The Option Investor Newsletter Sunday 1-30-2000 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 1-28 WE 1-20 WE 1-14 WE 1-07 DOW 10738.87 -512.84 11251.71 -471.20 11722.98 +200.42 + 25.44 Nasdaq 3887.07 -348.33 4235.40 +171.13 4064.27 +181.65 -186.66 S&P-100 738.04 - 41.74 779.78 - 17.74 797.52 + 14.03 - 9.34 S&P-500 1360.16 - 81.20 1441.36 - 23.79 1465.15 + 23.68 - 27.78 RUT 504.62 - 29.33 533.95 + 25.84 508.11 + 19.80 - 16.44 TRAN 2581.75 -169.74 2751.49 -140.14 2891.63 - 73.09 - 12.48 VIX 29.09 + 6.43 22.66 + .53 22.13 - 1.07 - 3.51 Put/Call .60 .47 .42 .50 ****************************************************************** Are we there yet? How often have your heard that? Are we there yet becomes the refrain that every parent dreads on a long trip with a car full of expectant children. They continue to ask because they have no concept of time and distance. Parents compound this by answering "just a little while longer" or "almost" when there may be hours left in the trip. It is easier than explaining the correct answer and the 20 questions that follow. To those of you, that emailed me Friday at various times asking "are we there yet", I dedicate this commentary. The buying opportunity today, for everyone in cash, was brought to you by the Goldilocks economy. The Employment Cost Index, which is closely watched by the Fed, posted a much stronger than expected gain of +1.1% compared to estimates of +0.9%. This equates to a +3.4% annual increase in employment costs. The GDP came in at a scorching rate of +5.8% when estimates were only +5.2%. The Fed would like to see a GDP in the range of +3.5%. At the rate we are increasing we could see +7% by the end of the year without any brakes on the growth. Almost twice the Fed's target rate. The University of Michigan Consumer Sentiment came in at much stronger than expected 112 vs the 105.4 posted in December. This and the GDP shows the American consumer is buying everything in sight and there is no letup. Business inventories doubled in the third and fourth quarters to supply this buying binge. Consumer spending is off the charts and is propelled by the tightest unemployment in decades and the billions of dollars in wealth pouring in from the runaway stock market. The government, if you believe Clinton, will have the trillions of dollars of national debt paid off in the next ten years or so based on the soaring tax receipts. Tax receipts based on the profits of the Internet economy and the profits from investing in the stock market. This windfall income stream could dry up in the blink of an eye if the Fed allows the economy and the stock market to run unchecked until it self destructed by itself. It would also dry up if the Fed turned up the heat too high. Either way the outlook would be grim. The key here is to let the economy and the markets continue to run but just slow them down slightly. Money will continue to flow, consumers will continue to buy and profits and taxes will continue to accrue. Adding to the extremely negative economic reports Friday was a couple of high profile earnings challenges. Compaq, not a stranger to earnings warnings, did an about face. At an analyst meeting Friday morning Compaq blessed the future growth estimates of +15% to +17%. Later in the day, an analyst expressed concern about Compaq being able to grow at more than +10% to +11%. The company, when confronted with the concerns, agreed that the 10% to 11% numbers were actually closer to reality. That is a pretty good trick, lose 6% of your growth estimates, a billion dollars or so, in only a couple hours! The next bombshell was in the Internet sector. Amazon announced it was laying off 150 workers in a cost reduction move to slow their cash burn rate. Although this was only a small number of their 7500 employees it was seen as a warning of things to come. Amazon is rumored to be planning to float another $1 bln plus offering to raise cash to make it through fiscal 2000 and announcing a layoff three days before their earnings was a warning to investors that they would lose more than expected. This increasing cash burn and widening losses for one of the biggest E-commerce sites on the net prompted concerns for all Internet stocks. These worries are only amplified by the high high valuations of techs and the extreme bullishness in the market. Investor sentiment is at the highest point since July 1999. All the buyers were fully invested in spite of the impending Fed meeting. The reasons for staying invested are almost gone. Earnings, have just about run their course and the February correction was just around the corner. Add to this mix a few margin calls and the Dow breaking under its 200 DMA and you have a recipe for trouble. Stir in some investor frustration with leaders YHOO, almost -40% from its recent high, and QCOM, -50% from its recent high, and many investors just decided to take their lumps and move to the sidelines. All of a sudden there are no buyers, even in a month where according to trimtabs.com $24 billion has come into mutual funds. Of this amount 25% went into global funds and the majority of the remaining $16 bln was earmarked for tech funds. $13 billion in additional funds were taken out of the general market and earmarked for the heavy IPO calendar. NYSE stocks were going begging for buyers. Funds were caught selling retail, manufacturing, cyclicals and basic material stocks as their customers moved into position to capitalize on the February weakness. Bonds were hot for a change with yields dropping into the 6.43% range. You can see where the cash was being parked until buying time is here again. The only sector positive for the day was drugs. Spared the "price control" for Medicare speech by Clinton on Thursday night investors breathed a sigh of relief and started moving back into this sector. Are we there yet? As you can see by the charts, there was some serious damage done this week. The Dow is now down -962 points from the record closing high on Jan-14th of 11731. Support at 11000 is long past and if needed the next level is around 10640, almost -130 points lower. The Nasdaq was even worse in percentage terms. The -152 point drop today, the second largest point drop in Nasdaq history, brought the total for the week to -415 points from the intraday high just last Monday. The two major averages were not the only place there was blood on the floor. The Russell-2000 was hammered for -12 points to bring the loss for the week to -36 points. The S&P-500 suffered its 7th largest point drop ever and is now trading at levels not seen since last November. As I said on Thursday, if we broke support it would get ugly. Ugly was an understatement. There was almost no bounce at the close and the "order on close" volume was all on the sell side. In just five days the Nasdaq has gone from record high to correction levels and the Fed has not even raised the rates yet. The Nasdaq broke the -10% intraday level of 3872 Friday and came within 9 points of touching the -10% level based on the previous record closing high of 4274. That is close enough in my book. The Dow however is still 130 points above its -10% correction level. The Nasdaq has now traded five straight days with over a 100 point spread. The highest volatility in Nasdaq history. Stocks with great earnings are being applauded on the announcement and then executed. Take SNDK who blew away estimates and announced a split. They gained +$33 Thursday and lost -$23 Friday. VIGN, great earnings, -$22 etc, etc. If we are not there, we are at least at a rest stop. As you can see by the combination chart above the VIX is almost exactly where it was when we corrected on the Dow the first week of January. Remember the Dow dropped back to 11000 in that event. The VIX has only reached this level five times in the last six months and each time it was a market bottom. Can it get worse? Sure but it is very rare. If the VIX reached 32 it would equate to the same severity drop as the drops in August and October last year. Memorable occasions but the cash flow into the market this time of year is much stronger and therefore harder to hold down. No analysis of the market next week would be complete without an analysis of the pending Fed meeting. I think there is no doubt in anybody's mind that there will be at least a +.25% rate increase. After the economic reports this morning there is a great number of analysts that think Greenspan could raise rates a full +.50%. Here is where the problem lies. In reality a +.50% increase is already priced into the market but there is still the uncertainty. It is like being summoned by the boss after being late three times in one week. You know you are in trouble, you just don't know how much until you get the lecture. The economy is in trouble, we just do not know how much. Chairman Greenspan is weighing the punishment. Here is my guess: They will only raise +.25%. Why? Greenspan is an incrementalist. He raised +.50 before and the market cratered. Different time, different factors but still it cratered. This is an election year and you can bet some higher ups do not want to have a market event during their last year in office. They would like to get their boy elected and it is going to be a tough road without additional challenges. They also do not want to trip up the cash machine that is paying down the debt and contributing to election campaigns. The market drop before the meeting has taken the pressure off the committee to "control" the runaway market. If we were pushing 12000 on the Dow it would be a tougher call. Under 11000, with "valuation" concerns making the rounds, some steam has been let out of the boiler. If they only raise +.25% now they can raise +.25% again in March and again in May and again in June, etc. They do not even have to wait for a meeting. If they see a blowout report, they can raise at any time. Therefore, they do not have to rock the boat with a +.50% hike now. At the March meeting they will have the complete economic data from January and February and they will be better able to tell if the hot economy cooled after the holidays or accelerated. My forecast for the week looks like this. Monday morning is a toss up. We could see a follow through of selling from Friday but I think it will be much more reserved. If anything we could see a drop at the open to the Nasdaq -10% level again and then a bargain hunter bounce. Cooler heads should prevail and many traders will be looking to buy some of these tech stocks before they rocket back up again. The weekend is a long time for traders itching to put their money back to work in stocks -20% to -30% off their highs. I am expecting a relief rally on Monday with a flat day Tuesday until after the meeting. Unfortunately we have January Non-farm payrolls on Friday so some traders will still be cautious. The wall of worry is vertical at this point and the market performs best under pressure. The downdraft will have taken some of the wind out of the bulls sails and made them more cautious. The good news in my mind is the drop. We have been expecting a drop in February for a month. Because of the huge gains from the October lows traders sold early in an attempt to beat the rush. We are now strongly oversold and the chance of a continued drop in February is now lessened quite a bit. A convincing case could be made now for a slow recovery over the next two weeks and then a rally in March as we near April earnings. So by taking our medicine early and in large doses we may have vaccinated ourselves against the February correction. Regardless of investor sentiment the markets are oversold and poised for a relief rally, soon. Nothing ever goes straight up or straight down. Any dip on Monday morning could be another buying opportunity for aggressive traders. Cautious traders should wait for the conclusion of the Fed meeting and confirmation that the drop is over. A week like we just finished sure makes you appreciate stop losses! You did use them? Didn't you? Don't you wish you had? Something funny happened this week. I did not get any emails complaining about my bearish outlook the last two weeks. I can't imagine why? Trade smart, sell too soon. Jim Brown Editor Seminar guest speakers It is with much pleasure that we announce the guest speakers for the Option Investor Expo in Denver. These gentlemen are in high demand as financial consultants and commentators and we are glad to present them to our readers. Harry Browne Harry Browne is an investment advisor, a newsletter writer, and a public speaker. In his latest work, Fail-Safe Investing, Harry collects his 30 years of investment experience and delivers it to readers in 17 short, savvy rules for financial investment safety. In all, he has written eleven books with combined sales of over 2 million copies. In 1996 he was the Libertarian candidate for President of the United States John Dessauer John Dessauer, editor of John Dessauer's Investor's World and chairman of McGinn Investment Management, is well known for his many accomplishments. Since 1989 he has been a regular panelist on Wall $treet Week with Louis Rukeyser. In 1995 John won the nation's most difficult investment competition, the annual portfolio contest for panelists on Wall $treet Week. He placed second in 1996. In 1999 John finished in the Wall $treet Week winners' circle for both the mid-year and year-end shows. His 1999 portfolio was up 60.43% earnings him third place. Mark Leibovit Mark Leibovit, author of the Volume Reversal method of market timing. In 1997, Timer Digest ranked Mark Leibovit in the top 10 market timers for the final half of 1997. Timer Digest ranked him #1 gold timer during 1996 and as the top market timer for the first half of 1989. Also, in 1989 the VRS was ranked in the top ten by the Hulbert Financial Digest and in July of that same year the Hulbert Financial Digest ranked the VRS #3 for top performance over the previous five years for mutual fund timing. Mark Leibovit served as a weekly consultant for 7 years on Louis Rukeyser's Wall Street Week. **************************************************** ANNUAL OPTION INVESTOR SEMINAR UPDATE - IMPORTANT !! **************************************************** The 2nd Annual Option Investor Seminar is almost sold out. There are only a few seats left for the March 28-31 event. As you can see by the quality of guest speakers announced this weekend the event will be packed full of quality information. If you were thinking about going but had not made up your mind then this is your last chance. We will not be repeating this 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. There are only a few seats left. 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? *********** JIM'S PLAYS *********** Remember this closing paragraph from last Sunday? --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. WOW!! I could not have asked for a more perfect scenario! -412 points from the Monday open! QQQ-Feb-196 puts Going into Monday I only had one trading position, QQQ puts, which I had bought at the close on the previous Friday. Something scary happened just before the open Monday. At 5:30 AM there was a loud pop in my office at home. My wife and I both jumped out of bed and ran to investigate. I opened the door and there was a strong smell of smoke. The battery backup on my PC was screaming and the fault light was on. My trading PC was dark. Once I turned off the alarm I explored the problem and found that the power supply inside my PC had fried and tripped the breakers. No problem, air out the room and back to bed. Check the futures on CNBC before I doze off again and the futures have spiked from the night before and the market is going to blow out at the open. It suddenly dawns on me that I cannot sell the puts without the phone call that takes 30 minutes at the open. No PC, no online trading! OOPS! But surely the Nasdaq will cool after the open and I can sell them when I get to work for only a minor loss. To make a long story shorter the Nasdaq had crashed almost immediately and by the time I got to work I was very profitable. I resisted the impulse to sell too soon with the Fed meetingon the horizon and the Dow still dropping. On Tuesday the markets opened down but recovered a little bit early. The ticks and advance/decline was sinking so I held until mid-afternoon. When the Nasdaq spiked downward and then held I thought we might get a relief bounce and closed my position. I was congratulating myself all afternoon on selling .50 off the high for the day (low on the QQQ) until the bottom fell out again on Wednesday morning. Still a profitable play. I closed the position at $19.13, cost $12.25. VOD - APR- $40 calls After the drop on Monday Tuesday I took advantage of the bounce on Wednesday to close the VOD calls. Momentum was fading and so were the markets. Still profitable, I sold them for $18.25. LEAPS I am still holding my leaps on Lucent and Gateway but I did not sell any covered calls yet. With the market sinking the premiums were too low on the strikes far enough away from the stock price to be fairly sure of not being called out. ************ My plan for the week was hope for a -10% correction and then sell naked puts at the bottom. Everything worked great except for the last word in the last sentence, "bottom". I had an itchy trigger finger and executed my sells too soon. I am still comfortable but now I am a little closer to the money on some than I would like. Still, if we get any rebound it will take the pressure off. I am not going to go into detail on each position since the idea is the same. We want the stock price to be above the strike price before expiration three weeks from now. If I am going to bet heavily on the rebound by selling this many naked puts then I should be long calls as well. I am. I bought the following Friday afternoon expecting a rebound into the close. The rebound was weak and the QQQ and OEX could be trouble on Monday. Also the NOK calls could get hammered after the overseas markets react to our drop on Friday. Still the NOK earnings should hold them up to some extent. If we get a rebound NOK should fly. It was up +$10 on Friday morning after the ERICY earnings. If ERICY did good then NOK should do better and they are a split candidate also. No, I will not hold over earnings. I am not planning to trade this week. As you can see I have my plate full and any further down moves could be disaster. I am firmly convinced that after such a major move the markets will bounce some before going much lower. The amount of money on the sidelines just keeps growing and there is no other game in town. I will be perfectly happy with a small bounce and flat market for the next three weeks until expiration but I will play the cards dealt. Good Luck Jim ************************ OPTIONS 101 by Jim Brown ************************ Big Cap Naked Puts I have had many requests this weekend for the high premium, high return naked put list again. With the market so beatup this would be a good strategy and there are only three weeks left until February expiration. Because this strategy requires naked option writing and not all of our readers can use it, I am not going to be talking about it for several weeks. I will continue publishing the list below but only on the website and in the Naked Put Section. I screened the top 75 highest premium optionable stocks and these are the ones I would play. Some are better than others but they would all be plays depending on your risk profile and use of stop losses. Several would be great plays and I am sorry I missed them last week. The table is sorted in percent of return order and not in order of safety or play critera. Please look at a chart and make your own decision before using this strategy. High returns always mean high risk. Jim Brown Sym Price Strk Prem Ret% Support ASKJ 100 100 11.75 47 100 ENZ 90 80 9.13 41 85 ASKJ 100 95 9.38 38 100 MUSE 163 160 15.25 37 160 VIGN 206 200 18.00 35 200 AFFX 228 220 20.00 35 220 MCOM 102 100 8.63 34 100 VRTS 154 150 13.00 34 150 SDLI 270 260 22.75 34 260 FDRY 130 125 10.75 33 125 VRSN 164 160 13.75 33 160 CRA 210 210 17.50 33 210 TIBX 158 150 12.50 32 155 MUSE 163 150 13.00 32 160 NSOL 223 220 17.65 32 220 SILK 162 160 12.75 31 160 PEB 166 160 12.38 30 160 VRTS 154 145 11.00 29 150 VRSN 164 155 11.25 27 160 MLNM 186 180 12.63 27 185 SDLI 270 250 18.25 27 250 ADAP 126 120 8.13 26 125 VERT 265 250 17.38 26 235 MCOM 102 95 6.25 25 100 BRCM 284 280 18.00 25 275 BRCM 284 280 18.00 25 275 INSP 152 140 9.25 24 145 PMCS 190 180 11.25 24 185 CRA 210 200 12.75 24 210 EXDS 120 110 6.75 23 120 ORTL 140 130 8.13 23 135 ARBA 174 170 10.00 23 170 AFFX 228 200 11.75 21 220 SEPR 138 135 6.75 20 135 VERT 265 240 13.38 20 235 BRCM 284 270 13.50 19 275 BRCM 284 270 13.50 19 275 ************ Stock News ************ Soon to be optionable - Sycamore Networks by Bill Gamble Headquartered in Chelmsford, MA is one of Wall Street's latest darlings, Sycamore Networks. They are focused on development of transport, switching and management products that are required to create a flexible and intelligent optical network http://members.OptionInvestor.com/stocknews/013000_1.asp ******* Ask OIN ******* by Ryan Nelson "I'm not dead yet!" to quote a line from Monty Python's classic movie, The Search for the Holy Grail. That is how I feel after daring to take on the markets this week; wounded, but not dead. Actually we had been expecting the bears to crash the party soon, just like they did this time last year (see Jim's warnings in his past wraps for the last couple of weeks). http://members.OptionInvestor.com/ask/013000_1.asp ************** Market Posture ************** As of Market Close - Friday, January 28, 2000 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 11,000 11,250 10,739 BEARISH 1.28 * SPX S&P 500 1,400 1,500 1,360 BEARISH 1.28 * OEX S&P 100 750 800 738 BEARISH 1.28 * RUT Russell 2000 475 500 505 BULLISH 11.12 NDX NASD 100 3,200 3,850 3,446 Neutral 1.06 MSH High Tech 1,650 1,900 1,706 Neutral 1.06 XCI Hardware 1,300 1,460 1,310 Neutral 1.28 * CWX Software 1,200 1,420 1,217 Neutral 1.07 SOX Semiconductor 700 745 749 BULLISH 12.21 NWX Networking 800 900 835 Neutral 1.07 INX Internet 700 800 701 Neutral 1.06 BIX Banking 645 690 528 BEARISH 11.30 XBD Brokerage 400 450 420 Neutral 11.30 IUX Insurance 625 650 554 BEARISH 11.30 RLX Retail 950 1,000 864 BEARISH 1.28 * DRG Drug 340 400 352 Neutral 1.28 * HCX Healthcare 700 790 722 Neutral 1.28 * XAL Airline 180 190 129 BEARISH 5.21 OIX Oil & Gas 280 315 271 BEARISH 1.27 Posture Alert Fears of inflation sent the market into a tailspin Friday; as most sectors closed down significantly, thanks to the stronger than expected Gross Domestic Product and Employment Cost Index. Sectors that shed considerably were led by Internet (-5.38%), Software (-5.03%), Retail (-4.89%), and the NDX (-4.10%). As such, sectors that were downgraded on this last week's carnage include the Dow, S&P 500, Hardware, S&P 100, and Retail. Two sectors that were upgraded from Bearish to Neutral include Drug and Healthcare. Not only did these two sectors bounce off previous levels, but the flight-to-quality syndrome made these two respective sectors the only positive closes on Friday, both gaining 1.66%. If further market weakness persists, we would look for more strength in these two sectors. ****************** Market Sentiment ****************** Sunday, January 30, 2000 Great Expectations III! A stronger than expected GDP and ECI helped add fuel to the bears fire on Friday, as most indexes suffered serious losses on the day. The ECI (Employment Cost Index), rose 1.1% in the fourth quarter, or faster than the 0.9% increase many analysts were expecting. This higher percentage on the ECI is what many pundits were concerned with, especially since Fed Chairman Alan Greenspan closely watches this index with intense scrutiny. With a 25 basis-point rate hike already figured into this upcoming meeting, as well as another 25-point hike in the spring, do these two latest economic figures really mean anything in the longer term of our economy? Is the negative sentiment in this market already priced in, and as such, will we rally soon? Some negatives in the current market place include inflation, overvaluation, higher energy costs, key indexes breaking below support levels, higher interest rates, high levels of investor expectations, as well as leading equities that are breaking below key levels. Everything listed is very important, and this market is at a crucial moment. However, there are several things to keep a close watch on that we thought were positive. During, Friday's big drop, option speculation was dominated by the bears. Put/call ratios were above average, and a lack of call speculation was obvious. The Pinnacle Index for the OEX (700-735) is indicating that support for this market at these levels is great. This consistent negative sentiment ahead of the Fed may be suggesting that a relief rally is due. Another thing that could be viewed as positive soon is that the Volatility Index closed at 29.09, and was as high as 30.04 Friday. For the last year, the low 30's on the VIX have been an accurate indicator for short-term bottoms. Finally, corporate earnings continue to come in very strong so fundamentals remain intact. Earnings for S&P 500 Companies: 278 companies have reported earnings above estimates. 