of the list of top performers by the end of the week. After all, they are not a tech or an Internet so there is no pizzazz to the offering. The resurgence of the IPO market after the Y2K hiatus is likely to recharge the overall market. The test of the February cycle theory is rapidly approaching. Many analysts are calling for a tech correction again and are baffled by the continued tech rally. Ironically, as long as everyone is expecting a correction it is not likely to appear. The contrarian theory would call for a continued rally and point to the wall of worry being built by these analysts as a motivating factor. The real worry is when these bears change their tune and start predicting the rally to continue. When everybody is standing on the same side of the boat it will turn over. The Dow has been weak from the sector rotation into the techs but it has failed to put a drag on the Nasdaq. Actually the Dow is now moving into an oversold condition and could turn positive next week on this sentiment alone. If the Dow does turn positive it could support a continued Nasdaq rally into the Fed meeting just at the time the Nasdaq should be pausing from its +171 point gain last week. The Fed meeting (Feb-1&2nd) is the next major hurdle. There are no major economic reports until the Employment Cost Index on Thursday so all eyes will be focused on Fed week. Earnings are dwindling and the "reason for the rally" is almost over. Dell Computer is widely expected to warn next week that they will miss earnings and that could hurt the techs if the market is running scared. The Russell-2000 continues to be the measure of the broader market and contrary to the Dow actually set a new high every day last week. I think this is actually the foundation under the Nasdaq rally as well. As long as investors are buying the small caps there should not be any serious dips in the forecast. Just remember the tide can turn on a moments notice. The bonds continue to be weak and yields are hovering around 6.73%. Many analysts fear the rising oil prices will eventually boost prices into an inflationary range. In reality oil prices only account for about 7% of the CPI and some analysts claim the price would have to stay above $30 bbl for several months before the impact would be severe enough to cause inflation trouble. The G7 meeting this weekend had also kept a lid on bond prices with some analysts expecting a call to rescue the Euro by the attendees. The market breadth continues to be negative. Even on the Nasdaq, which closed at a new high Friday the advancers only beat the decliners by 132 issues. Volume was incredible on Friday with over 3 bln shares traded. 1.9 bln on the Nasdaq and 1.2 bln on the NYSE. The extremely heavy NYSE volume on a down day is normally a bad sign. However Proctor & Gamble was the big loser on the Dow and accounted for -49 points of the -99 point loss. PG was making noises about entering into the Warner Lambert bidding war and investors were not happy. The point however was the Dow was only down -50 points if you discount PG. About a third of the companies in the S&P 500 have reported their numbers. Growth has been strong: Earnings are better than 23% over where they were in the year-ago period, according to earnings-tracker First Call/Thomson Financial. Moreover, 69% of the companies that have reported have topped estimates, against the usual 54%. Had you Greenspeak vaccination yet? Fed Chairman Alan Greenspan appears before Congress twice next week. He speaks to the Congressional Budget Committee on the budget Tuesday, and he will be grilled at the Senate Banking Committee's hearings to confirm him for a fourth term as Fed head Wednesday. While nobody expects any earth moving comments you can bet the markets will be watching carefully. For those that emailed me about suggested big cap naked puts for February I have created a list of the top 50 stocks with the highest premiums and the best chances for expiring worthless. This list is simply based on high premium value and high volatility. I am making no claims about the stability of the stocks. You should look at a chart for each and decide if it fits your risk profile. The list is in my Options 101 article for today. We will be announcing the guest speakers for the Denver Options Expo this week and you will not be disappointed. Watch for it! Trade smart, sell too soon. Jim Brown Editor **************************************************** ANNUAL OPTION INVESTOR 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 be held beginning on Tuesday March 28th with the Boot Camp refresher course 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, Tuesday 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 Some of the topics covered will be: Entry Point, Entry Point, Entry Point Technical & Fundamental Analysis Options on Stock Splits Understanding Market Sentiment Recognizing Market Changes Cash Flow with Covered Calls Covered Calls on Leaps Using The Power of Index Options Successful Spread Techniques Maximizing Returns With Options Selling Puts, A Win - Win Play Using Options To Hedge the Market Buying Stock with Options Fundamentals of Charting Picking the Right Play In the Money, At the Money, Out of the Money Understanding Risk Profiles Making Stop Losses Work Trend Trading Day Trading Options Trading Psychology Money Management Target Shooting, Waiting on the Market Capitalizing on Earnings Stress Free Straddles Taxes and the Trader Keeping more Profits by Paying Less Taxes Selling Time OEX Skybox Recognizing Opportunity and Profiting From It. The second session is already over half full. If you are interested please register immediately because seating is limited. http://www.OptionInvestor.com/bootcamp/oinmain.html ****************************** OptionInvestor/Optionetics Spring Advanced Seminar Series ****************************** The spring dates for the OptionInvestor/Optionetics seminar series have been announced. This is the advanced seminar taught by George Fontanills and Tom Gentile. If you feel you need more option strategies in your trading arsenal like the Delta Neutral Straddles George is famous for then this seminar is for you. Remember, you can bring a friend for free and retake this seminar as many times as you want for free. The cost of the two day seminar is about what you would lose in only one trade. Invest it, don't lose it. Here are the spring dates: Feb 27/28 Los Angeles Mar 19/20 Chicago Mar 26/27 Dallas Apr 2/3 San Francisco For complete details http://www.OptionInvestor.com/seminar/ There is a 100% money back guarantee and you can take a friend for free. What else could you ask for? ***********************Advertisement*************************** * FUN... CONTROVERSIAL... ADDICTIVE... and it's all FREE! * Like to Laugh... Like your news a little Bizarre... or do you like to be Teased, Brain Teasers that is? See why over one million people a day get their news, entertainment and fun from ShagMail! The widest selection of topics on the net. Visit: http://www.shagmail.com/al/affiliates.cgi?2961 *************************************************************** *********** JIM'S PLAYS *********** What a week if you were in Nasdaq stocks and a terrible week if you owned NYSE stocks. Fortunately I was in OEX and QQQ puts last Friday so the negative open on Monday was profitable. If you are looking for trading tips this week I am afraid you won't find any here. I was busy with some changes we are fixing to make at OIN and I did not trade much. The plan for this week is to sell naked puts on several stocks but I am concerned that we could see a market event soon so I am not sure if I want to sell now or wait a week. Selling naked puts is a great strategy normally but even better if you can sell at the bottom of a market drop. The risk is much less. QQQ - JAN-188 Puts I owned the JAN-188 puts for $5.75 from the previous Fridays close. I was able to sell them ot the open on Tuesday for $5.25. This was a long shot as I stated last week. I lost -.50 on the QQQ puts but I did real well on the OEX puts. On Thursday morning I felt the opening spike was too good to be true and I bought the QQQ-190 puts for 2.13 pretty close to the top and sold them a few minutes later for $3.00. At the close on Friday the QQQ was touching the 193 level again and after four up days I took a chance again and bought the QQQ-Feb-196 puts for $12.25. Eventually this Nasdaq train has got to rest! (famous last words) OEX - Jan-810 puts I wish I could say I was smart enough to hold my Jan-810 puts until the close on Friday but sad to say I sold to soon. I sold my $14.00 puts for $18.25 when the Dow started to recover at midday on Tuesday. I can't complain but those same puts closed out the week at $30.25. On Thursday when the OEX rolled over after the open I bought the 790 puts for $8.00 and sold them an hour later for $10.13. I did not buy OEX puts at the close on Friday. The Dow is nearing oversold and the Nasdaq is nearing over bought. I did play the Nasdaq. LU Jan-2002-45 leaps No excitement here but at least there was not another sell off. Now that the worry is over I am planning to sell covered calls against these leaps this week. The Feb-$55 calls are $2.25. I think I will watch to see what direction the market takes and then play accordingly. If we get a rally into the Fed meeting like we have had several times recently then Maybe I can sell the $60 for the same price and have less risk of being called out. GTW - Jan-2002 $50 Leaps Nice bounce after earnings. Hopefully it will hold and start moving back upward. I am going to write calls against these leaps as well. The $65 calls are $3.13 but may be too close. The $70 calls are $1.75. I think I will wait and see what the market gives me and make the decision closer to the end of the week. VOD - APR- $40 calls This play is working out great. I fought off the urge to sell them when they drifted lower midweek. They are in breakout mode and if VOD can hold here we could go to $60 soon. I am still holding! I bought at the $45-46 level so I am comfortable waiting. Below $52 I will start worrying. BVSN Jan-$130 Puts Finally a real direction. After closing my covered straddle the prior week I had planned to sell naked puts on BVSN last Tuesday. It worked great. I sold the $130 puts for $2.75 since they were clearly under support about $132 and BVSN never looked back. I closed them on Thursday for $.38 to avoid any last minute disasters. BVSN is high on my list of naked puts for February. With BVSN at $162, the $140 puts offer a 34% return with a minimum of risk. I will probably wait to see if the Nasdaq is going to pause or retreat before going opening the position. ************ Again, I am not planning to trade much this week as I have a heavy schedule. My preferred direction would be to have some softness in the Nasdaq early in the week and then a -10% drop or more around the Fed meeting. I would then leverage the majority of my account into naked puts on the stocks on my put list that went down the least and put the rest into calls. That would be as close as I could get to a perfect environment. But, Murphy is alive and well and the markets will probably rocket all week and totally ignore reality and the Fed meeting. If the market does continue up then the stocks below are the ones I am watching for call plays. Good Luck Jim Watch list ANAD, NOK, PCS, ADAP, ARBA, VRIO, AMCC, AES, SNE, CREE, CMVT LVLT, EPNY, SPLT, VOCL, BVSN, CMTN, FFIV, GBIX, PKSI, ISSX ALO, ORTl, NPNT, BGEN, YHOO, DISH, SFE, GUMM, DTE *********** OPTIONS 101 *********** Naked Put list for February and answers to covered strangle questions. I had many emails last week asking for my watch list for naked puts for February. The list below is the top 50 stocks with the highest premiums. Many are excellent plays and some have much higher risk. The stocks on this list have high premiums because they tend to move quickly not because they are all great plays. Spend ten minutes and look at a chart on each and decide which strike you are comfortable in selling. Remember, peace of mind with a 25% monthly return is far better than a 40% return and sleepless nights. http://members.OptionInvestor.com/options101/012300_2.asp ************ Stock News ************ Trimble Navigation: positioned for growth You probably have never heard of Trimble Navigation (NASDAQ:TRMB). But with interest peaking in the area of wireless technologies, specifically portable wireless devices, I expect that these guys will be making some headlines. http://members.OptionInvestor.com/stocknews/012300_1.asp *************** Ask OIN by Kimo *************** Hello everyone! I'm glad to be back. I know some of you have really missed the Ask OIN column and we're sorry it hasn't been on the site these last couple of weeks. Now that all the staff is back from the holidays or vacations we are excited and looking forward to the year ahead. http://members.OptionInvestor.com/ask/012300_1.asp ************** Market Posture ************** As of Market Close - Friday, January 21, 2000 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 11,000 11,250 11,252 BULLISH 1.13 SPX S&P 500 1,340 1,400 1,441 BULLISH 12.03 OEX S&P 100 700 750 780 BULLISH 12.03 RUT Russell 2000 430 450 534 BULLISH 11.12 NDX NASD 100 3,200 3,850 3,849 Neutral 1.06 MSH High Tech 1,650 1,900 1,882 Neutral 1.06 XCI Hardware 1,300 1,350 1,431 BULLISH 1.14 CWX Software 1,210 1,420 1,329 Neutral 1.07 SOX Semiconductor 640 660 804 BULLISH 12.21 NWX Networking 820 900 899 Neutral 1.07 INX Internet 665 800 760 Neutral 1.06 BIX Banking 645 690 519 BEARISH 11.30 XBD Brokerage 410 450 418 Neutral 11.30 IUX Insurance 625 650 563 BEARISH 11.30 RLX Retail 900 935 936 BULLISH 11.23 DRG Drug 380 400 359 BEARISH 12.07 HCX Healthcare 760 790 732 BEARISH 12.07 XAL Airline 180 190 134 BEARISH 5.21 OIX Oil & Gas 280 315 293 Neutral 1.06 Posture Alert The Nasdaq closed out the week on a higher note, as the technology index nearly traded 2 billion shares Friday. The Dow continues to suffer, as the index suffered another losing day Friday thanks to Procter & Gamble's (-9 7/8) apparent entry into the Warner-Lambert (and now American Home) auction. If this last week of January is any indication for the rest of 2000, then we should all be loading up on the small caps, as the Russell 2000 closed up another +1.26% Friday (+9% for the last 6 trading days). Losing sectors Friday were Airlines (-2.44%), Brokerage (-2.16%), and Retail (-1.81%). ****************** Market Sentiment ****************** Sunday, January 23, 2000 Great Expectations II! The earnings season continues to look impressive, and heading into the new trading week, the expectations for these solid earnings continue to rise. Below is a list of equities (that should be reporting their earnings this next week) and our Pinnacle Index for those particular stocks. The Pinnacle Index is a proprietary product that determines current market sentiment and expectations for underlying equities and indexes, which is based upon speculation in the option markets. Also included are their expected earnings, the infamous whisper number (if available), and their estimated earnings release date. What we look for are liquid stocks/options that garner a lot of interest from the investment community. Most of the issues are high tech, and are thus more aggressive. We then filter out many of the equities, only to show stocks with excessive optimism or pessimism. From a contrarian standpoint (a high number is a good indication of extreme optimism, and a low number is a good indication of extreme pessimism) you should buy when its low, and sell when its high. Last quarter, we highlighted some stocks with a Pinnacle Index that were stratospheric (as high as the upper 20's). Needless to say, these stocks had so much pent-up enthusiasm, that after their earnings, they tanked. It is the old adage, buy the rumor - sell the news. There were also numerous companies with a Pinnacle Index less than one. However, once these companies came out with their bad quarter, the stocks rallied due to the oversupply of pessimism. If your favorite stock is not listed, the most common reasons are: 1) there are no options traded on the underlying equity 2) lack of interest by option speculators in the security 3) lack of quality information 4) company already pre-released 5) insufficient data. Also, as we get closer to the heart of earnings season, the list will expand dramatically to reflect companies whose earnings are due out shortly. Company Symbol Pinnacle Expected Whisper#: Estimated Index(PI): Earnings: Date*: American Express AXP 1.29 +1.33 +1.35 1/24 AT&T T 4.89 +.56 +.57 1/24 BMC Software BMCS 1.79 +.49 +.50 1/25 Broadvision BVSN 9.87 +.06 +.07 1/26 Checkfree Hold CKFR 8.22 -.10 -.10 1/25 Compaq Computer CPQ 6.77 +.15 +.17 1/25 Covad COVD 8.25 -.97 -.95 1/25 Coca Cola KO 4.74 +.30 +.33 1/24 Compuware CPWR 2.10 +.33 +.35 1/24 ECI Telecom ECIL 7.18 +.62 +.63 1/28 Elect Arts ERTS 3.70 +1.38 +1.42 1/25 Ebay EBAY 6.47 +.02 +.04 1/25 EMC Corp EMC 8.89 +.31 +.33 1/26 Ericcson ERICY 2.30 +.32 +.33 1/28 Exodus EXDS 7.19 -.21 -.17 1/26 First Data FDC 9.04 +.54 +.55 1/27 JDS Uniphase JDSU 7.95 +.16 +.19 1/26 Lsi Logic LSI 9.33 +.43 +.48 1/25 Lexmark LXK 1.10 +.68 +.69 1/24 Macromedia MACR 8.28 +.13 +.14 1/26 Mirage Resorts MIR 3.25 +.19 +.19 1/24 MP3.Com MPPP 1.49 -.20 -.18 1/25 Mindspring MSPG 3.10 -.09 -.07 1/25 Merrill Lynch MER 3.59 +1.35 +1.38 1/25 NetZero NZRO 8.52 -.28 -.26 1/26 Priceline.com PCLN 5.95 -.08 -.06 1/27 Phillip Morris MO 0.98 -.77 -.77 1/26 Qualcomm QCOM 2.99 +.24 +.27 1/25 SanDisk SNDK 8.78 +.22 +.23 1/26 Silicon Graphics SGI 2.74 -.09 -.08 1/24 Starbucks SBUX 2.72 +.16 +.16 1/27 Tellabs TLAB 2.58 +.40 +.43 1/25 Equities showing high levels of expectations this week include: Sandisk, Priceline, Netzero, Macromedia, Lsi Logic, JDS Uniphase, First Data, Exodus, EMC, Ebay, ECI Telecom, Compaq, and Broadvision. Low expectation equities include: American Express, BMC Software, Compuware, Ericcson, Lexmark, MP3.com, Phillip Morris, Qualcomm, Tellabs, Starbucks, and Silicon Graphics. Have a good trading week. 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 (22.66): The VIX continues to prove that the low 30's are an excellent buying opportunity, and the high teens continue to be a great selling opportunity. Interest Rates (6.709%): 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 Benchmark (1/21) Overhead Resistance (780-800) 0.83 OEX Close 779.78 Underlying Support (750-770) 2.14 What the Pinnacle Index is telling us: Based on January 21, direct overhead is now light, and support is building. Based on the sentiment, we would not be surprised to see the OEX bounce higher this upcoming week. Put/Call Ratio Friday Strike/Contracts (1/21) CBOE Total P/C Ratio .47 CBOE Equity P/C Ratio .41 OEX P/C Ratio 1.26 Peak Open Interest (OEX) Friday Strike/Contracts (1/21) Puts 745 / 4,079 Calls 760 / 5,234 Put/Call Ratio 0.47 ************* COMING EVENTS ************* For the week of January 24th, 2000 Monday None Scheduled Tuesday Existing Home Sales Dec Forecast: -- Previous: 5.09M Consumer Confidence Jan Forecast: 141.1 Previous: 141.4 Wednesday None Scheduled Thursday Jobless Claims 1/22 Forecast: -- Previous: 272K Employment Cost Index Q4 Forecast: 0.9% Previous: 0.8% Durable Goods Orders Dec Forecast: 0.7% Previous: 1.2% Help Wanted Index Dec Forecast: -- Previous: 85 Friday Gross Domestic Product Q4-fin Forecast: 5.1% Previous: 5.7% Univ Michigan Sentiment Jan Forecast: -- Previous: 111.4 Week of 1/31 1/31 Personal Income - Dec 1/31 Chicago PMI - Jan 2/01 Construction Spending - Dec 2/01 NAPM Index - Jan 2/01 FOMC - Rate meeting begins 2/02 Leading Indicators - Dec 2/02 New Home Sales - Dec 2/02 FOMC - Rate hike announcement 2/03 Factory Orders - Dec 2/04 Nonfarm payrolls - Jan ************* WOMAN'S WORLD ************* IS THE GLASS HALF EMPTY OR HALF FULL? Tweaking Covered Calls - (Part 1 of 2) It is always difficult to determine at any given moment what strategy to put on. One of my favorite strategies is covered calls, but I must confess I don't do it often enough. After speaking to an investment firm this week about covered calls, I decided to expand my rules and do some analysis to tweak this strategy for my own purposes and thought I would share this with you. As a review, a covered call is going long the stock and writing (shorting) the call option. Writing a covered call has its advantages and disadvantages. Writing the call locks in a short-term profit, while at the same time caps your upside potential. However, in lieu of capping your upside, you have a lower break-even in the event your stock goes down. Is the glass half empty or half full? I looked at two different scenarios and determined how I could more effectively implement a covered call strategy in each of these. They are as follows: stocks trending sideways (Part 1) and stocks trending up (Part2). First, let's look at a stock trending sideways. Actually, the covered call strategy, generally works best for this trend. The chart below of AIG (American International Group) shows a stock that is channeling, with a slight upward bias. For the last four years, AIG has split every summer and the overall trend is up. Even in a stock trending sideways, I like the bias to be up. After all, I won't be nearly as upset if I get called out and make money, then if the stock tanks and I'm stuck losing money on the stock. Now, because timing is everything, let's look at the ideal scenario for AIG. The first step in doing any covered call is to determine the support and resistance levels. Ideally, in a covered write, you would buy the stock at support and sell the call at resistance, not necessarily in that order (unless you can't write naked calls in your brokerage account). In that case, you must first wait for the dip to buy the stock, and then let the stock run up before writing the call. Support for AIG is at 102 and then again at 100 and then at 98. These are the levels we would like to buy the stock. A bounce UP off of any of these numbers would be ideal. Resistance is at 111 and next level up is at 114-1/2, the 52 week high. After a failed bounce off these levels, we would like to write the call. It is impossible to pick the tops and the bottoms, but realistically we should be able to buy the stock at about 104 on the way up from the bottom after a bounce off 98 or 102. At the top of the range we should be able to write the February 110 calls when AIG is at 108 or 109 after a failed run at 111, or write the call when AIG is at 109 or 110 after a failed run at 114-1/2. Because this stock is channeling and has more upside potential, I would like to keep the stock and write calls against it as often as I can, until such time that the overall pattern or trend breaks down. Because time value erodes the most in the last 30 days, my own criteria would dictate that I write the February 110 call when AIG bounces off resistance. Of course you should have a stop-loss one point below support at either 99 or 97, depending on your risk tolerance. My biggest problem is when I see a predictable pattern like AIG's; I tend to pull the trigger too soon on one of the legs. Remember, channels do not last forever. A lot of times, by the time you find them, they are over-- only you don't know it. Most people generally lose on this strategy because they put on both legs at the same time or initiate one of the legs too soon. Believe me, I've been there. The previous week ending Jan 14, AIG went up steadily from 104 to 114-1/2. The February 110 call ran from 2-5/8 to 7. Had we implemented the strategy outlined above during the previous week, we would have bought AIG on Tuesday January 6 at 103 (above support). On Friday Jan 14, the stock made a 52-week high of 114-1/2. This would not have been the time to write the call, although, in hindsight it was. The stock could just as easily run up from the high, after it had broken through its key resistance level of 111. The bounce off resistance came on Tuesday Jan 18 when it gapped down at the open and ran below the 111-resistance level. At 110 we would be scrambling to write the February 110 call for about 4 points. Your break-even for the stock would be 99, stock cost less call premium (103-4=99). Now, here is where you can tweak this strategy. The stock can do one of three things: 1. Stock CONTINUES in the channel: If the stock bottoms and bounces UP off support, you could buy back the call for about 2 points, netting 2 points profit, and ride the stock back up to resistance and do it all over again. 