The Option Investor Newsletter Thursday 1-27-2000 Copyright 2000, All rights reserved. Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 1-27-2000 High Low Volume Advance Decline DOW 11028.00 - 5.00 11164.10 10915.40 1,124,137k 1,482 1,557 Nasdaq 4069.91 - 97.50 4140.09 3973.59 1,710,684k 1,829 2,284 S&P-100 759.61 - 3.18 770.77 737.32 Totals 3,311 3,841 S&P-500 1398.56 - 5.53 1418.86 1380.71 46.3% 53.7% $RUT 517.02 - 4.02 526.02 513.73 $TRAN 2615.27 - 49.52 2688.36 2610.64 VIX 25.06 - 0.02 31.37 23.50 Put/Call Ratio .49 ************************************************************* If the Nasdaq drops -100 in the morning but rebounds +65 in the afternoon, is that a rally? The Nasdaq gapped open this morning and traded higher for over an hour before giving in to another broad sell off. From the high of 4140 at 11:00 to the low of 3973 at 3:20 was a drop of -167 points. But the optimists out there are probably pointing to the +67 point bounce off the low into the close and claiming a rally. Call it what you want, the final score was -30.35 for the bears. It is only a rally in my book if it closes positive. Put a week of days like this together and you could have a 400 point trading range with lots of winners and sinners but you would still be -150 points when the smoke cleared on the last day. Another way to look at it based on the intraday high on Monday of 4300, we were down over -327 points for the week at 3:20 but we are only down -260 at the close. Does that make you feel better? If it did then the Dow's -451 point intraday loss from Monday's high of 11366 to today's low of 10915 probably will not faze you either. After the closing bounce we are only down -335 for the week. And to think I was worried! The Dow is now down -700 from the highs of last week. The good news, and it is good news, is the Dow support at 11000 held again for the third time this week. This support dates back to November of last year and was tested prior to this week only once on Jan-5th. The Nasdaq also tested technical support at 4040 and psychological support at 4000 and held. This support dates back to last December as well. If you look at all three charts above you will see one common point. All three indexes are exactly on their last ditch support before a serious drop. The Dow and the S&P are teetering on the edge of a large cliff. The Nasdaq has some intermediate support but still could drop -200 more points very easy if the support breaks. I always think it is amazing that all the indexes seem to drift back to support levels right before major market events like the ECI report and the FOMC meeting. The cautious investors get out and the aggressive investors start nibbling right at support. Santa Claus, Easter Bunny, Dell and Qualcomm. The market as a whole reacted extremely well considering the Dell earnings warning. Dell actually traded up for a few minutes after the open but the volume of shares to be sold were just too strong for the bulls. 127 million shares of Dell stock traded hands today and Dell closed down -2.81 at 37.56. For the Dell diehards who realize this is a great company being punished for slow shipments from Intel and Y2K lock downs, this the time to buy those long term options. The Jan-2001-$30 call is only $12.75 and the $40 leap is only $7.75. For less than the cost of a short term call on an Internet stock you can buy a leap on Dell and have almost zero risk on the down side and a 100% to 200% profit on the upside. Does anybody not think that Dell will be back to $60 before the year is out? Everybody knows by now that Qualcomm warned and the selling is not over yet. The warning that chip deliveries were slowing caught everyone off guard and many investors still refuse to accept the facts that their super stock is not bullet proof. This is like finding out after the fact that Superman wore lace panties or the Lone Ranger was a racist. First we find out there is no Santa Claus, the Easter Bunny does not exist and Dell and Qualcomm are just normal stocks. Dorothy, we are not in Kansas any more. On the economic front, the news was mixed. The Durable Goods orders came in this morning with a jump of +4.1% compared to the expected rise of +0.8% The figures were skewed, however, by a 16.2% advance in orders for transportation equipment, specifically airplanes and aircraft parts. Excluding this, orders grew by 0.7%. The weekly Jobless Claims inched up only +1000 to 266,000 proving that the labor market is still tight even after the holiday jobs were eliminated. Last weeks 265,000 was the lowest number of filers since Dec-1973. Friday we will have two more important pieces of Fed data. The Employment Cost Index, which is expected to rise by +0.8% and the Q4 domestic product which should confirm the +5% growth rate again. The markets will be watching the ECI for signs of excessive inflation that could cause the Fed to raise over +.25% on Tuesday. The Mon/Tue meeting by the FOMC is of course the biggest challenge facing this market. Most agree that there will be a +.25% hike but there are some who worry that Greenspan could take aggressive action and raise it +.50% to shock the markets and the economy. I cannot understand this line of thinking. Greenspan is an incrementalist. He may decide to raise rates by +1.00 to +1.50% this year but he will do it in +.25% increments. This is an election year and Greenspan was just nominated for another term as Fed chief. Not known for stupid moves he would be out of character to shoot himself in the foot now. Breadth of the markets was still negative but that should be no surprise. The volatility on the Nasdaq is reaching monumental proportions. The average daily intraday spread last December was 85 points. For the month of January the spread has averaged 109 points. Today the spread between high and low was 167 points. As I have said before, this is a clear sign of a market top or bottom. Since we are nowhere near a bottom the other choice is not pleasant. Volume remains very high at 2.94 bln shares and the market is slowly sinking. High volume on down days is not a good sign. The Russell-2000 finally rolled over on the 24th. As long as the small caps were gaining ground the big caps would not have given up many points. Now that the Russell is confirming the Dow drop we have two strikes against us. The bond market has staged a major recovery in the last four days. Yields are down to 6.52% from 6.75%. However, this is coming at the expense of stocks. Money is flowing out of stocks and into the safety of bonds as we get closer to February and the Fed meeting. The question is really "when will the trend reverse?" Why is the big money running to the sidelines? Is it just the seasonal portfolio rotation or something bigger. CNBC has been hyping the margin factor all day. They keep pointing out that for every major market top and reversal in the past there was an increase in margin debt. Margin debt is at an all time high today and almost double previous market top levels. Greenspan also talked about margin this week and its impact on the wealth of the consumer. With extremely high margin usage there is a foundational weakness in the markets. People who over extend themselves on margin are at risk to lose large percentage amounts relative to their capital base and are at risk of being liquidated at a substantial loss in the event of a market downturn. The use of margin has been widely debated recently and several major brokerages have already put plans in motion to increase the requirements and curtail future excesses. This will be good for the markets eventually and take some of the volatility out but it could also cause some ripples as the changes are implemented. Be very careful in the market at this critical inflection point. If we break support here the next stop on the Nasdaq could be 3800 which would be -10% from the last closing high. The -10% correction level on the Dow is 10530 but that would be much harder to hit do to the available cash on the sidelines. Keep your stop losses close and sell too soon! Jim Brown Editor **************************************************** ANNUAL OPTION INVESTOR SEMINAR UPDATE - IMPORTANT !! **************************************************** The four day Option Investor Option Expo in Denver on March 28-31st is going fast. There are less than 50 seats left and you will be disappointed if you miss this event. We are going to announce the guest speakers this Sunday and you are not going to believe who we have coming!! 