48 companies have reported earnings in-line with estimates. 23 companies have reported earnings below estimates. PINNACLE INDEX 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*: Amazon.com AMZN 0.98 -.48 -.47 2/2 Bud-weis-errrr BUD 3.70 +.40 +.43 2/3 CompUSA CPU 6.20 -.05 -.05 2/2 CNET CNET 1.01 -.41 -.40 2/3 Cdnow CDNW 2.98 -.93 -.87 2/3 Elec. Data Sys. EDS 4.57 +.59 +.60 2/3 GoTo.com GOTO 1.75 -.41 -.36 2/1 Metricom MCOM 9.87 -1.80 -1.75 2/3 NetSpeak NSPK 9.40 -.25 -.17 2/1 NetPerceptions NETP 3.94 -.14 -.13 2/2 Peoplesoft PSFT 3.27 +.02 +.03 2/1 QuePasa PASA 6.28 -.48 -.47 2/1 Sprint FON 3.04 +.40 +.40 2/1 Sprint PCS PCS 6.73 -1.45 -1.45 2/1 Nokia NOK 5.94 +.67 +.72 2/1 Open Market Inc OMKT 9.68 -.13 -.11 2/3 Pairgain Tech PAIR 2.54 -.05 -.05 2/3 Pixar PIXR 1.25 +.13 +.14 2/3 Schering-Plough SGP 1.25 +.33 +.33 2/2 Tekelec TKLC 8.42 +.18 +.20 2/2 Time Warner TWX 2.96 +.16 +.20 2/2 Viant VIAN 4.67 +.03 +.04 2/3 Williams Comm. WCG 6.69 -.23 -.21 2/2 Stocks with high expectations this week include CompUSA, Metricom, NetSpeak, QuePasa, Sprint PCS, Nokia, OpenMarket, Tekelec, and Williams Communications. Low expectation stocks include Amazon, CNET, GoTo.Com, Pixar, and Schering-Plough. Have a good trading week. 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. The short interest on the Nasdaq rose another 2.11% in the latest figures, its fourth consecutive record, to 2,413,628,695 shares. Mixed Signs: Interest Rates (6.431): 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 (29.09): 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 Benchmark (1/28) Overhead Resistance (765-785) 1.02 Overhead Resistance (740-760) 0.54 OEX Close 738.04 Underlying Support (700-735) 18.11 What the Pinnacle Index is telling us: Based on January 28, the lack of call buying and the extreme amounts of put buying may indicate an oversold market. Underlying support at these levels is currently very strong, and overhead resistance is very light. Based solely on the Pinnacle Index numbers, we would not be surprised to see a relief rally this week on the OEX. Put/Call Ratio Friday Strike/Contracts (1/28) CBOE Total P/C Ratio .60 CBOE Equity P/C Ratio .45 OEX P/C Ratio 1.41 Peak Open Interest (OEX) Friday Strike/Contracts (1/28) Puts 700 / 7,185 Calls 800 / 6,190 Put/Call Ratio 1.16 Volatility Index Major Date Turning Point VIX October 97 Bottom 54.60 July 20, 1998 Top 16.88 October 8, 1998 Bottom 60.63 January 11, 1998 Top 26.38 March 4, 1999 Bottom 28.15 May 14, 1999 Top 25.01 July 16, 1999 Top 18.13 August 5, 1999 Bottom 32.12 October 15, 1999 Bottom 32.06 January 28, 2000 Bottom? 29.09 /charts/index.asp?image=ms711 ************* COMING EVENTS ************* For the week of January 31st, 2000 Monday Personal Income Dec Forecast: 0.5% Previous: 0.4% Personal Spending Dec Forecast: 0.8% Previous: 0.5% APICS Survey Jan Forecast: -- Previous: 51.2 Chicago PMI Jan Forecast: -- Previous: 64.6 Tuesday NAPM Index Jan Forecast: 55.5% Previous: 56.8% Construction Spending Dec Forecast: -0.3% Previous: 2.6% Wednesday Leading Economic Indicat Dec Forecast: 0.3% Previous: 0.3% New Home Sales Dec Forecast: 870K Previous: 865K Thursday Jobless Claims 1/29 Forecast: -- Previous: 266K NAPM Non-manufacturing Jan Forecast: -- Previous: 55.5% Factory Orders Dec Forecast: 2.2% Previous: 1.2% Friday Nonfarm Payrolls Jan Forecast: 238K Previous: 315K Unemployment Rate Jan Forecast: 4% Previous: 4.1% Week of 1/31 2/07 Consumer Credit - Dec 2/08 Nonfarm Productivity - Q4 2/09 Wholesale Investories - Dec 2/11 Retail Sales - Jan 2/11 Univ Michigan Sentiment - Feb ************* WOMAN'S WORLD ************* A TALE OF TWO STRATEGIES Covered Calls in a Bull or Bear Market "It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct to hell." Does this describe your trading on Monday or Friday? On Friday, I spoke to all of my trader friends to make sure no one jumped out of any windows. Fortunately for me, my office is on the first floor. Being an eternal optimist (bull/cow?), I bought OEX calls about 11:15 a.m. on Friday after I thought the market was putting in a bottom at 750. That turned out to be about the high point for the rest of the afternoon. Because I had a previously scheduled meeting for that afternoon, I was not able to watch the painful bleeding on a minute-by-minute basis as I normally would have. The first opportunity I had to check my positions was about 1:00pm. The OEX had dropped to 745 and I was down 2 points on my options. I put in an order to buy puts on the OEX to protect my downside, which seemed imminent at that point. I couldn't find any green on my positions screen. Fortunately, I had written a lot of naked calls (one leg of my covered call strategy) the previous week on stocks like BVSN, TIBX, LRCX, and CMGI. I was happy to see that they were all in the "red". I closed out my BVSN naked calls (first leg of covered call strategy) that I had written the week before for an average of 12 points on 20 contracts. That took some of the sting out of the bite I would have felt on Friday. I then went back to my meeting and didn't get an opportunity to check my monitor again until 3:55 p.m. I tried unsuccessfully to buy back some more of my naked calls in my other positions in order to lock in some profits in case we woke up Monday to a raging Bull market. Doubtful, but as I've stated before, I am still an optimist at heart. I was quibbling over 1/8's and wasn't able to get any fills in the last five minutes. This week I had planned to write the second part of "Tweaking Covered Calls on Stocks Trending Up"(Part2), but after a week like the past one-that proved to be difficult, because I couldn't find up-trending stocks to implement the strategy. So instead, I will explain why covered call strategy can be used as effectively in a bear market as a bull market. All strategies have a risk/reward profile. In a bull market, your greatest risk is loss of upside gain on the stock. In a bear market, your risk is loss on the falling stock price which will exceed the gain in the call your have written. Therein lies the dichotomy of the covered call strategy, a tale of two strategies. Of course, in order to most effectively implement this strategy you must have naked option writing ability. With any strategy, timing in is of the essence. In a bull market, if the stock were up trending, you would typically buy the stock first, and wait to write the call when the stock bounces off a resistance level and then write the call. In a bear market you would typically sell the call first and wait for the stock to finish its descent and turn back around, at which time you would buy the stock. That is precisely what I did on expiration Friday of the previous week. I wrote calls on BVSN, CMGI, TIBX and LRCX. All of which appeared to be at the top of range short term. I was prepared to buy the stock at a bottom, whenever that came. During this past week BVSN, CMGI, and LRCX gave no signals of a bottom. This is where one must be patient. I typically get antsy and buy the stock too soon. That is precisely what I did on TIBX. I missed my opportunity on Monday because I thought TIBX would continue downward. On Tuesday Jan 25, TIBX gapped up. I didn't want to get caught in a bear trap so I was waiting for TIBX to clear Friday's high of 175, for my signal to buy. On Wednesday, TIBX opened at up again and started to skyrocket. This stock is very volatile and when it moves, its moves are fast. When it cleared 175 I put in my buy order. I bought a half position against my Feb 185 calls and got filled at 178. My next signal was 185, my strike price. If TIBX cleared 185 I would buy my second half to cover the balance of my naked calls. It traded for about a minute at 185 and hung in at 184, which appeared to be new resistance. The stock went down from there for the rest of the day to close at 179-5/16. On Thursday TIBX gapped up again to 182-1/16. When it appeared to be holding at 180, I was afraid this was now support so I bought the second half of my position at 180-1/2. My basis with my call premium was an average of 163 (average stock cost less call premium received). My downside break-even was 163 and my upside max was 185. Since there was quite a bit of resistance at 163 on the way up, there should be considerable support at 163 on the way down. Unfortunately, I bought at the high for the day and watched the stock go down, bounce back up at 163 (my support level) and close at 170. I was still up 7 points net. And then came Friday! TIBX gapped down and opened at 162-1/8. YIKES! It immediately turned back up over my breakeven before I could sell my stock, so I held on (dumb in hindsight). It rose to 165 by noontime and hovered between 164 and 168. I then had my scheduled meeting and missed its meteoric drop to 156-1/2 near the close. I had no time at the close to evaluate anything and I was 5 points in the hole! Unfortunately, the options were so overpriced and so far out of the money that they weren't dropping to the extent of the stock. I will be watching the futures Monday a.m. pre-market to determine my next move. My guess is, I will take what I can get for the stock and let the options expire worthless or buy them back if TIBX puts in a bottom. All in all, evaluating the overall strategy, I won in 3 out of 4 positions. My wins in the other three positions will more than bail me out of my one loser, but TIBX wins again! In hindsight, I shouldn't have bought the second half of the stock position until it had cleared the 185 strike price, as originally planned, OR I should have sold half of my position after the gap down on Friday. THE LESSON: I encourage you all to take some good quality time and review your worst trade of the week. Put it under a microscope and analyze it. Go back and look at the intra-day charts and re-evaluate how it looks. Was there really a good signal for you to buy or sell at that particular moment? Believe me, you will learn a lot about yourself, and thus improve your trading going forward. TIP: Remember when looking at the intra-day charts, you didn't have the forward candles at the time you made your decisions. I like to take a piece of paper and block out what came after my decision when analyzing my previous entry points. Contact Support *************************************** WOMANS WORLD - 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. 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The newsletter picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. The newsletter staff makes every effort to provide timely information to its subscribers but cannot guarantee specific delivery times due to factors beyond our control.
The Option Investor Newsletter 1-30-2000 Sunday 2 of 5 ************************ WOMANS WORLD - CONTINUED ************************ Long leaps, short stock I received a number of emails last week about my strategy of buying two leaps and taking a short in a stock. I used this particular strategy this week in one stock which I will detail, Qwest . On Tuesday when the market was down Qwest went down to 40. It had been 43 the week before, and the 52-week high was above 50. I bought two WWH Jan 02 40 calls at 12, and took a short in 100 shares of the stock at 39.75. It is possible to make money if the stock goes up or down. The only way to lose money is if the stock stays completely flat. Since in this particular situation the leap is two years I have two years for the stock to make a big move one way or the other. (I think it's going to be up) The leaps have very slow time decay in this situation. I probably will not make really big money right away with this position, but I think that I will make money, as the odds of Qwest being 10 points above or below 40 in the next two years are very high. This is only one example of this type of hedged strategy. Last week I detailed my strategy of buying 100 Nextlink and two at the money puts. This stock is volatile, in fact in the time I held the position the stock went from 80 to 65 to 95. The original cost of this position was 5600, 4000 for 100 stock on margin, 1600 for two at the money Feb 80 puts. When the stock went down to 65 the puts were both 15 ½, and the total position could have been closed for 6350, a profit of about 15% in a few weeks. The stock went up to 85, the puts were 6.5, the position had a profit of 1 point. (who gets excited about that nowadays)Before the Jan options expiration Friday the stock finally hit 95 and the puts hit 3.5, for a profit of 8 points on the position. In a situation like this, the options will lose time value very rapidly once they are expiring options. It is important to pick options two or three months from expiration. My other strategies for this method are Lucent, 100 shares and two July 55 puts at 5.5 each, Nortel and possibly Nextlink again. I am long Nortel and did not hedge this position. However, as an example of how this would work I can use Wednesday's early price of 103 for 100 shares of Nortel and two June 100 puts at 13 7/8. The stock went up to 108 after it declared earnings beating the estimates and a split. The stock went up 5 points and the puts went down approximately 2/3 point each for a profit on the position of 3 2/3. It is best to find a stock which is volatile like an internet stock but which has been dormant for several weeks (those are tough to find) Once a stock has made a big move up or down the price of the call and put options will be very high, which means your potential gains are limited. You need to understand something about how options move to see how a position like this can be profitable. One at the money call or leap moves about one half a point for every point move in the stock up or down. For example, if Qwest goes to 43.5, which it did last week, the leap should go up about 1 ¾. At this point the position should be break even (up 3 ½ for the two leaps and down 3 ½ for 100 shares short) Once Qwest goes to 45, the leaps will be in the money and should start picking up momentum and moving faster as the stock goes up. If Qwest hits 50, the leaps will be deep in the money and should generally move point for point with the stock. From this point on I should make two points (from two leaps) and lose only one with the short position for every one point move up. The position can be highly profitable. Also, on the downside, if Qwest drops to 35, the leaps should lose about 2.5 points each which would make this a break even. (If you break even in a very bad market you will be doing better than most people) If Qwest drops below 30, the leaps should retain most of their time value (remember leaps don't lose time value quickly) and the short position should start making money. Once the leap is deep out of the money it should only move about 1/3 of a point for every point move in the stock. This means if the stock drops 2 points the leaps should only lose about 1 1/3 points. You won't make as much money from this type of position as you would if you took an outright bullish or bearish position and your judgement were correct, but if you want to take a hedged positions with a percentage of your capital this can be a good strategy. The most difficult part is finding a stock that is going to make a big move, because time is your enemy with this type of strategy. Time deteriorates option premiums, which means your position will lose value if the stock doesn't move. This is why I like using leaps for this strategy because the time decay is slow. Leaps won't lose much time decay until about 6 months prior to expiration. I think we may have a choppy market for a while although I don't know of course, but hedging can be a way to protect your capital and make money in either an up or down markets. The concept of option pricing is a way too complicated and complex a topic to be covered completely in a one page article. This is just to give a basic idea of what hedging is all about. There are a number of good books and software programs available for options traders which explain these and other strategies in greater detail than is possible in this article. I usually only take outright call or put positions with about 25 to 30 % of my capital and hedge the rest. The benefit of trading in today's markets is that volatility is, in my opinion here to stay. The huge trading volume on the exchanges and the fact that nearly 80 million Americans own stocks now, which is over twenty times higher than the number who owned stocks a decade ago, provides liquidity which can make hedged positions profitable. Contact Support **** Renee is still on vacation this week *************** TRADERS CORNER *************** Ugly or Beautiful -- all in the Eye of the Beholder At the close, Friday, CNBC is heralding a story on "The Friday Sell Off" -- and I know exactly why I do not watch CNBC during the trading day. It encourages emotional trading & analysis which lead to bad decisions, which lead to more bad decisions. I was watching the market intermittently this morning, having slept in past the open. My one ST Trading Position -- short VRSN Feb 210 Calls -- was 35 points out of the money this morning, and I didn't really think that the market was going to turn around. I was pretty confident that VRSN would not gap up 35 points in these market conditions. I tuned into the market about halfway through the trading day. Sure enough, VRSN was down another 10 to 165. That's good, and just what I expected. It gave me 45 points of breathing room from the calls I sold earlier this week. But, the stock was now approaching the 155 - 160 support levels that I had, in my amateurish technical analysis mode, drawn into my qcharts last week. I priced the Feb140 through Feb155 Puts. Feb 145s were 20 points out of the money, and below the support level that seems to be holding for the last 2 months. When VRSN bounced off of 160, I sold VRSN Feb145 Puts for 7.5. VRSN had been down hard in the last few days, and I thought it could hold support above 150. That delivers more present cash flow to my account in addition to the cash flow from selling the calls earlier this week. In a continued sell off, VRSN might approach & violate 145. But, when I saw the bounce, I acted. Plus, I figured, get into the position before the weekend, which will be in my favor, since those premiums decaying over a weekend are good for me. In the broader market, I thought that there was a bounce off the lows of the day on the DOW. The NASDAQ continues to be weak, but might be setting up for at least a technical bounce early next week, I reasoned. I also sold a QQQ Put position at midday for a 25% profit. I established that QQQ Put position to hedge my LT Stock Holdings, but I took a profit when I had one. I have found that when playing index puts, it is always better to take a profit than to risk losing the profit in a bounce, technical or otherwise. If VRSN approaches 145, then I have to be prepared to go short the stock. That is the risk that I am being paid to take by doing this strategy. Nonetheless, I saw very little possibility that VRSN was going to hit either 145 or 210 today. 