2. Stock breaks through BELOW support: If the stock continues downward and closes BELOW support, you would sell the stock and let the call expire worthless. If you can't go naked, you would buy back the call at a profit, which would offset your loss in the stock. 3. Stock breaks through ABOVE resistance: If after selling the call, the stock turns around and continues to rise above the previous high 114-1/2, you could buy an "at the money" call or buy more stock. You would then get called out of your original position for a profit and additionally have the call or stock to let run up for an uncapped profit. Now can we make money on this stock using this strategy? Last week, AIG dropped from 112-3/8 to a low of 102-1/16 and closed just below 104 NEAR support. The stock has been dropping in price for the last 4 days. The Feb 110 call dropped from a high of 5 to a low of 1-15/16 on Friday. To maximize our return we want to buy the stock near the bottom of the range and sell the call near the top of its range, remembering that with each passing day the Feb time-value is melting away. It is entirely possible that the support level will become 103 or 104 if it bounces off this number a few times, as this stock is favored to the upside. In that case, I would buy the stock off a bounce of 104 and wait for the stock to run up before writing the call. Currently AIG is NEAR the bottom of the existing range, but a clear signal has not yet been given. I will be watching AIG closely this week to see if we get the bounce off resistance as an entry point. I only wish I had seen this pattern last week or the week before. My next article will be how to tweak this pattern in a stock trending upward, with an analysis of AIG over the next coming week. 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The Option Investor Newsletter 1-23-2000 Sunday 2 of 5 ************************* WOMAN'S WORLD - CONTINUED ************************* Crash of 1929, never again. My trades for the week were profitable although I missed a couple of good plays. I had previously closed out my Nextlink puts at a profit and wrote a Jan 75 call on Nextlink when it was 75. I was sorry I did when the stock went up to 89 the next week. So I bought back the Jan 75 call and wrote an April 85 call with only one half point difference in price. Possibly after earnings season I may be able to buy back the April 85 call cheap. My Qwest 2002 40 leaps were purchased at 11.5, and hit a high of 14, a profit of 20% in a couple of weeks. I think this has a lot further to go, and is a very low priced option for a two-year leap. Take a look at most two year leaps on technology stocks, and they will usually run over 50 or 60 dollars. My Nortel was purchased at 94, and is now 101. I plan to hang on to this until the day before the company reports earnings. CMGI Jan 125 leaps are trading around 37, which I think is reasonable, however if they drop to around 32 I am going to grab some. Despite the run up of the last few months, CMGI is a dynamic company with a lot of good news coming out every day. A solid earnings season and a strong Nasdaq have overpriced many option premiums. However, I have noticed a few stocks I like which have been down or flat and might make good candidates for leaps like At Home, Lucent, Dell and Qwest. My strategy is to buy two at the money leaps and take a short in the stocks. This way money can be made in either an up or down market. Last Monday in the Wall Street Journal there were a couple of articles discussing the topic of the overvalued Japanese stock market of the 1980s and the US stock market crash of 1929. There were three charts in a graph showing the rise of the Nikkei in the 1980s, the rise of the Dow before 1929 and the rise of the S & P 500 in the 1990s. The three charts looked identical except the chart of the S & P stopped before the other two crashed, and the articles raised the issue of previous "speculative bubble" periods and the ensuing crashes that followed. I found the graph misleading and the articles void of essential facts about the time periods and different economic fundamentals, which could lead readers to draw inappropriate conclusions. First, there are several important differences in the U.S. financial markets of the 1920s and those of the present. In the 1920s in the US there was no Securities and Exchange Commission. The SEC came into existence in the 30s to help stabilize the financial markets and protect the American investor from fraud. Many of the speculative stocks purchased in the 1920s were actually in bankruptcy and this was not disclosed to investors. The Federal Reserve existed in the 20s but it did not serve the same roles or functions it does now. It did not regulate margin requirements, which is why many investors were speculating by buying stocks on five- percent margin. The Fed did not exert the same influence over the money supply or interest rates that it does today. The exchanges themselves were not well regulated, which is why many specialists trading stocks back then lost all their money and couldn't open their stocks. Nowadays the Federal Reserve can actually intervene in the financial markets by lending money directly to specialists on the floor of the exchange if it is necessary so they can open their stocks. The exchanges did not have trading stops at various levels as they do now. Comparing the Japanese stock market to the US stock market at any point in history is like comparing animals of two different species. The Japanese society was not really a capitalist society in the 1980s or 1990s. Their social, economic, political and financial structure was based on principles foreign to Americans, such as kieretsu, which loosely translated means unity. They did not have the entrepreneurial spirit or individualistic motivations our society does. The government protected the banks, which lent money to dud customers, who kept borrowing more and more to pay off debts they could not afford. The finance ministry hid the banks' bad debts. Shareholders did not sue corporations and corporations did not sue each other because it was considered an act of disloyalty. Publicly traded stocks, which were not scrutinized by a regulatory organization such as the SEC lied on their balance sheets. Brokerage firms were known to engage in such practices as compensating customers losses out of the firm's own account. Insurance policies were heavily leveraged through the debt markets. The tight collusion of their political economy locked together special interest groups in tight unity. Companies donated money to politicians, politicians got them work from the government, and the companies offer the politicians jobs when they retired. Employees were guaranteed lifetime employment, but venture capitalists, scientists and individual entrepreneurs could not find financing to start their own businesses, as capital was only available to the same big corporations. The belief among many in the late 1980s was that Japan led the world in economic efficiency. In certain industries that may have been true, for instance mass production of automobiles. But the rising cost of land in Japan, and price fixing and other anti- competitive practices led to gross inefficiencies in large segments of their economy. While the US and Europe turned to the information technology and service industries as the foundation of growth, Japan has stagnated, depending on a few manufacturing industries to support their entire economy. The Japanese stock market resembled a building with a weak foundation. It was built on principles of fraud and deception and leveraged through excessive debt. Japanese accounting standards allowed companies to hide their problems not show them. Since the younger generation in Japan is starting to yearn for the Western way of life, the shock therapy, which was inflicted on them through their recession and market crash, may force their society to change. The US financial markets will have their ups and downs. Some individuals will show poor judgement by buying certain speculative stocks. The market will correct at some point, nobody knows when, but it may be scary and some people will lose money. However the US market is like a building with a strong foundation. If a house is built with a weak foundation and an earthquake hits, the house will crumble and have to be rebuilt. If a house is built with a strong foundation an earthquake may shake it but not destroy it. ************* Renee is on vacation this week *************** TRADERS CORNER *************** Why Do Most Traders Lose Money? In his book, Market Wizards, Jack D. Schwager asks Marty Schwartz that question. Marty Schwartz responds: "Because they would rather lose money than admit they're wrong. What is the ultimate rationalization of a trader in a losing position? 'I'll get out when I am even.' Why is getting out even so important? Because it protects the ego. I became a winning trader when I was able to say, 'To hell with my ego, making money is more important.'" Schwager, a former Marine, also draws on his training as an officer when in a tight position. The Marines, he says, taught him to either go forward or go backward, but don't just sit there. That's what I did this morning. One part of the plan I formulated last weekend was to begin to get experience executing the covered strangle strategy that Jim Brown described a few weeks ago. Instead of laying on both sides, I decided to start by selling only a naked call, and hedging it by buying the underlying whenever the stock went in the money. I went through 7 Internet/ Red Hot stocks with high volatilities to select good candidates to roll over. I narrowed down my choices to ARBA, TIBX, and ICGE. Against the advice of some advisors, I went with TIBX because it had the highest premiums. Having run up substantially last week (see Lynda's column from the Sunday newsletter), I figured that it was about time for it to roll over, hopefully with the rest of the market. I sold the Feb 165 Calls at 20.25 on Tuesday when TIBX was trading at 158. TIBX did not roll over. It did the worst possible thing. It went to the strike and played hopscotch. 163... 167... 164... 167. I sat in front of a computer in school and hedged... and unhedged... and hedged... and unhedged. Boy, let me tell you, that is fun. This morning, I checked the account figures, and I did not have enough buying power to fully hedge my position if TIBX went over 165. There is another nice feeling. So, I sat there through the open, and watched TIBX open at 164.875... and meander up to 168. Should I buy to close part of my naked call position? Close all of it? Should I hedge as much as I can by buying as much stock as I can? Then, Marty Schwartz' words came back to me. He describes unwinding a losing position with his wife standing over his shoulder, saying "get smaller... get smaller." First, I put in an order to buy to close part of the naked call position at a limit price that I knew would not fill -- at least I could adjust back into the spread. That was a good step. Then, I wrote the following down on my blotter: "1. Get Flat 2. Think Clear." Then I bought to close the remaining part of my position. I was already feeling much better. I had more than enough buying power to hedge the remaining contracts. I still had that unfilled order. Should I keep that too? Better to get flat and start again. I adjusted the limit and got filled. Now, I am thinking through the lessons learned -- 1. This is not a riskless strategy. 2. One risk is that you have to watch the market each day and every day. I called my girlfriend, who asked, "Is this a waste of time?" Each individual has to answer that. 3. Another risk is that the Internet/ Red Hot stocks which have the highest volatilities also move the most quickly. And Murphy is alive and well, as I know. 4. Another risk for the novice trader moving up to this level of trading is not fully understanding the margin math involved. If you are contemplating this strategy, check with your broker regarding: trade date balance, short market value, equity, how maintenance requirement is calculated, and buying power. On the plus side, this week, I did sell VRSN Feb 220 Covered Calls for 15 while the stock was at 200 after a big gap up. I also sold SCH Feb 45 Covered Calls for 1.5. I sold those in my LT Stock Account. I have already fully thought through those transactions -- if I get exercised, I have no problem selling the stock at that price; however, I think the market is getting set to roll over, so I hope that I end up pocketing the premiums. This weekend, I plan to go back to the drawing board. I am not completely throwing out the covered strangle strategy. I just want to learn it step by step, and to clearly evaluate whether it fits my trading style. Jim's Options 101 article from last weekend about selling naked puts may be more up my alley, especially since I have a list of stocks (HGSI, INCY, BRCM) that I would not mind acquiring as LT holdings when, and if, they go on sale. I can't report glorious victories this week, but at least I will live to fight another day. Janar Joseph Wasito ****************** OPTION CLUB UPDATE ****************** TRADING CLUB UPDATE ************************ Sunday, January 23, 2000 JOIN A TRADING CLUB TODAY!!! Visit the trading club message boards and see what others have to say: http://boards.OptionInvestor.com/tradersclubs/ UPDATE FROM SALT LAKE CITY *************************** SALT LAKE CITY AREA OIN GROUP MEETING We had a small group of seven this month. We met at the downtown office of one of our group. It was very helpful being able to use David's computer setup to pull charts and information. I reviewed some of my recent trades and strategies with the group. Especially one of my recent trades that I thought would be educational to the group in adjusting positions. I had purchased CNCX (Concentric) at $28.50 per share and sold a JAN 30 covered call for $3.00 per share. When the news came out that NXLK was purchasing CNCX, the stock shot up to over $40.00. I stood to make another $1.50 per share when called out of the JAN 30 for a total of $4.50. However, I waited for a pull back and bought the JAN 30 back at $8.125, then I waited for the upside and sold a FEB35 at $5.50 to cover the buy back. Now when I am called out in February I'll make a total of $6.50 per share versus the $3.00 to $4.50 per share from the original transaction. I'll watch this and if there is any kind of pull back before February expiration, I may buy back the FEB35 and sell a FEB40. I also shared some of my trades doing naked puts and long stock -covered calls. One of our new attendees, Hughes shared some of his strategies with us. He sets up several stocks under different sectors and watches the sectors and the stocks for new plays. He stressed the importance of watching a small group of stocks and mostly playing those stocks. This is something that Jim Brown has previously mentioned: Get to know stock patterns of just a few stocks, monitor the news and know everything you can about those companies, then play just those stocks. Hughes also re-inforced how important it is to set stop losses so he only takes small losses. We discussed watching the trend line and technical chart patterns for the positions we are in. We shared ideas and experiences about different charting services and brokerage accounts, ie, Telecharts vs Quote and Interquote and Preferred Trade vs others. It is great for me to get together with others who are on the same trading wavelength. I always come away from our meetings having learned something new and more importantly discussing the effectiveness of setting trading rules and following them. In February we are planning to meet on Thursday the 17th at 6:00 PM in the Sandy area. We alternate between downtown and the Sandy area since we have people coming from both the North end as well as the South end of the valley. We are setting up a guest speaker who writes for the OIN newsletter. Hope to see some new faces at this meeting. If you are interested in attending and are not already on my group list, contact Leslie at Contact Support and she will forward my e-mail address to you. Carol Mortensen Salt Lake City area organizer. If you would like to join contact us at Contact Support and Contact Support LAST WEEKS CHANGE FOR THIS WEEKS PICKS: *************************************** Daily Results Index Last Week Dow 11251.71 -371.68 Nasdaq 4235.40 125.24 $OEX 779.78 -14.19 $SPX 1441.36 -19.58 $RUT 533.94 19.72 $TRAN 2751.49 -107.32 $VIX 22.66 -0.62 Calls Week AFFX 253.63 66.88 If you are looking for a new leader MSTR 289.13 61.19 Investors key into potential growth JDSU 233.13 40.94 Earnings announcement January 26th HGSI 221.88 37.25 Still a hot issue in a strong sector EXDS 137.88 31.88 Houston, we have ignition for EXDS! SEPR 155.00 28.88 SEPR tags new 52-week high on Friday LVLT 110.50 23.75 LVLT has plenty of room for a split NTAP 117.13 23.44 Extremely well positioned in industry PCS 110.75 13.00 Looking for a nice sprint from PCS MFNX 69.88 12.75 Ten straight days of gains for MFNX! VIGN 212.50 11.56 Earnings on Tuesday after the close TQNT 141.50 11.50 A double whammy makes for a must own NTLI 136.38 11.06 New, 5:4 stock split on Feb 3rd LSI 82.00 9.25 Dropped, reporting earnings on Tuesday EMC 121.00 8.63 Dropped, start looking for an exit TWX 91.13 7.88 New, a play on the merger with AOL ANAD 79.25 6.25 Earnings just around the corner! DISH 96.25 6.00 New, we welcome DISH back to our list GMST 79.88 3.06 GMST is ready to reap the rewards! VOD 55.94 3.06 The bickering with Mannesmann goes on CMVT 150.38 2.06 It is hard not to like CMVT's chart NOK 185.00 1.56 Was Friday's breakout the beginning? AES 80.00 -3.25 New, no discrimination against profit! ADI 96.63 -4.75 Dropped, momentum may be subsiding Puts RMBS 75.38 -14.25 New, a decline pattern easy to see MU 67.13 -6.13 New, lack of performance gives us go SLR 80.00 -5.75 New, predictable earnings kiss of death WCOM 41.63 -4.94 Like a punch drunk boxer, on the ropes RLM 69.38 -4.13 A negative reaction doesn't help RLM FD 43.88 -4.00 Investors head for the returns counter IIJI 81.63 -3.88 Takes the initiative for a downturn CMGI 118.25 -3.69 Still suffering from post-split blues ISLD 91.63 14.50 Dropped, hungry investors grab up ISLD ICGE 159.00 25.50 Dropped, makes too good of an effort STOCKS ADDED TO THE PICK LIST ***************************** Calls AES - AES Corp. NTLI - NTL Inc. TWX - Time Warner DISH - Echostar Communications Puts MU - Micron Technology RMBS - Rambus Inc. SLR - Solectron *************************** PICKS WE DROPPED THIS WEEK *************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS ADI $96.63 (-4.75) ADI has indeed been a lucrative momentum play since we first picked it on December 30th. The intraday volatility offered a multitude of entry and exit points. Unfortunately we believe the momentum is subsiding and are exiting the play this weekend. ADI has not only shown weakness over the past two days, but also violated the 5-dma ($99.48) line which is not a good sign in this case. EMC $121.00 (+8.63) EMC has given us a nice run, and still may have some legs left. On Friday sellers moved in early, but were unable to push the price below $117. Buying pressure resurfaced and pushed prices above the new $120 resistance. EMC showed us the money by closing at $121, right at the high of the day. The strength today leads us to believe prices could continue upwards on Monday, but with earnings scheduled for Wednesday before the open, start looking for a good exit point. Since we never recommend holding through earnings, you want to be out before the close on Tuesday. LSI $82.00 (+9.25) We are dropping LSI this weekend because the company reports earnings Tuesday after the close, before another newsletter is published. LSI may have one or two more days of momentum left in the current earnings run. The Semiconductor company broke out to a new 52-week high Friday on strong volume of 1.87 million. LSI has seen earnings improve over the last year and has a recent history of earnings coming in ahead of analysts estimates. LSI moved up this week on