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 for this seminar 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 ********** STOCK NEWS ********** Keeping An "i" on B2B By Cindy Christ Just when you thought you had a handle on B2B e-commerce, the waters are starting to shift. The first swell in the B2B wave started with companies like BroadVision (BVSN) and Macromedia (MACR), which make software that helps companies build effective Web sites to sell goods and services over the Internet. http://members.OptionInvestor.com/stocknews/012700_1.asp ************** Market Posture ************** As of Market Close - Thursday, January 27, 2000 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 11,000 11,250 11,028 Neutral 1.25 SPX S&P 500 1,340 1,400 1,399 BULLISH 12.03 OEX S&P 100 700 750 760 BULLISH 12.03 RUT Russell 2000 430 450 517 BULLISH 11.12 NDX NASD 100 3,200 3,850 3,593 Neutral 1.06 MSH High Tech 1,650 1,900 1,778 Neutral 1.06 XCI Hardware 1,300 1,350 1,349 BULLISH 1.14 CWX Software 1,210 1,420 1,282 Neutral 1.07 SOX Semiconductor 640 660 779 BULLISH 12.21 NWX Networking 820 900 865 Neutral 1.07 INX Internet 665 800 741 Neutral 1.06 BIX Banking 645 690 548 BEARISH 11.30 XBD Brokerage 410 450 437 Neutral 11.30 IUX Insurance 625 650 567 BEARISH 11.30 RLX Retail 900 935 909 Neutral 1.25 DRG Drug 380 400 346 BEARISH 12.07 HCX Healthcare 760 790 710 BEARISH 12.07 XAL Airline 180 190 130 BEARISH 5.21 OIX Oil & Gas 280 315 275 BEARISH 1.27 * Posture Alert Corporate earnings continue to roll in very favorably, however, the market continues on its choppy ways. Thursday saw weakness in technology shares thanks to Dell Computer's whiff on earnings; however, select buying was witnessed in the Internet sector, which closed up +1.94%. The only other sector with decent buy pressure was Banking, which closed up +1.40%. On the downside, the Oil & Gas sector traded down -2.15%, and as such, we have lowered this sector to Bearish from Neutral. **************** Market Sentiment **************** Thursday, January 27, 2000 The Shorts Are Alive and Well! Sloppy market action continued Thursday with weakness in technology shares thanks to Dell Computers pre-release of an earnings shortfall. Dell exchanged 127 million shares and closed down -2 13/16, after actually being positive earlier in the trading session. Let's see; Dell was upgraded by Merrill Lynch, H&Q, Piper Jaffray, and Robbie Stephens but was downgraded by SG Cohen. Dell traded huge volume, but still managed to close down on the day even with 4/1 upgrade ratio. Either Cohen had a lot more stock for sale than the 4-upgrading firms could purchase, or these 4 big names firms were putting on Band-Aids to benefit their institutional clientele. We would most likely opt for the latter scenario. Regardless, this market continues on it volatile and direction-less pattern. We continue to believe that we are in a consolidating stage where we will see a vast trading range in very short periods of time. One important gauge of sentiment is the level of short interest on the major exchanges. Investors who sell securities "short" borrow stock and sell it, betting that the stock's price will decline and that they will be able to buy the shares back later at a lower price for return to the lender. Short interest reflects the number of shares that have yet to be repurchased to give back to lenders. In the past, stocks that have heavy short interest, when combined with some sort of positive news, has witnessed very quick and powerful up-moves. At times, short sellers are forced to cover, which only helps the buying pressure, and this is known as a "short squeeze." Walt Disney Company, which happens to be the 4th most shorted stock on the NYSE, was witness to short covering this week. As such, below is a list of the most heavily shorted stocks on the NYSE, and based on changes from the previous month, it is evident that the shorts are alive and well. Largest Short Positions Rank Jan. 14 Dec. 15 Change 1 At&T 74,321,531 79,641,975 -5,320,444 2 Vodafone 68,596,385 71,809,300 -3,212,915 3 America Online 64,305,968 60,868,701 3,437,267 4 Walt Disney-Hldg 61,897,330 61,068,546 828,784 5 Qwest Comm 52,059,751 N/A 6 Sprint PCS 43,591,236 36,361,743 7,229,493 7 Kmart 38,078,039 36,690,178 1,387,861 8 Lucent Technologies 38,028,314 38,858,872 -830,558 9 Wal-Mart 36,955,864 40,812,511 -3,856,647 10 Time Warner 36,631,438 38,997,033 -2,365,595 11 Nortel Networks 32,418,727 29,063,486 3,355,241 12 Columbia/HCA 31,602,801 31,990,328 -387,527 13 EMC 31,474,660 33,079,296 -1,604,636 14 BP Amoco 25,743,988 37,332,256 -11,588,268 15 Kroger 24,878,572 24,210,701 667,871 16 Citigroup 23,792,557 25,614,424 -1,821,867 17 Compaq Computer 23,631,238 22,769,674 861,564 18 Clear Channel 23,560,660 21,790,898 1,769,762 19 AT&T-Liberty (Cl A) 23,507,627 25,817,744 -2,310,117 20 Bell Atlantic 21,911,215 20,801,439 1,109,776 21 Rite Aid 20,825,502 20,169,732 655,770 22 Tyco Intl 20,658,933 18,712,490 1,946,443 23 Iomega Corporation 18,387,687 20,466,494 -2,078,807 24 Medtronic 18,111,230 16,909,566 1,201,664 25 Bank of America 18,014,373 14,454,826 3,559,547 26 Knight Ridder 17,665,230 16,896,922 768,308 27 Loral Space 17,612,639 14,306,355 3,306,284 28 Wells Fargo & Co 17,385,057 20,664,817 -3,279,760 29 Caremark Rx 17,346,630 17,286,304 60,326 30 Dominion Resources 17,148,754 9,654,400 7,494,354 BULLISH Signs: Corporate Earnings: Major corporate earnings are coming out left and right and it looks to be another very solid quarter! Cash Flow: The cash that has been sitting on the sidelines has been put to use as of late, as record volumes for the major indexes have been shattered. Short Interest: From a contrarian stand, short interest (JAN-14) on the NYSE is still very high, totaling 3,973,256,735 shares. Mixed Signs: Interest Rates (6.525%): The current break below a minor uptrend line leads us to believe that yields may pull back temporarily and test the 6.4% breakout level. BEARISH Signs: Volatility Index (24.34): 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. Energy Prices: With the rapid rise in crude oil, everything from manufacturing to transportation will be affected by higher costs. These higher costs will be felt 1-2 quarters out, and could put pressure on profit margins. The Power of Sentiment Analysis It has often been said that the crowd is right during the market trends but wrong at both ends. Measuring and evaluating the sentiment of the crowd, therefore, can give savvy option traders a decided edge. Pinnacle Index OEX Friday Tues Thurs Benchmark (1/21) (1/25) (1/27) Overhead Resistance (780-800) 0.83 1.26 1.80 OEX Close 779.78 767.31 759.61 Underlying Support (750-770) 2.14 2.93 2.14 What the Pinnacle Index is telling us: Based on January 25, underlying support for the OEX decreased back to previous levels. Overhead resistance is still light, but is slowly building due to call buyers entering the marketplace. Based on the statistics, we would look for continued sloppy action, most likely trading range bound. Put/Call Ratio Friday Tues Thurs Strike/Contracts (1/21) (1/25) (1/27) CBOE Total P/C Ratio .47 .50 .49 CBOE Equity P/C Ratio .41 .43 .42 OEX P/C Ratio 1.26 1.21 1.37 Peak Open Interest (OEX) Friday Tues Thurs Strike/Contracts (1/21) (1/25) (1/27) Puts 760 / 5,234 760 / 7,121 700 / 7,101 Calls 745 / 4,079 745 / 4,304 800 / 5,185 Put/Call Ratio 1.28 1.65 1.37 Please view this in COURIER 10 font for alignment ************************************************* CHANGES THIS WEEK Daily Results Index Last Mon Tue Wed Thu Week Dow 11028.02 -243.54 21.72 3.10 -4.97 -223.69 Nasdaq 4039.56 -139.32 71.33 -97.50 -30.35 -195.84 $OEX 759.61 -21.04 8.57 -4.52 -3.18 -20.17 $SPX 1398.56 -39.45 8.12 -5.94 -5.53 -42.80 $RUT 517.02 -10.99 -1.36 -0.55 -4.02 -16.92 $TRAN 2615.27 -48.54 -48.26 10.10 -49.52 -136.22 $VIX 25.06 3.66 -1.98 0.74 -0.02 2.40 Calls Mon Tue Wed Thu Week SILK 168.00 4.00 9.50 3.50 5.00 22.00 Moves up TQNT 154.06 1.13 17.00 -8.63 3.06 12.56 Superstar VECO 58.00 5.63 0.75 3.00 -1.00 8.38 Volume BGEN 99.69 -6.81 10.69 1.13 2.69 7.69 New LU 56.69 0.94 2.19 0.63 1.44 5.19 New PMCS 191.25 -4.00 9.63 6.13 -11.75 0.00 A gift? VOD 55.94 -1.00 0.13 1.13 -0.25 0.00 Will they? LVLT 109.88 2.38 -4.00 -0.50 1.50 -0.63 Caution PCS 109.50 -2.25 -0.25 1.00 0.25 -1.25 Last chance ANAD 77.13 -2.88 5.13 -3.88 -0.50 -2.13 Dropped MFNX 67.50 4.13 -3.38 -8.13 5.00 -2.38 In action TWX 85.75 -3.50 -1.38 -1.88 1.00 -5.38 Bounces DISH 90.38 -0.38 -1.06 -4.75 0.31 -5.88 Patience MUSE 166.69 -12.44 8.56 0.69 -3.06 -6.25 New NOK 178.50 -5.00 3.06 0.00 -4.50 -7.13 Strength GMST 68.63 -7.81 2.94 -5.06 -1.31 -11.25 Dropped NTLI 125.00 -8.13 -2.75 0.19 -0.69 -11.38 Splits 2/3 CMVT 136.50 -5.00 6.63 -6.94 -8.56 -13.88 Dropped NTAP 102.88 -15.13 5.19 1.19 -5.50 -14.25 Square one HGSI 199.81 -6.63 -10.06 -11.25 5.88 -22.06 Dropped AFFX 224.88 -27.25 -1.63 -1.75 1.88 -28.75 Support Puts IIJI 73.25 -0.13 -3.06 -3.81 -1.38 -8.38 Heads south SLR 71.00 -3.00 -0.50 -1.94 -4.00 -6.56 Dogpiled CMGI 112.25 -7.63 3.81 -3.44 1.25 -6.00 Bearish RLM 65.50 -2.19 -0.81 -0.69 -0.19 -3.88 Ski slope UAL 56.88 -0.13 -1.31 0.56 -2.38 -3.26 New MU 64.75 2.38 -3.63 -2.31 1.19 -2.38 Lack of vol FD 42.69 -2.63 1.81 1.94 -2.31 -1.19 More bears RMBS 77.50 -0.38 1.38 -1.69 2.81 2.13 Dropped ************ WOMANS WORLD ************ There is no Womans World article tonight. Renee is on vacation. ************** TRADERS CORNER ************** Selling Calls & Setting Ambushes My boxing coach used to teach us how to move to the side and throw a hook; or step back, then throw a jab. These drills worked particularly well with an overly aggressive opponent -- like the kids from Southie -- because you could use your opponent's momentum to double the force of a blow. Ultimately, using these kinds of punches depended more on footwork and conditioning