65 points of width on this strangle play. Might just be wide enough to drive a Red Hot through. Janar Joseph Wasito Contact Support ************** An Osmotic Technical Point of View Pirates, Yikes, Yippee, Ouch, Dell, USG, and a Polka ? Lost in space. I originally wrote this article Wednesday and it was sent off to OIN for Thursday (honest, ask Jim). But, somehow in the shuffle, it never made it. I am going to update where appropriate, but, I wanted to leave most of it "as is" for your benefit to see where my mind was as of Wednesday as an active trader. I duke it out along with you guys and gals almost every day! Interjections, that is what I would have to use to describe this market. Well, my very good comrade JDSU did not disappoint me. If you short-term traders got into JDSU before the earnings announcement, you should have made a few bucks. Although, I think that they should make option market makers wear an eye patch for easy identification. This is so that everyone will know that they are pirates. Taking the premium out of the call as the stock moves up is definitely piracy and they should be made to walk the plank., this hurts. Ouch! It is kind of like changing the odds on the horse race as the horses are running around the track. I have actually seen this done as well, although, not nearly as often as getting robbed by the market maker pirates. Did you know they actually have the skull and cross bones hanging outside the CBOE? OK, my long term trades are now three whole hours. How about you? The good news in this market is that if you are not happy with the price of something, just wait an hour and it will change. The bad news is that it might be up or down, but, it definitely won't be the same. Kind of like the weather in Denver. Here is my take on Dell. The party has been over for awhile but, they cannot get all the people with light shades on their heads to leave. Don't ask me about my personal experience with the rather large Dell paperweight that I recently purchased. Great paperweight! My thoughts now are we have Compaq all over again. I am going out on a limb here as it is actually Wednesday evening and the markets got rocked to say the least. Yikes, the $NDX got body slammed right into the close as I was bravely (or foolishly) picking up JDSU 2 minutes till the close. I watched the after markets as JDSU continued to fall. They beat the numbers, but, was it enough? Yippee, it was. So, ETEK should have a nice little spike tomorrow. I am really going out on a limb here. You will all be able to tell if my crystal ball is really working. Here goes, ETEK should spike for at least 5 minutes for 5 points. There, I am committed ,or at least should be. ETEK actually shot up over 10 points for quite awhile and yes I did get out! As far as I know, OIN is bringing you another first. The following are the lyrics to the very first option trading song. I don't have a melody yet but, who knows, we could have a top Polka hit on our hands. If anyone would like to add a verse, a melody, or rewrite the whole thing, just let me know. We are option traders option trading is fun We'll be trading options till there is no trading to be done Calls, puts, straddles, and even a spread Sometimes options can make your face turn bright red As long as we don't run out of money options can be fun then we tell our spouses to see what we have wrung Then it is one of two things We may be getting kisses or See how fast we can run Oh, my my, isn't option trading fun OK, can anyone guess what I am loading up on the most? No, it is not booze or any controlled substances. Greenstuff, greenbacks, dinero, wampum, moolah, coinage, dough, bread, loot, benjis, cash. I feel the breeze of February coming and it is this traders opinion that the temperature and the markets are going lower. (I do so like it when I actually interpret the charts correctly. Every once in awhile you get it right. If you put a 3 day moving average on the $NDX you can see that we may still be in for big trouble if we don't have a reversal on Monday) Here is a stock to watch for everyone, USG. They make building supply products. I think they make close to $8.00 per share and their PE is a whopping 4.5. Most importantly, they have options. It actually made it up to 41 1/2 Friday and still ended up at 39 1/8 on Friday, I am long the August 40 calls USG HH for $5. Although interest rates may slow down home starts, so far, so good. Are you having trouble getting into puts or are missing taking profits? Here is a tip that I taught myself . Print out the charts on the stocks that you have made the most money on with calls. Now here is the tough part. Turn it upside down. Amazingly simple, but, it really works! Well, I am off to look for some put plays and my lacrosse helmet. With this market, trading has definitely become a contact sport. As always, trade safe and buckle up and remember, the money you save, is probably your own! Happy Trading! Contact SupportHarrison ****************** OPTION CLUB UPDATE ****************** Sunday, January 30, 2000 THE OPTION INVESTOR TRADING CLUBS CONTINUE TO ADD NEW LOCATIONS EVERYDAY!!! Visit the trading club message boards and see what others have to say: http://boards.OptionInvestor.com/tradersclubs/ UPDATE FROM ORANGE COUNTY, CA ***************************** I started by putting messages on the OI club message board. The first one in mid Dec. asked any one interested to contact me. Suffice it to say we had 8 attendees at our 1st mtg., Dec 27th. This was an organizational meeting and it was decided: Limit our subjects to tools and techniques so that we don't get distracted by subjects that might not be of interest to the whole group. Meet once/month on the Monday preceding Option Expiration Friday, Limit the meeting time to 1 1/2 hours. I volunteered my office centrally located in Irvine to hold the meetings. It was so successful that afterwards most of the group talked outside for another hour. Most attendees have between 1-2 years experience with options. I think most felt it was gratifying to meet kindred spirits to whom we could discuss option trading. One attendee said it was worth missing Monday Night Football for. Now that's a real testimonial. Another said if I gain one idea at each meeting, it will be more than worthwhile. The second meeting was Monday Jan. 17th. WE HAD 12 ATTENDEES. Two orig. members called and said they couldn't make it because of the Martin Luther King holiday (Whoops, we didn't even think about that). One member was prepared to share some of his screening tools with us. We gathered around a monitor and he went through his technique. It was great stuff - we all learned and appreciated his willingness to share with the group. The mood of the group is just that - a willingness and desire to share. If the group gets too much larger we're going to need a larger meeting place than my conference room. The next meeting - Feb. 14th , 6 PM in Irvine, another member is going to show us the programs he uses and on March 13th a member is going to share a new program which he is beta testing. So we are off to an interesting start. Phil Nathan - Organizer, Orange County Option Investor Trading Club If you would like to join contact us at Contact Support and Contact Support ***** Predicting Sector Strength One of my market assumptions is that if a beaten down large cap stock in a certain sector gives a buy signal, then that sector might be in for an extended multi-quarter, even multi-year rally. Just as there are many new uses for specialized chips, which help fuel the Semiconductor sector, so are there many new developments in biotech, such as tissue and organ regeneration, genome mapping, or new cures for cancer. These sectors could be pre-eminent for the next decade because of all these new developments. In fact, one area to watch is the merging of these two technologies, such as Affymetrix (AFFX). An example of such "biochip" technology being developed by various companies is intraocular surgery for the blind, implanting a microchip that can "see" and transmits electrical signals that can be visually interpreted by the human brain. Two stocks in late December 1999, alerted me to the fact that something major was going on in this sector. On 12/21/99, Genzyme (GENZ), gave a buy signal by closing above the 50 day moving average at the high of the day on double average volume, with follow-through the next day. This is a large cap stock that got clobbered, losing over 40% of its share price from its August 1999 high to the December 1999 low. The second stock that gave a tell tale sign that something was going on in this sector is Gilead Sciences (GILD). Also on 12/21/99, GILD closed at the high of the day above the 4-day and 10-day moving averages on higher than average trade. Then on 12/28/99, it closed at the high of the day above the 50 day moving average on about five times the usual trade. GILD was a large cap in August 1999, but lost 50% of its value by December 1999. Disclosure: I held positions in these two stocks, and they have been closed as of the time of this writing. Both options were double or better. And Gilead held up despite the market drop the first week in January. Genzyme dropped to break-even, but rebounded sharply by the second week. Both trades are examples of low-risk entry points, because the downside is minimized, and the upside is maximized. Risk is also managed by being in the right sector at the right time. These types of setups are usually optimal for 3-4 week trades. You can use a time stop, or a percentage stop of about 20% gain on the underlying, or a double or triple on the option. One such system trade, Enron (ENE) is up 30% in less than a month. Sometimes you take a trip but you may want turn it into a journey, i.e., turning a short term into a long-term trade. One final note about the biotechs: they make great put plays when the market gets wobbly as it did in the first week of January 2000. Medimune (MEDI) can be a great moneymaker as the sell-offs are massive (40 points in two days starting 1/3/99). This is because the market makers and Electronic Communications Networks (ECNs) provide very little liquidity even though this is a large cap stock. If you have access to a Level II screen you will very often see 100 shares at each price level of the bid (left side). All it takes, then, is for a couple of traders to sell 1000 shares and a cascade effect takes place as more and more stops get hit! Francis Chadwick Research Analyst ***** Combination Positions: Strategy Selection This week we are going to begin a new series on trading with spreads and other combinations. As you can tell from the format of the Spreads section, it is written primarily for the novice trader, about 75% of our readership. With this in mind, it is obvious why I focus on the simplest techniques available. In today's discussion, we will review one of the most common combination strategies and its advantages and limitations. There are many types of traders and no single strategy can work for all of them. Suitability; one's risk/reward attitude and financial condition, is the key to determining which technique may be best for a specific individual. There is a wide range of trading strategies from which to choose, both aggressive and conservative. From high potential profit debit-spreads and sell straddles to covered-call writing on LEAPS and everything else in between; calendar and ratio spreads and various butterflies. Unfortunately, every strategy has risk and it is impossible to classify any specific technique as the absolute best method. The most important issue is to completely understand the mechanics of any strategy that you are using and try to construct a group of diverse positions based on a suitable trading style and the correct portfolio outlook. There are a number of factors to consider when determining which is the most appropriate trading strategy. The character of the position; aggressive or conservative, the technical pattern of the underlying issue and the market, option volatility levels and the the probability of a successful outcome. In most cases, there is more than one favorable strategy and even though each technique has different attributes, they can all be useful in a trader's portfolio at the proper time. The majority of traders are interesting in returning a favorable profit and at the same time, limiting their exposure to financial risk. For those with a conservative outlook, this can be difficult in the current market of high flying issues. The bullish, limited risk approach falls into two basic categories; option buying and (covered) option selling. The most widely used method of option trading has always been the purchase of calls. This technique can be very profitable but leaves the trader exposed to a large amount of downside risk. From a technical viewpoint, it is more favorable in stocks that have broken-out from lengthy consolidation patterns; hardly the case in today's market-leading issues. In addition, traders who purchase options are forced to pay extreme premiums for positions in the more volatile stocks, significantly reducing the probability of profit. Those who are intelligent enough to realize the uncertainty associated with this type of approach are generally forced to remain on the sidelines until they discover a favorable alternative. Fortunately in today's market, there are a number of ways to reduce risk and simultaneously benefit from those high premiums. The first technique that meets this criteria is the "in-the money" debit spread. This strategy is considered conservative because the risk is limited and the position is generally low cost with no margin or collateral requirements. The spread is initiated with the purchase of an in-the-money option and the sale of an at-the-money option, both with the same expiration. The strategy requires that you pay a premium; the cost difference between the option purchased and the option sold, in exchange for the potential of receiving the difference between the two option strike prices. The in-the-money debit spread has substantial benefits over a long option including lower cost, lower risk, and the ability to benefit from premium disparities in both options. The risk in this type of position is limited to the amount paid for the spread (plus commissions). The break-even point is equal to the long option's strike price plus the initial debit. The long call is hedged for loss by gains from the sale of the short option. This factor can be very important to a trader who can forecast market direction but cannot withstand the normal market fluctuations, even when the issue is trending in his favor. The potential for significantly lower losses will allow the position to survive all but the worst corrections and can often be the difference between a winning and losing trade. Another method that is commonly used to increase the probability of profit in this strategy requires an understanding of implied volatility in option pricing. When opening any type of spread, it's important to take advantage of premium disparities to create the best possible position. Always try to initiate new plays when there is little premium in the long position and excess value in the sold option. This approach allows you to enter the position at a discount, with a theoretical edge. Here is an example of a recent, in-the-money debit spread: **** 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) **** The advantages of this bullish technique appear so overwhelming that many traders wonder why anyone would consider buying naked options. Unfortunately there are several limitations that should be considered before a position is initiated. The first of course, is the extra commission, hardly a consideration. Second, spread and combination plays are subject to slippage that can occur when two or more positions are opened at different times, while the price of the underlying issue fluctuates. This unfavorable affect can be eliminated through the use of simultaneous (contingency) orders. The most obvious drawback to this type of position is the limited profit potential. However, for most traders, the ability to return a favorable profit, even in the case of static or slightly declining issues is more than enough reason to utilize this conservative technique. Next time: The Art and Science of Debit Spreads. Click here to email Ray Cummins LAST WEEKS CHANGE FOR THIS WEEKS PICKS: *************************************** Daily Results Index Last Week Dow 10738.87 -512.84 Nasdaq 3887.07 -348.33 $OEX 738.04 -41.74 $SPX 1360.16 -81.20 $RUT 504.62 -16.83 $TRAN 2581.75 -169.74 $VIX 29.09 7.29 Calls Week TQNT 160.50 19.00 Do not tell TQNT about the correction! SILK 162.00 16.00 Driven by strong earnings and upgrades VECO 56.00 6.38 Is there another peak coming for VECO? LU 55.25 4.13 Displays strength and holds steady ICIX 45.00 3.94 New, demonstrates relative strength EMIS 39.63 0.63 New, a call play not hard to swallow BGEN 92.25 0.25 BGEN entered the S&P 500 Index Friday FRX 69.25 0.25 New, a bullish story for drug sector PMCS 190.06 -1.19 A Valentines Day split run play! VOD 54.63 -1.31 VOD looks find a resolution in battle PEB 165.00 -2.88 New, stock splits 2:1 February 18th MFNX 65.16 -4.72 Renewed strength from here for MFNX? LVLT 104.94 -5.56 Reporting earnings before bell Thurs. NOK 180.13 -8.13 Dropped, alas no wedgie for Nokia PCS 101.00 -8.63 Dropped, earnings on February 1st ADAP 125.47 -9.03 New, we have been itching for this one TWX 81.88 -9.25 Dropped, gets a no confidence vote MUSE 162.88 -10.06 MUSE stock splitting 2:1 February 23rd DISH 84.19 -12.06 Dropped, timing can be everything CMGI 105.50 -12.75 New, makes move from our put play list NTAP 99.19 -17.94 Opportunities can come in strange ways NTLI 118.31 -18.06 Dropped, Friday's loss exasperating AFFX 228.13 -25.50 Impressed by AFFX's leadership skills BRCM 284.00 -28.44 New, potentially fantastic split run Puts INTU 57.75 -17.88 New, shareholders had a rough week CMGI 105.50 -12.75 Dropped, moving CMGI to our call list SLR 70.06 -8.31 Full tilt on negative indicators MU 59.50 -7.13 Dropped, could be the bottom for MU IIJI 74.63 -7.00 Dropped, possible trend reversal IPG 47.00 -5.75 New, following the DOW's movement ADBE 57.56 -5.31 New, quickly losing short-term favor BBY 50.00 -5.28 New, last three weeks not kind to BBY RLM 66.06 -3.31 Dropped, looks to be near bottom FD 41.63 -2.25 Dropped, at a long-time support level UAL 57.88 -2.25 Mother nature does some wing clipping STOCKS ADDED TO THE PICK LIST ***************************** Calls CMGI - CMG Information Services Inc EMIS - Emisphere Technologies, Inc. ICIX - Intermedia Communications FRX - Forest Laboratories PEB - PE Corporation ADAP - Adaptive Broadband Corp. BRCM - Broadcom Corp. Puts BBY - Best Buy Inc. ADBE - Adobe Systems Inc. INTU - Intuit Inc. IPG - Interpublic Group of Companies Inc. *************************** 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 TWX $81.88 (-9.25) Unfortunately, our leveraged AOL play gets a vote of 'No Confidence'. The press continues to be positive on the merger between TWX and AOL, but that hasn't been enough to stem the flow of sellers in this negative market. In the midst of yet another ugly day on both the NASDAQ and the DOW, AOL broke its major support at $60 for the first time since breaking out in early November. TWX followed suit, closing well below its $84 support level. Since beginning coverage last weekend, our play hasn't given us a decent entry and the drop today on increasing volume was the last straw. We may revisit these two when market sentiment improves, but for now we'll have to stand aside. NTLI $118.31 (-18.06) NTLI was on thin ice and has frankly turned out to be a disappointment. The stock was on a great split run before settling down to the $125 consolidation level this week. The pullback was natural following the huge gains, but Friday's -$6.69 loss was exasperating. We were patiently waiting for an upward bounce off the 10-dma ($127.03) not vice- versa. Combine this negative performance with the upcoming 5:4 split date on February 3rd and we have no choice but to exit the play at once. PCS $102.13 (-8.63) Our earnings/split play on PCS went out with a whimper on Friday, losing $7.38 for the session. PCS opened and traded up to a high just over $110 before falling into a steady decline for the rest of the day. Roughly $4 of the days loss came within the last thirty minutes of trading. Why? A 144 sale of approximately 11 million shares. On Friday, Chase Hambrecht and Quist initiated coverage of PCS with a Buy rating and a price target of $175. Though things are still looking good for PCS, they will be announcing earnings on Tuesday before the open and therefore, we are dropping this play. Be sure to close out your positions before the close on Monday. PCS stock splits 2:1 on the 4th. NOK $177.50 (-8.13) Alas, no wedgie of the breakout kind was to be found on Friday's chart, though we could have been convinced otherwise from the gap open to $189 following news that Ericsson had blown away their earnings number. In lockstep with the rest of the market, NOK sank back to its old familiar support at $175 before finishing the day at $177. We hope you sold into the strength of amateur hour. Still, given ERICY's strong earnings report, we expect NOK to announce equally strong if not stronger earnings on Tuesday before the opening bell. However, we never recommend holding over earnings and are thus dropping the play this weekend. We suggest making your exit Monday, especially on any strength. If NOK beats analysts' expectations by a long shot and announces a split, then we will consider adding it back depending on the particulars. But for now, it's over. Time to move on. DISH $84.19 (-12.06) Timing can be everything when selecting an option play. Although DISH never really gave us a point to enter this play, we still be believe the uptrend could continue once we get the Fed meeting out of the way. The $88 support area didn't hold with