positive comments from two analysts. If you have a position in LSI, we would suggest moving your stops up and letting the market dictate your next move. Remember you will want to close this play by the end of the trading day Tuesday. PUTS ICGE $159.00 (+25.50) ICGE is making such a good effort to remain high that we concede defeat and are saying goodbye to our put play. They broke through the resistance level of $150 and it looks like that will be support now. Earnings are also coming up here on February 1st and it looks like last week was a foresight into an earnings run for ICGE. Although CMGI has been down, and ICGE usually follows close on their heels, CMGI's misfortune has had no effect on ICGE. The Nasdaq, however, has been a big help for ICGE. Investors seem to be on ICGE's side, but still a little cautious with only normal volume behind these good days. Which is how we see ICGE, as their market capitalization skyrockets we raise our eyebrows at their pricey valuation and wonder if the fast climb could indicate the same kind of fall for them in the future. For now though we say goodbye and maybe we'll see them again soon. ISLD $91.63 (+14.50) Apparently, investors were hungry for any kind of news to give them the go ahead on ISLD. ISLD began Friday's session looking as though it was going to spend another day flirting around the $80 level. Then, about half way through the session, we saw the volume pick up to propel the shares as high as $94.50. ISLD wound up closing the day up over $11.50 with strong volume backing the move. So, the news that fueled the run? On Friday, ISLD announced that it had filed with the SEC to offer 4.5 million common shares and $175 million worth of convertible subordinated notes. It is unusual that this kind of news would inspire such a big move. Nevertheless, it did and therefore it is time to leave ISLD behind and swim for the mainland. STOCK SPLIT CANDIDATES *********************** Current Split Candidates NOK - Nokia AFFX - AffyMetrix VIGN - Vignette Corp. LVLT - Level Three Communications EXDS - Exodus Communications CMVT - Comverse Tech. Split Candidates that are not current plays: VRTS - Veritas Software IMNX - Immunex EMC - EMC Corp FFIV - F5 Networks Inc. NT - Nortel Networks Recent Announcements We Predicted SEPR - Sepracor Inc. STOCKS WITH UPCOMING SPLITS **************************** We don't list all splits available, only those we feel may have play possibilities. Symbol - Stock Splits/Date MWD - Morgan Stanley 2:1 01-26-00 ex-date 01-27 MSTR - Micro Strategy 2:1 01-26-00 ex-date 01-27 RAZF - Razorfish 2:1 01-27-00 ex-date 01-28 CHKP - CheckPoint Soft 2:1 01-28-00 ex-date 01-31 CYTC - CYTYC Corp 2:1 01-28-00 ex-date 01-31 HGSI - Human Genome 2:1 01-28-00 ex-date 01-31 GBIX - Globix Corp 2:1 01-31-00 ex-date 02-01 TMX - Telmex 2:1 02-01-00 ex-date 02-02 NTLI - NTL Inc 5:4 02-03-00 ex-date 02-04 PCS - Sprint PCS 2:1 02-04-00 ex-date 02-07 ASYT - Asyst Tech 2:1 02-04-00 ex-date 02-07 FDS - Factset Systems 2:1 02-04-00 ex-date 02-07 PEB - PE Biosystems 2:1 02-04-00 ex-date 02-07 MCHP - Microchip Tech 3:2 02-07-00 ex-date 02-08 QLGC - Qlogic Corp 2:1 02-08-00 ex-date 02-09 INFY - Infosys 2:1 02-11-00 ex-date 02-14 MERQ - Mercury Interact 2:1 02-11-00 ex-date 02-14 PSIX - PSINet Inc 2:1 02-11-00 ex-date 02-14 BRCM - Broadcom 2:1 02-11-00 ex-date 02-14 PMCS - PMC-Sierra 2:1 02-11-00 ex-date 02-14 YHOO - Yahoo! 2:1 02-14-00 ex-date 02-15 HRL - Hormel 2:1 02-15-00 ex-date 02-16 EMMS - Emmis Comm 2:1 02-15-00 ex-date 02-16 EXAR - Exar Corp 3:2 02-15-00 ex-date 02-16 ADCT - ADC Telecom 2:1 02-15-00 ex-date 02-16 DITC - Ditech Comm 2:1 02-16-00 ex-date 02-17 CTXS - Citrix Systems 2:1 02-16-00 ex-date 02-17 ITWO - I2 Tech 2:1 02-17-00 ex-date 02-18 CBXC - Cybex Comp Prod 3:2 02-18-00 ex-date 02-21 PRGN - Peregrine Sys 2:1 02-18-00 ex-date 02-21 TQNT - Triquint 2:1 02-22-00 ex-date 02-23 KANA - Kana Corp 2:1 02-22-00 ex-date 02-23 IVX - IVAX Corp 3:2 02-22-00 ex-date 02-23 SANM - Sanmina Corp 2:1 02-22-00 ex-date 02-23 MUSE - Micromuse 2:1 02-22-00 ex-date 02-23 USAI - USA Networks 2:1 02-24-00 ex-date 02-25 ESIO - Electro Scient 2:1 02-24-00 ex-date 02-25 MGG - MGM Grand 2:1 02-25-00 ex-date 02-28 SEPR - Sepracor 2:1 02-25-00 ex-date 02-28 SILI - Siliconix 3:1 02-28-00 ex-date 02-29 NSOL - Network Solution 2:1 02-28-00 ex-date 02-29 SDLI - SDL Inc 2:1 02-29-00 ex-date 03-01 GTLL - Global Tech 3:2 02-29-00 ex-date 03-01 TMPW - TMP Worldwide 2:1 02-29-00 ex-date 03-01 SLR - Solectron 2:1 03-08-00 ex-date 03-09 JDSU - JDS Uniphase 2:1 03-10-00 ex-date 03-13 LLTC - Linear Tech 2:1 03-27-00 ex-date 03-28 GE - General Elec 3:1 04-26-00 shareholder mtg SNE - Sony Corp 2:1 05-19-00 ex-date 05-22 AA - Alcoa 2:1 06-09-00 ex-date 06-12 For a complete list of all the coming splits check out the "split calendar" on the side of the online edition newsletter page. ******************** THE PLAYS OF THE DAY ******************** With all the great plays each week we can never decide on just one so take your pick. Call plays of the day: ********************** VIGN - Vignette Corporation $212.50 (+11.56)(P3W +50.44) See details in sector list Chart = http://quote.yahoo.com/q?s=VIGN&d=3m **** NOK - Nokia $185.63 (+1.56)(+13.06)(-20.06)(+6.00)(P6W +58.13) See details in sector list Chart = http://quote.yahoo.com/q?s=NOK&d=3m Put play of the day: ******************** RMBS - Rambus Inc $75.38 (-14.25) See details in put list Chart = http://quote.yahoo.com/q?s=RMBS&d=3m ************* DEFINITIONS ************* SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. TP/P= True premium or Time premium RRR = Risk/Reward/Ratio ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume MTD = Move to double - amount stock must move to double option price in one week. ONE WEEK MOVE ONLY ! Numbers within ( ) are the amount of change for the week. Numbers within ( ) may be designated with PxW, like P3W, prior 3 weeks The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. *********** CALLS PLAYS *********** BIO-TECH ******** HGSI - Human Genome Sciences $221.88 (+37.25)(+24.31)(P2W +31.25) Human Genome Sciences develops drugs and diagnostic products based on human genes. Although the company has no marketable products, firms pay HGSI to develop products for cancer, heart disease, arthritis, and Lou Gerhig's disease. HGSI is involved with SmithKline Beecham, Merck, and The Institute of Genomic Research. HGSI also researches non-human genes, including those of bacteria, fungi and viruses. These could eventually prove useful in creating vaccines and antibiotics. HGSI competes with Genzyme, Incyte Pharmaceuticals and Scios. Some investors are wondering just how much higher HGSI and stocks in the Genomics field can go. Since being added to our play list on December 28th, HGSI has run up about 60%. Is there a pullback coming? Probably so. At this point when it does occurs, it should be viewed as an opportunity to jump on board one of the strongest issues, in the hottest sectors, at this time. Investors added another $37.25 to the price of HGSI stock this week. Volume for the week was heavy with 3.99 million shares changing hands in four days. For a stock that sees an ADV of 468K, that tells us there may be more room to move higher, but HGSI could slow down to catch it's breath early next week. HGSI closed near intraday support of $220. The next two levels of support would be seen at $214.50 and $208. We believe HGSI could experience some profit-taking early next week. However we also believe it will be short- lived. A retracement followed by a bounce, would be a great chance to join in on this split run play. We have just one week left in this one, as HGSI splits 2-for-1 Jan 31st. Although HGSI has been a fantastic play, the option premiums are high and are not for all traders. On Thursday the Biotech sector got another endorsement. This one came from none other than President Bill Clinton. The President declared January National Biotechnology Month. President Clinton said "the impact of biotechnology is far- reaching" and has "provided a greater understanding of cellular and genetic processes, fostering research into treatments for diseases that affect millions of Americans, such as Parkinson's, Alzheimer's, diabetes, heart disease, AIDS and cancer." BUY CALL FEB-210 HHA-BB OI=53 at $35.63 SL=28.00 BUY CALL FEB-215*HHA-BC OI=74 at $33.25 SL=26.00 BUY CALL FEB-220 HHA-BD OI= 0 at $31.88 SL=25.00 New Strike SELL PUT FEB-185 HHA-NQ OI= 5 at $11.38 SL=14.00 (See risks of selling puts in play legend) Picked on Dec 28th at $138.88 P/E = N/A Change since picked +83.00 52-week high=$232.00 Analysts Ratings 1-4-2-0-0 52-week low =$ 28.75 Last earnings 10/99 est=-0.30 actual=-0.42 Next earnings 02-07 est=-0.70 versus=-0.55 Average daily volume = 468 K Chart = http://quote.yahoo.com/q?s=HGSI&d=3m **** SEPR - Sepracor Inc. $155.00 (+28.88)(+8.00) They are a specialty pharmaceutical company that develop improved versions of widely prescribed existing pharmaceuticals. Located in Marlborough, MA, Sepracor products can offer reduced side effects, improved safety, new uses, and improved dosage forms over traditional compounds. They are currently in the process of developing drugs to treat asthma, allergies, pain, sleep disorders, and depression. SEPR has licensed to Johnson & Johnson the rights to an improved version of JNJ's own Propulsid heartburn medication. SEPR competes in the healthcare sector with Bayer AG, Glaxo Wellcome, and Johnson & Johnson. The Board of Directors of SEPR provided us with great news to help our earnings play. Thursday morning they announced a 2-for-1 split of the company's stock. The ex-date is not for another month, on Feb 28th. Since the first of the year, the Biotechnology sector has been on the move. Investors have sold blue-chip stocks and invested their funds in SEPR and many of the companies in this sector. The strength early in week in SEPR was the result of positive comments from analysts late last week. SEPR gained over $26 in four days, most of which came on news of the split announcement. SEPR made a new 52-week high Friday at $157. We could see some traders take some money off the table early in the week. SEPR has support at $151 and $143. Many traders are expecting next week to be choppy ahead of the Fed meeting the first of February. We believe that may be true, however investors seem to want to jump into stocks in the Biotech sector. If we see a pullback to support in SEPR, followed by a bounce, we would look for opportunities to buy calls. Remember it will be a short-term play, that you will want to exit by Thursday at the close, as SEPR is scheduled to report earnings Friday morning. SEPR announced this week it has initiated a 400-patient clinical efficiency trial for (+)-zopiclone in the treatment of insomnia. Racemic zopiclone is a non-benzodiazepine rapid-acting hypnotic indicated for the treatment of sleep disorders. Racemic zopiclone is marketed under the names of Imovane and Amoban and is available in approximately 80 countries worldwide and has never been submitted for approval in the U.S. BUY CALL FEB-140*ERQ-BH OI=161 at $20.38 SL=16.13 BUY CALL FEB-145 ERQ-BI OI= 0 at $17.00 SL=13.50 New Strike BUY CALL FEB-150 ERQ-BJ OI= 0 at $14.25 SL=11.25 New Strike Picked on Jan 11th at $122.38 P/E = N/A Change since picked +32.63 52-week high=$157.00 Analysts Ratings 5-4-2-0-0 52-week low =$ 58.75 Last earnings 10/99 est=-1.56 actual=-1.68 Next earnings 01-28 est=-1.47 versus=-1.10 Average Daily Volume = 446 K Chart = http://quote.yahoo.com/q?s=SEPR&d=3m ************* SEMICONDUCTOR ************* TQNT - TriQuint Semiconductor $141.50 (+11.50) TriQuint Semiconductor is a leading worldwide supplier of a broad range of high performance gallium arsenide (GaAs) integrated circuits. TriQuint's products span the RF and millimeter wave frequency ranges and employ analog and mixed signal circuit designs. They are used in wireless communications, telecommunications, data communications and aerospace systems. TriQuint offers both standard and customer specific products as well as foundry services. TriQuint's two operations, in Oregon and Texas, are both certified to the ISO 9001 international quality standard. Oftentimes, January is the month that establishes the leadership groups for the rest of the year. With the SOX making several new highs so far this year it appears that Semiconductors will be one of those leaders. TriQuint's bullish story does not end there. The company's products are the key component of another leading industry group, wireless communications. This double- whammy makes TQNT a must own stock for followers of either or both industry groups. One only needs to look at the chart to see that TQNT is under accumulation. On top of this very bullish story, TQNT increased interest in its stock by announcing a 2-for-1 stock split, payable on February 22nd. TQNT's excellent uptrend was broken in the first week of the year. TQNT built a nice base at $100 to defend itself against the heavy selling. Since then it has been a nearly perfect stairstep moving ever higher. The best way to play the stock seems to be to buy intraday pullbacks. The trend looks good as long as TQNT does not trade below any previous day's close. If that were to happen the stock may be exhibiting signs of taking a break and looking to establish a new support level. Therefore, the first support level is $138 followed by $130. We liked the intraday print just above the psychologically important resistance level of $150. If the stock can close convincingly above that price we could see a very nice rally. Day traders may be interested in this stock. All last week TQNT would gap up, pullback in the first half hour and then make a subsequent new high, only to pullback again into the close. This is a very tradable pattern for anyone who is extremely aggressive with their money. Option players should look for new strikes becoming available on Monday. BUY CALL FEB-125 TQN-BE OI=1602 at $22.13 SL=17.25 BUY CALL FEB-130 TQN-BF OI= 26 at $18.88 SL=14.75 BUY CALL FEB-135*TQN-BZ OI= 157 at $17.38 SL=13.50 Picked on Jan 13th at $130.00 P/E = 131 Change since picked +11.50 52-week high=$150.38 Analysts Ratings 5-4-4-0-0 52-week low = $10.31 Last earnings 10/99 est= 0.27 actual= 0.36 Next earnings 02-10 est= 0.37 versus= 0.21 Average Daily Volume = 394 K Chart = http://quote.yahoo.com/q?s=TQNT&d=3m ******************************** CALLS CONTINUED IN SECTION THREE ******************************** ************************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
The Option Investor Newsletter 1-23-2000 Sunday 3 of 5 *************** CALLS CONTINUED *************** Internet ******** NTAP - Network Appliance Inc. $117.13 (+23.44)(+8.69) Their customer base is an impressive group of clients. Names like Yahoo, AOL, Motorola, Siemens and the UK's #1 ISP Demon Internet depend on them daily. Network Appliance uses its Netcache software and NetApp suite of network storage servers, or filers. These products are designed for and provide fast reliable cost effective service for Internet service providers, and corporate intranets. NTAP's hi-powered ONTAP operating system allows simultaneous access by users from Windows, UNIX and Web platforms. NTAP is located in Sunnyvale, Ca and competes against EMC, Sun Microsystems, Cisco Systems and Novell. Shares of NTAP experienced a nice gain this week. Investors continued to sell blue-chip stocks and rotate their funds into technology stocks. Traders focused their buying on tech issues that have proven track records as far as earnings and future profit potential. NTAP falls exactly in that category as NTAP is extremely well positioned in its industry. They don't report earnings until the middle of February, but analysts and investors are expecting solid numbers. The sector has been strong in past and regained momentum this week. NTAP seemed to be aided by PSIX, as the networking company announced a 2-for-1 stock split. Thursday morning analysts at PaineWebber reiterated their Buy rating of NTAP. They set a new price target of $150. NTAP made a new 52 week high Friday at $121.50. Volume on the last day of the week was strong at 2.45 million shares. Although we expect the trend to continue higher, NTAP gained over $23 for the week and a bit of profit taking would be normal. Technically support for NTAP is seen at $115 and $106. Another area of support is the 5-dma at $110.54. If we see a pullback next week in the Nasdaq and NTAP, look for opportunities to buy calls with a bounce off a support area. Wednesday, Veritas Software and NTAP announced the availability of a fully integrated and qualified high-availability application solution for NTAP's storage appliances. Customers can now achieve continuous access to critical information at both the application level and the data storage level, which will increase overall information availability for their business. BUY CALL FEB-110*NUL-BB OI= 80 at $14.63 SL=11.50 BUY CALL FEB-115 NUL-BC OI= 33 at $11.25 SL= 8.75 low OI BUY CALL FEB-120 NUL-BD OI= 22 at $ 9.25 SL= 7.00 low OI BUY CALL FEB-125 NUL-BE OI=175 at $ 7.25 SL= 5.50 SELL PUT FEB-105 NUL-NA OI= 3 at $ 4.00 SL= 6.00 low OI (See risks of selling puts in play legend) Picked on Jan 16th at $93.69 P/E = 389 Change since picked +23.44 52-week high=$121.50 Analysts Ratings 8-5-1-0-0 52-week low =$ 19.06 Last earnings 11/99 est= 0.17 actual= 0.19 surprise=+10.0% Next earnings 02-16 est= 0.11 versus= 0.06 Average daily volume = 1.61 mln Chart = http://quote.yahoo.com/q?s=NTAP&d=3m **** VIGN - Vignette Corporation $212.50 (+11.56)(P3W +50.44) VIGN provides Internet Relationship Management (IRM) software products and services, a category of enterprise solutions designed to enable businesses to build sustainable online customer relationships, increase returns on internet-related investments and capitalize on internet business opportunities. VIGN's clients come from diverse sectors and include financial services, health, education and government, media, retail, technology and telecommunications. As we mentioned on Thursday, VIGN looked like it was gathering its strength for another run at its 52-week high. Trading had been light, with VIGN giving back some of its recent gains on light volume. Buyers returned with a vengeance on Friday, shattering the resistance at $206 and setting a new closing high of $212.50. Trading as high as $219.88 on double its average daily volume, VIGN gave up some of its stellar gains as darkness approached. This play is based on a run into earnings, and the company is still being cagey about telling us when to expect the announcement. According to Investor Relations, we can expect them at the end of January or early February - Thanks! That's a big help. We want to be cautious going forward as Briefing.com is reporting a confirmed earnings date of January 25, after the close. For those of you keeping score, that is Tuesday, so watch out for VIGN to just spring the numbers on us. The resistance at $200 has now become support, with stronger support at $193-194, reinforced by the 10-dma at $194.50. Because of the uncertainty about earnings, we recommend caution in adding new positions at this time, and urge you to keep your stops in place. Also, watch for lots of action on Tuesday as VIGN's CEO will be appearing on CNBC's Power Lunch. This typically adds to the volatility. In the "late to the party" category, Donald Cunningham of Gilmour & Associates raised VIGN from a Sell to Neutral on Wednesday. He must have woken up to the fact that most of his colleagues had Buy ratings with price targets well over $200. ***Editor's note: VIGN's website is now showing Tuesday, after the close, as a confirmed earnings date. Therefore, close out the position before Tuesday's market close.