than on raw punching power, since most of the power a boxer develops comes from footwork, not upper body strength. That's what I am doing now -- I am using good money management (footwork, if you will) to position my portfolio to profit from an over-extended raging bull market on the last legs of its latest uptrend, which started on the last two days of October. Last week, I attempted to do this by selling TIBX Feb 165 Calls. I hadn't spent enough time at ringside watching my opponent first, though. I sold them when TIBX was at 158, and, like an aggressive fighter, TIBX went right to my strike and skipped back and forth, forcing me to hedge and unhedge, bleeding me in the exchange and tying up my account. On the second day of doing this, I tripped over my own feet when I did not have enough buying power to fully hedge my position. Last Sunday, I described how I followed my trading role model, Marty Schwartz, and closed this losing position. Good thing I did -- TIBX announced a 3:1 split on Monday, and moved up strongly, despite a down market, to something like 179. The gap up on Tuesday would have presented a difficult hedging problem, to say the least. This past weekend, I formulated my strategy -- do nothing because I really hadn't had the time to put in my homework. Monday was the first day of classes. Then, I checked the market at the close on Monday from a computer at school (not my trusty wireless modem equipped lap top, because it is in the shop). I saw a market doing exactly what I expected. On one of my back up lap tops (a Macintosh G3 with Virtual PC to run QCharts & Preferred Trade), I decided on a quick fragmentary plan -- sell VRSN Feb210 Calls if I get a failed rally at the open on Tuesday. To hell with it. I could hear my instructors from Marine Infantry Officer's Course now -- "Don't worry about how screwed up you are, worry about how screwed up the other guy is, and take advantage of that!" To hell with the fact that it was the first week of classes (I was shrewdly scheduling them all during non-market hours, but still had to make some commitments earlier in the trading day), and so what if my lap top had crashed. I saw my opening. I sold VRSN Feb210 Naked Calls at the open, commiting about 50% to 66% of my available buying power to the hedge, if required. If VRSN went up to 210, then I would hedge the calls. But, this was a opponent that I knew. I have held VRSN in my LT Stock Account & IRA since October, when I bought it at 58. I sold VRSN Feb220 Covered Calls in both accounts last week at 16 and 18. $1500 in present cash flow (per 100 shares) for selling a contract that is 15 points out of the money is a good deal, in my book...particularly when I expect a general market pullback. I had already decided to sell the shares at 220 if they were exercised, so this is a trade I did not have to monitor at all. I know VRSN well because I follow it every day, as it bobs back and forth wildly (good for volatility premiums, bad for peace of mind). I now think of the stock like an errant but spirited young puppy, shooting off in every direction. I knew that it was announcing earnings, and was happy to see good results. Now that earnings for the stock are over, and the Fed is on the collision radar, I felt much safer about selling those VRSN Feb210 Calls naked. At the open on Tuesday, the stock bumped up to 200, but then quickly dropped off to 195. I sold my contracts at 15. On Tuesday & Wednesday, VRSN bounced between 190 and 200, and closed today below 190. On Thursday, midday, as I edit this piece, VRSN is at 182, fully 28 points OTM. In a few weeks, if the market starts to drop off, I expect VRSN to drop with it. If VRSN drops hard in a "NASDAQ Event" (my criteria is that my fellow starving students/ wannabe traders are asking me, hey, did you see the market?... yeah, I caught that), say to 150, then I plan to be prepared to sell OTM VRSN Feb Puts, say Feb140s. This will complete "going short a naked strangle" (ah, yeah... you do that), as opposed to "going short a naked straddle" (which sounds both more enjoyable and less criminal). The great thing about this strategy is that it is impossible for both sides to be in the money. So, I have more than enough margin to hedge whichever side goes in the money. Indeed, I am guaranteed to have extra buying power. But this is my first month attempting this strategy. I am working on my footwork & endurance. This strategy might return 12% on my overall ST Options Portfolio. That will be just fine in a down month, thank you. Indeed, if I could compound 10% a month for the next 2 years, I would be quite happy. My plan in the future is to regularly monitor a watch list of Red Hot/Internet stocks (such as the 50 from Jim's Options 101 Column in last Sunday's newsletter) for resistance, support, bollinger bands, stochastics, MACD, and other technical indicators that give me good entry points for selling calls or selling puts. These will be the core stocks in my LT Stock Portfolio, which I acquire by selling puts; after acquiring them, I will sell covered calls when these stocks run up to resistance levels (see AFFX last week). These will be the stocks which I sell naked, OTM puts and calls on at support & resistance levels. These are the stocks which regularly come up in the newsletter's call picks. When these stocks again show up en masse in the call picks in Mid March, I will be playing calls on the Red Hots again... and again in June... and again in November/ December. But EVERY month, I plan to compound the gains in my portfolio by selling naked strangles. I will add more cash to this strategy as my footwork & endurance improves. Executing & monitoring this strategy is a different game than playing straight calls & puts. When you monitor straight puts and calls, entry point is all important and varies minute by minute. You have to watch the market with something like qcharts and a broker like preferred at least 3 times a day -- an hour after the market opens, at mid day when traders come back from lunch, and for the last 1:15 of the trading day. You have to have key support levels marked to "target shoot" a good entry. You have to use trailing stops if your position sky rockets to lock in the profit. You have to do all these things and more (see the Options 101 series for more details). It is like planning an attack on a hill -- set up the fire support, locate the enemy crew served weapons, figure out how to destroy them, find covered routes of approach. You take huge risks every step of the way. Selling Calls is more like setting an ambush. You withdraw from ground that you know, making note of natural obstacles, and planning places to drop bombs and artillery shells on an advancing enemy. You pick ground you want to fight on -- that hill looks like a good spot to put mutually supporting machine guns and anti tank wired guided missiles. I want to fight here. With a stock like VRSN, which I know well, I pick where I want to make my money as investors bid it up to an overextended level. Those investors/traders charge onward like an ignorant, but brave army, looking for more profits. They only know one dance step -- buy low, sell high. Come into my kitchen. VRSN hits its highs and pulls back. The options premiums are pumped way up, and they do not drop off over night. I sell that premium to a fighter trying to pound my face into hamburger. Fine buddy, let me clear a path for you. The stock peaks at 212, and retreats. Pow. That is where I want to land a punch, then cover up like Mohammed Ali doing the Rope-a-dope, waiting for another shot. Now the market goes into its Pre-Fed daze. Perfectly predictable, except for all the investors who poured into the market in the last few months, pushing daily trading volume on the NASDAQ towards 2 billion. Next, I wait for them all to discover that the Fed is a big bombshell, and there is really a lot of dead space between Feb 1-2 and March 26, the second FOMC meeting of the year. When they go screaming for the sell button, then I will land a second blow -- pow, thanks for that OTM premium pumped way up because you just sold an awesome stock. In a normal month in 1999, I might make 50 trades. In the February 2000 cycle, I would be very happy to make just two. If all this is too violent for you, think about this -- this strategy is actually much more like eastern Judo and the writing of Chinese military philospher, Sun Tzu. The goal is to efficiently use your opponent's energy against him. The analogy to warefare is just a fiction -- as former Marine and champion trader Marty Schwartz points out, your only real opponent in the market is your self. As the philosophical Market Wizard Ed Seykota likes to say, everyone gets what they want from the market. If you want to pay your broker for 50 trades and still lose money, go right ahead. I'd rather make money. Janar Wasito Contact Support PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** GMST $68.63 -1.31 (-11.25) We really wanted to see GMST hold that $69.50 support to justify keeping this call play. Alas, when the trend is not your friend it is time to kick him out of your sandbox. Ever since making a new