the carnage that took place in the major indices Friday. The next level of support for DISH is found at $80. DISH closed below its 50-dma at $85.70 and could go lower before gaining any momentum to move back up. We are dropping DISH from our list of plays, but will keep our eye on the satellite company for opportunities in the near future. PUTS RLM $66.06 (-3.31) In consideration of the negative market sentiment (to say the least!) RLM proved it's quite comfortable in the $66 range. Yesterday it broke this support level indicating it may be heading for the 200-dma ($63.29). However today's upward push on strong volume gave us a clear signal it was near the bottom. Therefore we're dropping RLM from our put list this weekend. CMGI $105.50 (-12.75) Yes indeed CMGI was a winner this week! As "planned" (and I say this loosely) the stock ultimately retraced 50% from its recent highs to the vicinity of the $100 level. At this point we expect buyers to start lining up and nibbling on this Internet powerhouse. Hence, it becomes wise to move out of the puts and into the calls. Following along on that thought, we're closing our put play on CMGI and switching it over to our call section this weekend. This move is of course based on the expectation that our forecast is correct. IIJI $74.63 (-7.00) IIJI has provided us with a decent put play, however, we are concerned with the fact that IIJI seems to be spending a good deal of time trading around its current level. As we mentioned in Thursday's write up, IIJI has reached a level of some previously established support, and it looks as though this level could hold and serve as a bottom to IIJI's recent downward trend. IIJI demonstrated good relative strength on Friday and though the volume backing the move up was certainly nothing to write home about, it was still an improvement over Thursday's down day. Being that we are seeing more and more indications of a possible trend reversal for IIJI, we are dropping it from put play list. FD $41.63 (-2.25) Because FD looks to be trading at a level of long-time support, we are ending our put play on FD. We have seen the strong volume backing the positive days rather than the negative, which is another indication that things could turn around for FD soon. The news about FD's plans for Internet related spending, which spooked investors and worked to drive FD down, is out and digested. FD delivered the drop we were looking for when we initiated this play and therefore, we are happy to bow out while we are still on the right side of this play. MU $59.50 (-7.13) Banc of America Securities strikes again! If you remember, Banc of America downgraded MU last Tuesday from a Strong Buy to a Buy. Apparently, they decided that Buy was still too strong of a rating and downgraded MU again on Friday from a Buy to a Market Perform. The second downgrade sent MU shares down to lose $5.25 for the session. MU looks to have found some support right around $60, which is the drop we were looking for when we initiated this play. Being that this level is a long-time support level for MU, we are dropping our MU from our play list to avoid falling victim to a trend reversal. STOCK SPLIT CANDIDATES *********************** Current Split Candidates LVLT - Level Three Communications AFFX - AFFYMETRIX NTAP - Network Appliance SILK - SilkNet Software Split candidates that are not current plays IMNX - Immunex EMC - EMC Corp. FFIV - F5 Networks CSCO - Cisco Systems CMVT - Comverse Tech Recent Announcements we predicted NT - Nortel (most recent pick) VRTS - Veritas (most recent pick) STOCKS WITH UPCOMING SPLITS **************************** We don't list all splits available, only those we feel may have play possibilities. Symbol - Stock Splits/Date 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 RNWK - RealNetwork 2:1 02-11-00 ex-date 02-14 SCMR - Sycamore Netwks 3:1 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 LSI - LSI Logic 2:1 02-16-00 ex-date 02-17 DSPG - DSP Group 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 SCI - SCI Systems 2:1 02-18-00 ex-date 02-19 TIBX - Tibco Software 3:1 02-18-00 ex-date 02-19 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 SNDK - SanDisk 2:1 02-22-00 ex-date 02-23 PXCM - Proxicom 2:1 02-24-00 ex-date 02-25 ITRU - InterTrust Tech 2:1 02-24-00 ex-date 02-25 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 WEBT - Webtrends 2:1 02-29-00 ex-date 03-01 ANAD - Anadigics 3:2 02-29-00 ex-date 03-01 MMPT - Modem Media 2:1 03-01-00 ex-date 03-02 VRTS - Veritas Soft 3:2 03-03-00 ex-date 03-04 XLA - Xcelera.com 2:1 03-03-00 ex-date 03-40 SLR - Solectron 2:1 03-08-00 ex-date 03-09 JDSU - JDS Uniphase 2:1 03-10-00 ex-date 03-13 ALLR - Allaire Corp 2:1 03-15-00 ex-date 03-16 LRCX - Lam Research 3:1 03-16-00 ex-date 03-17 SANM - Sanmina Corp 2:1 03-22-00 ex-date 03-23 LLTC - Linear Tech 2:1 03-27-00 ex-date 03-28 AHAA - Alpha Industries 2:1 04-19-00 ex-date 04-20 GE - General Elec 3:1 04-26-00 shareholder mtg AXP - American Express 3:1 05-10-00 ex-date 05-11 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: ********************** MUSE - Micromuse Inc. $162.88 (-10.06) See details in sector list Chart = /charts/charts.asp?symbol=MUSE **** AFFX - Affymetrix Inc. $228.13 (-25.50)(+66.88)(+33.50) See details in sector list Chart = /charts/charts.asp?symbol=AFFX **** ICIX - Intermedia Communications $45.00 (+3.94) See details in sector list Chart = /charts/charts.asp?symbol=ICIX Put play of the day: ******************** ADBE - Adobe Systems Inc. $57.56 (-5.31) See details in put list Chart = /charts/charts.asp?symbol=ADBE ************************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 1-30-2000 Sunday 3 of 5 ************* 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 ******** PEB - PE Corporation $165.00 (-2.88) PE Corporation is the leading supplier of products, services, and information in the life sciences and in genomics, used in markets such as pharmaceuticals, biotechnology, basic research, molecular medicine, human DNA, environmental testing, food, and agriculture. It is the parent company to PE Biosystems Group and the Celera Geonomics Group. PE Biosystems develops, markets and supports systems consisting of instruments, reagents, and software that are used in basic life science research, pharmaceutical research and development, diagnostics, forensics, and food testing. Last week was a little rough for the Biotechs in general, however, PEB managed to hold up fairly well. Friday's session saw a loss of over $7 for PEB but this doesn't seem so bad if you take Thursday's session into account. PEB announced earnings last Thursday morning and came in a penny above analysts estimates. The stock actually had a delayed opening due to an order imbalance following the announcement. When the stock did finally open, it shot up and traded to a new 52- week high of $189.25. PEB closed the day posting a gain just under $10. See, now Friday doesn't seem so bad does it? We believe that last week may have presented us with a great opportunity. PEB has been traded down to a level of some previously established solid support. PEB held support at $160 on Friday and $165 at several points throughout last week and we think that this current level may serve well in providing some potential points of entry. Another reason we like PEB as a call play is an announcement made on Wednesday of an upcoming 2:1 stock split to be payable on February 18th. Now that the earnings announcement excitement is over, we think that the upcoming split and the fact that PEB has some solid near-term support may have PEB positioned well to reclaim some positive momentum. PEB may encounter some resistance in the neighborhood of $170-$171 so keep an eye on this level. Obviously, it will be important to confirm direction this week before entering. On Tuesday, it was announced that PEB was engaging in a combination of "intellectual property" with Quantech Ltd. (QQQQ) to form a corporation called HTS-Biosystems. On Monday, PEB announced that they would be acquiring privately-held Third Wave Technologies for approximately 1.97 million shares of stock. BUY CALL FEB-165 PEB-BY OI= 6 at $15.50 SL=12.00 low OI BUY CALL FEB-170*PEB-BW OI=151 at $13.00 SL=10.00 BUY CALL FEB-175 PEB-BV OI= 0 at $11.50 SL= 9.00 New contract Picked on Jan 30th at $165.00 P/E = 75 Change since picked +0.00 52-week high=$189.25 Analysts Ratings 4-4-2-0-0 52-week low =$ 43.94 Last earnings 01/00 est= 0.40 actual= 0.41 Next earnings 04-27 est= 0.49 versus= 0.32 Average Daily Volume = 625 K http://OptionInvestor.com/charts/charts.asp?symbol=PEB **** BGEN - Biogen Inc. $92.25 (+0.25) 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. Friday was a gut wrenching experience for many investors, as the major indices tumbled. Shareholders of BGEN, saw the company loose over 7% in the price of its stock. Volume for the day was incredible at 24 million. BGEN did have one highlight for the day. It entered the S&P 500 index at the end of the day, which is what accounts for the high volume. After making a low at $89.88, in the last thirty minutes of trading, buyers stepped in buying shares of the Biotech company. The volume during the last hour Friday was heavy with over 4.5 million shares changing hands. Although BGEN experienced selling during the session, some good news was released after the close, which could help bring BGEN and the Biotech sector out of the hole. A panel of experts that makes recommendations to the Food and Drug Administration, voted that Novatrone, made by Immunex, could safely slow the progress of advanced stages of multiple sclerosis. Technically BGEN had made a new 52-week high in each of the three previous sessions, and was beginning to get a bit over extended. Friday's decline could be providing us with a great entry point for this play. The $90 mark is a solid support area for BGEN, with the next level found at $85. With the Immunex news in the market, we would look for BGEN to find its footing and climb out of the hole. The only fly in the ointment could be the FOMC meeting next week, as investors may continue to be skittish, until the Fed is out of the way. Prior to entering a play in BGEN confirm the volume and the direction of the Biotech sector. Recently BGEN was added to the "Focus List" at Merrill Lynch as their stock of the week. Tuesday, Merrill Lynch analyst Eric M. Hecht reiterated his near term Buy rating of BGEN and also reiterated a long-term Buy rating. In the last two weeks BGEN has seen at least four upgrades or reiterations adding strength to the recent moves. BUY CALL FEB- 85 BGQ-BQ OI= 514 at $10.50 SL=8.25 BUY CALL FEB- 90*BGV-BR OI= 877 at $ 8.38 SL=6.50 BUY CALL FEB- 95 BGV-BS OI= 948 at $ 5.63 SL=3.75 BUY CALL FEB-100 BGV-BT OI=2365 at $ 3.75 SL=2.00 Picked on Jan 27th at $99.69 P/E = 66 Change since picked -7.44 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 Next earnings 04-13 est= 0.42 versus=-0.29 Average daily volume = 2.80 mln http://OptionInvestor.com/charts/charts.asp?symbol=BGEN **** EMIS - Emisphere Technologies, Inc. $39.63 (+0.63) Emisphere Technologies, Inc. is a biopharmaceutical company specializing in the oral delivery of therapeutic macromolecules and other compounds that are not currently deliverable by oral means. The company has two drugs in human clinical trials using its unique carrier technology and has strategic alliances and ongoing feasibility studies with several other pharmaceutical and biotech companies, including Novartis Pharma AG and Eli Lilly & Co. While looking at the chart for EMIS, you could say that our reasons for initiating a call play aren't hard to swallow. Sorry, couldn't resist. EMIS is an up and comer in the biopharmaceutical field with, as mentioned above, a focus on developing oral pharmaceuticals. EMIS has come up with an oral form of a drug called Herapin, which is currently in Phase III trials. This is an anti-coagulant and is typically used to prevent Deep Vein Thrombosis following surgery. On January 11th, CEO Michael Goldberg announced that EMIS has also discovered a viable way for oral delivery of a protein to treat osteoporosis. EMIS is working through Phase I trials with Novartis on this new oral protein. EMIS demonstrated good relative strength last week, not only against the market as a whole but more specifically, against the Nasdaq Biotechs. The Nasdaq Biotech Index was headed downhill all last week and lost nearly 200 points. EMIS on the other hand, managed to close the week up $0.63. Not a huge gain, but still a gain in the face of adversity. Support is something that EMIS looks to have plenty of. EMIS is resting just pennies above its 5-dma, which is at $39. EMIS' 10-dma, which is currently at $38.25, has done a nice job providing support throughout the majority of January. EMIS has tested and held this level several times this month. We also see some support right around $37.50, $34 and $30. EMIS has found resistance at $40, and though it has traded above this level before, $40 is going to be an important breakthrough level for an indication of the positive momentum of this play. The volume backing the positive days for EMIS has been impressive, a good indication that there are plenty of investors feeling bullish toward this stock. Look for more trading and a close above $40. If we see this, and there is solid volume backing the move we could be cleared for new entries. In the news, EMIS received a nice little blurb on January 20th in the Hambrecht and Quist 18th Annual Healthcare Conference Issue regarding the continuing success and broadening use of its Herapin products. The stock closed up $3.81 the following day. There is some conflicting information out there regarding the date of the next earnings announcement, but using history as our guide, we believe there should be one mid-March. We will be confirming the exact date with the company next week. BUY CALL FEB-35*MTQ-BG OI=196 at $6.25 SL=4.50 BUY CALL FEB-40 MTQ-BH OI=181 at $4.13 SL=2.50 BUY CALL FEB-45 MTQ-BI OI=543 at $1.88 SL=1.00 BUY CALL MAR-40 MTQ-CH OI= 13 at $6.13 SL=4.25 BUY CALL MAR-45 MTQ-CI OI=615 at $4.25 SL=2.50 Picked on Jan 30th at $39.63 P/E = N/A Change since picked +0.00 52-week high=$41.75 Analysts Ratings 2-2-0-0-0 52-week low =$ 6.50 Last earnings 12/99 est=-0.99 actual=-0.81 Next earnings 03-15 est= N/A versus= N/A Average Daily Volume = 277 K http://OptionInvestor.com/charts/charts.asp?symbol=EMIS **** AFFX - Affymetrix Inc. $228.13 (-25.50)(+66.88)(+33.50) 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. We continue to be impressed with the leadership qualities of AFFX. When the NASDAQ was getting killed, AFFX kept coming back showing a relative strength that is necessary to designate it as a candidate for leadership. AFFX is one of the single best ways to make a play on the very exciting Human Genome Project. The mapping of the Human Genome could easily become one of the most significant sources for pharmacological discoveries for the next several years. The potential revenues for AFFX are huge because Healthcare is one of the biggest components of our economy. By providing the necessary tools for Human Genome researchers, AFFX stands to be one of the biggest beneficiaries of this hugely important endeavor. By definition, AFFX is not only a genomic stock but it is also considered to be a semiconductor AND a software company. AFFX is a great play for any institution which desires to invest in any or all of these industry groups. AFFX will be reporting earnings on Thursday. If the market can survive the Fed meeting on Tuesday, we may be able to get an earnings run. We caution against holding a position through an earnings report, due to inflated premiums and totally unpredictable stock price reactions. Therefore, if you do not happen to read Tuesday's update, we will be dropping the stock before the earnings. AFFX had a very interesting week that was full of important technical action. Tuesday's selloff took the stock right down to the breakout point around $205 and change, thereby establishing a nice support level and a possible entry point. For the rest of the week the stock appeared to be tethered to $225. Every rally and sell off brought the stock back near to that price. It appears that AFFX will have a substantial break from this range at some point. Support is at $215 and the aforementioned low $200's. Resistance remains at $240 and then the psychologically important $250 level. Those of you who watched the State of the Union Address were treated not only to Clinton's Freudian slip, but also to the rare occurrence of the President singling out technological development. The President singled out the Director of the Genome Project, applauded his efforts and called for continued Government funding of important scientific research. This has to be a good thing for AFFX, perhaps accounting for the stock's rise in an otherwise awful market on Friday. BUY CALL FEB-230*FUE-BF OI=115 at $24.88 SL=19.38 BUY CALL FEB-240 FUE-BH OI=132 at $20.63 SL=16.00 BUY CALL FEB-250 FUE-BJ OI=288 at $17.00 SL=13.25 BUY CALL MAR-220 FUE-CD OI= 21 at $38.63 SL=30.13 BUY CALL MAR-250 FUE-CJ OI= 10 at $26.63 SL=20.75 SELL PUT FEB-200 FUE-NT OI=280 at $11.75 SL=15.00 (See risks of selling puts in play legend) Picked on Jan 2nd at $184.75 P/E = N/A Change since picked +43.38 52-week high=$271.06 Analysts Ratings 3-5-2-0-0 52-week low =$ 31.75 Last earnings 10/99 est= -0.28 actual= -0.21 Next earnings 02-03 est= -0.20 versus= -0.31 Average Daily Volume = 506 K http://OptionInvestor.com/charts/charts.asp?symbol=AFFX ************* SEMICONDUCTOR ************* BRCM - Broadcom Corp. $284.00 (-28.44) Broadcom develops integrated circuits used in broadband data and video transmission products. The company's integrated circuits are in more than 80% of all cable modems and in digital set-top boxes. The company depends on two company's for the majority of their business, General Instruments, which is now part of Motorola and 3Com. BRCM's integrated circuits are also used in Ethernet networking, digital broadcast satellite, and digital subscriber line products. The competition in the industry is stiff, but they hold their own against Conexant Systems, Lucent and Texas Instruments. After a shaky start at the first of the year, BRCM experienced a great earnings run. Now we are adding BRCM to our list of plays for its potential to give us an equally fantastic split run. This earnings season investors have bid the price of many companies stock higher going into earnings, only to punish them by selling shares after the announcement, regardless of the report. Jan 18th, BRCM reported solid earnings, beating the street by 14%, with revenues increasing by 116%. That same day the company declared a 2-for-1 stock split. Since that time BRCM has seen the share price fall from its high at $332.13 all the way back to Friday's low of $272.44. The ex-date for the split is Valentines Day, February 14th, and we believe BRCM is setting up to provide us with a sweet play as well. Friday during the carnage in the broader markets, BRCM found buyers late in the day and managed to finish the day in the plus column. BRCM and the Internet sector has taken a drubbing this week. The $274 area has provided good support for BRCM on three different occasions during the week. The fact that we saw buyers step in and buy shares of BRCM, on a day like Friday tells us the split run is about ready to begin. BRCM can obviously be a volatile stock and may not fit everyone's risk profile. The option premiums are a bit expensive due to the volatility, but if we get a good split run, it should provide a nice return. Although the price of BRCM stock has declined, it hasn't changed the mind of analysts that follow the company. After reporting earnings, Morgan Stanley Dean Witter reiterated an Outperform rating for BRCM, raising year 2000 earnings estimates and the target price from $250 to $400. BUY CALL FEB-280*RDW-BP OI=1022 at $23.63 SL=18.50 BUY CALL FEB-290 RDW-BR OI= 724 at $18.75 SL=14.63 BUY CALL FEB-300 RDW-BT OI=1509 at $15.00 SL=11.75 BUY CALL FEB-310 RDU-BB OI= 546 at $11.63 SL= 9.25 Picked on Jan 30th at $284.00 PE = 394 Change since picked +0.00 52-week high=$332.13 Analysts Ratings 8-13-1-0-0 52-week low =$ 46.25 Last earnings 01/00 est= 0.27 actual= 0.31 Next earnings 04-18 est= 0.31 versus=-0.19 Average daily volume = 2.12 mln http://OptionInvestor.com/charts/charts.asp?symbol=BRCM **** TQNT - TriQuint Semiconductor $160.50 (+19.00)(+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. Please, nobody tell TriQuint Semiconductor that we are in the second major NASDAQ correction of the month. All week we have been reporting that TQNT is one of the strongest tech stocks out there. The strength of TriQuint shares seems to be based on the fact that they are one of the best pure plays for both the Semiconductor industry as well as the Telecommunications sector. Both sectors have been leading contributors to this long-term economic and stock market boom. Fund managers and individual investors alike seem to be saying why not buy shares of a company that represents both groups. Buying may also be fueled by the company's announcement of a 2-for-1 split, payable near February 22nd (subject to shareholder approval, yeah like they ever say no!). Ever since we began following this company as a Call Play, we have noticed a very solid stair step accumulation pattern. Also, its volatility has developed a very nice trading pattern for intraday players. Profits have been possible by avoiding the gap-ups and waiting for the pullback, followed by a midday rally into higher ground. We have also continuously remarked that this very bullish pattern may be broken if the stock trades below its previous day's low. On Friday, the stock did indeed trade below Thursday's low print of $151.63. But like a beach ball held under water, TQNT's shares exploded back up despite the incredible late day selling pressure in the overall market. The early selling has indeed put a chink in the armor of TQNT's uptrend but the counter-rally may have offset that. Suffice it to say, more caution is advised if one is going to trade TQNT