*** BUY CALL FEB-200 GGV-BT OI=184 at $32.38 SL=25.25 BUY CALL FEB-210*GGV-BB OI=201 at $27.38 SL=21.50 BUY CALL MAR-210 GGV-CB OI=281 at $37.00 SL=28.75 Picked on Dec 30th at $163.75 P/E = N/A Change since picked +48.75 52-week high=$212.50 Analysts Ratings 9-4-0-0-0 52-week low =$ 19.91 Last earnings 10/99 est=-0.20 actual=-0.19 Next earnings 01-25 est=-0.09 versus= N/A Average Daily Volume = 1.33 mln Chart = http://quote.yahoo.com/q?s=VIGN&d=3m **** EXDS - Exodus Communications $137.88 (+31.88)(+18.88) Though they don't like the term, they are frequently called "server farms". Exodus is a leading provider of Internet systems and network management solutions for enterprises with mission- critical Internet operations. Exodus manages Internet Web sites and its network infrastructure from 16 Internet Data Centers located in the United States and Europe. Exodus currently has IDCs located in the Austin, Boston, Chicago, London, Los Angeles (2), New York (2), Seattle (2), Silicon Valley (4) and Washington, D.C. (2) metropolitan areas. Exodus added three additional IDCs and three international server hosting sites at the end of 1999, bringing the total number of Exodus sites to 22 worldwide. Houston, we have ignition! The week started out peppered with big news announcements. The most noteworthy include teaming up with Foundry Networks to increase access speeds up to 10 times for EXDS customers, a partnership with Nomura Research Institute to offer Web hosting services in Japan, and announcement of their intention to team up with Anderson Consulting to offer Internet hosting and solutions to financial institutions - all of which helped goose the price this week. However, there was nothing on the newswires that would account for $10 of Friday's $12 gain in the final hour and one half of trading. Volume really cranked at the close bringing an otherwise average volume day to a 50% excess. Demand is strong, and technicals are strong in the positive. The only thing we can figure is that traders and investors lit EXDS's rocket in anticipation of strong earnings after the close on January 26,and the possibility of a split announcement too. While it looks like the oxygen supply won't run out until EXDS is in orbit, we want to caution you that traders may have recognized that the YHOO pattern applies to other issues too. Thus, a selloff prior to earnings could occur anytime beforehand. That said, consider setting your stops so you don't give back that free money you earned into Friday's close. Mild support is at $132, but it's much stronger at $122 - not much in between, making EXDS inherently risky. Wear your G- suit to absorb the punishing acceleration in both directions. With high time value, consider using Jim's Covered Straddle strategy outlined in a recent Options 101 column or selling naked puts. BUY CALL FEB-130*QED-BF OI= 117 at $21.00 SL=16.50 BUY CALL FEB-135 QED-BG OI= 38 at $18.63 SL=14.50 low OI BUY CALL FEB-140 QED-BH OI= 77 at $16.38 SL=12.75 SELL PUT FEB-110 DUB-NB OI= 115 at $ 5.00 SL= 6.25 (See risks of selling puts in play legend) Picked on Jan 11th at $103.19 P/E = N/A Change since picked +34.69 52-week high=$140.00 Analysts Ratings 18-8-0-0-0 52-week low =$ 9.00 Last earnings 10/99 est=-0.29 actual=-0.29 Next earnings 01-26 est=-0.19 versus=-0.13 Average Daily Volume = 3.90 mln Chart = http://quote.yahoo.com/q?s=EXDS&d=3m **** MFNX - MetroMedia Fiber Network $69.88 (+12.75)(+9.00) Buckets-O-Bits. That's not a new dog food. It's MetroMedia's business to send big batches of data down its fiber-optic network lines as a competitive local exchange carrier (CLEC). It operates its network in Chicago, Philadelphia, New York City and Washington, D.C. and interconnects its service areas through an agreement with Williams Communications. It rents its fiber to customers, ISP's, other local and long distance carriers and wireless providers. Racal is their partner between the U.S. and the U.K. Metromedia also owns Abovenet, a recent acquisition (and competitor of Exodus Communications) in the hosting business. Bell Atlantic owns 10% of the company and contracts with MFNX to use their network. Ten straight days of gains - will it ever end? We hope not, but as we often repeat, nothing goes up forever in a straight line and MFNX is defying the odds. Volume is beginning to taper back to match the ADV too, which tells us that this immediate run may be about to end - at least temporarily. Consider moving those stops up so you don't have to give anything back. Unfortunately, MFNX is rather tight-lipped on news that would be driving the price. So far they have not committed to an earnings date. Just in the last week, their IR department has told us from the first week in February to the first week in March. Zack's has February 7 listed, so we go with that for now. Despite the frustration with "secret" news and IR, the chart is nothing less than incredible. There is really no support to speak of (except a brief test of $66 on Friday) and blue sky all around. Were it not for a closing volume surge, MFNX likely would have closed flat for the day. Nonetheless, all indicators (MACD, stochastic, and RSI) are maxed out positive. Still we suggest waiting for a pullback. Or if your risk profile allows it, step in on an intraday (mid-day) dip, say around lunchtime. But remember those stops! More from the "it's-news-but-we're-not-going-to-talk-about-it" department: Metromedia Fiber Network Inc said it acquired closely held network builder, M.I.B.H. Inc. for about $51 million in cash and stock to expedite the development of a high-speed Internet network in North America and Europe. Bloomberg, who penned the article noted, "The company wouldn't comment on further details about the acquisition". No surprise there. BUY CALL FEB-65*QFN-BM OI=498 at $ 8.88 SL= 6.75 BUY CALL FEB-70 QFN-BN OI= 19 at $ 6.25 SL= 4.25 low OI BUY CALL FEB-75 QFN-BO OI=100 at $ 4.13 SL= 2.50 BUY CALL MAY-75 QFN-EN OI= 7 at $12.50 SL=10.00 low OI Picked on Jan 16th at $57.13 P/E = N/A Change since picked +12.75 52-week high=$70.38 Analysts Ratings 18-8-0-0-0 52-week low =$17.38 Last earnings 11/99 est=-0.12 actual=-0.16 Surprise=-33% Next earnings 02-07 est=-0.26 versus= 0.00 Average Daily Volume = 2.8 mln Chart = http://quote.yahoo.com/q?s=MFNX&d=3m ********* SOFTWARE ********* MSTR - MicroStrategy Inc. $289.13 (+61.19)(+17.56)(+0.38) MicroStrategy is a worldwide provider of enterprise DSS software applications and related services. DSS software enables users access to and the analysis of information stored in large relational databases through various devices like the Internet, e-mail, telephones, pagers and other wireless communications devices. Through this software clients can improve operations, analyze marketing effectiveness and create and deliver targeted one-to-one marketing campaigns to customers. MicroStrategy also provides customers with professional and customer support services. MSTR is fast becoming one of the favorite plays in the very hot B2B sector. MicroStrategy has completed an amazing transformation from a medical supply company into a leading information technology company. B2B stocks were very strong last week as investors are keying into the potential explosive growth of this field. This industry could be one of the strongest for many years to come as businesses in all fields are spending tons of money to become more efficient by utilizing the Internet for their information gathering and dissemination. MSTR is planning a 2-for-1 stock split on January 26th, which is adding fuel to an already very hot fire. There is evidence that MSTR's software and consulting services are becoming very popular. MSTR has recently added a string of high profile clients including Sybase, Ameritrade and Dimension Data, to name just a few. Last week, MSTR completed the formation of a nice base at $219. MSTR has been able to take off quite nicely from that level. The race to accumulate shares really exploded when the stock traded above $250. The ensuing rally took MSTR to the exact psychological resistance level of $300. MSTR's quick rise took a small break on Friday as the stock failed to make a new high finding a little resistance at $296 before falling back. Pullbacks to the $270 level have resulted in some nice bounces. If the stock can wander back to that area it might be a nice place to go long and participate in a split rally. Below $270 we find support at $250. Just remember we are at the tail end of this play as the split will be after the close on Wednesday. MicroStrategy is planning to advertise during the Super Bowl in an attempt to lure even more businesses. We noted last week that the stock really started rallying the day after employees returned to work after a two week company wide planning and strategy meeting. Somebody liked what they heard! It is also interesting to note that MSTR was named by Fortune Magazine as one of the "Top 100 Best Places to Work", with the stock going parabolic we can see why. BUY CALL FEB-270 MKZ-BN OI=11 at $48.38 SL=37.75 BUY CALL FEB-280 MKZ-BP OI= 5 at $42.88 SL=33.50 BUY CALL FEB-290*MKZ-BR OI=14 at $38.38 SL=30.00 BUY CALL FEB-300 MKZ-BT OI=66 at $33.88 SL=26.50 SELL PUT FEB-250 EUU-NZ OI=24 at $18.50 SL=24.00 (See risks of selling puts in play legend) Picked on Jan 9th at $210.38 P/E = 1028 Change since picked +78.75 52-week high=$300.00 Analysts Ratings 5-3-1-0-0 52-week low =$ 14.69 Last earnings 10/99 est= 0.08 actual= 0.09 Next earnings 01-27 est= 0.11 versus= 0.07 Average daily volume = 337 K Chart = http://quote.yahoo.com/q?s=MSTR&d=3m ******* Telecom ******* VOD - Vodaphone AirTouch $55.94 (+3.06)(+5.25) Formed when the UK's Vodaphone Group bought US wireless provider AirTouch Communications in 1999, VOD operates mobile phone networks offering voice messaging, paging, and data services. With the most mobile phone subscribers in the world, (31 million and rising), VOD is a giant in the world of wireless phones, holding the #1 position in the UK and the #2 position in the US. The company continues to expand at aggressive pace, having agreed to combine with US wireless carrier Bell Atlantic, and still pursuing its takeover bid for Germany's Mannesman. While it may be entertaining, the bickering between VOD and Mannesmann is not lighting a fire under our call play. For those of you new to this drama, VOD has been working hard to negotiate a merger with Mannesmann. VOD's advances have been soundly rejected at every turn, but when we added this play on Tuesday, it looked like a sweetened offer might do the trick. Well it was not to be! Mannesmann shot back, calling the latest offer "wholly inadequate", indicating there is still much work to be done if the merger is to be approved before the offer expires in 2 weeks. Our play still looks good technically as prices bounced firmly at $54 Friday morning. This is right in the middle of the gap up on Tuesday morning, and should provide strong support going forward. The drop on Friday did come on fairly heavy volume, which causes us some concern, especially since volume diminished significantly as prices recovered in the afternoon. Going forward, entries can be considered on another bounce from support or if VOD can trade through resistance at $57.50. If you trade this ADR, be mindful of the fact it usually gaps at the open and the direction of the gap is frequently a good indicator of the overall direction for the day. Most of the news this week is merger related, so here's the meat. VOD is willing to raise its all-stock offer for Mannesmann, giving Mannesmann shareholders just under half of the merged company, but Mannesmann management isn't willing to support the offer unless its owners get at least 58.5 percent. VOD may even be willing to appoint Mannesmann CEO Klaus Esser to the combined company's top post if he agrees to the "merger of equals". Both companies are rumored to be in talks with the French conglomerate Vivendi, in an effort to strengthen their respective bargaining positions. In other news, VOD has agreed to buy an additional 16.9 percent of Airtel SA, as it seeks to gain majority control of Spain's second-largest wireless phone company. BUY CALL FEB-50*VOD-BJ OI=4143 at $8.38 SL=6.50 BUY CALL FEB-55 VOD-BK OI=1508 at $5.13 SL=3.25 BUY CALL FEB-60 VOD-BL OI= 333 at $3.00 SL=1.50 BUY CALL APR-55 VOD-DK OI=1955 at $7.50 SL=5.75 BUY CALL APR-60 VOD-DL OI= 539 at $5.63 SL=3.75 Picked on Jan 18th at $57.50 P/E = N/A Change since picked -1.56 52-week high=$58.00 Analysts Ratings 4-3-2-0-0 52-week low =$33.21 Last earnings 12/99 est= N/A actual= N/A Next earnings 06-08 est= 0.42 versus= 0.34 Average Daily Volume = 3.59 mln Chart = http://quote.yahoo.com/q?s=VOD&d=3m **** ANAD - Anadigics Inc $79.25 (+6.25)(+25.56) Anadigics designs and manufactures radio frequency and microwave gallium arsenide integrated circuits (IC). These circuits are sold to communications equipment makers in the broadband, direct satellite, fiber-optic and wireless communications markets. Ericsson, Motorola, and Qualcomm account for about 60% of total sales. Positive company news along with a Strong Buy recommendation from Needham & Co first ignited ANAD's upward momentum. Anadigics announced on January 10th a $10 mln expansion of its state-of-the-art six-inch facility production facility in response to the growing demand for its wireless and broadband products. Investors realized the revenue potential and subsequently have since bid up the share price $27.25, or 52.4%. To spice up the momentum, earnings are just around too. On Wednesday, ANAD reached a pinnacle at $83.06 and is now consolidating at near-term support ($79). This is the first time ANAD has really flattened out in awhile. That may not be a good sign. Also, the company is confirmed to report earnings this Friday January 28th, after the bell, which leaves us with only four more trading sessions. So be careful if you're considering a quick in-and-out play. OIN never recommends holding over an earnings' announcement. BUY CALL FEB-70 DQA-BN OI=145 at $13.63 SL=11.00 BUY CALL FEB-75*DQA-BO OI= 33 at $10.75 SL= 8.50 BUY CALL FEB-80 DQA-BP OI= 10 at $ 8.50 SL= 6.50 BUY CALL FEB-85 DQA-BQ OI= 0 at $ 6.13 SL= 4.25 New Strike Picked on Jan 13th at $66.00 P/E = N/A Change since picked +13.25 52-week high=$83.06 Analysts Ratings 3-2-1-0-0 52-week low =$11.19 Last earnings 10/99 est= 0.10 actual= 0.15 Next earnings 01-28 est= 0.16 versus=-0.01 Average Daily Volume = 370 K Chart = http://quote.yahoo.com/q?s=ANAD&d=3m **** LVLT - Level 3 Communications $110.50 (+23.75)(+10.88) Level 3 Communications is a telecommunications and information service company that is building an international fiber-optic network. The technology is based on Internet protocol. They provide local, long-distance, and Internet service over leased networks in 20 cities in the US and Europe. Besides sheer momentum, LVLT has a couple of other factors that are driving its share price higher and higher. Level 3 is confirmed to report earnings on February 3rd, before the bell, and at these higher trading levels above $80, LVLT is considered a split-candidate. Since a recent increase of authorized shares from 500 mln to 1.5 bln and only 341 mln shares outstanding there's plenty of room for a stock split. These events are powering LVLT into higher realms. At the beginning of the week, we were looking for the stock to show strength above $90. By Thursday we saw near-term support elevate to $94 and $95 and the 5-dma become clearly out-paced. However there was still concern since the 52-week high at $100.13 represented a psychological hump and $98 was standing as the first line of resistance. All our concern was for naught as this powerhouse shattered the glass-ceiling and climbed to an all-time high of $111. The stock demonstrated its stamina and bullishly closed just cents away from this mark on Friday. Notably trading volume was 5 times the ADV at 8.18 mln shares exchanging hands. This is definitely a good sign of more to come. So where's the entry point? Well there's obviously been no pullback so traders have had to risk an intraday buy on the ascent. I say "risk" because you don't want to get caught buying at an inflated price only to watch the stock begin a consolidation period the next day or so. This is a decision you must make based on your personal risk profile. On Tuesday, Level 3 and Convergys (CVG), an outsource business support systems company, inked a deal which will link CVG's online billing and customer services to Level 3's Internet network. BUY CALL FEB-100 QHN-BT OI=774 at $15.63 SL=12.25 BUY CALL FEB-105*QHN-BA OI=239 at $12.00 SL= 9.50 BUY CALL FEB-110 QHN-BB OI=102 at $10.00 SL= 7.50 BUY CALL MAR-105 QHN-CA OI= 80 at $15.13 SL=11.75 BUY CALL MAR-110 QHN-CB OI=684 at $12.50 SL=10.00 Picked on Jan 16th at $86.75 P/E = N/A Change since picked +23.75 52-week high=$111.00 Analysts Ratings 4-5-2-0-0 52-week low =$ 39.81 Last earnings 10/99 est=-0.51 actual=-0.43 Next earnings 02-03 est=-0.60 versus=-0.11 Average Daily Volume = 1.69 mln Chart = http://quote.yahoo.com/q?s=LVLT&d=3m **** CMVT - Comverse Technology $150.38 (+2.06)(+9.31)(-5.75) Comverse is the world leader in multimedia telecommunications applications. Through its Comverse Network Systems division, the company markets its Access NP and TRILOGUE INfinity Enhanced Services Platforms, which enable wireless, wireline, and internet companies to offer enhanced telecommunications services to business and residential customers. Among these services are voice and fax messaging, call answering, and web information services. Comverse also offers Intelligent Peripheral/Service Node, supporting next-generation personal communication services such as pre-paid wireless, mobile number portability, call screening, and mobile attendant functions. It doesn't have the huge gains of some of the Internets, but CMVT's chart is hard not to like. Consistently delivering higher-lows, it broke through resistance at $149 on Thursday and used that level for support on Friday. With the nearly $7 gain on Thursday, we would have been surprised if there hadn't been some profit-taking. It was encouraging to see volume less than 40% of the ADV on Friday's pullback. The 5-dma (currently $148.38) provided excellent support all week, adding momentum to fuel this play which was originally started on speculation about a possible split announcement (see below). Investors are being attracted to CMVT because of the strength of its market position; its customer base currently numbers more than 290 telecommunications operators worldwide, with more than 150 of these in the rapidly growing digital wireless market. We are getting close to the 52-week high of $155.88, the next resistance level, and will need to see volume return to push us through. Going forward, CMVT has additional support at $144-145, which would provide a nice entry in the event of broad market weakness. There is additional support near $139-140, but in the absence of a broad selloff on the NASDAQ, a drop to that level would cause us to question the viability of our play. Consider opening new positions on a convincing bounce (read volume) off of support anywhere above $144. For those with open positions, remember to use stops so you don't end up giving back your gains. News is sparse on CMVT, so we are left to enjoy the ride while we wait for the much anticipated split announcement. Recall that it has been a split candidate since October when the company increased the number of shares and the CEO said a split would be coming in a matter of weeks or months. BUY CALL FEB-145 CQV-BI OI=179 at $13.00 SL=10.50 BUY CALL FEB-150*CQV-BJ OI=218 at $10.25 SL= 7.75 BUY CALL FEB-155 CQV-BK OI=160 at $ 7.75 SL= 6.00 BUY CALL APR-150 CQV-DJ OI=395 at $18.75 SL=14.63 BUY CALL APR-155 CQZ-DK OI= 41 at $17.25 SL=13.50 SELL PUT FEB-135 CQV-NG OI= 10 at $ 3.00 SL= 4.75 (See risks of selling puts in play legend) Picked on Jan 9th at $139.00 P/E = 74 Change since picked +11.38 52-week high=$155.88 Analysts Ratings 10-4-0-0-0 52-week low =$ 43.63 Last earnings 11/99 est= 0.53 actual= 0.56 Next earnings 02-29 est= 0.56 versus= 0.44 Average Daily Volume = 1.28 mln Chart = http://quote.yahoo.com/q?s=CMVT&d=3m **** PCS - Sprint PCS Group $110.75 (+13.00) Sprint PCS operates the largest 100 percent digital, 100% 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 added yet another day to its good looking trend, picking up on Friday right where it had left off on Thursday. Though PCS did not really test $110 enough on Friday to identify it as support, this level could hold going forward. PCS looks to have support right around $107.50 and additional support at $100, which is not only a strong psychological number, but is also currently the 10-dma. The 52-week high of $114.44 looks to be the only resistance in the road at this point. As we mentioned on Thursday, new entries are most likely best made toward the early part of the session, as PCS has a pattern of opening on or near the low for the day and gradually moving up to the close. Other than the upcoming earnings announcement and stock split, there is not much out there in the way of news that is currently helping to move this stock. There seems to be a bit of confusion out there as to whether the new price target of $160 from Paine Webber is pre or post-split. The $160 target is a pre-split number. One point of interest is Friday's high volume on the February 105 and 110 contracts (see below). BUY CALL FEB-105 PCS-BA OI=421 at $12.00 SL=9.50 Fri. vol= 1668 BUY CALL FEB-110*PCS-BB OI=758 at $ 8.88 SL=6.50 Fri. vol= 1109 BUY CALL FEB-115 PCS-BC OI=447 at $ 6.50 SL=4.75 SELL PUT FEB- 95 PCS-NS OI=155 at $1.75 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 +2.75 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 = 2.39 mln Chart = http://quote.yahoo.com/q?s=PCS&d=3m **** NOK - Nokia $185.63 (+1.56)(+13.06)(-20.06)(+6.00)(P6W +58.13) Finnish Phone Firm, Nokia is the world's number one maker of wireless cellular phones, ahead of Motorola, Ericsson and Qualcomm. In addition they make wireless networking equipment, PC monitors and workstations, digital satellite and cable network systems, and set-top boxes. However mobile phones make up 80% of their $18.5 bln in annual sales. Return on equity is an industry smokin' 43%, and they currently sit on $3.3 bln cash, or slightly over $3 per share. NOK finished a volatile, range-bound week with a bang on Friday, tacking on $5.88. While volume remained well under the ADV of 3.4 mln shares all week, Friday it picked back up to at least match the average. By now, we all know that handset sales are on fire and NOK, as well as the other brands, can't keep up with demand despite excellent manufacturing capability. The growth has exceeded even NOK's highest projections. In fact, it was as early as November that NOK's chairman guided the Street to higher growth rates in the 30-40% range. Given that he noted they would achieve their three revenue goals in two years, we think that 40% is conservative (more like 50% - but that will dribble out over the next few earnings periods. Speaking of earnings, NOK announces theirs on February 1 before the bell. Furthermore, their conference call begins around 8:00 a.m. ET, wherein NOK may also announce a split given that their shares have now reached over $150, a historical split level. Support has been moving up during the last two weeks, and is fairly strong at $175, though $177 held up well toward the end of the week. With 20/20 hindsight, we can see that NOK has been consolidating with higher lows on slack volume with resistance at $185. Friday's breakout into the close with increased volume on Friday may signal that the earnings run has begun. Volume will be the key While earnings are driving the play, NOK announced that Scandic Hotels, the largest Scandinavian hotel chain would begin implementing a WAP booking service utilizing NOK's equipment and expertise - just another step in becoming the dominant hardware player in the wireless world. BUY CALL FEB-180*NZY-BP OI=2092 at $16.75 SL=13.00 BUY CALL FEB-185 NZY-BQ OI= 521 at $14.38 SL=11.00 BUY CALL FEB-190 NZY-BR OI=1958 at $12.25 SL= 9.75 BUY CALL APR-185 NZY-DQ OI= 455 at $24.13 SL=18.75 BUY CALL APR-190 NZY-DR OI= 347 at $21.25 SL=16.50 Picked on Nov 14th at $122.25 P/E = 81 Change since picked +63.38 52 week high=$196.00 Analysts Ratings 13-8-0-0-0 52 week low =$ 62.31 Last earning 10/99 est= 0.52 actual= 0.57 surprise=9.6% Next earning 02-01 est= 0.66 versus= 0.58 Average Daily Volume = 3.4 mln Chart = http://quote.yahoo.com/q?s=NOK&d=3m **** JDSU - JDS Uniphase $233.13 (+40.94)(+12.88)(+7.75) Here's another company laying around on paradigm beach ready to surf the next wave. Uniphase Corporation is a fully integrated optical electronics company that designs, develops, manufactures and markets fiber optic telecommunications components and modules and laser subsystems. The Company's telecommunications products include semiconductor lasers, high-speed external modulators, transmitters, fiber