high seven trading days ago, GMST just keeps slipping below one support area after another. We think GMST might be nearing a bottom with pretty good support at the 50-dma at $66 level. Despite this support, we are dropping GMST for now until it can get back on track and move out of this pullback/consolidation phase. CMVT $136.50 -8.56 (-13.88) Tired of waiting? That seems to be the sentiment of CMVT investors. We picked this play in anticipation of a split announcement - as promised back in October. The last 2 days however, seem to indicate that investors don't want to hang around and wait forever. Yesterday was bad enough, as CMVT sold off to close right above the $144 support level, but today was downright ugly, as CMVT gapped down at the open and headed south from there. Losing almost $9 on greater than average volume is not a good sign for our play and it is time to say goodbye. HGSI $199.81 +5.88 (-22.06) Our view of HGSI has changed a bit as the decline that began the first of the week, continued the past two days. Our long-term view is still positive, but our split run may be all but over. The broader indices have been choppy and HGSI seems to have been forming an intraday base between $195 and $205 for most of the last two sessions. HGSI fell to a low of $192.50, in the fist fifteen minutes of trading Wednesday morning and has struggled to regain any momentum to the upside. Although we could see one more push, we are going to drop HGSI from our list tonight, due to the split on Monday. If you hold a position in HGSI, make sure to close it by the end of business Friday. HGSI has been a great play, and the company most assuredly will be back be back list of plays in the near future. ANAD $77.13 -0.50 (-2.13) Anadigics reports its earnings tomorrow morning at 8:30 EST. At this point all your positions should be closed out. ANAD has taken us for a volatile ride, but that same volatility is what gave us multiple opportunities for profit. But ground zero is here and we're dropping ANAD this evening. PUTS: ***** RMBS $77.50 +2.81 (+2.13) RMBS shrugged off the Nasdaq and decided to go their own direction. The Nasdaq was down and RMBS was up, so we have decided to drop our play due to their independence. They shattered the resistance level of $76.08 and took off today, even hitting the next stop at the 10-dma, $80. The old resistance level now may become support. There still was not a lot of volume backing up the breakthrough so investors might turn on RMBS and test the new support level. But for us, right now, we see them headed upward and that has made us make the decision to drop them as a put play. They had no major news effecting their trading. ******************** PLAY UPDATES - CALLS ******************** AFFX $224.88 +1.88 (-28.75) Affymetrix seems to be consolidating its monster move in the latter part of this week. On the bullish side we have seen higher lows three days in a row. On the bearish side, we see selling thwarting any huge rallies. The bullish picture still looks stronger than the bearish picture. When money starts flowing back into the market we feel it is likely that AFFX will be bid up. Human Genome stocks still look like the place to be during rallies. This industry group could become the leaders of the momentum players. That said, we need to see confirmation of this leadership position in the near future. If these stocks do not start rallying soon, they may get stuck in a consolidation phase for awhile. We see nice support around $207, which is possible if we get another selling wave in this volatile market. Aggressive traders may want to key into the support in the mid $220's. Look for resistance at $238 followed by $248. TQNT $154.06 +3.06 (+12.56) TriQuint sure looked like a superstar earlier today. All week, TQNT gaps up to a new high, pulls back, takes out the opening high, rallies a bit and then pulls back. If it was not for the huge selling wave intraday, TQNT seemed poised to shatter its previous day's high. The high print of $163 was impressive. As long as the uptrend stays in place, it seems possible that TQNT will trade up there again soon. It looks like TQNT needs to hold the $151 support level to keep the uptrend alive. A drop below this price could take the stock back down to around $138. If TQNT fails to take out resistance at $163, aggressive traders may want to take profits to avoid holding a position over the weekend. It sure has been nice listening to CNBC the past two days. The "talking heads" keep reporting that one of the strongest tech stocks is TQNT. Welcome aboard! VECO $58.00 -1.00 (+8.38) Veeco started off in the right direction for us yesterday. Midday the stock traded above Tuesday's high of $56.75. With increasing volume the stock went straight to resistance at $60, before pulling back. It looks like $60 is a very important level for the stock to cross before it can continue its charge, especially since we saw the stock back off of that level again today. In the initial report on Tuesday we failed to mention that one of the reasons why Veeco intrigued us as a call play was because of the incredible volume that accompanied the breakout above $50. We still have not seen any news to account for it, but technically it is very positive. Support remains in the $53-$54 area, which may be a good place to go long on pullbacks. There is very good longer-term support at $50. *********************************************** PLAY UPDATES - CALLS - CONTINUED IN SECTION TWO *********************************************** ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. 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The Option Investor Newsletter Thursday 1-27-2000 Copyright 2000, All rights reserved. Redistribution in any form strictly prohibited. ******************************** PLAY UPDATES - CALLS - CONTINUED ******************************** SILK $168.00 +5.00 (+22.00) Somebody forgot to tell SILK investors that the markets are in correction/consolidation mode. Since we picked it on Tuesday, SILK has continued to move up nicely. Although volume remains weak (only about half the ADV), nobody seems willing to part with their shares, even at these lofty prices. Intraday support sits at $160-162, with stronger support down at $151. Resistance is at today's high of $$173.25 and then the 52-week high of $177.94. Recall that nothing moves in a straight line, and with the overall market weakness, we will likely see some consolidation soon. SILK has wide intraday swings which will provide ample entry opportunities, but play this volatile issue with caution. TWX $85.75 +1.00 (-5.38) Still consolidating, TWX continues to bounce at the $84 support level. While the rest of the market continues to weaken, TWX looks to be forming a nice base in anticipation of the next move upwards. Volume continues to decrease from the extreme levels seen after the merger announcement with AOL. Most analysts have come out in support of the deal, some going so far as to call the combined company the internet company of the future. Be aware that TWX is scheduled to announce earnings on February 1st, even though we were unable to confirm this with the company. We don't expect this to move the share price significantly and since this is really a play on AOL we will be holding over earnings. Conservative investors may want to wait until after earnings at this point just to be safe. Any move up from support on increasing volume is buyable, but we would be concerned if the $84 level is broken on a closing basis. Support for AOL at $60 continues to hold and is the real catalyst for the direction of TWX's stock. VOD $55.94 -0.25 (+0.00) Will they or won't they? That is the $64,000 question, as we wait to see if the Mannesmann shareholders will approve VOD's buyout bid by the February 7th deadline. Given the overall market weakness, VOD has performed well, showing us that the $54 support level is strong. There is not a lot of pressure to push the shares in either direction as volume has been light the past 2 days. In order to confirm a continued move upwards we will need to see the buyers return in force. Target shoot entries on intra-day dips near the $54 support level or wait for a breakout above $57 on strong volume. If support is broken, stand aside in this volatile market. As always, protect yourself with stops. NOK $182.75 -4.50 (-7.13) NOK felt a wedgie coming on (an ascending one on the chart)...that is until today's big dip to $174. We're going to give NOK just one more day to pull it out despite today's loss. Here's why. Earnings are next Tuesday (Feb. 1) before the bell and we may get a split announcement then too. As we've noted all along, NOK revised their growth rate from 25-35% up to 30-40%. They won't under-perform that number, and we think NOK is likely to exceed that figure given their CEO's comments that they would hit their 3-yr gross revenue goals in two years (code for 50% growth). We're surprised the Street hasn't come to the same view. Though plodding along in neutral in the $175-$185 range for at least the last two weeks, 45 minutes before today's close, NOK really demonstrated strength as it pumped up the