to the long side. But if you are inclined to go long, there are very few stocks that look stronger than TQNT, at least for now. It seems very strange that the CBOE has not seen fit to add some out-of-the-money calls for TQNT. Is it a commentary on their perception of the company? Not likely. They just have to be created daily with the stock hitting new highs so often. If you are so inclined to trade out-of-the-money calls then you can find them in May. BUY CALL FEB-145 TQN-BX OI= 3 at $21.38 SL=16.68 low OI BUY CALL FEB-150 TQN-BW OI=126 at $18.00 SL=14.00 BUY CALL MAR-150*TQN-CZ OI=101 at $23.00 SL=17.88 SELL PUT FEB-140 TQN-NY OI= 5 at $ 3.38 SL= 5.00 (See risks of selling puts in play legend) Picked on Jan 13th at $130.00 P/E = 141 Change since picked +30.50 52-week high=$163.00 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 = 401 K http://OptionInvestor.com/charts/charts.asp?symbol=TQNT **** VECO - Veeco Instruments Inc. $56.00 (+6.38) Veeco Instruments is a worldwide leader in metrology tools for the data storage, semiconductor and research and scientific markets; and process equipment etch and deposition tools for the data storage and opto-telecommunications markets. Major clients include; IBM, Seagate, Read-Rite, TDK, Siemens and Samsung. Some of Veeco's major products include, force/ scanning probe microscopes, optical interferometers, stylus profilers, x-ray fluorescence thickness measurement systems and leak detection/vacuum equipment. It looks like the market might be trying to broaden out and start to include some of its smaller brethren. Couple that fact with VECO's historical pattern of rallying this time of year and we see Veeco as a possible opportunity to make a little profit to the upside. Veeco is in a good group of companies that should be able to increase revenues and earnings into the foreseeable future. Last year, Y2K sucked up a lot of the budgets of technology companies. This year, many of those same companies need to get up to date on their other needs, such as tools for semiconductor manufacturing and measurement devices. In recent weeks Veeco has received new orders of over $7 million, if this trend continues then VECO could have a sustainable rally. We first became intrigued by VECO when it experienced a very high volume breakout on January 24th. We could not find any news that could account for the interest. However, it was a major technical event that drove the stock out of the $40-$50 range. A new resistance level of $60 has been established. We are looking for a break above that price to help confirm that VECO is going in the right direction before the 02-10 earnings report. It is important to note that VECO's share priced peaked during this time last year. A very long- term chart indicates that VECO has lower highs going back four years. If another peak is coming do not be afraid to take quick profits. They stock may find support initially at $53.38 and then at $50. These might prove to be good entry points if the bears get their claws in the market early next week. On Friday, Wyko Corp, a division of Veeco had a ruling go against them in a lawsuit initiated by Zygo Corp concerning patent infringement. The judgement was for just over $1 million. It is possible that this untimely news, announced during the middle of a market selloff, might have taken VECO down a little more than it ordinarily would have. We will keep an eye on the situation. BUY CALL FEB-50 QVC-BJ OI=430 at $7.88 SL=5.75 BUY CALL FEB-55*QVC-BK OI=158 at $5.00 SL=3.25 BUY CALL FEB-60 QVC-BL OI=157 at $2.81 SL=1.25 BUY CALL MAR-55 QVC-CK OI= 25 at $7.75 SL=5.25 Picked on Jan 25th at $56.00 P/E = 41 Change since picked +0.00 52-week high=$60.13 Analysts Ratings 7-5-1-0-0 52-week low =$24.44 Last earnings 10/99 est= 0.35 actual= 0.39 Next earnings 02-10 est= 0.39 versus= 0.30 Average Daily Volume = 326 K http://OptionInvestor.com/charts/charts.asp?symbol=VECO **** PMCS - PMC-Sierra Inc. $190.06 (-1.19) PMC-Sierra is in the business of designing, developing, and supporting high-performance semiconductor system solutions for the communications market. The company is a leading provider of high speed internetworking component solutions emphasizing ATM, Ethernet, SONET/SDH, T1/E1 and T3/E3 applications. The company's products are used in broadband communications infrastructures and high bandwidth networks. Other network equipment manufacturers integrate the company's products into their own system for Internet, remote-access and corporate data networking applications. PMCS gapped down nearly $5 to open at $186.38 on Friday and quickly traded up to tag its high for the day at $195.50. Once again, PMCS did find support at its 10-dma, which is now at $184. This level could continue to provide a nice back up support level when needed. PMCS wrestled its way through Friday's session made a nice move up toward the close. We are encouraged by the relative strength that PMCS demonstrated in the face of Friday's weak market. PMCS could be positioned for a nice start to next week, particularly since we are still at a level of some potentially good possible points for new entry. Let us not forget the reason that we initiated our play on PMCS. PMCS stock will be splitting 2:1 on February 14th. One thing to keep in mind, is that PMCS has offered a trading range of $87.50 just during the month of January. Therefore, it is not all that surprising that we have seen some profit-taking as of late. Look for $190 to provide some support going forward. Again, as we mentioned last Thursday, this level could be a nice area for possible entry points. $195 provided some resistance at various points throughout last week so watch for some trading above this level to confirm momentum. PMCS looks to have some additional resistance to conquer at $200. Other than the upcoming stock split, there is no other new news out there for PMCS. BUY CALL FEB-190*SDL-BR OI=338 at $16.75 SL=13.00 BUY CALL FEB-195 SDL-BS OI=153 at $14.75 SL=11.50 BUY CALL FEB-200 SDL-BT OI=901 at $12.88 SL=10.00 BUY CALL FEB-210 SDL-BB OI=217 at $ 9.63 SL= 7.50 Picked on Jan 25th at $196.88 P/E = 160 Change since picked -6.81 52-week high=$207.50 Analysts Ratings 15-6-2-0-0 52-week low =$ 31.94 Last earnings 01/00 est= 0.27 actual= 0.29 Next earnings 04-20 est= 0.29 versus= 0.17 Average Daily Volume = 1.61 mln http://OptionInvestor.com/charts/charts.asp?symbol=PMCS ******** Internet ******** ADAP - Adaptive Broadband Corp. $125.48 (-9.03) Through their satellite and microwave transmission systems/ equipment, Adaptive Broadband offers consumers the power of a high-speed corporate LAN connection from their home, office or wherever business takes them. AB-Access provides wireless broadband connections at 25 Mbps, enabling high-speed communications for roughly the cost of a cable modem. With AB-Access, users can attach a portable device to their laptops and enjoy the convenience of "anytime, anywhere" access to people and information. Similar to mobile telephones, consumers will be able to purchase AB-Access through retail outlets and order over-the-air activation for immediate service. ADAP developed this technology by building a point-to-multipoint radio platform featuring ultra-efficient data transport. This Media Access Control (MAC) layer delivers more bandwidth to more customers per unit of spectrum than any other product on the market. The design enables service providers to obtain a "mosaic" of licenses - from MMDS to LMDS bands and beyond - and still deliver a consistent set of services. First take note that ADAP is a risky play and not for the weak stomached. For a company that just reported a loss of $0.19 on Thursday (three cents wider than expected) and that also lost over $13 of value on Friday, you might be wondering what it's doing on the call list. Here's the deal. As an arms merchant in a battle for the last mile to your home, ADAP offers the right product (wireless delivery at 25 Mbps) at the right time when cable and DSL, both terrestrial delivery systems, are duking it out for supremacy. Briefing.com reports that ADAP gave one of the strongest analyst presentations made at the CE Unterberg Towbin Broadband Conference last week. We've been itching to make this play. From our perspective, the doubling in price over the last 13 of 14 trading days hasn't gone unnoticed in our research, but we haven't recommended it because we were waiting for a pullback. Thursday and Friday, we got it based on less than expected earnings. However, ADAP also announced a 2:1 stock split payable in March to make up for the shortcoming. The pullback also happens to correspond with a 50% retracement of the price spike, and more importantly corresponds with a strong recovery (with strong buying volume) to near its 10-dma ($127) from its low of $116 just 10 minutes from closing - that's some recovery! And we consider it a good entry point. As we noted, ADAP is volatile. That said, we could get another test of $116 if the market's selling pressure keeps up. You can target shoot there, but you run 2 risks: 1) you get filled and ADAP moves further south; 2) it never gets back down to $116 and you miss the fill altogether. You really need to make your entry where you feel comfortable, and use stop orders to protect your gains (or against losses). Be sure to check out the "Ask OIN" section for detailed technical analysis. Now, a few red flags sure to draw ire from bulls - In the growing broadband equipment business, it's not acceptable to report losses bigger than expected (remember Lucent). It's even less acceptable to sell equipment (supposedly in high demand) for less than it costs to make. While they may have partially solved that problem by outsourcing production to Solectron, there is a pretty low barrier to entry that will keep pressure on profit margins. Here's the capper. Despite the excellent presentation at the CE Unterberg Towbin Broadband Conference, CEU&T harshly downgraded ADAP from Strong Buy to Neutral based on valuation following the conference - Ouch! BUY CALL FEB-120*CQI-BD OI=71 at $14.75 SL=11.50 BUY CALL FEB-125 QHV-BE OI=10 at $12.38 SL= 9.25 low OI BUY CALL FEB-130 QHV-BF OI=61 at $ 9.88 SL= 7.25 BUY CALL MAR-130 QHV-CF OI= 0 at $16.50 SL=13.00 Wait for OI! Picked on Jan 30th at $125.47 P/E = N/A Change since picked +0.00 52-week high=$159.69 Analysts Ratings 4-0-1-0-0 52-week low =$ 9.00 Last earning 01/00 est=-0.16 actual=-0.19 surprise=-18.7% Next earning 04-27 est= 0.02 versus=-0.28 Average Daily Volume = 458 K /charts/charts.asp?symbol=ADAP **** CMGI - CMG Information Services Inc $105.50 (-12.75) 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. In anticipation that buyers will start lining up and nibbling on this Internet powerhouse we're adding CMGI to our call list. Since climbing to an all-time high at $163.50 (split-adjusted) on January 3rd, CMGI has retraced over 50% of its share price. We successfully played CMGI as a put the past couple of weeks and set our goal for it to move back towards the $100 level and break the 50-dma (now at $109.27). The play went well and now it's time to see the writing on the wall and move on. For the past four trading sessions CMGI has been trying to bottom out, yet continued to move lower due to market conditions. It easily penetrated the first line of support at $112.50 and on Friday dipped to an intraday low of $103.88. Now it's possible the stock could edge a bit lower in the very near-term, but we prefer to use this level as a buying opportunity. A move through the 5-dma ($110.69) technical will give us the first definitive sign of a reversal and more conservatively, through near-term resistance at $115. Essentially the approach is based on our forecast that this low share price will entice investors and thus, create upward momentum. Earlier in the week CMGI announced its venture capital arm, @Ventures, launched @Ventures Technology Fund, a $1 bln capital investment focusing on Internet technologies and infrastructure companies. Also CMGI announced a 50-50 joint venture with Pacific Century CyberWorks, Asia's largest scope Net company outside of Japan. Together they will orbit the emerging Asian cyberspace. On Thursday, Lazard Freres & Co started new coverage with a Buy recommendation and issued a price target of $170 for CMGI. BUY CALL FEB-100 GCD-BT OI= 531 at $12.13 SL= 9.50 BUY CALL FEB-105 GCD-BA OI=1184 at $ 9.25 SL= 7.00 BUY CALL FEB-110 GCD-BB OI=1290 at $ 7.00 SL= 5.25 BUY CALL MAR-105*GCD-CA OI= 445 at $15.13 SL=11.75 BUY CALL MAR-110 GCD-CB OI=1346 at $13.00 SL=10.50 Picked on Jan 30th at $105.50 PE = 81 Change since picked +0.00 52 week high=$163.50 Analysts Ratings 4-7-0-0-0 52 week low =$ 20.50 Last earnings 12/99 est=-0.72 actual=-1.08 Next earnings 03-13 est=-1.32 versus= 0.07 Average Daily Volume = 6.04 mln http://OptionInvestor.com/charts/charts.asp?symbol=CMGI **** NTAP - Network Appliance Inc. $99.19 (-17.94)(+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. Opportunities sometimes come in the strangest ways. What we are referring to is the broad market sell-off that took place Friday. Hopefully if you had a position in NTAP, you took some money off the table earlier in the week, and have been patiently waiting for another chance to enter this play. That could be exactly what is coming. NTAP could not escaped the selling in the markets Friday, but the $98 level held up as the low of the day. The volume was heavy in the broader markets Friday, and NTAP lost only -3.69, on average volume, with 1.8 million shares changing hands. This suggests investors that hold shares of NTAP stock still believe NTAP will recover from the decline seen this past week. Why would shareholders continue to believe in NTAP? The networking company joined the S&P 500 index last June, and since Nov 1st has been the top performing stock in the index. NTAP also ranks very high when comparing earnings and book value and over 68% of the outstanding shares are owned by institutions. So how do we continue with this play? We are looking for NTAP to begin to form a base at this support level and then to regain some momentum. Be patient, let the FED have their meeting next week, and look for NTAP to get back on track. We could see a relief rally begin next week. If the $98 level proves to be support for NTAP, we would look for a bounce to enter a new position. With the volatility we've seen, the use of trailing stops would be advised. Earlier this week NTAP announced the availability of NetCache 4.1 streaming media. NTAP becomes the only company with a streaming media solution capable of delivering digital video and audio content like Internet Webcasts and corporate videoconferences using the major streaming formats, including Apple QuickTime, Microsoft Windows Media, and RealNetworks. BUY CALL FEB- 90 NUL-BR OI=156 at $14.25 SL=11.50 BUY CALL FEB- 95 NUL-BS OI=391 at $11.25 SL= 8.75 BUY CALL FEB-100*NUL-BT OI=175 at $ 8.38 SL= 6.25 BUY CALL FEB-105 NUL-BA OI=296 at $ 6.75 SL= 5.00 SELL PUT FEB- 90 NUL-NR OI= 46 at $ 3.88 SL= 5.50 (See risks of selling puts in play legend) Picked on Jan 16th at $93.69 P/E = 331 Change since picked +5.50 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 02-15 est= 0.11 versus= 0.06 Average daily volume = 1.76 mln http://OptionInvestor.com/charts/charts.asp?symbol=NTAP ********* SOFTWARE ********* SILK - Silknet Software $162.00 (+16.00)(+10.13) 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. After five straight days of gains in a difficult market environment, SILK was due for a rest. We were concerned with the lack of conviction in this week's move, as volume has remained low at about half the ADV. Given the carnage in the major indices Friday, we were pleased to see our play only give up $6, closing above Wednesday's intraday support level of $161. Because of the rapid move up, additional support is sparse, appearing first at $150, the site of the 10-dma. This is a pure momentum play, driven by strong earnings and analyst upgrades. While that is frequently enough in a positive market, this type of play will eventually fall victim to a weak market. In order for the move up to continue, we need to see volume return to something approaching the daily average, and that will likely require an improvement in overall market sentiment. Consider opening new positions at current levels if buyers return in force. Otherwise, apprehension over the pending interest rate increase could produce a drop to the $150 area. A bounce here would provide a very nice entry, but wait for the bounce. Chasing an entry point can have an unpleasant effect on your trading account. 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. BUY CALL FEB-155 ULI-BK OI= 20 at $24.88 SL=19.50 low OI BUY CALL FEB-160*ULI-BL OI=149 at $18.75 SL=14.63 BUY CALL FEB-165 ULI-BM OI= 66 at $16.50 SL=12.88 BUY CALL FEB-170 ULI-BN OI= 23 at $14.50 SL=11.50 low OI Picked on Jan 25th at $159.50 P/E = N/A Change since picked +2.50 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 = 291 K http://OptionInvestor.com/charts/charts.asp?symbol=SILK **** MUSE - Micromuse Inc. $162.88 (-10.06) 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. IT managers love to be cool and MUSE has one of the hottest (coldest?) software products on the market, Netcool, which enables telecom and Internet service providers manage their varying systems. Micromuse has been greatly rewarded for their innovation with a supercharged stock. In fact the company has announced that it will split its shares 2-for-1 on Feb 23rd. The share price of MUSE is so hot that it made Bloomberg's list of the top 100 stocks whose increase in share price in 1999 outpaced that of all other publicly traded companies. MUSE was number 21 on the list. High-Tech stocks that derive the bulk of their business from supplying other High-Tech companies with the tools that they need to stay on the cutting edge seem to be among the strongest companies in the market. This symbiosis was recently mentioned by the CEO of MUSE, Greg Brown, when he remarked, "The explosive growth of Internet, telecom and cable networks are major drivers behind our business." During recent trading sessions, Micromuse has formed what is called a contracting triangle formation. What usually happens as a result of this formation is that a break to one side or the other results in a huge move. If the market can recover and rally, we like the chances of MUSE breaking to the upside due to a split rally. The key boundaries that need to be watched are $160-$172, which was almost the entire range of Friday's trading. A breakout to the upside could find resistance at $185 followed by the all-time high of $192.50. The next support level below $160 is $152. Micromuse reported a very strong quarter on Jan 19th. Revenue was up 106% when compared to the first quarter last year. The net earnings were up over 62% Micromuse also announced that they have increased their customer base with 91 new clients taking the total to 532. BUY CALL FEB-160 QVM-BL OI= 19 at $21.38 SL=16.68 low OI BUY CALL FEB-165 QVM-BM OI= 5 at $18.88 SL=14.75 low OI BUY CALL FEB-170*QVM-BN OI=162 at $16.50 SL=12.88 BUY CALL FEB-175 QVM-BO OI= 41 at $14.75 SL=11.50 BUY CALL MAR-165 QVM-CM OI= 20 at $27.88 SL=21.75 low OI Picked on Jan 27th at $166.69 P/E = 386 Change since picked -3.81 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 http://OptionInvestor.com/charts/charts.asp?symbol=MUSE ********************************* 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 1-30-2000 Sunday 4 of 5 ******* Telecom ******* MFNX - MetroMedia Fiber Network $65.16 (-4.72)(+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. Complaining of a small loss with low volume during Friday's selloff would be akin to complaining about leaves blowing in your yard during a hurricane. No whining. MFNX actually moved up $5 to $72 with strong volume in the second 15 minutes after the open. Though drifting back, MFNX stayed mostly positive until the last 1.5 hours of trading. Even in the final 10 minutes, it found the horsepower to pop up over $1 from its $64 low. The 10- dma ($66) has historically acted as good support, but MFNX is slightly below that now. Given the nature of the selloff, we would not be surprised to see renewed strength from here. The reason for the play in the first place is that MFNX is actually selling capacity within its dark fiber network to other carriers by the lambda, or number of light frequencies, rather than the bit stream. By using Nortel's all-wave technology, they can cram potentially 50% more wavelengths down a single strand of fiber. In addition to their high capacity network now spanning 20 cities in Europe and the U.S., they also own AboveNet, a Web hosting (server farm) operation similar to Exodus in character. With daily volume scaled back from last week, MFNX may need some time to consolidate. A willing market would be nice too. Also, with an IR and PR department rather tight-lipped on news, earnings scheduled for release in late February or early March (IR would not confirm a date) are not going to help much here. Support is $66. As long as volume remains below the ADV, and the market remains wobbly, MFNX will remain volatile. You can target shoot your favorite $1 increment down to $62.50 beginning at $66. Otherwise you may want to wait for a break over $72 with volume for the best chances of success. (Tasmanian Devil personality) Needless to say, no news this week either, though Advanced Equities meekly issued a Buy rating with an $80 13-month price target. At least they don't have to work very hard to be correct on this one. BUY CALL FEB-60 QFN-BL OI=715 at $8.25 SL=6.50 BUY CALL FEB-65 QFN-BM OI=541 at $5.25 SL=3.50 BUY CALL FEB-70 QFN-BN OI=558 at $3.38 SL=1.50 BUY CALL MAR-65 QFN-CM OI= 36 at $8.00 SL=6.25 BUY CALL MAR-70 QFN-CN OI=268 at $6.13 SL=4.25 Picked on Jan 16th at $57.13 P/E = N/A Change since picked +8.03 52-week high=$75.81 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 = 2.9 mln /charts/charts.asp?symbol=MFNX **** LU - Lucent Technologies $55.31 (+4.13) Formerly known as Western Electric, 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. By now we all