Bragg gratings and optical modules for fiber optic networks in the telecommunications and cable television industries. Based in the Silicon Valley, California, they employ approximately 6260 people worldwide. As we've said before, "Dear God, please let there be one more company like Intel to invest in, and I promise not to mess it up this time". Effectively they do for light what Intel does for electrons and is the largest arms merchant in the optical networking wars. Whatta week for JDSU! Anybody complaining? No sooner had ETEK announced an 18% earnings surprise last week when JDSU announced they'd bought ETEK. Given that the industry has been unable to keep up with demand, the new ETEK/JDSU combination should produce better manufacturing efficiencies and capacity, assuring a better supply chain according to Kevin Kalkhoven, JDSU's CEO. Extending a multi-year supply agreement with Lucent this week didn't hurt either. With good momentum already underway, earnings scheduled for release on January 26 after the bell should really spark trader action on Monday and Tuesday, probably juicing the price even more. Go easy though - remember YHOO that actually sold off prior to earnings? Traders are getting savvy to the pattern and may begin to unwind in front of the announcement. Think about tightening those stops since we never recommend holding through earnings - there's no good reason to let greed keep you in the play as the profits slip away. Not counting the last two days, support is way down around $210. Nearer, but much less reliable are $232, $229, and $225. Consider setting your stops just under those figures according to your risk profile so you don't get bounced out on a minor dip. Just a reminder too that JDSU announced another 2:1 split 3 days following its last split, which will become effective on March 10, assuming the shareholders approve an increase in the number of authorized shares from 600 mln to 3 bln on February 25. However, that is not the main reason for the play. Those interested in listening to the conference call can go to the following address at 4:15 p.m. ET: http://www.vcall.com/static/startframeset.asp?companyid=1104 The guys at Griffiths McBurney who recommended a Reduce rating last week with a price target of $68 are probably kicking themselves now. We bet their clients are kicking them too! Limited resources and oh so many ways to play! Consider the Covered Straddle from a recent "Options 101" portion of the newsletter (naked puts too). Just look at those juicy premiums ripe for the selling! BUY CALL FEB-220 UCQ-BD OI=3675 at $34.13 SL=26.75 BUY CALL FEB-230*UCQ-BF OI=1119 at $29.38 SL=23.00 BUY CALL FEB-240 UCQ-BH OI= 703 at $24.88 SL=19.50 SELL PUT FEB-210 UCQ-NB OI= 766 at $17.58 SL=21.50 (See risks of selling puts in play legend) Picked on Jan 13th at $187.69 P/E = N/A Change since picked +45.44 52-week high=$248.50 Analysts Ratings 13-13-0-0-0 52-week low =$ 16.56 Last earnings 10/99 est= 0.25 actual= 0.29 surprise=16% Next earnings 01-26 est= N/A versus= 0.07 Average Daily Volume = 5.0 mln Chart = http://quote.yahoo.com/q?s=JDSU&d=3m **** NTLI - NTL Inc $136.38 (+11.06) NTL is the UK's biggest cable TV operator. They provide extensive communication networks to homes, businesses, and wholesalers. Television, radio, Internet, wireless, and a variety of telecommunications services are provided to more than two million subscribers. NTL is presently extending its reach in Europe through the purchase of Cablecom, the #1 Swiss cable operator, and France Telcom has agreed to take a 25% stake in the company in a deal worth approximately $5.5 bln. NTL's share price has risen significantly over the past couple months escalating from $90 in early December to a new all-time high of $137.09 during Friday's session. Our call play is elementary. We're anticipating NTLI will continue to climb to newer heights in the upcoming weeks because of pre-split excitement. On January 20th the BoD announced a 5:4 stock split of its common stock payable on February 3rd. There are about 106.2 mln shares outstanding and 400 mln authorized providing plenty of room for the split. Therefore it's expected the existing momentum is likely to be fueled by this event. It's also quite possible NTLI could exceed CBIC World Market's price target of $150 before all is said and done. On the day of the split announcement CIBC started coverage for NTLI with a new Buy and issued the 12-month price target. That same day NTLI cracked strong resistance at $128 and pushed through the $130 level. Near-term support is now emerging at $131 and $132 just above the trailing 5-dma ($129.50). This technical indicator has consistently served as support during the recent uptrend. If the stock fails to take a breather during the next few sessions you may have to look for an intraday bottom to get your foot in the door. Keep in mind this is a quick play. There are only eight trading days until NTLI splits. We never recommend holding through the ex-date. Recently it hit the press that NTLI is planning to bid $5 bln for Belgium's Telnet NV, a telephone and cable service company. Neither company offered comment. NTLI is also in talks to buy a 10% stake in Aston Villa Plc, an English Premier League soccer club. The strategy? To gain influence and negotiating power over Premier League TV nights. ***Presently there are no strikes above 135*** BUY CALL FEB-125 ISQ-BE OI=455 at $16.75 SL=12.75 BUY CALL FEB-130*ISQ-BF OI= 55 at $13.50 SL=11.25 low OI BUY CALL FEB-135 ISQ-BG OI= 21 at $10.63 SL= 8.25 BUY CALL MAR-130 ISQ-CF OI=200 at $14.50 SL=11.50 BUY CALL MAR-135 ISQ-CG OI= 0 at $12.25 SL= 9.75 New Strike Picked on Jan 23rd at $136.38 P/E = N/A Change since picked +0.00 52-week high=$137.09 Analysts Ratings 1-0-0-0-0 52-week low =$ 53.00 Last earnings 11/99 est=-3.66 actual=-2.89 Next earnings 03-31 est=-3.59 versus=-2.74 Average daily volume = 1.17 mln Chart = http://quote.yahoo.com/q?s=NTLI&d=3m ********************************* CALLS - CONTINUED IN SECTION FOUR ********************************* ************************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 ************************************************************** ******************************* CALLS CONTINUED IN SECTION FOUR ******************************* SEE DISCLAIMER IN SECTION ONE
The Option Investor Newsletter 1-23-2000 Sunday 4 of 5 ***************** CALLS - CONTINUED ***************** Miscellaneous ************* AFFX - Affymetrix Inc. $253.63 (+66.88)(+33.50)(-16.49) Affymetrix, Inc. is recognized as a worldwide leader in the field of DNA chip technology. The Company has developed and intends to establish its GeneChip system as the platform of choice for acquiring, analyzing and managing complex genetic information in order to improve the diagnosis, monitoring and treatment of disease. The Company's GeneChip system consists of disposable DNA probe arrays containing gene sequences on a chip, certain reagents for use with probe arrays, a scanner and other instruments to process the probe arrays, and software to analyze and manage genetic information from the probe arrays. The company sells its products to Drug and Biotech companies involved in gene research. If you are looking for the new leaders of the NASDAQ, you may not have to look any farther than AFFX. When the sideline cash started piling back into the market the past two weeks, one of the biggest beneficiaries has been AFFX, primarily because it is an unique way to invest in the Human Genome Project. Affymetrix provides the tools that researchers need to keep the project going. As long as funding for the project continues, AFFX is in position to experience outstanding growth. AFFX is not only considered a Genomics stock, it is also a software and semiconductor company. By having a claim to three high tech sectors, AFFX is fast becoming a must own stock for any Mutual Fund that specializes in these sectors. When we started AFFX as a play three weeks ago we mentioned that the original breakout above $130 implied a run to $260. We have also noticed that AFFX seems to trade in accordance with the psychologically important support and resistance levels. Last week when AFFX closed nicely above $200 it rallied straight to $250, found a little resistance at $250 pulled back, gathered strength and moved forward again to close nicely above the $250 level. If the market stays healthy next week we could see AFFX rally to the next level of $300. Having said that, be careful. AFFX is an extremely volatile stock and should only be considered a play for investors who can monitor the position closely. Support levels can first be found at $250 then $240 then all the way back at $200. Friday's high print of $271.13 is a resistance point that needs to be taken out for the stock to keep its incredible run going. How many times have we seen an analyst raise their target price on a high flying stock only to watch the stock take out the new target within days? Talk about an ego boost! CS First Boston raised their target price on AFFX to $250 from $150 on Wednesday. The leader of the Genomics race is Celera, which announced that it has completed 90% of the mapping project. If this news brings more companies into the research fold then Affymetrix stands to benefit from the sale of its research tools. One recently announced new client for AFFX was Novartis. When looking at the options available please note that at the time of writing this report there was almost no open interest in the near-the-money calls. This is due to both the stock's very quick rally and Friday's expiration. Look for new strikes to begin trading on Monday. BUY CALL FEB-230 FUE-BF OI=0 at $47.75 SL=37.25 BUY CALL FEB-240*FUE-BH OI=0 at $42.25 SL=33.00 Fri. vol=19 BUY CALL MAY-220 FUE-ED OI=0 at $64.25 SL=50.00 BUY CALL MAY-230 FUE-EF OI=0 at $58.38 SL=45.50 Picked on Jan 2nd at $184.75 P/E = N/A Change since picked +68.88 52-week high=$271.13 Analysts Ratings 3-5-2-0-0 52-week low =$ 31.00 Last earnings 10/99 est=-0.28 actual=-0.21 Next earnings 02-03 est=-0.20 versus=-0.31 Average Daily Volume = 473 K Chart = http://quote.yahoo.com/q?s=AFFX&d=3m **** GMST - Gemstar International $79.88 (+3.06)(+11.31) Gemstar develops, markets and licenses proprietary technologies and systems aimed at making technology user- friendly for consumers under the VCR Plus+ name. Gemstar is a leading provider of electronic program guide services, which allow users to view a television program guide on screen, obtain details about a show, sort shows by themes or categories and select shows for tuning or recording, all through remote control. Gemstar's primary source of revenues has been license fees paid by consumer electronics manufacturers and publications for the licensing of the VCR Plus+ technology and the right to print the PlusCode Numbers. Gemstar has been putting itself into position to become a household name in the world of home electronics. It took the company years to get its proprietary technology accepted and now that it has been accepted, GMST is ready to reap the rewards. Recently, GMST was added to the NASDAQ 100 thereby validating the claim that it is one of the leading technology stocks trading today. Many of today's stock market leaders are very recent additions to the NASDAQ 100 and GMST is one of only three foreign companies in the Index. The long-term story for Gemstar that has investors buying the stock is the belief that the company will be one of the leaders in the development of fully interactive television. GMST broke sharply above a downtrend that saw the stock drop from $80 to $60 during the first week of hangover selling. A five day rally ensued, resulting in the establishment of a new high at $88.50, followed by another round of profit taking. Now what? It looks like GMST has found some nice support around $76. If that support fails due to a sideways market next week look for more support around $72. A period of consolidation might be exactly what GMST needs to gather strength for the next run at new highs. If the stock starts the week with strength look for new highs to be tested if GMST trades above $82. By adding the two leading "electronic book" companies, NuvoMedia and Softbook Press in a stock transaction, Gemstar is becoming a powerful new age media player. GMST already owns one of the largest publications in the world, TV Guide. The battle for control of the new age of television got a little more interesting when GMST filed suit against TiVo for allegedly infringing a patent on its interactive TV program guide. BUY CALL FEB-70 GST-BN OI=1641 at $13.50 SL=10.50 BUY CALL FEB-75*GST-BO OI=4363 at $10.13 SL= 7.50 BUY CALL FEB-80 GST-BP OI=1113 at $ 7.13 SL= 5.25 SELL PUT FEB-75 GST-NO OI= 231 at $ 4.38 SL= 6.00 (See risks of selling puts in play legend) Picked on Jan 11th at $70.63 P/E = 99 Change since picked +9.88 52-week high=$88.50 Analysts Ratings 7-0-0-0-0 52-week low =$13.88 Last earnings 10/99 est= 0.09 actual= 0.09 Next earnings 02-15 est= 0.10 versus= 0.08 Average Daily Volume = 1.50 mln Chart = http://quote.yahoo.com/q?s=GMST&d=3m **** AES - AES Corp. $80.00 (-3.25) AES is a leading global power company comprised of competitive generation, distribution and retail supply businesses. The company's generating assets include interests in one hundred and nineteen facilities totaling over 42 gigawatts of capacity. AES' electricity distribution network has over 940,000 km of conductor and associated rights of way. In addition, through its various retail electricity supply businesses, the company sells over 110,000 gigawatt hours per year to over 15 million end-use customers. Surprised to see a utility company profiled in these pages? We never discriminate against a company that looks primed to give us some profits. There are a lot of NYSE stocks that seem to be going nowhere so far this year and AES is an exception. AES' stock has increased over 12% in three weeks. A lot of "safe" money seems to be flowing into companies like AES. One story that has been driving the shares of utility companies recently is deregulation. AES is one of the strongest in the industry and stands to benefit from this continuing development. Our main interest in AES is technical so let's look at the chart. On January 14th, AES established a new high of $83.25. AES subsequently pulled back and established a very nice 2 day base at $77.50. A break above that base on Friday implies that the stock should take a look at the old high and possibly trade through it. A follow through rally to at least $90 is not out of the question. We can find first support at $78 which might be a good entry point if we get a pullback on Monday. An open above $80 would be bullish for a run to $83.25. If for some reason the stock falls below the $77.50 point you should probably avoid a bullish position until support is re-established. On January 5th, Warburg Dillon Read raised their price target to $95 from $77. The target is based on 25 times estimated 2001 earnings. The research report also noted that AES' Brazilian investments have recovered nicely since the currency devaluation. The analyst re-iterated a "Strong Buy" recommendation. BUY CALL FEB-70 AES-BN OI=1547 at $11.25 SL=8.75 BUY CALL FEB-75*AES-BO OI= 406 at $ 6.88 SL=4.75 BUY CALL FEB-80 AES-BP OI= 219 at $ 3.75 SL=1.75 BUY CALL FEB-85 AES-BQ OI= 20 at $ 1.81 SL=0.75 Picked on Jan 20th at $80.00 P/E = 71 Change since picked +0.00 52-week high=$83.38 Analysts Ratings 9-5-2-0-0 52-week low =$32.81 Last earnings 10/99 est= 0.50 actual= 0.50 Next earnings 02-03 est= 0.59 versus= 0.49 Average Daily Volume = 786 K Chart = http://quote.yahoo.com/q?s=AES&d=3m **** TWX - Time Warner $91.13 (+7.88) Time Warner is the world's largest media and entertainment company with revenues in excess of $23 billion. The company is in every area of the media business, from publishing and music to movies and cable TV. Its portfolio includes Time Inc., Warner Music Group, Home Box Office (HBO), and Warner Cable. TWX also owns cable TV networks (CNN, TBS, TNT) and other properties from Mad Magazine to the Atlanta Braves. America Online (AOL) recently announced that it is buying TWX in a $178 billion stock transaction. This is a play on the merger of TWX with AOL. Although investors severely punished AOL after announcement of the merger on January 10th, $60 has emerged as strong support (AOL closed at $65 on Friday). When the deal was announced, TWX shares jumped as high as $102, but then fell back as investors began to digest the news. Once investors wake up and realize that the deal is good for both companies, shares should start marching up nicely. We want to take advantage of the recovery in AOL (as the selling looks like it was overdone) and we can get more bang for our buck from TWX. There are 1.75 outstanding shares of AOL for each share of TWX (and in this merger-of-equals) so TWX shares will move faster. After the announcement, TWX declined to about $78, where it now has strong support. It began moving up on Jan 13th and since then has shown us a nice pattern of higher-highs and higher-lows. The 10-dma has moved up to $84, which should provide good support going forward. Any pullback near this level with a corresponding bounce, would make for an excellent entry point. If the stock remains strong, wait for it to move convincingly through the 52-week high of $92.25 before opening a new position. Currently TWX has earnings scheduled for February 1 (unconfirmed). TWX and AOL have been hiring teams of lobbyists to minimize any potential political complications to their merger. AOL is highly motivated (by a $5.4 billion fee for backing out) to avoid a repeat of the criticism leveled at the CBS and Viacom merger by the Senate Judiciary Committee last October. AOL's reported strong earnings last week with a record 1.8 million new members last quarter. BUY CALL FEB- 90*TWX-BR OI=5609 at $6.50 SL=4.75 BUY CALL FEB- 95 TWX-BA OI=5977 at $4.25 SL=2.50 BUY CALL FEB-100 TWX-BB OI= 733 at $2.81 SL=1.50 BUY CALL MAR- 95 TWX-CA OI= 532 at $7.38 SL=5.50 BUY CALL MAR-100 TWX-CB OI=1228 at $5.63 SL=3.75 Picked on Jan 23rd at $91.13 P/E = 142 Change since picked +0.00 52-week high=$102.00 Analysts Ratings 9-10-0-0-0 52-week low =$ 58.50 Last earnings 10/99 est= 0.04 actual= 0.07 Next earnings 02-01 est= 0.16 versus= -0.17 Average Daily Volume = 1.17 mln Chart = http://quote.yahoo.com/q?s=TWX&d=3m **** DISH - Echostar Communications $96.25 (+6.00) Located in Littleton, Co is the second-largest provider of satellite broadcasting. EchoStar operates the DISH Network and offers more than 300 channels of digital TV and audio programming. They have over 3 million subscribers and also provide satellite delivery of local network stations in several large markets. Their Technologies Corp. designs, manufactures and distributes DBS set-top boxes and antennas and other digital equipment. DISH formed a partnership with Microsoft to provide WebTV access through its DBS system. They compete with industry heavy-weights DIRECTV, Time Warner, and AT&T Broadband & Internet Services. We welcome DISH back to our list of plays. DISH had a fantastic start to the new year, making a new 52-week high at $102. Profit-taking then began at the Nasdaq, and for DISH, as the communications company saw the price of their shares decline to a strong support level at $80. Since then DISH has spent time consolidating. Last Monday DISH began an accent to higher prices, with momentum gaining as the week went on. Volume the last two days of the week picked up as well. We believe DISH is poised to break out over the century mark, and mount an assault on the old high. With the passage of satellite TV legislation by Congress last December, DISH can now offer cable customers an affordable alternative by offering local programming. This Wednesday DISH announced they will offer local channels to Houston and Kansas City, in addition to the 20 cities already in the loop. The balance of the month may be choppy ahead of the Fed meeting in early February. We believe the momentum behind the current move will continue. Should we see a pullback next week, DISH will find intraday support at $94 and $91. The 5-dma is seen at $93.15, with the 10-dma back at $89.70. If we see continued strength in DISH, we would look to enter this play. We feel DISH is very close to breaking out. A close over $100 would be the confirming factor. Tuesday DISH declared a quarterly dividend on the company's 6 3/4% Series C Preferred Stock. Also DISH announced that Castle Cable Services, a private cable company is installing the first of EchoStar's Quadrature Amplitude Modulation systems for multiple dwelling units in North America at the Avalon Towers in San Francisco, California. BUY CALL FEB- 90 UAB-BR OI= 313 at $12.13 SL= 9.50 BUY CALL FEB- 95*UAB-BC OI= 536 at $ 9.63 SL= 7.38 BUY CALL FEB-100 UAB-BD OI=1338 at $ 7.25 SL= 5.50 BUY CALL FEB-105 UAB-BE OI= 539 at $ 5.38 SL= 3.50 SELL PUT FEB- 85 UAB-NQ OI= 103 at $ 3.25 SL= 5.00 (See risks of selling puts in play legend) Picked on Jan 23rd at $96.25 P/E = N/A Change since picked +0.00 52-week high=$102.00 Analysts Ratings 9-6-1-0-0 52-week low =$ 10.75 Last earnings 11/99 est=-0.48 actual=-0.55 surprise=-14.6% Next earnings 03-01 est=-0.62 versus=-0.67 Average daily volume = 1.95 mln Chart = http://quote.yahoo.com/q?s=DISH&d=3m ***** LEAPS ***** Our LEAPS portfolio continues to give us some nice gains. The VIX closed at 22.66, so waiting for it to rise will provide better entries. The laggards in our portfolio like LU and GTW, may be giving us some nice entry points. Speaking of entry points, AOL looks like it is recovering from the merger-related selloff. Now would be a good time to start buying into this one while it's cheap. We started coverage of TWX in the Calls section this weekend. The leverage described there could also be applied to the AOL LEAP play. EMC has been a nice play, and since earnings come out Wednesday morning, now would be a good time to consider taking some profit off the table. Decide for yourself if you want to hold over earnings, it depends on your investment objective. All in all, we continue to be pleased with the market, but watch out for the typical post-earnings market dip that may be approaching. Current Plays SYMBOL SINCE LEAPS SYMBOL CURRENT PICKED RETURN EMC 11/07/99 JAN-2001 $80 ZOH-AP at $51.50 $15.38 234.85% JAN-2002 $90 WUE-AR at $54.75 $19.00 188.16% GPS 11/07/99 JAN-2001 $40 ZGS-AH at $12.88 $ 5.75 124.00% JAN-2002 $45 WGS-AI at $14.88 $ 7.88 88.83% IBM 11/07/99 JAN-2001 $100 ZIB-AT at $33.50 $13.63 145.78% JAN-2002 $110 WIB-AB at $36.75 $16.50 122.73% CSCO 11/14/99 JAN-2001 $80 ZCY-AP at $45.25 $19.13 136.54% JAN-2002 $90 WIV-AR at $46.50 $22.00 111.36% GE 11/21/99 JAN-2001 $150 ZGR-AU at $20.88 $16.25 28.49% JAN-2002 $150 WGE-AU at $31.63 $25.50 24.04% NT 11/28/99 JAN-2001 $75 ZOO-AO at $40.88 $22.25 83.73% JAN-2002 $75 WNT-AO at $49.50 $30.25 63.64% VOD 12/05/99 JAN-2001 $50 ZAT-AJ at $15.63 $10.75 45.40% JAN-2002 $50 WHV-AJ at $20.25 $15.00 35.00% KM 12/05/99 JAN-2001 $10 ZKM-AB at $ 2.81 $ 2.50 12.40% JAN-2002 $15 WKM-AC at $ 2.25 $ 1.75 28.57% ADBE 12/12/99 JAN-2001 $65 ZAE-AM at $14.25 $15.00 - 5.00% JAN-2002 $70 WAE-AN at $18.50 $20.38 - 9.22% TXN 12/12/99 JAN-2001 $110 ZTN-AB at $25.50 $22.25 10.11% JAN-2002 $120 WGZ-AD at $30.75 $28.50 7.89% NXTL 12/19/99 JAN-2001 $90 ZFU-AR at $44.75 $23.50 90.43% JAN-2002 $100 WFU-AT at $50.25 $27.25 84.40% SUNW 12/19/99 JAN-2001 $80 ZJX-AP at $23.38 $17.63 32.62% JAN-2002 $90 WJX-AR at $28.50 $22.00 29.55% AOL 12/23/99 JAN-2001 $90 ZKS-AR at $ 9.13 $20.13 -54.65% JAN-2002 $100 WAN-AT at $13.75 $25.63 -46.35% LU 11/14/99 JAN-2001 $80 ZEU-AP at $ 4.38 $12.88 -65.99% JAN-2002 $90 WEU-AR at $ 8.25 $16.13 -48.85% 01/09/00 JAN-2001 $50 ZEU-AJ at $13.50 $13.63 0.95% GTW 11/21/99 JAN-2001 $90 ZWB-AR at $ 7.75 $17.75 -56.34% JAN-2002 $100 WGB-AT at $12.63 $22.50 -43.87% 01/09/00 JAN-2001 $60 ZWB-AL at $16.75 $15.88 5.48% MOT 01/09/00 JAN-2001 $125 ZMA-AE at $41.38 $31.13 32.93% JAN-2002 $125 WMA-AE at $52.25 $41.50 25.90% CY 01/16/00 JAN-2001 $40 ZSY-AH at $ 9.00 $ 9.13 - 1.42 JAN-2002 $40 WSY-AH at $12.75 $12.63 1.03 To review the play description on any of our current plays, go to the LEAPS section for the date the play was added New Plays No new plays with the VIX so low and a potential market dip ahead. Drops SLR $78.38 Solectron has provided a couple of nice runs from support at $80 up to $95, but we are concerned about it in the short-term. On Friday it closed below long-term support and we are adding it to our put list this weekend. The day after the current slide began, the company announced they would split their stock 2-for-1, payable February 23rd. The company fundamentals still look very strong, and once the buyers return, we expect SLR to return as a LEAP play. ***************** PUTS, PUTS, PUTS ***************** Put plays can be very profitable but have a larger risk than call plays. When a stock is falling the entire investment community (except the shorts) is hoping it will reverse and start back up. The company management is also doing everything they can to shore up their stock price. The company issues press releases, brokers talk it up, analysts try to put a positive spin on everything. Then of course there is the death knell, the "buy recommendation" simply because the price has dropped to some level that analysts feel attractive again. Buyers who like the stock wait until it appears a bottom has been reached and then jump on it in a feeding frenzy. They may already have a large position and are averaging down. Many factors can stop a free falling stock in mid drop. **** IIJI - Internet Initiative Japan, Inc. $81.63 (-3.88)(-11.50) Founded in 1992, IIJI offers a comprehensive range of Internet access services and Internet-related services to customers, including corporations and other Internet service providers, in Japan. IIJI offers its services via one of the largest Internet network backbones in Japan as well as between Japan and the United States. We were waiting for IIJI to make up its mind as to what direction it was going to head. Friday was encouraging for our put play, as IIJI dropped $3.75 for the session. IIJI tested and held support at $80 several times throughout the day. As we have mentioned, this level seems to be providing solid support and timing new entries around this current level could be risky. We are obviously looking for a drop below this level to indicate the continuing negative momentum for this put play. Otherwise, new entries are really only going to be feasible on any moves up held back by resistance. This could be risky and it will be imperative to use your stops if you are going to try and target shoot your way in. We saw a pick up in Friday's volume, as it was nearly double over Thursday's, which was a nice bearish indication. IIJI looks to have immediate resistance overhead at $82 backed by its 5-dma of $84. Though we have not been able to confirm the date yet, there will most likely be an upcoming earnings announcement sometime around February 15th. The possibility of an earnings run makes a breakthrough the $80 level even more important for the continuance of our put play. Exercise caution. On Friday, IIJI announced that it will be expanding service areas for high-speed dialup access from 30 points, to 34. This will allow dial-up customers more convenient access to wider areas. ***Editor's note: IIJI put premiums currently appear grossly over-priced so proceed with caution.*** BUY PUT FEB-80*IUJ-NP OI=87 at $10.63 SL=8.00 BUY PUT FEB-75 IUJ-NO OI=38 at $ 8.00 SL=6.25 Average Daily Volume = 538 K Chart = http://quote.yahoo.com/q?s=IIJI&d=3m **** FD - Federated Department Stores $43.88 (-4.00)(-2.94) Federated Department Stores, Inc. is the nation's largest operator of department stores, located in all major regions of the United States. Federated operates 403 department stores in 33 states as of January 1, 2000. Additionally, in March of 1999 Federated acquired Fingerhut, which together with Bloomingdale's By Mail, Macy's By Mail, Macys.Com and certain other direct marketing activities comprises its direct-to-customer businesses. Investors seem to be finding that the shares of FD just don't fit right in their portfolio anymore and are heading for the returns counter. Friday was another day downhill for FD, as it dropped over $2. FD found resistance for the day at $44 and closed the session just pennies shy of this level. We did see nice volume backing FD's declines last week, which seems to be indicative of the lack of investors wanting to own this stock. As we mentioned, FD did find resistance at $44 on Friday and looks to have additional resistance to conquer at $46 and $48. FD's next level of support looks to be right around $42-$41 followed with a bit of support in the $39 neighborhood. Should we get a breakthrough here, we could be cleared for a healthy fall. As far as new entries go, watch for any intraday rallies backed with holding resistance and try and target shoot your way in. The $48 level of resistance looks to be rather solid and any moves up and bounce from this level could offer some nice opportunities. Though FD claims that E-Commerce is going to prove to be the growth segment of their business, investors seem to be concerned about the effect FD's near-term Internet related spending could have on the stock. This news could continue to plague the shares for a while. BUY PUT FEB-50 FD-NJ OI= 33 at $5.13 SL=3.25 BUY PUT FEB-45*FD-NI OI=680 at $3.00 SL=1.50 Average Daily Volume = 1.22 mln Chart = http://quote.yahoo.com/q?s=FD&d=3m **** WCOM - MCI WorldCom, Inc. $41.63 (-4.94)(-0.63)(-5.88) MCI Worldcom is a telecommunications giant, providing consumers and businesses with local, long distance, Internet, data, and international communications services. Included in the company's products and services are switched and dedicated long distance and local products, dedicated and dial-up Internet access, wireless services, 800 services, calling cards, and debit cards. Like a punch-drunk boxer, WCOM is on the ropes again, setting another 52-week low on Friday. On triple the average daily volume, our put play went down all day Friday, pummeled by the now-familiar double-whammy of reduced revenues and merger concerns. Competitor AT&T announces earnings on Tuesday before the open and is expected to see reduced long-distance revenues due to its ongoing rate war with WCOM and Sprint. This concern is spilling over to shares of WCOM, and the results on Tuesday are likely to add further downside pressure. The news on the merger with Sprint is also bearish. Sprint is close to an agreement on the divestiture of its interest in the unprofitable Global One telecommunications joint venture, and the value of the cash sale is now expected to be closer to $5 billion than the originally estimated $10 billion. WCOM will report its earnings on February 10, but we don't expect any help from that corner. Going forward, we expect $45 to provide serious resistance, as this is now the location of the 10-dma. Support is harder to find, as WCOM has not traded this low since late 1998. Using historic levels, we may see support in the $37-38 range. BUY PUT FEB-45*LDQ-NI OI=8791 at $5.13 SL=3.25 BUY PUT FEB-40 LDQ-NH OI=4020 at $2.19 SL=1.00 Average Daily Volume = 18.47 mln Chart = http://quote.yahoo.com/q?s=WCOM&d=3m **** CMGI - CMG Information Services Inc $118.25 (-3.69)(-15.56) CMGI invests in, develops, and integrates advanced Internet, interactive, and database management technologies. The company's venture capital arm is called @Ventures and boasts a portfolio of over 30 Internet companies such as Lycos and Raging Bull. One of the more prominent additions to its portfolio is a 83% acquisition of the search engine, Alta Vista. The majority of CMGI's revenues (80%) is derived from fulfillment and mailing list services. CMGI is a "post-split" blues play. Initially the culprit was broad interest-rate concerns and typical pre-split profit- taking. But following the actual 2:1 split on January 12th, CMGI continued its descent and slipped under the 30-dma (now at $126.17). Our Target is for a 50% retracement of the extraordinary gains made since mid-November. Take a look at a chart and you can see this price level is in-line with the 50- dma (now at $103.30). The volume has been strong too sometimes double or triple the ADV. This week $123 and $125 formed a shield of resistance while an intraday low of $112.50 serves as bottom support. The intraday swings offer a multitude of entry opportunities, but let's make no mistake here. CMGI is a volatile Internet play that requires your undivided attention. In other words, be prepared for a quick turnaround. In the news on Tuesday, CMGI announced its acquisition of Green Witch, LLC, a leader of open source Internet radio broadcast solutions. Financial terms were not available. And on Thursday, CMGI announced another acquisition. By way of one of its majority owned companies, Engage, a tracker of online customers' tastes, it 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. BUY PUT FEB-125 GCD-NE OI=1425 at $17.38 SL=13.50 BUY PUT FEB-120 GCD-ND OI=1162 at $12.88 SL=10.50 BUY PUT FEB-115*GCD-NC OI= 575 at $10.88 SL= 8.75 Average Daily Volume = 5.75 mln Chart = http://quote.yahoo.com/q?s=CMGI&d=3m **** RLM - Reynolds Metals $69.38 (-4.13) 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 downdraft foreshadowed a post-earnings decline despite the company's solid earnings report of $1.09 p/s versus $0.76 p/s same quarter a year ago on Wednesday. To add salt to the existing wound, investors continued to shred the share price up on concerns that Alcoa's decision to boost aluminum production by 7% before the end of the year would ultimately drive down the prices and profits of Reynolds. Although from a fundamental view point, analysts agree Alcoa's plan to increase production is positive. Nonetheless, RLM was already suffering a significant decline from an $82 high on January 10th, and the investor's negative reaction seem to seal its fate. The stock fell a sharp $5.13, or 7.1% on Thursday. Friday's performance indicated overhead resistance is establishing a pattern of lower-highs and bottom support is waggling between $66 and $67. Beyond that the 200-dma ($62.97) marks the next line of opposition for RLM. Friday may have afforded entry points into this put play, however it's imperative to confirm direction and sentiment before opening a new position. BUY PUT FEB-70*RLM-NN OI=2806 at $4.13 SL=2.50 BUY PUT FEB-65 RLM-NM OI=2270 at $2.13 SL=1.00 Average Daily Volume = 500 K Chart = http://quote.yahoo.com/q?s=RLM&D=3m **** MU - Micron Technology $67.13 (-6.13) Micron designs, develops, makes and markets semiconductor memory products. Also known as DRAMs. MU also manufactures entire PC systems via 64% owned Micron electronics (MUEI). Production includes a wide range of memory intensive, high performance desktop and notebook PC systems and multiprocessor network servers. Brand names include GoBook ClientPro, Millenia and Transport Trek. Micron's performance, or lack there of, during Friday's session gave us the go ahead to initiate this put play. MU broke through $70, leaving a good deal of support behind on its way down, including the combined support of its 10 and 30-dmas at $72.50. MU had strong volume pushing it down, a good indication that there are plenty of investors looking to unload this stock. This is a negative momentum run, pure and simple. $65 managed to catch MU briefly on Friday, though we see the real support coming in to play right around $60. $70 could hold as resistance going forward. MU has additional resistance overhead right around $71, where its 5 and 50-dmas have converged. MU demonstrated weak relative strength throughout the majority of last week. While the Semiconductors in general had a fairly decent week, MU continued to steadily decline. Another reason we like this put play, is that MU continues to go down despite positive news. For example, on Monday, an announcement was made the MU along with five other companies including Intel (INTC), were working together to further develop high-performance DRAM chip technology. You would think that an announcement tying MU in with a name like INTC would have a positive impact on the stock. Not the case here though. Another example was an upgrade by ABN AMRO from Outperform to Buy. Apparently, investors weren't even interested in buying the upgrade, as MU continued right on downhill. Watch for a drop below $65 to confirm continuing negative momentum. For new entries, try and enter toward the earlier part of the session, as typically MU opens near its high and closes near its low. BUY PUT FEB-70*MU-NN OI=10325 at $8.63 SL=6.50 BUY PUT FEB-65 MU-NM OI= 1127 at $5.88 SL=4.25 Average Daily Volume = 5.15 mln Chart = http://quote.yahoo.com/q?s=MU&d=3m **** RMBS - Rambus Inc $75.38 (-14.25) Rambus Inc. is based in Mountain View, Calif. They develop and licenses high-speed chip-to-chip interface technology that enables semiconductor memory devices to keep pace with faster generations of processors and controllers. Providers of Rambus-based integrated circuits include the world's leading DRAM, ASIC and PC controller manufacturers. Currently, eight of the world's top-10 semiconductor companies license Rambus technology. We picked RMBS as a put play this week and you can easily see the reason why. The decline pattern is very easy to follow, but first let's talk numbers. They have now broken through support of $77, which makes the next support level at $66-$68. The close below the 50-dma ($76.08) on Friday is another good sign. The 50-dma should now act at resistance. Also note the strong intraday top on RMBS at $77 during the day Friday. Now lets talk surroundings. The Nasdaq. It has been rising all week with no effect on RMBS they have been declining all week. And RMBS provides no help for themselves with earnings coming out that only meet analysts expectations. Also, RMBS is suing Hitachi for a patent violation. With all that in mind it looks like a downward trend to us. Volume on Friday was high which shows that investors are helping with the decline. Watch the price Monday and since RMBS tends to have wide trading ranges use that to your advantage and get in on the high side. A good idea for stops is to place them slightly above the 10-dma in case RMBS reverses course. BUY PUT FEB-80 BNQ-NP OI=708 at $9.50 SL=7.00 BUY PUT FEB-75*BNQ-NO OI=905 at $6.75 SL=4.75 Average Daily Volume = 1.63 mln Chart = http://quote.yahoo.com/q?s=RMBS&d=3m **** SLR - Solectron $78.38 (-5.75) Solectron is a premier global provider of customized manufacturing services rendering electronic solutions for original equipment manufacturers (OEM's). They have won the Malcolm Baldrige Award for their manufacturing excellence twice. Solectron has a wide range of clients including Cisco, Hewlett-Packard, and Mitsubishi. While we don't have anything specifically in the news that would explain the negative chart pattern, we do know that investors have moved on to the sex appeal of high-flying companies offering a lick and a promise. Having predictable, nonetheless growing, earnings seems to be the kiss of death that brings wild price gyrations back to earth. With nothing left to argue about, it's pretty tough for an analyst to raise a price target from $350 to $600 just because he/she can spin the story. The fact is SLR is an excellent company with excellent (and growing) earnings. Only the stock is in a slump now. As opportunists, our job is to capitalize on the sentiment. Looking at the technical chart, SLR was doing its best imitation of a yo-yo, having encountered resistance at $95 only to regain support at $80. SLR fell through support at mid-day and couldn't get back over $79 (new resistance?). The crowning blow was the selling of over 635K shares in a block trade at $78 after the bell on Friday. Ouch! That's rough on a stock with 1.6 mln as its ADV. Needless to say, RSI, stochastic and MACD are deep in negative territory. The next level of support is around $72 and could easily move to that level in an overall southerly market move (not out of the question with Fed meetings in the offing). To be sure the move south is for real, look for a mild recovery say to $79, then another bounce south on increasing volume. That will be the key. News that may account for the recent downtrend is that IBM awarded Celestica its server business, and SLR apparently had some Q1 inventory issues. Nonetheless, Lehman Bros upgraded the stock to Outperform from Neutral. That didn't save SLR. Not even an earnings run will save this stock since they won't announce until March 13, according to Zack's BUY PUT FEB-80*SLR-NP OI=647 at $6.50 SL=4.75 BUY PUT FEB-75 SLR-NO OI= 42 at $3.88 SL=2.25 Average Daily Volume = 1.6 mln Chart = http://quote.yahoo.com/q?s=SLR&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 *****************************
The Option Investor Newsletter 1-23-2000 Sunday 5 of 5 ************* COVERED CALLS ************* Covered-Calls: The Correct Approach... Understanding how various strategies work can often be the most difficult task for a new trader. Fortunately, the advantages of most option trading techniques are well worth the time devoted to learning how to use them. Covered-call writing is a stock options trading strategy that investors utilize when they are striving for a conservative risk profile along with favorable profit potential in neutral to bullish market environments. Investors usually write covered-calls to generate monthly income, collecting the premium for the sale of an option against a stock position in his or her portfolio. This conservative strategy can be used effectively on all type of stocks as long as the outlook (fundamental or technical) for the issue is favorable. One of the advantages to this technique is that it allows new investors to learn successful trend-trading techniques with a small margin of safety while managing the combined positions for upside profit and downside risk. The underlying basis for this strategy is a high probability of limited profit. The major advantage to a novice trader is that the technique is easy to use and the resultant position is far more conservative than outright stock ownership. By writing an option on the stock, the investor has insured the issue against a future drop in value. Unfortunately, the downside risk in ownership is not eliminated, only reduced. In addition, the cost of opportunity or potential upside movement can be substantial. There are other, more subtle benefits and disadvantages but these are the most common reasons that investors choose or avoid this technique. The reason most long-term investors do not write covered options is the possibility of unrealized gains when the share value rises significantly or the loss of the underlying issue in assignment. Both of these concerns have merit but statistics suggest that a systematic program of covered writing outperforms stock ownership on a consistent basis. If a trader is more concerned about stock ownership, or is extremely bullish, or worried about capping his profit potential, then perhaps a different philosophy should be employed -- as in just buying the call, or just buying the stock itself. Such a philosophy when writing calls, is more like being a stockholder and trading options against one's stock position, rather than actually participating in a covered writing strategy. The key to success with this technique lies in one objective; a reasonable flow of monthly income with limited portfolio risk. The focus of play selection should be to continually produce an acceptable level of option premium while protecting against the potential for downside losses. Issues that become unfavorable due to changes in fundamental or technical characteristics must be removed from the portfolio before they can generate significant deficits. Catastrophic failures are not unavoidable but they can be sufficiently managed to reduce the effects of the shortfall. In the OIN's Covered-call portfolio, we follow this conservative, "total return concept" when evaluating potential candidates. We utilize overvalued premiums to generate maximum yield in the event the share value declines. We target 5% monthly returns and view the entire position as a single entity with respect to risk and probability of profit. Our track record suggests that this method consistently produces a 35%-40% annual return on investment, in all but the worst market conditions. For conservative investors, that is a more than acceptable rate or return. SUMMARY OF PREVIOUS PICKS Stock Price Last Mon Strike Opt Profit ROI Monthly Sym Picked Price Price Bid /Loss ROI MCRE 7.56 12.50 JAN 7.50 1.31 *$ 1.25 