volume and added back $4 from it's low of the day. It now rests just below its 10-dma support of $181. Let volume and move back above $181 be your guide to entry, and be prepared to exit before earnings. MFNX $67.50 +5.00 (-2.38) As we noted in Tuesday's update, MFNX may need more than just one negative day to cool off. That turned out to be true as MFNX took a beating yesterday, falling to as low as $62. Buying volume sneaked in this morning AFTER amateur hour and took the price back to $70 before it reversed and found support on two occasions in the $65-$66 range. $66 is shaping up to be excellent support. Now, market willing, MFNX may be ready for another leg up. Still no news and earnings are mid to late February at the earliest. Thus that won't be a price driver. Given today's volume of 3.5 mln shares (22% over the ADV) and that it happened after the first hour, we could deduce that professionals are back in the action, which could drive the price higher over the next few trading sessions. Again, this issue is temperamental and acts erratically on lower volume. Special understanding of Tasmanian Devils may be helpful here. Let the volume be your guide. PCS $109.50 +0.25 (-1.25) Well, it certainly was not the most exciting trading day for PCS, but in a market as volatile as today's, we are not complaining! PCS spent Wednesday continuing its recovery run, trading to just under $110 and closing near the high end of its day. Today's session offered pretty much the same trading range as yesterday though in a slightly different fashion. PCS started the day at its high, traded to its low mid-day and then moved up to close positive. PCS encountered some resistance at $110 both yesterday and today. Needless to say, we would like to see a breakthrough and a close above this level to confirm the continuing momentum of this earnings/split run. PCS did close today's session resting on its 5-dma which could hold heading into tomorrow. PCS looks to have some additional support at $108, which it has tested throughout the last two sessions. PCS has further support right around $105. We will be dropping this play on Sunday since PCS will be announcing earnings on February 1. PMCS $191.25 -11.75 (+0.00) Wednesday delivered the close above $200 that we were looking for. PMCS offered a nice trading range of just under $10 on Wednesday and traded as high as $207.50, a new 52-week high. Today, PMCS gapped up over $2 at the open and then quickly succumbed to a bout of profit-taking, which dragged the stock down as low as $182.19. Ouch! PMCS did find support at its 10-dma and managed to move up nearly $10 from its low by the close. PMCS has re-enlisted support at the $190 level which could hold and serve as a nice point for new entry going forward, should PMCS continue to reclaim its positive momentum. Today's session may end up being a gift for our split play on PMCS. Obviously, confirm direction before entering. NTAP $102.88 -5.50 (-14.25) NTAP got a nice bounce Wednesday as the networking company continue the momentum from late Tuesday. The only problem was it ran into resistance at $115 and turned around. NTAP exemplifies the choppy action seen in the major indices this past week. NTAP gave us a chance for a nice day trade yesterday before rolling over. We are not promoting "day-trading" but many times we are forced to take what the market gives us. Again we are back at square one. The $100 level has provided good support and a bounce higher would provide another good entry point for this play. If we see weakness and the $100 support level doesn't hold then the next area of support is down near $92. Resistance is found at $108 and $115. If you enter a new play in NTAP be prepared to sell to soon until we get through the FOMC meeting next week, as we may see a clear develop at that time. DISH $90.38 +0.31 (-5.88) Other than the initial failed spike right out of the gate Monday morning, DISH has yet to provide a satisfactory entry point. We still believe DISH will provide a good opportunity. Patience can definitely be a virtue when waiting for that perfect entry point. Actually the recent decline will provide us with a much better entry if the momentum continues as we believe it will. DISH has suffered through the volatility and choppiness seen at the Nasdaq and will likely continue to do so until we get the Fed meeting out of the way, next week. Tomorrow morning will see the release of the ECI report and GDP. Bad numbers could definitely set a negative tone for the markets. The 50-dma at $85.50 has provided support for DISH, a close below that level could spell trouble. LVLT $109.88 +1.50 (+9.38) Ok let's practice a little caution here. LVLT has risen significantly over the past few weeks. We've seen the stock tack on $33.50, or 36.6% since we added it to our call list on January 14th. And just on Monday LVLT pinnacled at $120.25 setting yet another new 52-week record. Since then the market has shown signs of weakness and instability. Granted LVLT has held up well with near-term support in-line with the 5-dma (now at $110.10), but be warned. Next week is the Fed meeting followed by the company's earnings' report on Thursday, before the bell. These events could possibly shake up the momentum. If that turns out to be the case, it wouldn't be surprising to see LVLT move closer to its 10-dma ($100.93). So be prepared for a downdraft. On the brighter side, recall LVLT is a split-candidate and there's plenty of shares available for a stock split. NTLI $125.00 -0.69 (-11.38) NTLI is in a steadfast consolidation period in the proximity of the 10-dma ($127.08). Today there were a couple of dips to firmer support near $120, but these downward spikes were quickly reversed. This is a bullish sign. However, the stock has been trading at the $125 level since Tuesday so keep out the yellow flag on NTLI. First of all we need to see a confirming bounce off this mark and second, the play is over when NTLI splits 5:4 on February 3rd. Keep these factors in mind before opening a new position. ******************* PLAY UPDATES - PUTS ******************* SLR $71.81 -3.19 (-6.56) A weak market, weak sentiment, and weak chart all combined in a dogpile on SLR today. Though displaying half-hearted attempts at support at $74, $73, and barely a hiccup at $72, SLR headed south in today's trading to $68.69 before a strong recovery with strength into the close. On the way back up, SLR stopped short of $72, its previous support, which may act as new resistance (at least temporarily). Surprisingly, it didn't help much that Merrill Lynch named it a long and short- term Buy with a new target price of $120. So here's the deal. Waiting for penetration of $72, then a firm bounce south of $73 on increasing volume will yield the best entry. Even so, with the strength in other semiconductors, SLR may have run its course. Tighten up your stops to protect your profits. This has been a good run, but we'll have to wait and see if it's over yet. If not, the next likely support level is at $68. IIJI $73.25 -1.38 (-8.38) IIJI attempted a move back up to $80 at the open of Wednesday's session but after a brief rendezvous, IIJI was pulled back down to close the session under $75. Today, IIJI flirted around with $75, trying to decide if this level was going to end up serving as resistance or support. Obviously, resistance won out. IIJI has additional resistance at $78, $79 and $80. IIJI is trading in the range of some previously established support, right around $72-$73, so it is important to exercise caution here. We are also still concerned about the lack of volume backing the decline; another reason to proceed carefully until we see an increase. FD $42.69 -2.31 (-1.19) Admittedly, our put play on FD was looking a little shaky yesterday. FD tried to make a break for it and made it all the way up to $45, a move backed by strong volume. FD managed a close just pennies shy of the high for the day and looked well positioned heading into today. This morning the bears emerged, proving that they were not done with FD just yet. FD gapped down $0.75 at the open, again found resistance at $44 and spent the rest of the session heading south. FD did find support at $42 and as we mentioned on Tuesday, we would like to see a drop below this level to confirm continuing negative momentum. Otherwise, your best bet for new entries could be on up days like yesterday that are held back by resistance. Today, FD announced that its board of directors has authorized an additional repurchase of up to $500 million of its common shares. This authorization replaces the current repurchase program which expires tomorrow. MU $64.75 +1.19 (-2.38) Wednesday was a good day for our put play on MU. MU lost $2.31 and offered a nice trading range of nearly $5. MU made a weak attempt at a positive day today and was unable to come up with anything too impressive. MU traded in a tight range and had volume just over half of the daily average backing its move up, a good indication that there aren't really too many interested MU buyers out there. MU's 5-dma, which has done a nice job of providing resistance in the past, is sitting overhead at $66. Look for