know that Lucent missed the earnings boat - they missed by one penny. In short, they underestimated demand for optical products and got aced by Nortel. Their CEO, Richard McGinn was apologetic on the conference call, but left analysts convinced LU was on the right track for the future. In his own words, "As the world moves to global networks, we aim to be the plumbers, with our optics, silicon, software services." He pegs revenue growth at 17% and further gains in market share for FY2000. With all the bad news from earnings 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 after January 20. Support is rock solid at the $50-$52 level. However, LU has encountered resistance at $58 since the drop. It's worth noting though on the chart that LU's Friday loss came early in the morning session and did not follow the market pattern down late in the afternoon. In a display of good strength, it stopped dead in its tracks at $55 (above its 10-dma of $53.77) held steady around $55.50 for the next five hours while the rest of the market caved in around it. If you tend toward the conservative, this may be your kind of play. Given the strength, you can consider taking a position at the current level, or wait for LU to bounce off $52 (maybe won't happen again). If you really want to be sure, consider waiting for the breakout over $58.50. For an excellent article on Lucent, grab a copy of the Forbes Magazine, February 7 issue. In it, the author mentions that LU may offer an optical component tracking stock that "could add billions in value". In other news, note that class action lawsuits filed by multiple law firms over the recent price drop will cause some parasitic drag on sentiment, but that it will most likely be settled once discovery is completed. No worries. BUY CALL FEB-50 LU-BJ OI= 3106 at $6.25 SL=4.50 BUY CALL FEB-55*LU-BK OI=12299 at $2.88 SL=1.50 BUY CALL FEB-60 LU-BL OI=21733 at $1.06 SL=0.00 High Risk! BUY CALL MAR-55 LU-CK OI= 1051 at $4.38 SL=4.00 BUY CALL MAR-60 LU-CL OI= 4244 at $2.25 SL=1.25 Picked on Jan 27th at $57.44 P/E = 81 Change since picked -1.38 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 /charts/charts.asp?symbol=LU **** VOD - Vodaphone AirTouch $54.63 (-1.31)(+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. Reminiscent of watching two 5-year olds argue over their favorite toy, the endless bickering between VOD and Mannesmann is becoming tiresome. We're glad it will be over one way or the other when VOD's buyout offer expires on February 7th. The VOD management team continues to woo Mannesmann shareholders, but no amount of concessions seems sufficient to coerce the Mannesmann management team to abandon their go-it-alone strategy. The latest maneuvering has Mannesmann trying to build alliances in the internet world; making the case that Mannesmann is also an internet company, while VOD has no internet presence (see news below). All of this wrangling has had little affect on VOD shares, as they trade between $54 and $58 on average volume. Entries can still be considered when prices bounce off of support at $54, but more conservative investors may want to wait for a convincing break through the upper end of this trading range. VOD will likely remain rangebound until the resolution to this battle becomes apparent. This will likely continue to be a news-driven play, but general market weakness could still torpedo our play. As such, play with caution, and keep your stops in place. Concerning speculation about a deal with AOL, Mannesmann confirmed that integrated online services play a key role in the company's strategy, and that they have been talking to several different Internet companies about possible collaboration. Also on Friday, Mannesmann announced a joint venture with Deutsche Bank, launching a new European service that turns phones into personal bank tellers by combining telephone and bank accounts. Mannesmann hopes the venture, called Tele-Commerce Bank, will bolster the company's e-commerce strategy and strengthen its defense against VOD's $156 billion hostile takeover bid. BUY CALL FEB-50 VOD-BJ OI=3250 at $6.75 SL=5.00 BUY CALL FEB-55 VOD-BK OI=1761 at $3.25 SL=1.75 BUY CALL FEB-60 VOD-BL OI=1869 at $1.63 SL=0.75 BUY CALL APR-55*VOD-DK OI=2173 at $6.50 SL=4.75 BUY CALL APR-60 VOD-DL OI= 705 at $4.50 SL=2.75 Picked on Jan 18th at $57.50 P/E = N/A Change since picked -2.88 52-week high=$58.00 Analysts Ratings 3-3-2-0-0 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 = 4.13 mln http://OptionInvestor.com/charts/charts.asp?symbol=VOD **** LVLT - Level 3 Communications $104.94 (-5.56)(+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. Welcome new readers! LVLT was first added to our call list on January 16th as it was building momentum ahead of its scheduled earnings. Earnings are now upon us. Level3 is confirmed to report this Thursday, before the bell. Another factor that played into this momentum scenario is the possibility of a split announcement around this time too. LVLT reached split- level candidacy when it began trading consistently above $80. With 1.5 bln shares authorized and only 341 mln outstanding there are certainly plenty of shares available for a stock split (we've got our fingers crossed!). The initial run up was at lightening speed taking us upwards to an all-time of $120.25, the pinnacle reached on Monday. You couldn't have asked for a more bullish climb! However since then the market has shown signs of instability and weakness. Plus you had to expect traders to take some money off the table at some point. Now granted LVLT held up well just above the 5-dma (now at $108.99), but on Friday the stock surrendered and slipped under this mark. At this time we must continue to advocated "caution" particularly in front of the Fed meeting (February 1st and 2nd). Remember too that you want to be out of any existing positions before LVLT reports its earnings Thursday morning. It's not worth the risk to hold over the announcement no matter how good the numbers may prove to be. For the aggressive day traders, LVLT is still providing lots of intraday volatility for target shooting. On Monday Level3 executives held a conference for analysts and investors. The main topics included Level3's accelerated worldwide network construction schedule that is expected to be finished ahead of schedule in the 4Q of 2000. Also part of the discussion was the expansion of its wholesale facilities and the plans to build an Asian undersea connection. The following day Kaufman Brothers reiterated a Buy recommendation and issued an $163 price target. BUY CALL FEB-100*QHN-BT OI=1284 at $ 9.50 SL=7.25 BUY CALL FEB-105 QHN-BA OI= 424 at $ 6.63 SL=5.00 BUY CALL FEB-110 QHN-BB OI=2722 at $ 4.50 SL=2.75 BUY CALL MAR-105 QHN-CA OI= 594 at $10.50 SL=8.25 BUY CALL MAR-110 QHN-CB OI=1066 at $ 8.25 SL=6.50 Picked on Jan 16th at $86.75 P/E = N/A Change since picked +18.19 52-week high=$120.25 Analysts Ratings 4-5-2-0-0 52-week low =$ 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 = 1.93 mln http://OptionInvestor.com/charts/charts.asp?symbol=LVLT **** ICIX - Intermedia Communications $45.00 (+3.94) Intermedia Communications is an integrated communications provider with products and services that encompass the broadest range of networking solutions available from any single supplier. These solutions include local and long distance services, frame relay networking, Internet, ATM, and bundled services, which provide both voice and data connectivity on a single access circuit. Intermedia's ViewSPAN offers performance monitoring across numerous platforms, integrating even those networks owned by other carriers. Intermedia's products and services include industry-leading guarantees, customer service, technical support for design, implementation, and operations. Perhaps the most impressive quality for ICIX last week was the relative strength it demonstrated, particularly on Friday. We saw the Nasdaq Telecommunications Index down over 40 points and yet ICIX managed a nice gain of nearly $2. Not to mention that ICIX traded to a new 52-week high of $46.38 and posted volume over two times the daily average. Apparently, there are plenty of investors interested in this stock. ICIX has been trending upward since roughly the beginning of November and has picked up the pace a bit throughout the last two months. January 12th turned out to be a very good day for ICIX. Digex (DIGX), which is a subsidiary of ICIX, announced that it would be working with Compaq and Microsoft (MSFT) to develop application hosting services. It was also announced that CPQ and MSFT would each invest $50 million in DIGX to help with the funding of the service development. It was reported that DIGX had acquired roughly $700 million total in strategic financing from various sources. On the same day, Duff & Phelps Credit Rating Company raised their Rating Outlook for ICIX from Stable to Positive, citing the strategic financing announcement as the reason for the upgrade. On January 13th, ICIX was upgraded by AG Edwards from an Accumulate to a Buy. ICIX gained $1.75 on the 12th and $4 on the 13th. ICIX has some nice support backing it. Its 5 and 10-dmas have converged at $42.25, which could provide some solid support if needed. The $42 level looks to have provided some support several times last week, so this could be a good level for possible entry points on pullbacks. ICIX has additional support at $41, $40 and $37. ICIX did encounter some resistance at $46 on Friday, but could have the momentum to keep climbing through this level next week. We have an unconfirmed date of February 24th for an upcoming earnings announcement. We will be confirming this date with the company next week. Last Wednesday, ICIX announced their strategies for continuing growth and expansion. These initiatives included expanding their DSL service, an enhancement in their ability to offer voice and data communications services, and improvement in the area of global connectivity. They also announced that they had signed on to the Optical Domain Service Interconnect agreement to "collaboratively develop and encourage open interfaces and protocols within the telecommunications industry." BUY CALL FEB-40 QIX-BH OI=1717 at $7.00 SL=5.25 BUY CALL FEB-45 QIX-BI OI=1117 at $4.13 SL=2.50 BUY CALL FEB-50 QIX-BJ OI=1409 at $2.13 SL=1.00 BUY CALL MAR-40*QIX-CH OI= 245 at $9.13 SL=6.75 BUY CALL MAR-45 QIX-CI OI=1558 at $6.50 SL=4.75 Picked on Jan 25th at $45.00 P/E = N/A Change since picked +0.00 52-week high=$46.38 Analysts Ratings 6-5-3-0-0 52-week low =$13.06 Last earnings 11/99 est=-2.98 actual=-2.97 Next earnings 02-24 est=-3.08 versus=-2.84 Average Daily Volume = 1.38 mln http://OptionInvestor.com/charts/charts.asp?symbol=ICIX ************* Miscellaneous ************* FRX - Forest Laboratories $69.25 (+0.25) Forest Labs develops, manufactures and sells both branded and generic forms of ethical products which require a physician's prescription, as well as non-prescription pharmaceutical products sold over-the-counter, which are used for a wide range of illnesses. The company's main products include Celexa, a selective serotonin reuptake inhibitor for the treatment of depression; Tiazac, for the treatment of hypertension and angina; Aerobid, an inhalent for asthma; and Infasurf, for the treatment of respiratory distress in infants. The bullish story for the Drug sector is very well known. We have an aging population. New drugs are providing results not deemed possible just a generation ago. More people around the world can afford and are willing to pay for life saving therapies. Pricing remains very strong due to vigorously protected patents and revenues and profits continue to grow in a steady and even fashion. So why is it that Drug stocks can not seem to get out of their own way? Several rallies have failed over the past several months. Late last week Drug stocks became a relatively safe harbor against the torrential winds of major selling. Will this rally last? We do not know. But if this trend continues for awhile we might as well be invested in one of the strongest stocks in the sector and FRX is clearly one of the best. FRX is up over 50% from its October lows. After a little selling early this year, FRX enjoyed a key reversal rally that shattered resistance at $61.75. A subsequent pullback to the breakout point indicates that the low $60's is an excellent support area for the stock. Friday's rally was very impressive and it is clear that scared money is finding its way to more familiar and supposedly more fundamentally stable stocks. If this trend continues, look for FRX to make another new high, followed by a pullback. A break above Friday's high could be good for a small rally to the high of $70.75. A new high might give us a rally of a couple more points. FRX is in a decided uptrend. Because of sharp pullbacks that seem to last a few days, it may be advisable to use a trailing stop strategy to protect any profits you may have. The first level of support can be found just above $65 followed by $61. Following an earnings report on January 18th when FRX "beat" the estimates by $0.02, Robertson Stephens reiterated their Buy rating on the company. Their current target price of $65 has not been raised, yet. BUY CALL FEB-60 FRX-BL OI= 43 at $ 8.00 SL=6.25 BUY CALL FEB-65 FRX-BM OI= 71 at $ 6.00 SL=4.25 BUY CALL FEB-70*FRX-BN OI=101 at $ 3.25 SL=1.50 BUY CALL MAY-65 FRX-EM OI=109 at $10.13 SL=7.50 BUY CALL MAY-70 FRX-EN OI= 81 at $ 6.63 SL=4.75 Picked on Jan 30th at $69.25 PE = 47 Change since picked +0.00 52-week high=$70.75 Analysts Ratings 6-8-4-0-0 52-week low =$41.25 Last earnings 01/00 est= 0.34 actual= 0.36 Next earnings 05-04 est= 0.30 versus= 0.45 Average daily volume = 597 K http://OptionInvestor.com/charts/charts.asp?symbol=FRX ********************** LEAPS by Mark Phillips ********************** Waiting for entry points? Patient investors were rewarded last week as the VIX closed at 29.09. It was an ugly week in the markets, but experience has shown us that this is exactly what we want for good entry points on our LEAP plays. The VIX in the low 30's continues to provide excellent buying opportunities. You will notice that many of our returns went down, but not just because the stocks dipped, the premiums deflated as well. This makes for great call buying opportunities! In looking through the charts, many of our LEAP plays have now pulled back to support, providing good entry points, as long as the markets move up from here. Patience is still the watchword; with earnings season winding down and the FOMC meeting early next week, play with caution. Current Plays SYMBOL SINCE LEAPS SYMBOL PICKED CURRENT RETURN EMC 11/07/99 JAN-2001 $ 80 ZOH-AP $15.38 $36.00 134.07% JAN-2002 $ 90 WUE-AR $19.00 $40.13 111.21% GPS 11/07/99 JAN-2001 $ 40 ZGS-AH $ 5.75 $11.50 100.00% JAN-2002 $ 45 WGS-AI $ 7.88 $13.63 72.97% IBM 11/07/99 JAN-2001 $100 ZIB-AT $13.63 $25.88 89.88% JAN-2002 $110 WIB-AB $16.50 $29.88 81.09% LU 11/14/99 JAN-2001 $ 80 ZEU-AP $12.88 $ 4.75 -63.12% JAN-2002 $ 90 WEU-AR $16.13 $ 8.63 -46.50% CSCO 11/14/99 JAN-2001 $ 80 ZCY-AP $19.13 $34.75 81.65% JAN-2002 $ 90 WIV-AR $22.00 $37.38 69.91% GE 11/21/99 JAN-2001 $150 ZGR-AU $16.25 $15.88 - 2.28% JAN-2002 $150 WGE-AU $25.50 $25.63 0.51% GTW 11/21/99 JAN-2001 $ 90 ZWB-AR $17.75 $ 7.00 -60.56% JAN-2002 $100 WGB-AT $22.50 $11.25 -50.00% NT 11/28/99 JAN-2001 $ 75 ZOO-AO $22.25 $34.75 56.18% JAN-2002 $ 75 WNT-AO $30.25 $42.25 39.67% VOD 12/05/99 JAN-2001 $ 50 ZAT-AJ $10.75 $14.88 38.42% JAN-2002 $ 50 WHV-AJ $15.00 $19.25 28.33% TXN 12/12/99 JAN-2001 $110 ZTN-AB $22.25 $21.75 - 2.25% JAN-2002 $120 WGZ-AD $28.50 $27.88 - 2.18% NXTL 12/19/99 JAN-2001 $ 90 ZFU-AR $23.50 $34.75 47.87% JAN-2002 $100 WFU-AT $27.25 $40.25 47.71% SUNW 12/19/99 JAN-2001 $ 80 ZJX-AP $17.63 $16.63 - 5.67% JAN-2002 $ 90 WJX-AR $22.00 $21.88 - 0.06% AOL 12/23/99 JAN-2001 $ 90 ZKS-AR $20.13 $ 6.38 -68.31% JAN-2002 $100 WAN-AT $25.63 $10.88 -57.55% LU 01/09/00 JAN-2001 $ 50 ZEU-AJ $13.63 $15.00 10.09% GTW 01/09/00 JAN-2001 $ 60 ZWB-AL $15.88 $15.38 - 3.15% MOT 01/09/00 JAN-2001 $125 ZMA-AE $31.13 $29.38 - 5.62% JAN-2002 $125 WMA-AE $41.50 $40.13 - 3.30% CY 01/16/00 JAN-2001 $ 40 ZSY-AH $ 9.13 $ 7.50 -17.85% JAN-2002 $ 40 WSY-AH $12.63 $11.25 -10.93% 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 ERICY - Ericsson $70.06 A split run in the LEAPS section? Sure, why not. Money invested in ERICY had been pretty much dead until late October when investors started paying attention again. The price has nearly doubled since then and the faithful were rewarded last week with strong earnings and the announcement of a 4:1 split. That's right, a $70 Telecom stock with a pending 4:1 split! Shareholders will vote on the split on March 31st, giving us plenty of time to open positions before the run commences. Now before you start getting visions of QCOM in your head, stop and take a deep breath. ERICY doesn't have the kind of power that was afforded QCOM through its CDMA ownership. ERICY is simply a strong player in the telecommunications field, supported by several analyst upgrades. The company expects 20 percent sales growth this year and forsees "substantial" earnings growth. Support is building at $65, which should provide a nice entry point in the event of a pullback. BUY LEAP JAN-2001 $65.00 ZYD-AM at $19.75 BUY LEAP JAN-2002 $65.00 WRY-AM at $27.00 http://www.OptionInvestor.com/playimages/index.asp?image=ERICY013000 **** MSFT - Microsoft $98.25 It seems as though you can't go wrong with MSFT. No matter what obstacles appear, (Y2K, anti-trust lawsuit, etc.), MSFT just rolls over them like a Panzer on a Sunday drive through the countryside. Each negative news event simply provides us with another entry point. Regardless of the outcome of the Justice Department's anti-trust case, MSFT shareholders will continue to be rewarded. Even if the company is broken up, the result will be two or more 800-lb gorillas instead of one 1600-lb behemoth. MSFT has strong support in the $94-96 range, and a bounce near this level would make for a nice entry going forward. BUY LEAP JAN-2001 $100.00 ZMF-AT at $17.63 BUY LEAP JAN-2002 $110.00 WMF-AB at $21.63 http://www.OptionInvestor.com/playimages/index.asp?image=MSFT013000 Drops KM $8.50 We started this as a speculative value play, but it hasn't shown sustained signs of life. Although we got some movement from when we started coverage on December 5th, there isn't enough life to keep it. Weakness in retailers like WMT will exert further downward pressure, prompting us to let KM go. Just keep in mind that we saw some incredible percent gains in the at-the-money options when KM decided to move. You could almost treat this as a rolling stock situation. Buy the dips and sell the rallies. ADBE $57.56 What was looking like a consolidation last week gave way to a renewed decline in ADBE, as prices fell through support at $60. This level had held up well since early December, but Friday's drop takes our play down to levels not seen since early October. While our play may recover from here, we think it is more likely to continue weakening and we don't want to try to pick the bottom. ADBE is still very well positioned in its marketplace, so we expect it to return to our LEAPS list when investor sentiment improves. ***************** 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. **** UAL - UAL Corp $57.88 (-2.25) 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! In due course this warning dragged down the airline sector that is already feeling the squeeze from skyrocketing fuel costs. UAL cited that rising fuel prices could push its 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. It's also important to note that many of the airlines (including UAL) recently reported solid earnings and beat analysts' estimates; however, we need to remember that these numbers are tempered by the fact that estimates were significantly lowered due to the rising oil prices. Despite these negative events UAL held firm above support at $60. But remember that blizzard that pummeled the east coast this week? Well it caused major flight disruptions and United was forced to cancel nearly 400 flights. You could rationalize that Mother Nature simply clipped the airline's wings. But from a deeper perspective consumers are already "annoyed" by what they consider poor customer service and delayed flights. This only added salt to the wound. Now tack on that UAL would be adding on a $20 fuel surcharge (already on domestic flights) as well as a general 3% increase to its international flights and you've got a nasty combination. On Tuesday the stock slipped under firm support at $60 dipping to an intraday low of $58. Volume was moderate to very strong and UAL hit lower-lows as the week progressed. Keep in mind that the negative market sentiment is playing a significant role in the descent too. For an entry take a look at a one-month chart with a 5-dma line. It's easy to see this technical indicator is a good gauge for an entry into this put play. ***Presently there are no strikes below 55*** BUY PUT FEB-60*UAL-NL OI=819 at $3.75 SL=2.25 BUY PUT FEB-55 UAL-NK OI=865 at $1.25 SL=0.50 Average Daily Volume = 709 K http://OptionInvestor.com/charts/charts.asp?symbol=UAL **** SLR - Solectron $70.06 (-8.31)(-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. Just like clockwork, SLR gapped up to $73 on Friday where it hit resistance and fell back through $72, which would have made a good entry as SLR continued south to $69 where it regained support. Hmmm...two negative days in a row where SLR found support at $69 - it's looking pretty tough to move any further down, though with any continued weakness in the market, the stairs could lead further into the basement. However, our best suggestion for a good entry is to wait for a bounce down from resistance at $73, or simply wait for a break down through $69 on strong volume. That's what makes the play so workable. The chart is full-tilt negative on indicators including MACD, stochastic, and RSI. If SLR can move down with conviction past $69, the next strong support level will be $62. Volume in descent mode remains well above the ADV conveying that sellers are