20.0% 14.5% SPLH 8.44 12.25 JAN 7.50 1.81 *$ 0.87 13.1% 11.4% EMIS 19.88 39.00 JAN 17.50 4.50 *$ 2.12 13.8% 10.0% WSTL 10.75 17.00 JAN 10.00 1.88 *$ 1.13 12.7% 9.2% CBIZ 10.31 7.63 JAN 7.50 3.63 *$ 0.82 12.3% 8.9% FSII 10.69 18.00 JAN 10.00 1.94 *$ 1.25 14.3% 8.9% LGND 11.69 16.13 JAN 10.00 2.75 *$ 1.06 11.9% 8.6% NFO 14.38 21.56 JAN 12.50 2.94 *$ 1.06 9.3% 8.1% STRX 8.13 7.94 JAN 7.50 1.00 *$ 0.37 5.2% 7.5% AWEB 12.13 11.75 JAN 10.00 3.00 *$ 0.87 9.5% 6.9% NETA 25.13 27.19 JAN 22.50 3.63 *$ 1.00 4.7% 6.7% SCOC 17.88 20.19 JAN 15.00 4.13 *$ 1.25 9.1% 6.6% PILT 17.56 28.75 JAN 12.50 5.88 *$ 0.82 7.0% 6.1% ONHN 10.25 8.13 JAN 7.50 3.38 *$ 0.63 9.2% 5.7% ENER 11.81 16.88 JAN 10.00 2.06 *$ 0.25 2.6% 5.6% BAMM 9.81 7.81 JAN 7.50 2.75 *$ 0.44 6.2% 5.4% MWHS 15.06 18.25 JAN 12.50 3.25 *$ 0.69 5.8% 5.1% PILT 20.25 28.75 JAN 15.00 6.38 *$ 1.13 8.1% 5.1% RNBO 20.00 24.50 JAN 15.00 6.13 *$ 1.13 8.1% 5.1% NPLS 20.56 23.06 JAN 17.50 3.63 *$ 0.57 3.4% 4.9% TSCM 15.75 18.50 JAN 12.50 3.88 *$ 0.63 5.3% 4.6% NETS 28.00 25.25 JAN 22.50 6.63 *$ 1.13 5.3% 4.6% AGY 16.88 16.69 JAN 15.00 2.75 *$ 0.87 6.2% 4.5% EMIS 24.63 39.00 JAN 20.00 5.38 *$ 0.75 3.9% 4.2% CNCX 29.88 49.00 JAN 22.50 8.00 *$ 0.62 2.8% 4.1% ENMD 28.44 54.63 JAN 22.50 6.75 *$ 0.81 3.7% 4.1% SATH 12.69 11.94 JAN 10.00 3.38 *$ 0.69 7.4% 4.0% MESG 16.63 17.31 JAN 12.50 4.88 *$ 0.75 6.4% 4.0% BNYN 15.81 21.00 JAN 12.50 4.13 *$ 0.82 7.0% 3.8% BIDS 5.13 4.31 JAN 5.00 1.00 $ 0.18 4.4% 2.7% TTWO 16.31 11.88 JAN 12.50 4.63 $ 0.20 1.7% 1.2% BIDS 5.25 4.31 JAN 5.00 0.94 $ 0.00 0.0% 0.0% VDAT 13.50 9.13 JAN 10.00 3.88 $ -0.49 -5.1% 0.0% CYOE 5.50 6.50 FEB 5.00 1.44 *$ 0.94 23.2% 21.3% TERA 4.41 7.06 FEB 5.00 0.50 *$ 1.09 27.9% 20.2% WDC 5.50 5.13 FEB 5.00 1.13 *$ 0.63 14.4% 10.4% GMGC 6.84 6.94 FEB 5.00 2.38 *$ 0.54 12.1% 8.8% GMGC 7.50 6.94 FEB 5.00 2.88 *$ 0.38 8.2% 7.6% ERTH 6.03 5.16 FEB 5.00 1.38 *$ 0.35 7.5% 6.9% CCUR 18.38 23.44 FEB 15.00 4.38 *$ 1.00 7.1% 6.6% ASFT 21.50 20.13 FEB 15.00 7.38 *$ 0.88 6.2% 5.7% HRC 5.81 6.38 FEB 5.00 1.13 *$ 0.32 6.8% 5.0% EAII 14.25 14.56 FEB 10.00 4.75 *$ 0.50 5.3% 4.9% MUEI 12.75 12.00 FEB 10.00 3.25 *$ 0.50 5.3% 4.9% PCMS 10.06 13.50 FEB 7.50 3.00 *$ 0.44 6.2% 4.5% HMK 9.88 11.69 FEB 7.50 2.81 *$ 0.43 6.1% 4.4% XICO 22.56 20.38 FEB 17.50 5.75 *$ 0.69 4.1% 3.8% IFCI 10.13 16.56 FEB 7.50 3.00 *$ 0.37 5.2% 3.8% *$ = Stock price is above the sold striking price. Comments: The Friday rebound of Bid.Com (BIDS) looks promising. The issue appears to have made another successful test of the August low. The premiums in February and May are quite favorable. Visual Data (VDAT) is still suffering from the its downgrade and earnings report. A possible test of the October lows could be forthcoming. Consider rolling down to the FEB-$7.50 call for a wash verses cutting losses and moving on. The MAY-$7.50 is an alternative but that is a long time to tie up money for a small profit. Century Business (CBIZ) just made it, but may not be called away at $7.62. On Health Network (ONHN) enjoyed a nice rebound. No news to explain the Take-Two Interactive Software (TTWO) drop Friday and it wasn't a good sign that it broke its 50 dma on relatively heavy volume. You may want to consider the break-even exit until the reason is known. January Positions Previously Closed: Value America (VUSA), Summit Tech (BEAM). NEW PICKS ********* Definitions: OI - Open Interest CB - Cost Basis (Price paid - Prem rec'd, the break-even point) RC - Return Called RNC - Return Not Called (Stock Price Unchanged) Sequenced by Company Stock Price Mon Strike Option Opt Open Cost RC RNC Sym Price Symbol Bid Intr Basis CORL 22.13 FEB 15.00 ORU BC 7.75 195 14.38 4.3% 4.3% DBCC 9.19 FEB 7.50 BQD BU 2.00 152 7.19 4.3% 4.3% ESPI 9.22 FEB 7.50 AQ BU 2.19 953 7.03 6.7% 6.7% GELX 20.38 FEB 17.50 GQX BW 4.00 140 16.38 6.8% 6.8% GSTX 10.69 FEB 10.00 QGS BB 1.63 736 9.06 10.4% 10.4% MESG 17.31 FEB 15.00 MUG BC 3.25 236 14.06 6.7% 6.7% MSGI 19.13 FEB 15.00 UMS BC 4.75 666 14.38 4.3% 4.3% VOYN 13.06 FEB 10.00 UOY BB 3.50 187 9.56 4.6% 4.6% VTS 17.75 FEB 15.00 VTS BC 3.50 579 14.25 5.3% 5.3% Sequenced by Return Not Called Stock Price Mon Strike Option Opt Open Cost RC RNC Sym Price Symbol Bid Intr Basis GSTX 10.69 FEB 10.00 QGS BB 1.63 736 9.06 10.4% 10.4% GELX 20.38 FEB 17.50 GQX BW 4.00 140 16.38 6.8% 6.8% ESPI 9.22 FEB 7.50 AQ BU 2.19 953 7.03 6.7% 6.7% MESG 17.31 FEB 15.00 MUG BC 3.25 236 14.06 6.7% 6.7% VTS 17.75 FEB 15.00 VTS BC 3.50 579 14.25 5.3% 5.3% VOYN 13.06 FEB 10.00 UOY BB 3.50 187 9.56 4.6% 4.6% CORL 22.13 FEB 15.00 ORU BC 7.75 195 14.38 4.3% 4.3% DBCC 9.19 FEB 7.50 BQD BU 2.00 152 7.19 4.3% 4.3% MSGI 19.13 FEB 15.00 UMS BC 4.75 666 14.38 4.3% 4.3% Company Descriptions CORL - Corel $22.13 *** New Contracts *** Corel is an internationally recognized developer of award-winning business productivity, graphics and operating system solutions on the Windows®, Linux®, UNIX®, Macintosh® and Java(TM) platforms. Corel also develops market-leading, Web-based solutions including applications, contents, e-commerce and online services. Investors appear to support Corel's earnings report even though a profit was provided by a one time tax gain. The real news was on Friday with the U.S. Department of Justice licensing of Corel WordPerfect® software - enough for a $3 dollar pop and a new January high. Though bullish, we prefer a cost basis near the December low. FEB 15.00 ORU BC Bid=7.75 OI=195 CB=14.38 RC=4.3% RNC=4.3% Chart = http://quote.yahoo.com/q?s=CORL&d=1y **** DBCC - Data Broadcasting $9.19 *** Expansion *** Data Broadcasting is a leading provider of real-time market data to the individual trader and investor. The company delivers real- time stock quotes, financial news and information to three million users via PCs, wireless FM, cable, satellite and the Internet (eSignal and cbs.marketwatch). Data Broadcasting is also one of the principal investors in WhisperNumber.com. DBC continues to expand its partnerships with several trading firms as it steadily establishes itself in the investment community. Shareholders are scheduled to vote Feb. 23 on the previously announced merger with Financial Times Asset Management. We favor the successful test of last year's lows and a cost basis below the December support. FEB 7.50 BQD BU Bid=2.00 OI=152 CB=7.19 RC=4.3% RNC=4.3% Chart = http://quote.yahoo.com/q?s=DBCC&d=1y **** ESPI - e.spire Communications $9.22 *** CLEC Rally? *** e.spire Communications is a leading integrated communications provider, offering traditional local and long distance, Internet access and Web-hosting services, and advanced data solutions, such as ATM and frame relay. e.spire's subsidiary, ACSI Network Tech. provides third parties, including other communications concerns, municipalities and corporations, with turnkey fiber-optic design, construction and project management expertise. Upgraded, downgraded, new customer accounts, and the launch of e.spire XpressLink (DSL). What to make of it all? How about a breakout above the 150 dma on heavy volume reaching a new 5-month high? FEB 7.50 AQ BU Bid=2.19 OI=953 CB=7.03 RC=6.7% RNC=6.7% Chart = http://quote.yahoo.com/q?s=ESPI&d=1y **** GELX - GelTex Pharmaceuticals $20.38 *** Drug Manufacturer *** GelTex Pharmaceuticals develops polymer-based, non-absorbed pharmaceuticals that selectively bind and eliminate target substances from the intestinal tract resulting in a systemic medical benefit. GelTex and Sankyo Pharma have signed agreements on the licensing of Cholestagel® for the treatment of hyper- cholesterolemia. GelTex submitted its NDA on Cholestagel in July of last year and anticipates an FDA decision in mid-2000. Last week GelTex reported a 16% jump in fourth-quarter revenues and forecast solid earnings growth in line with expectations. We favor the strong breakout in a hot sector. FEB 17.50 GQX BW Bid=4.00 OI=140 CB=16.38 RC=6.8% RNC=6.8% Chart = http://quote.yahoo.com/q?s=GELX&d=1y **** GSTX - GST Telecommunications $10.69 *** Another CLEC *** GST Telecommunications provides a broad range of integrated tele- communications products and services including enhanced data and Internet services and comprehensive voice services throughout the US. Facilities-based GST continues to focus on its western regional strategy by anchoring its next generation networks in local markets and connecting them via long haul fiber networks. An agreement (swap fiber access plus cash) with Worldwide Fiber on Jan. 12 helped move GST's price above its 150 dma on heavy volume. GST also announced a 35% increase in sales and a 37% increase in installations compared to the previous quarter. Favorable speculation in a hot sector. FEB 10.00 QGS BB Bid=1.63 OI=736 CB=9.06 RC=10.4% RNC=10.4% Chart = http://quote.yahoo.com/q?s=GSTX&d=1y **** MESG - MessageMedia $17.31 *** New BUY Rating *** MessageMedia is the leading provider of e-mail-based customer relationship management and direct marketing services. The Company offers a comprehensive suite of outsource messaging services for information delivery, e-commerce services, permission-based direct marketing, ongoing customer communications and real-time customer feedback solutions using industry standard Internet protocols. MESG's clients include: Cisco, E*TRADE, AOL, Apple, Yahoo!, and Microsoft, to mention a few. A buy rating and a $28.50 price target from Robertson Stephens should make for favorable speculation. We favor a cost basis near support as MESG consolidates. Earnings are due next week. FEB 15.00 MUG BC Bid=3.25 OI=236 CB=14.06 RC=6.7% RNC=6.7% Chart = http://quote.yahoo.com/q?s=MESG&d=1y **** MSGI - Marketing Services Group $19.13 *** Trading Range *** Marketing Services Group is organized into two business divisions: The Internet Group and The Direct Group. The Internet Group's mission is to acquire, invest in and incubate Internet companies. The Direct Group provides strategic planning, direct marketing, database marketing, telemarketing, telefundraising, media planning and buying. MSGi's revenues have grown from $16 million in fiscal 1996 to in excess of $100 million on an annualized basis. GE and CMGI both have positions in MSGI. The technicals continue to strengthen though we favor an entry point near support. Earnings are due near February 14. FEB 15.00 UMS BC Bid=4.75 OI=666 CB=14.38 RC=4.3% RNC=4.3% Chart = http://quote.yahoo.com/q?s=MSGI&d=1y **** VOYN - Voyager.net $13.06 *** Need I say CLEC? *** Voyager.net is the largest Internet service company focused in the Midwestern US, with approximately 340,000 subscribers including 650 DSL subscribers. Voyager.net's focus is on providing quality, local Internet services to customers in the Midwest, including smaller communities in the secondary and rural markets. Voyager.net recently announced its plans to roll-out DSL-based broadband solutions in 40 Midwest cities. Last week, Jefferies & Co. initiated coverage with a buy rating. The spike in price in early January was due to a tender offer by Growth Capital to purchase up to 1,500,000 shares of common stock from stockholders of Voyager.net at $10.00 per share. Hmmmm. OK. That's a reasonable strike price to sell. FEB 10.00 UOY BB Bid=3.50 OI=187 CB=9.56 RC=4.6% RNC=4.6% Chart = http://quote.yahoo.com/q?s=VOYN&d=1y **** VTS - Veritas DGC $17.75 *** Oil Sector On Fire *** Veritas DGC, headquartered in Houston, Texas, provides integrated geological and geophysical technologies to the petroleum industry worldwide. Veritas has started off the millennium with a new CEO in Richard C. White, the recent President of the Western Geophysical division of Baker Hughes. Veritas also continues to install NEC vector supercomputers as it works towards providing faster turnaround on complex 3D depth imaging projects. With the recent boost in oil prices drawing attention, it only follows that oil companies will be increasing exploration budgets. We favor the breakout above the 150 dma and the improving technical picture suggesting a new trend. FEB 15.00 VTS BC Bid=3.50 OI=579 CB=14.25 RC=5.3% RNC=5.3% Chart = http://quote.yahoo.com/q?s=VTS&d=1y ***************** NAKED PUT SECTION ***************** Option Trading Basics: Using The Correct Strategy... There are benefits and disadvantages to every form of option trading. The key is to construct positions with a high probability of profit and limited downside risk. Flexibility is another important aspect of successful trading and in order to select the most appropriate technique, you must beware of the current market trends and the character of option volatility. With this approach, you can easily determine the proper strategy for any specific set of conditions. One of the most common questions that new traders ask is whether it is better to buy or sell options. The truth is, both long and short positions have benefits, depending on the outlook for the underlying issue and relative cost (premium) of the options. Long positions offer limited risk and the potential for exponential profits while the sale of options benefits from time value decay and a historically higher probability of success. Novice traders are generally attracted to option buying because the potential for loss is limited; an option buyer can only lose the amount of the initial investment, and the benefits of purchasing options are far less complicated than option sales. In contrast, experienced traders are the most common participants in option selling strategies. They promote the techniques based on known advantages; options are a decaying asset and the margin for error (and profit) is much higher than strategies in which you buy premium. In most cases, the benefits of one particular strategy over another are readily apparent. As an example, an investor who is bullish on an underlying issue market can either buy a call or sell a put. Both techniques are based on a future upside movement but they have entirely different risk/reward characteristics. The long call option has low risk along with a low probability of a large reward. The short put option has greater risk with a high probability of a small reward. Each position has merit based on the relative price of option premiums and the character of the expected movement in the underlying instrument. The disadvantages to option buying are obvious but most traders increase the potential for loss by purchasing expensive options (high implied volatility = inflated premium) that are too far out-of-the-money and too close to expiration. Occasionally, with the incredible moves in markets such as the recent technology rally they will be successful. Unfortunately, that success is statistically short-lived. On the other hand, there are drawbacks to option writing. The most devastating is a "gapping" market open. Huge price swings and rising volatility can also become a seller's nightmare. Professional traders are the most frequent writers of options and they typically hedge their positions in the short-term to limit risk. Until recently, this technique was difficult for retail traders due to prohibitive commission costs and delays in order execution. Now the most sought-after methods are available to anyone who has the skill and determination to master the art. After reading Jim's (OIN editor) recent articles on the covered- strangle, most of you would have to agree with the advantages of this approach. There are benefits to almost every style of trading and success comes from knowledge of profitable techniques and the ability to correctly implement them in a timely manner. *** WARNING!!! *** Occasionally a company will experience catastrophic news causing a severe drop in the stock price. This may cause a devastatingly large loss which may wipe out all of your smaller gains. There is one very important rule; Don't sell naked puts on stocks that you don't want to own! It is also important that you consider using trading STOPS on naked option positions to help limit losses when the stock price drops. Many professional traders suggest closing the position when the stock price falls below the sold strike or using a buy-to-close STOP at a price that is no more than twice the original premium from the sold option. SUMMARY OF PREVIOUS PICKS Stock Price Last Mon Strike Opt Profit ROI Monthly Sym Picked Price Price Bid /Loss ROI ADG 13.13 12.50 JAN 10.00 0.25 *$ 0.25 8.7% 18.9% AWEB 12.88 11.75 JAN 10.00 0.50 *$ 0.50 16.2% 17.6% ITIG 24.81 35.75 JAN 17.50 0.63 *$ 0.63 11.3% 16.3% WAXS 20.00 19.94 JAN 17.50 0.69 *$ 0.69 11.1% 16.1% ASFT 18.13 20.13 JAN 12.50 0.25 *$ 0.25 6.4% 14.0% PILT 17.13 28.75 JAN 12.50 0.50 *$ 0.50 12.7% 13.8% AFCI 37.13 43.69 JAN 27.50 0.50 *$ 0.50 6.3% 13.7% RNBO 21.94 24.50 JAN 17.50 0.81 *$ 0.81 15.6% 13.5% AND 9.25 7.75 JAN 7.50 0.44 *$ 0.44 18.4% 13.3% SATH 12.94 11.94 JAN 10.00 0.56 *$ 0.56 17.8% 12.9% SCOC 29.00 20.19 JAN 17.50 0.56 *$ 0.56 8.8% 12.8% GSTRF 35.56 43.69 JAN 25.00 0.44 *$ 0.44 5.8% 12.7% ORCT 31.00 54.94 JAN 25.00 0.81 *$ 0.81 11.2% 12.2% AMD 33.00 37.88 JAN 25.00 0.38 *$ 0.38 5.4% 11.8% IUSA 12.13 17.06 JAN 7.50 0.31 *$ 0.31 11.3% 9.8% LOR 20.25 22.94 JAN 17.50 0.38 *$ 0.38 6.6% 9.6% EMIS 21.00 39.00 JAN 15.00 0.50 *$ 0.50 10.6% 9.2% DAVX 23.75 27.00 JAN 17.50 0.56 *$ 0.56 10.5% 9.2% CCUR 17.75 23.44 JAN 12.50 0.50 *$ 0.50 12.3% 8.9% SCOC 17.88 20.19 JAN 12.50 0.44 *$ 0.44 10.9% 7.9% MSGI 19.00 19.13 JAN 12.50 0.38 *$ 0.38 9.1% 7.9% ENMD 28.44 54.63 JAN 20.00 0.44 *$ 0.44 7.2% 7.8% CS 28.50 27.50 JAN 20.00 0.56 *$ 0.56 8.9% 7.8% PRRC 23.56 28.31 JAN 17.50 0.56 *$ 0.56 10.6% 7.7% INSO 32.13 34.00 JAN 20.00 0.75 *$ 0.75 10.4% 7.6% WAXS 20.50 19.94 JAN 15.00 0.38 *$ 0.38 8.5% 7.4% NETS 28.00 25.25 JAN 20.00 0.50 *$ 0.50 8.2% 7.1% MMWW 37.38 26.94 JAN 22.50 0.50 *$ 0.50 6.3% 4.5% EGRP 35.56 23.56 JAN 25.00 0.56 $ -0.88 -11.5% 0.0% CNQR 29.50 19.50 JAN 22.50 0.94 $ -2.06 -30.1% 0.0% WSTL 11.44 17.00 FEB 7.50 0.50 *$ 0.50 17.9% 16.5% DMRK 22.38 29.56 FEB 17.50 0.69 *$ 0.69 13.3% 12.3% TLCM 20.25 21.88 FEB 15.00 0.50 *$ 0.50 11.0% 10.1% PGEX 22.81 19.88 FEB 15.00 0.50 *$ 0.50 9.9% 9.1% PILT 25.94 28.75 FEB 17.50 0.56 *$ 0.56 9.7% 9.0% NOVL 33.69 35.88 FEB 25.00 0.63 *$ 0.63 8.5% 7.9% GSTRF 34.19 43.69 FEB 22.50 0.63 *$ 0.63 8.4% 7.8% EMIS 35.63 39.00 FEB 25.00 0.63 *$ 0.63 8.1% 7.5% NETA 28.00 27.19 FEB 20.00 0.38 *$ 0.38 6.4% 5.9% *$ = Stock price is above the sold striking price. Comments: E*Trade Group (EGRP) is doing the post earnings drop. A test of the September - October lows appears likely. To get a different perspective, look at a long term chart (2 year weekly). That viewpoint makes a case for cutting losses early while they are minimal. Concur Technologies (CNQR) offered an escape on Thursday (near break-even) after missing earnings and being downgraded. Current technical support is about $10 lower. NEW PICKS ********* Definitions: OI - Open Interest CB - Cost Basis (break-even point if put exercised) ROI - Return On Investment Sequenced by Company Stock Price Mon Strike Option Opt Open Cost ROI Opt Sym Price Symbol Bid Intr Basis Expired CPQ 32.00 FEB 25.00 CPQ NE 0.56 4270 24.44 8.0% HSAC 23.00 FEB 17.50 HSU NW 0.69 25 16.81 13.0% MCRE 12.56 FEB 10.00 MQZ NB 0.69 48 9.31 21.5% NPLS 23.06 FEB 17.50 UTN NW 0.44 0 17.06 8.7% NSPK 22.25 FEB 15.00 NNQ NC 0.56 63 14.44 11.2% NZRO 33.25 FEB 22.50 NUR NX 0.75 47 21.75 10.1% QTRN 24.44 FEB 17.50 QRT NW 0.50 95 17.00 9.3% RNBO 24.75 FEB 20.00 BQO ND 0.56 0 19.44 9.8% SMSC 14.25 FEB 12.50 OMQ NV 0.50 50 12.00 11.2% Sequenced by ROI Stock Price Mon Strike Option Opt Open Cost ROI Opt Sym Price Symbol Bid Intr Basis Expired MCRE 12.56 FEB 10.00 MQZ NB 0.69 48 9.31 21.5% HSAC 23.00 FEB 17.50 HSU NW 0.69 25 16.81 13.0% NSPK 22.25 FEB 15.00 NNQ NC 0.56 63 14.44 11.2% SMSC 14.25 FEB 12.50 OMQ NV 0.50 50 12.00 11.2% NZRO 33.25 FEB 22.50 NUR NX 0.75 47 21.75 10.1% RNBO 24.75 FEB 20.00 BQO ND 0.56 0 19.44 9.8% QTRN 24.44 FEB 17.50 QRT NW 0.50 95 17.00 9.3% NPLS 23.06 FEB 17.50 UTN NW 0.44 0 17.06 8.7% CPQ 32.00 FEB 25.00 CPQ NE 0.56 4270 24.44 8.0% Company Descriptions CPQ - Compaq Computer $32.00 *** Earnings Rally *** Compaq Computer designs, develops and manufactures hardware and software including desktop and portable computers and consumer personal computers. Compaq markets its products primarily to business, home, government and education customers. They develop products through customer-focused, global product groups, which provide customers with solutions for leadership in the emerging Internet-based economy. The earnings run is in full swing and next Tuesday's report will decide the outcome of the recent rally. Potential owners can play it now, based on the bullish chart and short-term traders can wait until the earnings are reported. FEB 25.00 CPQ NE Bid=0.56 OI=4270 CB=24.44 ROI=8.0% Chart = http://quote.yahoo.com/q?s=CPQ&d=1y **** HSAC - High Speed Access $23.00 *** The Need for Speed *** High Speed Access is a provider of high speed Internet access via cable modem to residential and commercial users in ex-urban areas Their services enable subscribers to receive Internet access at speeds substantially faster than traditional Internet access, at minimal cost to the cable operator. HSAC rose recently on optimism that it will benefit from the America Online and Time Warner pact. Institutional buying has picked up in the past few weeks and this quarter's earnings are expected to outperform analysts' estimates. FEB 17.50 HSU NW Bid=0.69 OI=25 CB=16.81 ROI=13.0% Chart = http://quote.yahoo.com/q?s=HSAC&d=1y **** MCRE - MetaCreations $12.56 *** Breakout! *** MetaCreations is a provider of graphics software for use in print, on the Web and computer graphics applications. MCRE markets 2D and 3D visualization software and technologies in two basic categories: professional and consumer. The company's professional product line includes a number of well-known titles and their leading consumer software is popular among amateur web designers. The recent chart indications suggest MCRE is no longer a single digit issue. FEB 10.00 MQZ NB Bid=0.69 OI=48 CB=9.31 ROI=21.5% Chart = http://quote.yahoo.com/q?s=MCRE&d=1y **** NPLS - Network Plus $23.06 *** New High Soon? *** Network Plus is a facilities-based integrated communications provider offering integrated local, long distance, data and enhanced telecommunications services. Their customers are small and medium-sized businesses located in major markets in the Northeastern and Southeastern regions of the United States. They also provide international wholesale transport and termination services to major domestic and international