this level to hold. This could be a nice level for possible entry points. MU could have additional resistance at its 10-dma of $69.75. MU's next notable support level is at $60. CMGI $112.25 +1.25 (-6.00) CMGI gave us solid confirmation of its direction over the past two days. The stock clearly penetrated support at $112.50 and bearishly closed below this first line of opposition. Again $115 served as strong resistance during intraday trading offering a nice point of entry into this "post-split" blues play. Initially, we cited the 50-dma (now higher at $108.20) as our first goal. This week CMGI tagged this technical indicator intraday giving us confidence our target is within our reach. Still I want to mention a somewhat dissenting disposition that could effect this put play. Late day CMGI participated in the "rally" on increased volume and this may not be a good sign. Also Lazard Freres & Co started CMGI with a new Buy rating and issued a target price of $170. With or without news, remember this is a HIGH-RISK Internet play that requires your undivided attention. RLM $65.50 -0.19 (-3.88) The pattern of lower-highs and lower- lows continues to establish itself forming a steep ski slope. So what's driving this stock down? The negative market pressure and RLM's own downward momentum is steadily pushing the share price lower. Today we saw RLM break through bottom support at $67 and $66. And after hitting an intraday low of $64.88 the stock couldn't manage a recovery and hit the wall at $65.50. The next shield to penetrate is at the 200-dma ($63.25) where there is established support. Take a look at a six-month chart for visual confirmation. You can see how the $60 to $63 range formed a tight channel during October and November. ************** NEW CALL PLAYS ************** MUSE - Micromuse Inc. $166.69 -3.06 (-6.25 this week) Micromuse develops, markets and supports scaleable, rapidly deployable, configurable, software solutions for the effective monitoring and management of multiple elements underlying an enterprise's information technology infrastructure. Micromuse recently earned the highly acclaimed "Best of Show" award in the network management category at the 1999 Networld + Interop in Atlanta. Major Micromuse clients include: AirTouch, AOL, AT&T, Charles Schwab, GTE, Mindspring and a number of financial investment concerns. Micromuse is considered to be the leading provider of fault and service-level management software. Micromuse is perhaps better known as the "Netcool" company, which refers to its software product used extensively by telecommunications and Internet service providers. Recently named in Bloomberg's list as one of the top 100 stocks whose increase in value during 1999 outpaced that of all other publicly traded companies (MUSE was 21st), Micromuse is no stranger to the gunslingin' world of NASDAQ tech traders. Software in general is a leading group and MUSE is one of the group's brightest stars. It is no surprise then that MUSE has scheduled to split its shares 2:1 (ex-date on February 23rd). Micromuse's business is driven by many other tech sectors. According to the CEO, Greg Brown, "The explosive growth of Internet, telcom, and cable networks are major drivers behind our business." We have recently had success in the Calls Section with stocks that are a member of one high tech group but are also substantially benefiting from doing the bulk of their business with the leaders of other high tech groups. See AFFX and TQNT. MUSE has formed a very intriguing technical formation called a contracting triangle. This means that in recent trading sessions the shares have had lower highs and higher lows. What usually happens in this formation is that a break to one side or the other typically results in a huge move. With a split rally a possibility, we like the chances that the breakout will be to the upside. The key prices to watch are $160-$171. The next move could occur with a break from this range. A move to the upside might find a little resistance at $185 followed by the all-time high of $192.50. The next support level below $160 is $152. January 19th saw MUSE report record quarterly results. Revenues for their first quarter increased 106% over the comparable quarter in the previous year. Net earnings showed an increase of over 62%. This quarter also showed that a record 85% of revenues came from service provider customers. In the last quarter, Micromuse added 91 new customers to increase its total customer base to 532. BUY CALL FEB-165 QVM-BM OI= 5 at $24.38 SL=19.00 low OI BUY CALL FEB-170*QVM-BN OI=162 at $19.25 SL=15.00 BUY CALL FEB-175 QVM-BO OI= 41 at $17.50 SL=13.63 BUY CALL MAR-165 QVM-CM OI= 20 at $32.38 SL=25.25 low OI Picked on Jan 27th at $166.69 P/E = 386 Change since picked +0.00 52-week high=$192.50 Analysts Ratings 5-6-0-0-0 52-week low = $24.00 Last earnings 01/00 est= 0.13 actual= 0.13 Next earnings 04-19 est= 0.14 versus= 0.07 Average Daily Volume = 291 K Chart = /charts/charts.asp?symbol=MUSE **** LU - Lucent Technologies $57.44 +1.44 (-4.75 this week) Lucent makes the things that make communications work, or so goes the tag line on the commercials. Actually, Lucent Technologies, headquartered in Murray Hill, N. J., designs, builds, and delivers a wide range of public and private networks, communications systems and software, data networking systems, business telephone systems, and microelectronics components. Bell Labs is the research and development arm for the company. Ugh! Anybody holding a long position on January 6 after the close when LU reported they would experience an earnings shortfall was probably in a lot of pain. In fact, LU opened down $20 on the 7th from its previous day close at $72. As they had warned, earnings fell a penny shy of estimates. The worst was that their revenues were relatively flat compared to last year with not much hope of a big recovery this current quarter. That was January 20th. With all the bad news priced in and most of the sellers shaken out on that 176 mln share day following the warning, and stragglers exiting on the 18th, only the die-hards were left. With no more sellers around, buyers are beginning to nibble. Support is rock solid at the $50-$52 level. For the conservative trader, this can be one of the more comfortable plays that will let you sleep at night. You can target shoot on a bounce off any weakness, or simply wait for a breakout over $58.50 to take a position. Of course, confirm market direction first. In the news, there were comments earlier in the week (Forbes Magazine quoting unnamed sources) that LU might consider offering a tracking stock for its optics division, which could also help the underlying shares. We'll keep you posted on any developments. By the way, combined with purchases from Nortel Networks, these two make up 46% of JDSU's sales. BUY CALL FEB-50 LU-BJ OI= 3269 at $7.75 SL=6.00 BUY CALL FEB-55*LU-BK OI=12708 at $4.00 SL=2.25 BUY CALL FEB-60 LU-BL OI=21348 at $1.50 SL=0.75 BUY CALL MAR-55 LU-CK OI= 989 at $5.63 SL=4.00 BUY CALL MAR-60 LU-CL OI= 3982 at $3.13 SL=1.50 Picked on Jan 27th at $57.44 P/E = 81 Change since picked +0.00 52 week high=$84.19 Analysts Ratings 15-16-5-0-0 52 week low =$47.00 Last earning 01/00 est= 0.37 actual= 0.36 surprise=-3.0% Next earning 04-20 est= 0.25 versus= 0.17 Average Daily Volume = 16.8 mln Chart = /charts/charts.asp?symbol=LU **** BGEN - Biogen Inc. $99.69 +2.69 (+7.69 this week) Biogen researches, develops, and markets biopharmaceuticals to treat a variety of illnesses. AVONEX, is the company's claim to fame, used in the treatment of multiple sclerosis. Other drugs made by BGEN include Amevive, for psoriasis; Antova for autoimmune diseases; and Adentri, for congestive heart failure. BGEN also receives revenues from licensing drugs it has developed to other companies. BGEN has research agreements with Schering-Plough, SmithKline Beecham, Merck and Abbott Laborites. As we add BGEN to our play list, BGEN will be added to another prestigious list of companies. What could be better than being on our select list of plays, you ask? Well BGEN will join the S&P 500 Index Friday after the close of business. This past Monday, Standard & Poors said it will add Harley-Davidson and Biogen to its index. As if the Biotech company didn't have enough going for it lately, investors jumped in with both feet Tuesday morning driving the price of BGEN to new highs in each the last three sessions. BGEN has had quite a month. After a brief dip the first two days of the new year, BGEN has gone virtually straight up. BGEN reported earnings in the middle of the month beating analysts estimates. Since the first of the new year BGEN has been upgraded on at least five different occasions. Late last week, Merrill Lynch named BGEN to their "Focus One" list based on a compelling valuation and strong sales of Avonex. Avonex is the company's flagship drug, used in the treatment of multiple sclerosis. Although the Biotech sector has experienced a pullback, BGEN has continued higher for most of the week. We believe the momentum will continue. BGEN did make a new 52-week high today at $101.25. Support is found at $99 and $96.50. The strength