still in control. Play this one for the technicals. Not even an earnings run will save this stock since SLR won't announce until March 13, according to Zack's. However, more upgrades like the one from Merrill Lynch might. They reiterated their long and short-term Buy rating while offering a new price target of $120. Others could follow. BUY PUT FEB-75*SLR-NO OI=377 at $7.38 SL=5.50 BUY PUT FEB-70 SLR-NN OI-596 at $4.50 SL=2.75 Average Daily Volume = 1.6 mln /charts/charts.asp?symbol=SLR **** BBY - Best Buy Inc. $48.75 (-5.28) If it requires electricity, Best Buy wants to be your store. As the #1 consumer electronics specialty retailer, BBY sells home office products (computers, telephones, copiers), consumer electronics (TVs, VCRs, stereo systems), entertainment software (CDs, DVDs, video games), and appliances (microwaves, vacuums). BBY operates over 310 stores in 36 states and offers product information and demonstration areas to make customers feel more confident about utilizing a self-service discount store format. Suffering the double insult of general market weakness and the end of the Christmas shopping season, BBY hasn't been a very good buy for investors this year. Without the anticipation of earnings to prop up the share price, the last three weeks have not been kind to BBY. Losing over $9 since its January high, the electronics retailer looks to be headed for lower ground. With the e-commerce side of its business just getting started, higher interest rates just around the corner, and the seasonal weakness in the overall stock market, BBY looks like a great put play. Now trading below both the 30 and 50 day moving averages, BBY broke through long-term support at $51 on Friday. This should provide resistance going forward, reinforced by the 30-dma ($51.50) and the 50-dma ($52.50). Volume has been on the light side this week, but began picking up on Friday. Look for additional selling to push prices down to $43-44 before BBY finds support. A move up to resistance followed by renewed selling pressure is buyable, as is a continuation of the slide from Friday's close. BUY PUT FEB-50*BBY-NJ OI=999 at $3.63 SL=1.75 BUY PUT FEB-45 BBY-NI OI=543 at $1.63 SL=0.75 Average Daily Volume = 3.28 mln http://OptionInvestor.com/charts/charts.asp?symbol=BBY **** ADBE - Adobe Systems Inc. $57.56 (-5.31) Adobe Systems builds software solutions for Web and print publishing. Its graphic design, imaging, dynamic media, and authoring tools enable customers to create, publish and deliver visually rich content for various types of media. The company's products are used by Web and graphic designers, professional publishers, document-intensive organizations, business users and consumers. Adobe is the 4th largest U.S. based personal software company and has over $1 billion in annual revenues. Yesterday's favorites are quickly losing short-term favor and ADBE is not immune to the changing tide. There is nothing wrong with ADBE internally. December's earnings announcement was strong. The company recently released a new product for their business application clients and the company was named in Fortune Magazine as one of the best 100 companies to work for. So what gives? Why is the stock in a downtrend? Could it simply be because the company, as good as it is, is just yesterday's news? Is bad news coming? Whatever the reason, we primarily like ADBE as a put play because of its chart. After peaking at $79 in November, Adobe has suffered a steady string of lower highs and lower lows. It is a very well defined downtrend and profits have been made selling rallies for two months. With the market losing steam, look for ADBE to be a source for raising cash. If there is a rally, look for ADBE to possibly top out around $60, where a potentially profitable put position might be placed. A break below Friday's low of $56.63 might be the sign momentum players need to punish the stock a little bit more. ADBE's most recent uptrend began around $52. We see that price as potentially providing pretty good support. If the stock can find support there, it might be a good place to take profits. BUY PUT FEB-60*AEQ-NL OI= 429 at $5.25 SL=3.50 BUY PUT FEB-55 AEQ-NK OI=1195 at $2.94 SL=1.50 Average Daily Volume = 1.98 mln http://OptionInvestor.com/charts/charts.asp?symbol=ADBE **** INTU - Intuit Inc. $57.75 (-17.88) Intuit makes software. ADBE is the number one maker of personal finance software. The company is well known for its Quicken personal finance and TurboTax tax filing products. They have added the Internet as a marketing tool as well. The company offers Internet products and services such as financial news site Quicken.com, payroll processing, insurance marketing, and mortgage filing. Their main competition comes from H&R Block and Microsoft. Shareholders of INTU had a tough week. The one bright spot should have been the announcement of a new president to run the company. Investors either didn't approve or didn't care, as they sold share of INTU for most of the week, dropping over $17 off the price of the company's stock. Monday INTU named Stephen Bennett as the new president and CEO, replacing William Harris, who quit in September. Analysts at ABN Amro reiterated their Buy rating on INTU on the announcement and maintained their earnings estimates for the software company. Much of the recent concern surrounding INTU recently, seems to have come from their lack of any strong leadership. Several analysts believe Bennett may do a good job, but investors are taking a "show me" attitude towards the company. Our put play in INTU is not expected to be a long-term play, but we do believe the momentum behind the current down-draft could carry the stock to the $51 to $52 area before finding any support. With the negative tone in the broader markets it may not take much to push the stock to new lows. If we do see a bounce from this level, initial resistance is found at the 50-dma at $60.82 followed by $65. A bounce followed by a decline would provide a good entry for this play. BUY PUT FEB-65 IQU-NM OI= 410 at $9.63 SL=7.25 BUY PUT FEB-60*IQU-NL OI=2473 at $6.13 SL=4.25 BUY PUT FEB-55 IQU-NK OI= 371 at $3.63 SL=2.00 Average daily volume = 3.18 mln http://OptionInvestor.com/charts/charts.asp?symbol=INTU **** IPG - Interpublic Group of Companies Inc $47.00 (-5.75) IPG owns and operates leading advertising agencies and communications services companies. They are the world's #2 advertising group standing only behind Omnicom. Their global advertising agency business is conducted through the McCann- Erickson World Group and The Lowe Group. The company also operates a media buying business through its ownership of Western International Media. It also has its hands in public relations, graphic design, and market research. Are you interested in another stock that clearly mimics the DOW's movement? Overlap IPG and the Dow Jones Industrial Average(INDU) charts and you've got yourself a nice match. The first inkling of the stock's downdraft was back on January 20th after it topped the day before at $55.56 on moderate volume. As the market's weakness and instability extended so did IPG's decline. By this Thursday IPG had cracked support at $51 and was trading below the 50-dma (now at $51.60). It edged even lower on Friday moving closer to the 200-dma line ($42.66), a technical indicator it hasn't tagged since mid-November. Even a new Market Perform rating from DLJ on Wednesday had no positive effect. In contrast, the news of the $110 to $115 mln in charges against 4Q earnings certainly did put a damper on the share price this week. IPG is confirmed to report next month on February 23rd. The charges are a reflection of the global merger between Lowe & Partners and Ammirati Puris Lintas. Also the company announced it would be reducing the work force between these two giants by about 7%, or 900 jobs. Still let's keep in mind that IPG is more heavily influenced by the market than anything else. So it's imperative to confirm both stock direction and market sentiment before opening a new position. It's difficult to pinpoint a solid entry into this put play. Overhead resistance is strong at $51, but if IPG continues in a straight descent you may have to simply take a risk on an intraday high. BUY PUT FEB-55*IPG-NK OI= 31 at $7.13 SL=5.50 BUY PUT FEB-50 IPG-NJ OI=100 at $3.25 SL=1.75 Average Daily Volume = 975 K http://OptionInvestor.com/charts/charts.asp?symbol=INTU ************************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 1-30-2000 Sunday 5 of 5 ************* COVERED CALLS ************* Success With Covered-Calls: It's All About Attitude... Each week we receive a wide variety of questions regarding our approach to this conservative strategy. The most common topics are related to portfolio management and trading style. The list of subjects generally encompasses a number of basic strategy goals and we have narrowed the area of discussion to three primary issues: 1. Why do we focus on stocks under $30? 2. Why don't we recommend out-the-money covered writes? 3. Why aren't we concerned with stock ownership? Essentially, why do we do what we do? There is a simple answer: Because that is the style and approach we have found to be most successful in this conservative strategy. Over the years, we have tried several different variations of this technique and have encountered many of the well-known covered-call demons, "Why didn't I just buy and hold (and avoid the covered-call). Why did I buy and hold? (If only I had sold the call earlier.) Why didn't I close (buy-back the call and sell the stock) that position?" Oh, and my favorite, "I wish I had sold the in-the-money call!" The accompanying mood changes and second-guessing occur at various times. You probably know them well by now; "This week I am long-term...no wait, maybe I am short term...I don't know! Look at those call buyers making a killing as the market climbs, maybe I should do that! Look at those call buyers getting killed as the market tanks. No thanks, too risky. I'm glad I just sell covered-calls!" So that's really what it all comes down to; risk tolerance. As proponents of this system, we have slowly evolved into "non- risk-takers", or in most cases, we endure as little risk as possible. We tend to trade for lower returns than those that are listed in the play section. (3% on margin equates to a 6% monthly return.) We don't focus as much on the reward side of our trading strategy. When we have in the past (personal experiences abound), we've been burned. What did we learn? To be successful, you must remove emotions (mainly greed) from any trading strategy. We have found that if we concentrate on not losing money (by focusing on downside protection), our portfolio grows. What really matters is that we achieve a high probability of not losing money! The rest will almost always take care of itself. To counter the "buy and hold" mentality, many of our trades are entered via a "buy-write." Too many times in the past, we have bought stock, hoping to sell the call on a rally, only to watch the value of the call drop. I have never aged so fast in such a short time (waiting for an upside move to inflate the value of the call I want to sell). If we don't use a buy-write, we sell the call right after we buy the stock. To offset the impact of commissions, we usually trade a minimum of 500 - 1000 shares. Once we enter a position, we monitor it daily. (Unlike like the short-term call buyers, who are usually glued to their computer screen all day, fingers on the "sell" button.) We check the price movement on a closing basis and review any news releases or market activities that might affect the position. Occasionally we will check the issue during the day, but usually it is after the close. With this style of trading (limited risk/maximum downside protection), most positions can fall to technical support and still provide maximum profit. If the underlying stock rises significantly (and the written call is trading at parity), there may be an opportunity to close the play early, exchanging a quick turnaround for a slightly smaller return. The most important act occurs when the position becomes negative. Do not hesitate to buy back the call and sell the stock (or roll down), depending on your analysis and outlook of the overall situation. As far as pricing, we concentrate stocks under $30 because they provide the best yield (due to the relative premiums in option pricing). These low cost issues also allow us to open several positions to further diversify the potential risk. The use of high-priced stocks would require the majority of novice traders to participate in only one or two positions, not to mention the potential for increased risk. Statistics suggest that this technique works well for those who favor its risk/reward outlook. With almost two years of providing covered write candidates for the OIN's subscribers, we have averaged 8 out of 10 profitable choices, with annualized returns well above all but the most successful funds. Remember, these small cap issues were recently in their own private bear market. Only after experiencing days like this Friday, can investors appreciate the value of our conservative approach. Good Luck! SUMMARY OF PREVIOUS PICKS Stock Price Last Mon Strike Opt Profit ROI Monthly Sym Picked Price Price Bid /Loss ROI CYOE 5.50 9.06 FEB 5.00 1.44 *$ 0.94 23.2% 21.3% TERA 4.41 6.25 FEB 5.00 0.50 *$ 1.09 27.9% 20.2% WDC 5.50 5.00 FEB 5.00 1.13 $ 0.63 14.4% 10.4% GMGC 6.84 7.41 FEB 5.00 2.38 *$ 0.54 12.1% 8.8% GMGC 7.50 7.41 FEB 5.00 2.88 *$ 0.38 8.2% 7.6% MESG 17.31 18.31 FEB 15.00 3.25 *$ 0.94 6.7% 7.3% ESPI 9.22 11.06 FEB 7.50 2.19 *$ 0.47 6.7% 7.3% ERTH 6.03 5.03 FEB 5.00 1.38 *$ 0.35 7.5% 6.9% CCUR 18.38 19.50 FEB 15.00 4.38 *$ 1.00 7.1% 6.6% ASFT 21.50 18.50 FEB 15.00 7.38 *$ 0.88 6.2% 5.7% VTS 17.75 15.81 FEB 15.00 3.50 *$ 0.75 5.3% 5.7% VOYN 13.06 12.19 FEB 10.00 3.50 *$ 0.44 4.6% 5.0% HRC 5.81 5.44 FEB 5.00 1.13 *$ 0.32 6.8% 5.0% EAII 14.25 12.50 FEB 10.00 4.75 *$ 0.50 5.3% 4.9% MUEI 12.75 10.81 FEB 10.00 3.25 *$ 0.50 5.3% 4.9% CORL 22.13 19.63 FEB 15.00 7.75 *$ 0.62 4.3% 4.7% DBCC 9.19 8.31 FEB 7.50 2.00 *$ 0.31 4.3% 4.7% MSGI 19.13 18.25 FEB 15.00 4.75 *$ 0.62 4.3% 4.7% PCMS 10.06 14.88 FEB 7.50 3.00 *$ 0.44 6.2% 4.5% HMK 9.88 9.94 FEB 7.50 2.81 *$ 0.43 6.1% 4.4% XICO 22.56 19.75 FEB 17.50 5.75 *$ 0.69 4.1% 3.8% IFCI 10.13 13.25 FEB 7.50 3.00 *$ 0.37 5.2% 3.8% GELX 20.38 16.13 FEB 17.50 4.00 $ -0.25 -1.5% 0.0% GSTX 10.69 8.63 FEB 10.00 1.63 $ -0.43 -4.7% 0.0% *$ = Stock price is above the sold striking price. Comments: Many of the stocks above are starting to consolidate (pullback) with the general market malaise. The strength of these issues will be measured by how well they hold up at support. Breaking through a support area would be a logical exit signal (time to roll down?). Geltex (GELX) is approaching the neck-line of its recent double bottom (around $14.00) and that should be a key support area. Gst Telecom's (GSTX) president and CEO resigned and caused the usual stock correction. The stock may test the December low. The technicals on both of these issues remains fairly healthy though price is the ultimate gauge. 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 BRKT 25.75 FEB 22.50 BUQ BX 4.13 200 21.62 4.1% 4.1% CCCG 16.88 FEB 15.00 KDQ BC 2.56 175 14.32 4.7% 4.7% ESPI 11.06 FEB 7.50 AQ BU 3.88 1060 7.18 4.5% 4.5% KELL 8.81 FEB 7.50 KQC BU 1.69 0 7.12 5.3% 5.3% MCRE 11.88 FEB 10.00 MQZ BB 2.50 439 9.38 6.6% 6.6% NZRO 35.00 FEB 25.00 NUR BE 10.88 42 24.12 3.6% 3.6% PRST 19.63 FEB 17.50 PQK BW 2.75 325 16.88 3.7% 3.7% Sequenced by Return Not Called Stock Price Mon Strike Option Opt Open Cost RC RNC Sym Price Symbol Bid Intr Basis MCRE 11.88 FEB 10.00 MQZ BB 2.50 439 9.38 6.6% 6.6% KELL 8.81 FEB 7.50 KQC BU 1.69 0 7.12 5.3% 5.3% CCCG 16.88 FEB 15.00 KDQ BC 2.56 175 14.32 4.7% 4.7% ESPI 11.06 FEB 7.50 AQ BU 3.88 1060 7.18 4.5% 4.5% BRKT 25.75 FEB 22.50 BUQ BX 4.13 200 21.62 4.1% 4.1% PRST 19.63 FEB 17.50 PQK BW 2.75 325 16.88 3.7% 3.7% NZRO 35.00 FEB 25.00 NUR BE 10.88 42 24.12 3.6% 3.6% Company Descriptions BRKT - Brooktrout $25.75 *** New Range? *** Brooktrout is a worldwide supplier of electronic communications products. Through its multiple companies, Brooktrout's mission is to provide high performance, quality electronic communications products to system vendors, service providers and VARs dependent on electronic information exchange. Their subsidiary, Brooktrout Software is enhancing its e-Business solutions, replacing touch- tone capabilities with speech-enabled functionality through an alliance with SpeechWorks. Though the stock has a rolling past, it appears to have broken out of its previous range and is headed higher. With earnings due this week, we will remain cautious and speculate with a cost basis at recent support. FEB 22.50 BUQ BX Bid=4.13 OI=200 CB=21.62 RC=4.1% RNC=4.1% Chart = /charts/charts.asp?symbol=BRKT **** CCCG - CCC Information $16.88 *** Next move up? *** CCC Information Services is the automotive claims industry's top provider of business solutions. Connecting people, processes and information, CCC's innovative technology-based capabilities ensure that the right information is always available - at the right time and to the right person - to make the right business decision. On Thursday, CCC announced record revenue and operating income for the quarter. The momentum from the earnings run has moved CCC above its stage one base and to a new 52-week high. Favorable speculation on an issue with technical support near the cost basis. FEB 15.00 KDQ BC Bid=2.56 OI=175 CB=14.32 RC=4.7% RNC=4.7% Chart = /charts/charts.asp?symbol=CCCG **** ESPI - e.spire Communications $11.06 *** Deep ITM *** 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 & project management expertise. Upgraded, downgraded, new customer accounts, and the launch of e.spire XpressLink (DSL). This week a new CEO. What to make of it all? How about a breakout above the 150 dma on heavy volume reaching a new 6 month high? A week later with another chance at a very conservative covered call position. FEB 7.50 AQ BU Bid=3.88 OI=1060 CB=7.18 RC=4.5% RNC=4.5% Chart = /charts/charts.asp?symbol=ESPI **** KELL - Kellstrom Industries $8.81 *** Stage I Base *** Kellstrom Industries is a leader in the airborne equipment segments of the international aviation services after-market. Kellstrom's principal business is the purchasing, overhauling, reselling and leasing of aircraft, avionics and aircraft rotables, and engines and engine parts. The company is also a leading international after market reseller of turbo-jet engines and turbo-jet engine parts for helicopters and large cargo transport aircraft for which it also supplies airframe material. The chart is exhibiting positive technical divergence's as KELL forms a stage I base. Established support above the sold strike provides favorable speculation. Earnings are due near February 14. FEB 7.50 KQC BU Bid=1.69 OI=0 CB=7.12 RC=5.3% RNC=5.3% Chart = /charts/charts.asp?symbol=KELL **** MCRE - MetaCreations $11.88 *** 3D Software *** 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. With earnings due next week, MetaCreations is consolidating. We favor the technical support provided by the 30 dma at the sold strike. FEB 10.00 MQZ BB Bid=2.50 OI=439 CB=9.38 RC=6.6% RNC=6.6% Chart = /charts/charts.asp?symbol=MCRE **** NZRO - NetZero $35.00 *** 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. NetZero reported a higher loss but beat estimates and posted a 10,000% increase in revenues from the same quarter last year. Investors appear pleased as the price continues to climb. We favor caution and an entry point below technical support. FEB 25.00 NUR BE Bid=10.88 OI=42 CB=24.12 RC=3.6% RNC=3.6% Chart = /charts/charts.asp?symbol=NZRO **** PRST - Presstek $19.63 *** Stage II climb *** Presstek is a leading developer and international marketer of non-photographic, non-toxic digital imaging and printing plate technologies for the printing and graphic arts industries. PRST's products and applications incorporate PEARL® and DI® technologies and utilize PEARL consumables for computer-to-plate and direct-to press applications. The company's patented DI and PEARL thermal laser diode family of products enable its customers to produce high quality, full-color lithographic printed materials more quickly and cost efficiently. Presstek has continued its stage II climb since exiting a base in November. With earnings due shortly, we favor a cost basis near the 30 dma and technical support of the December high. FEB 17.50 PQK BW Bid=2.75 OI=325 CB=16.88 RC=3.7% RNC=3.7% Chart = /charts/charts.asp?symbol=PRST ***************** NAKED PUT SECTION ***************** Selling Naked Puts: Strategies And Objectives... There are a number of well-known principles that a new investor should consider when participating in this technique. Experienced option traders use this strategy because it offers two methods for generating profits: collecting premium by selling out-of-the money options or acquiring stock at a reduced price. Investors who sell puts for stock ownership believe the underlying issue is a good buy at the strike price whereas speculators write options with the expectation they will not be exercised. The first and foremost rule for any style of option trading is to feel comfortable with the strategy you are using. Writing naked options is often described as one of the most aggressive methods of derivatives trading and it is important to understand the risks inherent in the strategy. As with most techniques, the key is to evaluate the profit/loss characteristics of the position and avoid any trade that is unsuitable, based on your experience level or portfolio outlook. The next requirement for any form of investment is to utilize a trading plan and sound money management principles. The initial step in this process is to define the overall profit objectives and loss limits. In most cases, winning trades involve far less critical decision-making; it's the losers that determine your success or failure. Managing each position in an efficient and unemotional manner is the best way to increase the probability of profitable