telecommunication carriers. A recent addition to the Lucent deal expands their capacity for offering voice service over telephone lines capable of simultaneously handling Internet transmission. Friday's jump in price on heavy volume further validates the head-n-shoulders bottom. Resistance is the intraday high in July. FEB 17.50 UTN NW Bid=0.44 OI=0 CB=17.06 ROI=8.7% Chart = http://quote.yahoo.com/q?s=NPLS&d=1y **** NSPK - NetSpeak $22.25 *** Entry Point *** NetSpeak develops, markets, licenses and supports a suite of intelligent software modules that provide business solutions for real-time interactive voice, video and data communications over packetized data networks such as the Internet, Lan's and Wan's. NetSpeak's products allow organizations to build new voice and video-enabled communications networks. Their products consist of call management software, gateway systems and software based client telephones. A fair cost basis for a popular issue in a hot sector. FEB 15.00 NNQ NC Bid=0.56 OI=63 CB=14.44 ROI=11.2% Chart = http://quote.yahoo.com/q?s=NSPK&d=1y **** NZRO - NetZero $33.25 *** IPO Speculation *** NetZero is developing a new Internet service model that provides consumers with free access to the Internet while offering online advertisers an effective way to target those users. NetZero is the nation's largest free Internet access provider based on number of registered users. NetZero just launched a service where members can now log-in to their personalized home page from any computer, through any Internet access provider. Their earnings report is expected next week and the recent speculative rally has driven the stock to record levels. Aggressive traders only. FEB 22.50 NUR NX Bid=0.75 OI=47 CB=21.75 ROI=10.1% Chart = http://quote.yahoo.com/q?s=NZRO&d=1y **** QTRN - Quintiles Transnational $24.44 *** Stage I *** Quintiles Transnational provides full-service contract research, sales, marketing and healthcare policy consulting and health information management services to the global pharmaceutical, biotechnology, medical device and healthcare industries. QTRN provides a broad range of contract services to help its clients reduce the length of time from the beginning of development to peak sales of a new drug or medical device. Quintiles also offers healthcare policy research and management consulting services that improve the quality, availability and effectiveness of healthcare. A consolidation may be in order as earnings are expected next week. We favor the sector and the technical support near the cost basis. FEB 17.50 QRT NW Bid=0.50 OI=95 CB=17.00 ROI=9.3% Chart = http://quote.yahoo.com/q?s=QTRN&d=1y **** RNBO - Rainbow Technologies $24.75 *** B2B Play *** Rainbow Technologies develops and supplies computer network security products that secure the rights to software and other digital content, and that provide privacy and security for computer network and Internet communications and commerce. Their products are designed for anti-piracy, license management and tracking and software distribution over the Internet. They also provide Internet security products computer transaction servers engaged in Internet commerce, electronic brokerage and financial services, and encrypted processing and acceleration for original manufacturers of routers and switching equipment. A great company in a rapidly expanding industry with an excellent chart pattern. FEB 20.00 BQO ND Bid=0.56 OI=0 CB=19.44 ROI=9.8% Chart = http://quote.yahoo.com/q?s=RNBO&d=1y **** SMSC - Standard Micro $14.25 *** Aggressive Entry Point *** Standard Micro is a global supplier of metal-oxide-semiconductor, very-large-scale-integrated (MOS/VLSI) circuits for the personal computer (PC) and related industries. Their integrated circuits are developed and sold for applications in PC input/output, PC connectivity, Local Area Networking (LAN), PC systems logic, and embedded networking. The company's subsidiary, Toyo Microsystems also sells local area networking products to original equipment manufacturers and distributors of electronic components. The stage II climb continues with the December consolidation providing technical support near our cost basis. FEB 12.50 OMQ NV Bid=0.50 OI=50 CB=12.00 ROI=11.2% Chart = http://quote.yahoo.com/q?s=SMSC&d=1y ************************ SPREADS/STRADDLES/COMBOS ************************ Dow Drubbing Continues.. Friday, January 21 Interest rate fears and higher oil prices combined to bring down what was previously the world's most watched index. The new rage is technology and today the Nasdaq composite climbed another 45 points to finish at 4,234, its third record close of the week. Meanwhile, the Dow industrial average dropped 99 points to 11,251, its fourth straight decline. The broader S&P 500 index ended down 4 points at 1,441. Trading was volatile due to Friday's "double- witching" expiration of stock and index options and volume on the NYSE was heavy at 1.2 billion shares traded. Losers again beat the winners 1,728 to 1,317. In the bond market, the 30-year treasury rose 14/32, bid at 92 15/32, pushing its yield down to 6.70%. Thursday's new plays (positions/opening prices/strategy): Tera Computers TERA JUN5C/FEB7C $2.00 debit diagonal Western Digital WDC FEB5/CC-NP $4.38 debit cov-combo Our new positions traded just as expected with Western Digital consolidating during the session and Tera climbing higher on the heels of the rallying technology sector. Neither position offered our suggested target but both issues provide favorable entry opportunities. Portfolio plays: The Dow drought continued today as rising oil prices weighed on transport stocks while cyclicals suffered from new fears of a rate hike. The biggest conglomerate in our portfolio, Procter & Gamble (PG) dropped almost $10 as investors voted their disapproval of the possible merger with Warner-Lambert and American Home Products. The Wall Street Journal reported that PG's board was scheduled to hold a teleconference to discuss a possible pact and individuals close to the talks suggest it is a done deal. A number of brokers have downgraded the issue as a result of the speculation and our position may suffer if the sell-off continues. We remain bullish on the issue with a long-term diagonal position; LJAN100C/FEB110C but the possibility of a roll-down to limit losses increased with today's move. A number of other long-term issues were in the news and most of them were affected by earnings announcements or the rising cost of crude. Oil company stocks moved higher while transportation issues remained under pressure amid of a bout of severely cold weather and concerns about low petroleum inventories in the U.S. and Europe. Fortunately we have straddled the issue with both transport and oil stocks and our diverse portfolio averages the effects of the commodity's changing prices. Today Exxon-Mobil (XOM) was the beneficiary, climbing $1.31 to close at $85, our sold strike for the LEAPS/CC's position. The move to FEB-$85 calls reduced our cost basis in the overall position; LJAN85C/FEB85C to $2.38. Airlines were hardest hit by the rising oil prices and United (UAL) continued to suffer, falling to a recent low near $60. It will be some time before our long-term position on that issue regains profitability. On the bright side, SBC Communications (SBC) rose 4% to $43 after Morgan Stanley upgraded the stock to a STRONG BUY. Unfortunately, the issue has been in a slump as of late and the bullish LEAPS/CC's spread remains one of our few losers. There were other stocks in the long-term portfolio requiring adjustments and the majority of moves involved downside protection. Solectron (SLR) and Sun Microsystems (SUNW) were the only positions rolled to a higher strike price. Small-cap stocks continued to rally in today's session and the top performer in that group was Geron (GERN). The stock soared $7 to close near $31 after news the company had won the first two British patents covering the technology used to clone "Dolly" the sheep. Company officials said the patents cover nuclear transfer technology, which could help doctors grow living tissue, such as cartilage, bone and muscle, for transplants. Geron also said the U.S. Patent Office had accepted its application for a patent on the same technology. Needless to say, our position is at maximum profit. Recent market leaders dominated the Spreads/Combos portfolio and Concentric (CNCX) was today's winner, climbing almost $5 to a new all-time high near $50. The issue is now tracking Nextlink (NXLK) and Salomon Smith Barney raised their price target on shares of the merger partner to $115 from $70. The upward revision is based on changes to the revenue model created by the addition of CNCX. Cohu (COHU) also rallied to an all-time high, finishing $3 higher at $46. The issue has almost doubled since we opened the bullish position last month. The bullish oil sector also produced some excellent moves and our new calendar position in Pride International (PDE) finished exactly at the sold strike for a perfect transition to February options. Key Energy (KEG) also rallied, climbing $1.12 to $8.50. As we said in last week's commentary, continued upside movement would require an adjustment in the bullish position to remain profitable. The original spread was a JUL7C/FEB7C at $0.93 debit. A roll-up to the February $10 calls on the short side required an additional $1.00 of debit, raising the cost basis of the position to $1.93. Now the spread will return $0.56 on $1.93 invested if the stock finishes above $10 in February; or you can sell another call against the long-term (July) position. If you think the stock is overextended and will experience a pull-back, then you should remain in the current position with a neutral to bearish outlook, and wait for further signs of direction. The key to the concept of selling time is maintaining a position that benefits from the highest rate of premium erosion; and that occurs in at-the-money options. Another play that found the mark was Zoltek (ZOLT). The stock finished at $9.88, the ideal price for a move to February options. Once again, we are selling the highest amount of time premium, the $10 options. Questions & comments on spreads/combos to ray@OptionInvestor.com ********* NEW PLAYS ********* This week I received two requests for conservative, bullish debit spreads and another for a conservative position in Thursday's new pick, Sprint PCS. The first play may satisfy all three petitions. **** PCS - Sprint PCS $110.75 *** Reader's Request *** Sprint is a global communications company that integrates long distance, local and wireless communications services, and carries Internet traffic. In 1998, Sprint formed the PCS Group to manage their domestic wireless mobile phone services. PCS Group provides nationwide service through operating its own digital network in major United States metropolitan areas, affiliating with other companies, roaming on other providers' analog cellular networks using Dual-Band/Dual-Mode handsets, and digital PCS networks with code division multiple access. Sprint PCS now operates the largest 100% digital, 100% PCS nationwide wireless network, serving the majority of the nation with licensed PCS coverage of nearly 270 million people in all 50 states, Puerto Rico and the U.S. Virgin Islands. Wireless telecom continues to be a HOT industry and recently a PaineWebber analyst raised price targets for the group based on an expected record number of new wireless subscribers in 2000. The report said that wireless subscribers will increase 25% over the estimated 17 million who subscribed in 1999 and will grow to 24 million in 2001. Almost one half of the U.S. population will use wireless next year and the expansion will boost the revenues of companies like PCS. The upgrade suggested a new price target for Sprint PCS of $160 and Deutche Banc Alex. Brown also recently boosted its rating of the company. The big news for Sprint is the upcoming two-for-one split of the company's PCS stock. The split will be in the form of a dividend in Sprint PCS shares. A comparable dividend will be paid on the Class A common stock owned by France Telecom and Deutsche Telekom. New shares will be issued on February 4, 2000, to shareholders of record on January 14, 2000. PLAY (very conservative - bullish/debit spread): BUY CALL FEB-85 PCS-BQ OI=1138 A=$26.50 SELL CALL FEB-95 PCS-BS OI=375 B=$17.50 INITIAL NET DEBIT TARGET=$8.75-$8.88 ROI(max)=12% - or - PLAY (conservative - bullish/debit spread): BUY CALL FEB-85 PCS-BQ OI=1138 A=$26.50 SELL CALL FEB-100 PCS-BT OI=1775 B=$14.00 INITIAL NET DEBIT TARGET=$12.38-$12.50 ROI(max)=20% Chart = http://quote.yahoo.com/q?s=PCS&d=3m **** BCE - BCE Inc. $96.75 *** Internet/Telecom Conglomerate *** BCE supplies telecommunication and other wireless communication services and equipment and publishes telephone directories. The company holds Canada's national telephone company, Bell Canada, and a broad array of telecommunication and Internet related businesses. BCE has been compared favorably to other well-known Internet holding companies and it is one of the most undervalued telecommunication stocks in the sector, trading at a substantial discount to these other industry leaders. One of our leading researchers has compiled an excellent study of this issue at: http://members.OptionInvestor.com/stocknews/011800_1.asp Recent news items include favorable articles on the company and a number of upgrades including a BUY rating at Nesbitt Burns and a STRONG BUY at CIBC, both in the last week. We favor the bullish technical formation and a small premium disparity will allow us to participate in this play at a discount. PLAY (conservative - bullish/debit spread): BUY CALL FEB-75 BCE-BO OI=314 A=$23.25 SELL CALL FEB-85 BCE-BQ OI=346 B=$14.88 INITIAL NET DEBIT TARGET=$8.12-$8.25 ROI(max)=21% Chart = http://quote.yahoo.com/q?s=BCE&d=3m **** ESCM - ESC Medical Systems $11.31 *** On The Rebound! *** ESC Medical develops, manufactures and markets medical devices utilizing lasers and proprietary intense pulsed light technology for non-invasive treatment of varicose veins and other benign vascular lesions, as well as other clinical applications. Their PhotoDerm VL technology uses thermal energy generated by an intense pulsed light source to selectively eliminate unwanted lesions without damaging the surrounding healthy tissue. They are also developing a product called the PhotoDerm PL, which is a noninvasive treatment to remove tattoos. Other products in the works include a skin rejuvenation device to reduce wrinkles, a hair-removal device, and a product to reduce psoriasis. ESC Medical began the new year in a good way, announcing that sales for the fourth quarter 1999 were strong and have exceeded the company's expectations. The CEO suggested the results were particularly encouraging since they came at a time when the company was cutting expenses through a restructuring process. He also said the results of the new leaner organization are consistent with sales growth. In other news, ESC Medical and LPG Systems announced they reached an out-of-court settlement of the pending lawsuit involving LPG's therapeutic massage equipment. As part of the agreement, ESC Medical will become a distributor of LPG products, which are used for a variety of indications, including the temporary reduction in the appearance of cellulite. The recent break above a year-long base indicates a bullish trend for this slumping issue. The new interest in options will provide us with a favorable, low risk position with excellent reward potential. PLAY (conservative - bullish/debit spread): BUY CALL APR-7.50 QFC-DU OI=1045 A=$4.88 SELL CALL APR-10.00 QFC-DB OI=605 B=$3.38 INITIAL NET DEBIT TARGET=$1.38 ROI(max)=81% Chart = http://quote.yahoo.com/q?s=ESCM&d=3m **** CTAS - Cintas $49.25 *** Fading Slowly *** Cintas is engaged in the design, manufacture and rental of corporate identity uniforms. They provide uniforms to businesses of all types, including small service and manufacturing companies, and major corporations that employ thousands of people. Cintas also offers customized uniforms through its subsidiary, Uniforms To You. The company's services to the rental markets include the rental and cleaning of uniforms as well as providing ongoing uniform upgrades. Their products include shirts, pants, jackets, gloves, T-shirts, lab coats and hats. They also offers ancillary products, such as the rental or sale of walk-off mats, fender covers, towels, mops, linen products and first aid products. There has been little in the way of positive news for Cintas in the past few weeks. The brisk rotation out of consumer cyclicals has left a number of well-known issues struggling and this stock may be experiencing some of the same effects. The most negative technical indication came after last week's announcement of a a 27% increase in the company's annual dividend and three-for-two split of its common stock. The share value fell almost $5 in the three days following the news and now it appears that investors will be unwilling to support any sustained rally in the coming weeks. A small disparity in option pricing offers us a favorable edge in this conservative, low cost position. PLAY (conservative - bearish/credit spread): BUY CALL FEB-65 NQQ-BM OI=24 A=$0.25 SELL CALL FEB-60 NQQ-BL OI=116 B=$0.93 INITIAL NET CREDIT TARGET=$0.75 ROI(max)=17% Chart = http://quote.yahoo.com/q?s=CTAS&d=3m **** PGR - Progressive Insurance $65.50 *** Comfortably Numb? *** Progressive provides personal automobile insurance and other specialty property-casualty insurance and related services. The company's property-casualty insurance products protect customers against collision and physical damage to their motor vehicles and liability to others. Progressive's personal line insurance provides insurance for passenger automobiles and recreational vehicles. Progressive also offers specialty personal lines including motorcycle, mobile home, boat and snowmobile insurance. Other insurance products and services offered include physical damage insurance and tracking services to protect the commercial or retail lender's interest, liability insurance for directors and officers, employee dishonesty insurance and claim services. In addition, Progressive provides mono-line commercial vehicle insurance, which covers commercial vehicle risks for primary liability, physical damage and other supplementary insurance. It's been a long and painful descent to the current levels and for now there is no bottom in sight. Of the 17 major analysts following the company, only a small minority suggest the issue has a favorable short-term outlook. Overall, the stock is rated slightly better than a HOLD (which means SELL) and the leading brokers reiterated their bearish comments in recent reports. S & P Market Scope suggests the company should be avoided with the current sales forecast below projections. Ing Baring Furman Selz says it's a HOLD at best with 4Q EPS expected to fall well below analysts estimates. Analysts at Warburg Dillon Read are the most optimistic, offering a new HOLD rating on the company. The chart tells the tale and until it experiences a significant character change, this issue has little chance of recovery. A move above an ascending 30 dma will be our first indication to review the position. PLAY (conservative-bearish/credit spread): BUY CALL FEB-85 PGR-BQ OI=265 A=$0.68 SELL CALL FEB-80 PGR-BP OI=35 B=$1.25 INITIAL NET CREDIT TARGET=$0.68 ROI(max)=15% Chart = http://quote.yahoo.com/q?s=PGR&d=3m ******************** INDEX OPTION SPREADS ******************** As a trader, you may be familiar with options on individual stocks where you have the right to buy (call option) or the right to sell (put option) a particular stock at some predetermined price within some predetermined time. The buyer has the rights and the seller the obligations. With index options the basic ideas are the same. Index options allow you to make investment decisions on a specific market industry or on the market as a whole. Spread strategies can be made with index options similar to those made with individual stock options. Many professional traders employ index spreads as a hedge strategy. We favor debit positions on the SPX for momentum and hedge or longer-term plays and OTM credit spreads on the OEX when the risk/reward is favorable. Low ROI disparity spreads will be listed (when available) for the conservative index trader. **** OEX - S&P 100 Index $779.78 OTM Credit-Spreads The Standard & Poor's 100 Index is a capitalization-weighted index of 100 stocks from a broad range of industries. The component stocks are weighted according to the total market value of their outstanding shares. The impact of a component's price change is proportional to the issue's total market value, which is the share price times the number of shares outstanding. OBSERVATIONS: For OTM credit spread trades, we like to use the actively-traded S&P 100 Index options because they contain much more premium than options on individual stocks and provide an underlying instrument less prone to huge, gapping moves. Remember however, that you can always be exercised early so monitor your positions daily. Review the 'Market Sentiment' section for specific technical information on the S&P 100 Index. Aggressive... PLAY (Bearish): BUY CALL FEB-830 OEX-BF OI=2886 A=$1.56 SELL CALL FEB-825 OEX-BE OI=768 B=$2.00 NET CREDIT TARGET=$0.50 ROI=11% PLAY (Bullish): BUY PUT FEB-730 OEZ-NF OI=1607 A=$4.12 SELL PUT FEB-735 OEZ-NG OI=1360 B=$4.75 NET CREDIT TARGET=$0.68 ROI=15% TOTAL CREDIT = $1.06 COMBINED ROI = 26% UPSIDE BREAK-EVEN = $826.06 DOWNSIDE BREAK-EVEN = $733.93 By combining two credit spread positions, you can participate in a popular neutral strategy known as the Long Iron Condor. It is often used with range-bound positions and is a limited risk, limited profit strategy that gives you a wide range for success. The play is based solely on the current price and trading range of the underlying issue and the recent technical trend. Current news and market sentiment will have an effect on this position so review the underlying issue and make your own decision about the future outcome of the stock price. CHART= http://quote.yahoo.com/q?s=^oex&d=b ************************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 *****************************
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