behind the move today was impressive with 7.9 mln. shares changing hand. Look for continued strength or a bounce off support as an entry point for this new play. The latest comments on BGEN came from analyst Eric M. Hecht at Merrill Lynch. Hecht reiterated a near-term Buy rating for the company and also reiterated a long-term Buy rating. BGEN had a helping hand today as the FDA reported Immunex's drug, Novatrone appears to be effective treatment for patients suffering from multiple sclerosis as well. BUY CALL FEB- 95 BGV-BS OI= 970 at $11.00 SL=8.75 BUY CALL FEB-100*BGV-BT OI=2119 at $ 8.00 SL=6.25 BUY CALL FEB-105 BGV-BA OI= 95 at $ 5.88 SL=4.25 Picked on Jan 27th at $99.69 P/E = 71 Change since picked 0.00 52-week high=$101.25 Analysts Ratings 9-6-11-0-0 52-week low =$ 44.00 Last earnings 01/00 est=-0.42 actual= 0.44 surprise=+4.7% Next earnings 04-13 est= 0.42 versus=-0.29 Average daily volume = 2.74 mln Chart = /charts/charts.asp?symbol=BGEN ************* NEW PUT PLAYS ************* UAL - UAL Corp $56.88 -2.38 (-3.25 for the week) UAL is a holding company whose principal subsidiary is United Air Lines, the world's largest airline. They engage in the commercial air transportation of people, property, and mail. Notably, UAL is one of the world's largest employee-controlled companies with its employees owning 47% of the stake. On January 13th, UAL abruptly announced its 2000 financial forecast would be well below analyst expectations. UAL shares stumbled a whopping 13% on strong volume and the news subsequently dragged down the airline sector. UAL cited that rising fuel prices could push costs upwards of 25% compared to the 1999 levels. Plus the company is expecting labor costs to rise as well in anticipation of contract negotiations with its pilots and mechanics. Merrill Lynch also came forward on the news and downgraded the airline to a Near-Term Neutral from a Near-Term Accumulate. Despite the negative events UAL held firm above support at $60. That is until this Tuesday when it slipped under the mark. Flight disruptions caused by the east coast blizzard shut down nearly 400 flights and news of International fare increases were not well received by investors. UAL announced it would be tacking on the $20 fuel surcharge (already on domestic flights) as well as a general 3% increase to its international flights. UAL dipped to an intraday low of $58 and has since edged lower. Take a look at a one-month chart with a 5-dma line and you can see this technical indicator is a good gauge for an entry into this put play. Presently the 5-dma is at $58.99 so look for an intraday bounce off this mark. Keep in mind too that the negative market sentiment is playing a significant role in the descent. ***Presently there are no strikes below 55*** BUY PUT FEB-60*UAL-NL OI=732 at $4.25 SL=2.75 BUY PUT FEB-55 UAL-NK OI=824 at $1.63 SL=0.75 Average Daily Volume = 700 K Chart = /charts/charts.asp?symbol=UAL ********************** PLAY OF THE DAY - CALL ********************** SILK - Silknet Software $168.00 +5.00 (+22.00 this week) Silknet Software is squarely positioned in the e-business world, providing its industry-leading customer-centric applications and systems to the likes of Microsoft, Office Depot, Sprint, Inacom, and Bell Canada. SILK's software allows companies to build strong customer relationships through personalized marketing, sales, electronic commerce and customer support services. SILK's approach integrates all customer interactions and data, whether across the Internet, by phone, through e-mail, or in person, providing the company's partners and customers with a single view of their relationship. Tuesday's Write Up Along with the rest of the NASDAQ, sellers hammered SILK right after the first of the year. After finding its feet near $105, buyers began immediately buying it up and quickly pushed the price above $130. After a couple days of consolidation, the stock began steadily moving up, using the 10-dma (currently $142.50) as support. The move really got underway when the company announced strong earnings on the 13th, followed by George Gilbert of Credit Suisse First Boston reiterating his Buy rating the next day. It has been encouraging to see that SILK has remained strong this week in the face of the weakness in the broader markets. We are a bit concerned that volume has been light and we want to see it pick up going forward. Looking at an intraday chart, we see a very nice pattern of higher-highs and higher-lows over the past week and a half. Because the move up has been so quick, there is not strong support until $133. We should see mild support at $150, and then $144; a bounce at either of these levels accompanied by increasing volume is a good target for opening new positions. The next point of resistance will likely be the 52-week high ($177.94), set on December 30. This is a volatile internet stock, subject to large daily moves. While this provides plenty of entry points, exercise caution and use stops to protect yourself in the event of a correction. SILK continues to form strong alliances and customer relationships, the latest with Computer Sciences Corp. Beneficial to both companies, the agreement (announced today) extends SILK's business-to business market penetration. On January 19th, the company announced the adoption of Silknet eBusiness Systems and Silknet eService by two automotive e-commerce companies, BBCN.com and CarParts.com. Thursday's Write Up Somebody forgot to tell SILK investors that the markets are in correction/consolidation mode. Since we picked it on Tuesday, SILK has continued to move up nicely. Although volume remains weak (only about half the ADV), nobody seems willing to part with their shares, even at these lofty prices. Intraday support sits at $160-162, with stronger support down at $151. Resistance is at today's high of $$173.25 and then the 52-week high of $177.94. Recall that nothing moves in a straight line, and with the overall market weakness, we will likely see some consolidation soon. SILK has wide intraday swings which will provide ample entry opportunities, but play this volatile issue with caution. BUY CALL FEB-160*ULI-BL OI=166 at $21.50 SL=16.75 BUY CALL FEB-165 ULI-BM OI= 60 at $19.13 SL=15.00 BUY CALL FEB-170 ULI-BN OI= 41 at $16.88 SL=13.25 BUY CALL FEB-175 ULI-BO OI= 98 at $14.63 SL=11.50 Picked on Jan 25th at $159.50 P/E = N/A Change since picked +8.50 52-week high=$177.94 Analysts Ratings 1-6-0-0-0 52-week low =$15.63 Last earnings 01/00 est=-0.28 actual=-0.20 Next earnings 04-13 est=-0.26 versus= N/A Average Daily Volume = 290 K Chart = /charts/charts.asp?symbol=SILK ************************ COMBOS/SPREADS/STRADDLES ************************ Earnings And Inflation Woes Continue.. Wednesday, January 26, The rotation out of technology issues continued today as earnings reports warned of future shortfalls. A wave of late selling left the Dow almost unchanged at 11,032 while the Nasdaq ended the session sharply lower. The composite of hi-tech stocks closed 97 points lower at 4069. The S&P 500 index was down 5 points at 1404. NYSE volume was active at 1.1 billion shares. Gaining issues led losers 1,737 to 1,317. Stable bond prices added support with the 30-year Treasury rising 19/32, bid at 93 31/32, pushing the yield down to 6.58%. Portfolio plays: Investors focused on earnings reports and forecasts during the morning session, but most of the action took place after the Fed chair's comments on the future of interest rates. Greenspan told the Senate Banking Committee that keeping prices stable will cut the risk of imbalances in the economy. He said that low, stable inflation is essential for US prosperity and that the Fed's task is to set conditions to extend growth. He also said there are no signs of US productivity peaking and that the US trade gap is not credible over the long run. Analysts now believe a 25-basis-point increase will be the most likely outcome when the FOMC meets next week. A number of market-leading issues fell prey to profit-taking and the biggest losers were the computer hardware and biotechnology sectors. Some signs of bullish activity were present in banking, media and defense stocks but there were no wide-spread rallies. Our portfolio was amazingly quiet with few issues moving much in either direction. In the small-cap group, On Health Networks (ONHN) surged $1.75 to close at $10 on news their award-winning online health and wellness destination for consumers has emerged as an E-healthcare leader for 2000. The company announced it has closed 1999 with record-breaking gains in advertising and site traffic with 3.2 million unique users in December and more than 100 advertisers and e-commerce partners. P-Com (PCMS) was another mover, climbing to a midday high near $14 on speculation of their earnings report due out this week. The bullish diagonal position offered a favorable early-exit opportunity with $0.50 profit on $3.00 invested for one month. In the LEAPS/CC's portfolio, Vodaphone (VOD) climbed $1.12 after bid target Mannesmann indicated that it would be happy to settle for less than 50% of the marriage just so long as VOD increases the cash element of the bid. The merger is expected to benefit Vodaphone's bottom line and growth prospects significantly, as long as they don't spend a fortune in the acquisition. Medtronics (MDT) also rallied during the session, rising to a new all-time high after the U.S. Food and Drug Administration approved its Reveal Plus Insertable Loop Recorder, an implanted heart monitor that tracks heart activity much like an airplane's flight data recorder. The device, which Medtronic said was the world's first implantable heart monitor with new auto-activation capabilities, helps physicians diagnose the cause of suspected heart-related symptoms such as dizziness, palpitations, seizures, or fainting. The stock closed at $46.12 and our position is at maximum profit above $42.50. Unfortunately, one of our favorite issues is in a significant slump. Solectron (SLR) has fallen almost $10 in the past week and rather than lose all of our previous gains in the sell-off, we have decided to close the position and look for a new entry point after the issue finds support and new interest. Thursday, January 27 Anxiety among investors increased today as Dell Computer warned of future profit shortfalls. The Dow Industrials managed a slight gain, closing up 5 points at 11,028 while the technology-heavy Nasdaq Composite fell 30 points to 4,039. The S&P 500 Index was down 5 points at 1,398. In the broad market, declines edged out advances 15 to 14 with over 1 billion shares traded on the NYSE. There were 41 stocks at new highs while 122 made new lows. The benchmark 30-year U.S. Treasury Bond was up 20/32 with the yield falling to 6.52%. Portfolio plays: There were only a few blue-chip issues that enjoyed major gains in today's session and General Motors (GM) was our big winner. The stock rallied $4.31 to close just below $83 after Goldman Sachs analyst Gary Lapidus upgraded the company to the brokerage firm's "recommended list". The analyst said GM's core automotive now sells at all-time low on both price to sales and price to forward earnings and he expects an announcement by GM management about partial separation of Hughes within the next few months, possibly following GM's board meetings in February or March. GM is expected to spin-off 30%-50% of its Hughes (GMH) stake to shareholders, contribute some portion to GM's hourly pension and retain a stake to be distributed at a later date. The brokerage report suggested that GM is worth about $100 a share, based on the sum of its parts and a discount due to the expected Hughes deal. That suits us just fine as our position returns maximum profit above $80. A number of other portfolio issues made favorable moves in today's slumping market. One of our recent suggestions, BCE Inc. (BCE) rallied almost $5 to close at a new all-time high near $105. The move came after Salomon Smith Barney raised its price target for shares in the telecom's holdings to $120. On Thursday, the Montreal-based firm announced plans to spin off 94% of its stake in communications equipment player Nortel Networks (NT). The spin-off is seen as a smart strategic step in unlocking the company's value and will help fund future growth, especially in its data, media and wireless operations. Our position returns maximum profit above $85. The most surprising stock was Splash Technologies (SPLH). The unique computer hardware company moved to a midday high near $16 on heavy volume with no public news. Our recent bullish offering was a FEB7C/FEB10C bull-call spread at $2.00 debit. This position is expected to expire at maximum profit. Questions & comments on spreads/combos to Click here to email Ray Cummins ********* NEW PLAYS ********* ASDV - Aspect Development $78.00 *** New All-Time High *** Aspect Development creates, markets and supports enterprise client server software and content products that enable manufacturers to improve product development and business processes through component and supplier management (CSM). Aspect's CSM solution is licensed to global enterprises in many industries including electronics and high technology, aerospace and defense, automotive, industrial process and consumer package goods. The CSM solution incorporates four interrelated elements, the Explore family of enterprise client server software products, the VIP family of component and supplier content databases, Professional Services for legacy data conversion and business process consulting and a Web Catalog Publisher. Aspect's customers include more than 150 of the 200 largest manufacturing companies in the world. ASDV makes Internet-based software and reference data products that help businesses improve product development and business processes through component and supplier management solutions. Their recent blow-out earnings and the B2B sector momentum has boosted the issue to new highs. The technical support from the recent consolidation area provides a margin of safety for this favorable short-term position. PLAY (conservative - bullish/debit spread): BUY CALL FEB-55 QDV-BK OI=5 A=$24.75 SELL CALL FEB-65 QDV-BM OI=155 B=$15.75 INITIAL NET DEBIT TARGET=$9.00 ROI(max)=11% (two weeks) Chart = /charts/charts.asp?symbol=ASDV **** GLW - Corning $162.00 *** On The Move! *** Corning is a diversified technology company that manufactures leading edge communications, electronics and textile products around the world. Most of their products are marketed under the Corning, Celcor, Costar, Fibergain, HPFS, LEAF, Pyrex, Steuben and Vycor trademarks. The Telecommunications Segment produces optical fiber and cable, optical hardware and equipment, and photonic components for the telecommunications industry. The Advanced Materials Segment manufactures specialized products with unique properties for applications utilizing glass, glass ceramic and polymer technologies. Businesses within this segment include environmental products, science products, semiconductor materials and optical and lighting products. The Information Display Segment manufactures panels and funnels for televisions and CRTs, projection video lens assemblies and liquid-crystal display glass for flat panel displays. Corning's share value continued higher this week after Monday's favorable earnings report. A number of analysts have upgraded the company in the past few days including Salomon Smith Barney with a BUY rating and a target of $225; Josepthal with a BUY rating; and Gruntal with a new short-term target of $176. Today the stock price rose $6 on news the company would increase its manufacturing capacity to produce additional optical components used in communications. Corning said the additional capacity is necessary to meet increasing demand for photonic components. The company also said it would make a public offering of 13 million common shares at $151.38. Currently, that's about what the stock appears to be worth. PLAY (conservative - bullish/credit spread): BUY PUT FEB-120 GLW-ND OI=322 A=$1.12 SELL PUT FEB-130 GLW-NV OI=269 B=$2.12 INITIAL NET CREDIT TARGET=$1.12 ROI(max)=12% (two weeks) Chart = /charts/charts.asp?symbol=GLW **** SEBL - Siebel Systems $101.88 *** Reader's Request *** Siebel Systems is the market leader in enterprise-class sales, marketing and customer service information systems. The company helps organizations to focus on increasing sales, marketing and customer service effectiveness in field sales, customer service, telesales, telemarketing, call centers and third-party resellers. SEBL designs, develops, markets and supports their own enterprise applications software, a leading web-based product designed to meet the sales, marketing and customer service information system requirements of the largest organizations. Siebel's e-commerce applications deliver the first entirely Web-based, enterprise class family of sales, marketing, and customer service products. Siebel applications fully support ActiveX, Java, and HTML and can be delivered over the Internet or via an organization's intranet, supporting multiple desktop platforms. Shares in Siebel Systems rocketed this week after the company reported stronger-than-expected results for its fourth quarter and analysts boosted their earnings outlook for the future. Siebel officials said that new e-commerce business helped its revenue surge 109% to $268 million, while net income climbed to $0.19 a share. Analysts were expecting $0.15 a share and after the news, they jumped on the upgrade opportunity. Bear Stearns reiterated their ATTRACTIVE rating based on strong 4Q results. Hambrecht & Quist offered a BUY rating and placed the stock on their focus list citing the big upside in revenue and an EPS well above their forecast. SG Cowen reiterated a STRONG BUY, based on explosive license revenue acceleration. A reader requested a bullish short-term position on this issue and the risk/reward outlook is favorable for this aggressive debit spread. PLAY (aggressive - bullish/debit spread): BUY CALL FEB-85 SGW-BQ OI=1976 A=$18.62 SELL CALL FEB-95 SGW-BS OI=1138 B=$10.75 INITIAL NET DEBIT TARGET=$7.75 ROI(max)=29% (two weeks) Chart = /charts/charts.asp?symbol=SEBL ************************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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