outcome. Selection and timing are generally considered the most important characteristics of a favorable position. A successful trader will wait until an overwhelming majority of factors are positive before initiating a trade. Fortunately, opportunities are plentiful and as option traders we must be very selective, participating only when the circumstances indicate the probability of profit is at the highest levels. One of the keys to correct entry timing is to let the market tell you when to trade; based on reliable technical patterns, option volatility and public sentiment (often the most useful contrarian indicator). The skilled and disciplined option writer can benefit from all types of markets using a diverse, well ordered approach to this uniquely effective strategy. Naked option writing is one of the few techniques where the trader has an advantage over the majority of other players. The option seller provides the buyer a market in which to speculate, and for that service he is paid a fee and receives slightly better odds. Studies suggest that option writers can achieve a 15 - 20% greater probability of success in their trading through the sale of over- valued positions. Obviously, before you can evaluate a potential candidate, you must know whether volatility is historically high or low and be able to compare it's value to that of other possible positions. Option sellers strive to take advantage of statistically high option premiums and in most cases, the best opportunities occur when volatility is at an extreme. In fact, that is also when the greatest number of pricing disparities are present in the market. The last theoretically important component is time decay. Over-valued, high volatility options lose their time premium rapidly as they approach expiration and that is the primary reason why this strategy has become so popular with Jim (the OIN editor). The current market offers an incredible number of volatile issues with overpriced options and when you become a merchant of time, the odds are definitely in your favor. *** 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 MCRE 12.56 11.81 FEB 10.00 0.69 *$ 0.69 21.6% 23.4% WSTL 11.44 18.88 FEB 7.50 0.50 *$ 0.50 17.9% 16.5% HSAC 23.00 18.56 FEB 17.50 0.69 *$ 0.69 13.0% 14.2% DMRK 22.38 31.13 FEB 17.50 0.69 *$ 0.69 13.3% 12.3% SMSC 14.25 13.88 FEB 12.50 0.50 *$ 0.50 11.2% 12.2% NSPK 22.25 20.25 FEB 15.00 0.56 *$ 0.56 11.2% 12.1% NZRO 33.25 34.94 FEB 22.50 0.75 *$ 0.75 10.1% 11.0% RNBO 24.75 23.88 FEB 20.00 0.56 *$ 0.56 9.8% 10.7% TLCM 20.25 23.13 FEB 15.00 0.50 *$ 0.50 11.0% 10.1% QTRN 24.44 26.06 FEB 17.50 0.50 *$ 0.50 9.3% 10.1% NPLS 23.06 26.00 FEB 17.50 0.44 *$ 0.44 8.7% 9.5% PGEX 22.81 19.69 FEB 15.00 0.50 *$ 0.50 9.9% 9.1% PILT 25.94 27.50 FEB 17.50 0.56 *$ 0.56 9.7% 9.0% CPQ 32.00 27.50 FEB 25.00 0.56 *$ 0.56 8.0% 8.7% NOVL 33.69 30.19 FEB 25.00 0.63 *$ 0.63 8.5% 7.9% GSTRF 34.19 31.75 FEB 22.50 0.63 *$ 0.63 8.4% 7.8% EMIS 35.63 39.63 FEB 25.00 0.63 *$ 0.63 8.1% 7.5% NETA 28.00 25.69 FEB 20.00 0.38 *$ 0.38 6.4% 5.9% *$ = Stock price is above the sold striking price. Comments: High Speed Access (HSAC) is still displaying positive technical divergence's though a test of the December low appears likely. Breaking that support would be a logical exit point. Netspeak (NSPK) will need to weaken considerably to reach our sold strike. With Compaq (CPQ), we may see just how strong the support really is (at the sold strike). This assessment applies to Novell (NOVL) and Globalstar (GSTRF) as well. Evaluate now whether you want to own any of these issues. If not, stick to your pre-planned target exit (where you will buy the put to close your position). 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 MESG 18.31 FEB 15.00 MUG NC 0.50 92 14.50 11.1% MSGI 18.50 FEB 15.00 UMS NC 0.50 238 14.50 11.4% OTEX 20.63 FEB 17.50 QFT NW 0.56 266 16.94 9.9% PCMS 15.00 FEB 12.50 PQP NV 0.50 195 12.00 12.5% TLCM 23.13 FEB 17.50 TMU NW 0.31 40 17.19 6.3% TRVL 15.50 FEB 12.50 TVU NV 0.44 10 12.06 12.1% TSEMF 14.38 FEB 12.50 TWQ NV 0.75 50 11.75 16.2% XICO 19.75 FEB 15.00 CIU NC 0.31 30 14.69 7.3% Sequenced by ROI Stock Price Mon Strike Option Opt Open Cost ROI Opt Sym Price Symbol Bid Intr Basis Expired TSEMF 14.38 FEB 12.50 TWQ NV 0.75 50 11.75 16.2% PCMS 15.00 FEB 12.50 PQP NV 0.50 195 12.00 12.5% TRVL 15.50 FEB 12.50 TVU NV 0.44 10 12.06 12.1% MSGI 18.50 FEB 15.00 UMS NC 0.50 238 14.50 11.4% MESG 18.31 FEB 15.00 MUG NC 0.50 92 14.50 11.1% OTEX 20.63 FEB 17.50 QFT NW 0.56 266 16.94 9.9% XICO 19.75 FEB 15.00 CIU NC 0.31 30 14.69 7.3% TLCM 23.13 FEB 17.50 TMU NW 0.31 40 17.19 6.3% Company Descriptions MESG - MessageMedia $18.31 *** New Contracts *** 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. New contracts and BUY rating with a $28.50 target from Robertson Stephens provides us with favorable speculation. With earnings due in about 10 days, we favor selling a strike below the December high. FEB 15.00 MUG NC Bid=0.50 OI=92 CB=14.50 ROI=11.1% Chart = /charts/charts.asp?symbol=MESG **** MSGI - Marketing Services $18.50 *** Breakout soon? *** Marketing Services 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. Marketing Services has formed an ascending triangle (a bullish formation) with technical support near our cost basis. FEB 15.00 UMS NC Bid=0.50 OI=238 CB=14.50 ROI=11.4% Chart = /charts/charts.asp?symbol=MSGI **** OTEX - Open Text $20.63 *** Share Buyback *** Open Text develops, markets, licenses and supports collaborative knowledge management application software for use on intranets, extranets and the web, that enables users to find electronically stored information and work together in creative processes. Their flagship "Livelink" software enables users to search intranets, manage documents and work flow, collaborate on projects, and schedule corporate wide group activities. Open Text values its shares at $20 as it just completed a 4 million share buy back program. The technicals remain bullish as the issue has moved above its 150 dma with a recent increase in volume. FEB 17.50 QFT NW Bid=0.56 OI=266 CB=16.94 ROI=9.9% Chart = /charts/charts.asp?symbol=OTEX **** PCMS - P-Com $15.00 *** Is it gone?/Can we catch it? *** P-Com develops, manufactures, and markets network access systems for the worldwide wireless telecommunications market. The point- to-point, spread spectrum, and point-to-multipoint radio links provided by PCMS are designed to satisfy the network requirements of cellular, personal and corporate telecom services, public utilities and local governments. In addition, P-Com provides comprehensive network services including system planning, program planning and management, path design, and installation. P-COM has moved to a new 52-week high on increasing volume and Friday's upgrade along with the recent favorable earnings report should propel it higher. FEB 12.50 PQP NV Bid=0.50 OI=195 CB=12.00 ROI=12.5% Chart = /charts/charts.asp?symbol=PCMS **** TLCM - TelCom Semiconductor $23.13 *** Blue Sky *** TelCom Semiconductor designs, develops, manufactures and markets a diversified portfolio of high-performance analog integrated circuits for a wide variety of applications in the industrial, wireless communications, computing, networking and medical markets. The company builds products in a number of critical areas for a wide range of electronic systems. After recently being upgraded, TelCom reported record revenues and operational profits for the fourth quarter and full year this week. TelCom has moved into blue sky territory though some consolidation is in order. We favor getting paid for trying to own TelCom near support. FEB 17.50 TMU NW Bid=0.31 OI=40 CB=17.19 ROI=6.3% Chart = /charts/charts.asp?symbol=TLCM **** TRVL - Travel Services $15.50 *** Breakout *** Travel Services International is a specialized distributor of travel products including cruise vacations, vacation packages, domestic and international airline tickets and European auto rentals, and also provides travel services such as electronic hotel reservation services, specialized hotel programs and services and incentive travel programs. The company provides its services to both travel agents and retail customers, and recently they launched a new vacation web site (mytravel.com). The technical break-out above old resistance near $14 may be an indication of a new trading range for this issue. FEB 12.50 TVU NV Bid=0.44 Oi=10 CB=12.06 ROI=12.1% Chart = /charts/charts.asp?symbol=TRVL **** TSEMF - Tower semiconductor $14.38 *** Stealth Take-over? *** Tower semiconductor is an independent manufacturer of integrated circuits on silicon wafers and a provider of related services. As a foundry, Tower provides IC design, manufacturing and turnkey services using advanced production capabilities and the proprietary IC designs of its customers, and is specializing in providing solutions for embedded non-volatile memory devices and CMOS image sensors. ICs manufactured by Tower are adapted into a wide range of products in diverse and rapidly growing markets, including computer and office equipment, communication products and consumer electronics. Israel Corp. has recently obtained 45% interest in Tower providing financial strength and management experience that should help Tower's growth plans. Investors have reacted positively with Tower breaking out of its recent trading range. We favor the support near our cost basis. Earnings are due this week. FEB 12.50 TWQ NV Bid=0.75 OI=50 CB=11.75 ROI=16.2% Chart = /charts/charts.asp?symbol=TSEMF **** XICO - Xicor $19.75 *** Own This One! *** Xicor designs, develops, manufactures and markets reprogrammable nonvolatile semiconductor integrated circuits containing digital, analog and reprogrammable nonvolatile elements. Xicor's devices can be reprogrammed bit by bit or in larger groups without being removed from the system and operate from a range of power sources. Xicor recently reported favorable quarterly earnings and received a new upgrade with a price target of $35. That's optimistic for sure but we like the cost basis of this position, near a recent consolidation area and technical support (December highs). FEB 15.00 CIU NC Bid=0.31 OI=30 CB=14.69 ROI=7.3% Chart = /charts/charts.asp?symbol=XICO ************************ SPREADS/STRADDLES/COMBOS ************************ Panic And Pandemonium In The Pits.. Friday, January 28 Traders bolted for the exits Friday as robust economic data raised fears the Fed would fight inflation aggressively in its monetary policy meeting next week. The Dow Industrials fell sharply, closing down 289 points at 10,738. The Nasdaq posted its second biggest point loss ever, falling 152 points to 3887. The S&P 500 index closed down 38 points at 1360. Volume on the Big Board was unusually average at 1 billion shares. Losers trounced the winners 2,034 to 1,001. Bond prices firmed and the 30-year Treasury closed up 31/32 with the yield at 6.49%. Thursday's new plays (positions/opening prices/strategy): Aspect Dev. ASDV FEB55C/FEB65C $8.75 debit bull-call Corning GLW FEB120P/F130P $1.12 credit bull-put Siebel Sys. SEBL FEB85C/FEB95C $7.00 debit bull-call Our new group of bullish positions might be considered untimely, based on today's market movement. Fortunately, the positions we offered were all market leaders, and there is a good chance they will finish the expiration period profitable. Aspect Development was by far the strongest of the three, falling only slightly during the session. Corning took a big dive but support near $125 may eventually help the bullish credit spread. SEBL, our reader's request play was the most troublesome issue, opening almost $4 lower and finding little support on the way to a $10 loss. Our initial move was to the next lower strike and an $8.50 debit on the FEB80C/FEB90C spread was achieved before the selling began in earnest. However, we will list the play as originally posted for those of you that made no adjustment. Portfolio plays: Equity markets tumbled after the release of stronger-than-expected economic data renewed concerns of inflation and higher interest rates. The slide came on the announcement that the fourth quarter gross domestic product rose 5.8% versus the forecast 5.0%. The employment cost index also ended higher, 1.1% against a forecast rise of 0.9%. Analysts say the data was very negative and many now expect the Fed to raise rates by 50 basis points when they meet to discuss monetary policy next week. The bearish move took the DOW below the 11,000 level for the first time since early January, and beneath its 200-day moving average; a technically significant support level. Now the bears are out in force and they have plenty of ammunition with the market internals weakening on a daily basis. The selling was widespread and without remorse, and financial stocks were hardest hit. Among the few bright spots in the market were shares of drug companies and small telecom issues. In the tech arena, Internet issues were pounded and the majority of other sectors were significantly affected. Our portfolio was no different with nearly all of the issues falling on the news of rising inflation. The losses were significant in a number of the higher priced stocks but the majority of portfolio plays are intact. Those that were in danger of substantial losses were closed to protect previous gains. We also exited a few of the high risk positions with significant downside potential. The next few days will undoubtedly determine our level of success for the month of February. Questions & comments on spreads/combos to Click here to email Ray Cummins ********* NEW PLAYS ********* NN - Newbridge Networks $28.68 *** New Merger Speculation *** Newbridge Networks designs, manufactures, markets and services wide area networking (WAN) solutions to service providers and corporate customers based on a broad product family that cost effectively addresses their constantly evolving communications requirements. Newbridge has developed a broad family of digital networking products that are effective in the core, edge and access portions of service provider or corporate WANs. Their products employ a common architecture that allows TDM, X.25, frame relay, asynchronous transfer mode (ATM), SMDS and local area networks (LAN) internetworking to coexist within the same network and provides a migration path from legacy narrowband to next generation broadband networks. Their customers include the world's 350 largest service providers and 10,000 corporations, government organizations and other institutions in more than 100 countries. Shares in Newbridge Networks spiked last week as takeover rumors resurfaced. Speculation that a sale could come in the next month propelled the stock to recent highs. A number of candidates have been named as potential buyers including Nortel Networks, Cisco Systems, Tellabs and European telecom companies Alcatel Alsthom, Siemens AG and Ericsson. The company may consider the sale of a portion of the business, rather than the entire operation. Newbridge is also due to report earnings on or near February 22 and fortunately, the announcement should occur after this month's options expire. We will use the new interest in call options to open a speculative, short-term position. PLAY (speculative - bullish/diagonal spread): BUY CALL MAR-17.50 NN-CW OI=222 A=$11.00 SELL CALL FEB-25.00 NN-BE OI=9047 B=$4.62 INITIAL NET DEBIT TARGET=$6.12 TARGET ROI=20% (3 weeks) Chart= /charts/charts.asp?symbol=NN **** CCN - Chris Craft Industries $75.38 *** CBS Buy-out? *** Chris-Craft Industries is a television broadcasting company with business conducted through its majority owned subsidiary, BHC Communications (BHC), which owns of Chris-Craft Television (CCTV), Pinelands and over half of United Television (UTV). BHC operates six very high frequency (VHF) television stations and three ultra high frequency (UHF) television stations, together constituting Chris-Craft's Television Division. United Paramount Network (UPN), owned 50% by BHC and 50% by Viacom's Paramount Television Group, broadcasts ten hours of original prime time programming on five nights per week. CCN Industrial Products, a wholly owned subsidiary of Chris-Craft that constitutes its Industrial Division, is primarily engaged in manufacturing plastic flexible films and distributing containment systems to the healthcare industry. Chris-Craft shares broke-out of a recent trading range last week after reports that the company was again in talks with CBS Corp. (CBS) regarding a potential acquisition. Published news items suggested that representatives of both companies met on Thursday in a renewed effort to consummate a deal. CBS, which is being acquired by Viacom, is apparently pursuing the pact on behalf of both companies. Chris-Craft is considered a favorable candidate for the conglomerate because the revised FCC rules concerning TV-station ownership have made its properties very attractive. Another factor that could lead to a Chris-Craft takeover is its equal partnership with Viacom in the UPN television network. Regardless of the outcome, speculation is rampant and the new interest in CCN's stock has pushed the issue above a short-term resistance level. With support near the sold strike, this play offers a favorable risk/reward outlook. PLAY (aggressive - bullish/credit spread): BUY PUT FEB-65 CCN-NM OI=189 A=$0.68 SELL PUT FEB-70 CCN-NN OI=60 B=$1.50 INITIAL NET TARGET=$0.93 ROI(max)=22% Chart= /charts/charts.asp?symbol=CCN **** EXTR - Extreme Networks $87.38 *** Extremely Awesome! *** Extreme Networks provides switching solutions that meet the needs of enterprise local area networks, via utilization of ASIC semiconductors throughout the product line. Their leading-edge switches transmit more information faster and enable enterprises to transition from older LANs to current technologies. Extreme makes several switch product lines including BlackDiamond and Summit, which address the switching needs across the LAN, from desktops to servers, work groups, and network cores. Extreme also offers software for switch management and system configuration. Their customers include electronics manufacturers and resellers around the globe. Extreme pummeled the analysts with record results earlier this month and for that act, they were rewarded. Their share value gapped-up $15 and a slew of upgrades followed. Robertson Stephens Senior Communications - Networking Analyst Paul Johnson was the first to step forward, reiterating his BUY rating and raising future estimates based on higher revenue growth from the company's business model and new product lines. Hambrecht & Quist also rates Extreme a BUY and they recently added the company to their Focus List, based on its compelling near-term growth prospect and attractive relative valuation. We simply favor the fundamental outlook and bullish technicals. The possibility of ownership at that level is also attractive, in the event of a short-term consolidation. PLAY (conservative - bullish/credit spread): BUY PUT FEB-65 EVT-NM OI=41 A=$0.75 SELL PUT FEB-70 EVT-NN OI=145 B=$1.18 INITIAL NET CREDIT TARGET=$0.56 ROI(max)=12% Chart= /charts/charts.asp?symbol=EXTR *************** TECHNICALS ONLY *************** These plays are based on the current price or trading range of the underlying issue and the recent technical history or trend. The probability of profit from these positions is also higher than other plays in the same strategy, based on option pricing disparities. Current news and market sentiment will have an effect on these issues so review each play individually and make your own decision about the future outcome of the position. **** TQNT - Triquint Semiconductor $160.50 *** Up, Up and Away! *** TriQuint Semiconductor develops, manufactures and markets high performance analog and mixed signal integrated circuits for the communications markets. The company utilizes its proprietary gallium arsenide (GaAs) technology to enable its products to overcome the performance barriers of silicon devices in a variety of applications. TriQuint offers families of standard products for each of its target markets, including wireless communications, telecommunications, data communications and millimeter wave communications. This issue has one of the strongest technical patterns in the market. The stock has traded at or above its 30 dma for almost nine months and the trend shows no signs of weakening. TQNT is also being added to the S&P MidCap 400 Index; a move that can only help its trend. A small disparity in option premiums will allow us to participate in the upward movement of this issue with relatively low risk. PLAY (aggressive - bullish/debit spread): BUY CALL FEB-135 TQN-BZ OI=452 A=$27.25 SELL CALL FEB-140 TQN-BY OI=1 B=$24.00 INITIAL NET DEBIT TARGET=$3.25 ROI(max)=33% Chart= /charts/charts.asp?symbol=TQNT ********* STRADDLES ********* Profitable debit straddles are relatively simple to uncover and there are three rules to identifying favorable conditions for a straddle purchase. First, the trader should select issues with options that are undervalued (statistically cheap). Next, the underlying security must have the potential to move (high or low) enough to make the straddle profitable. Finally, the underlying stock should have a history of multiple movements through a sufficient range in the required amount of time to justify the overall risk/reward of the position. It appears the following play meets all of the requirements. **** APLX - Applix Incorporated $14.62 Applix develops, markets and supports front office business software applications, which allow organizations to improve decision-making and corporate productivity. The front office business applications include a suite of thin-client Customer Relationship Management applications, which include Applix Enterprise and Enterprise Anyware product lines, and a set of real-time Business Intelligence tools and applications, which include the Applix TM1 product line. In addition to its front office business applications, Applix also provides a set of decision support applications, consisting of Applixware and Applix Anyware products. Most of the company's products are available on a variety of software platforms, including Windows, Windows NT, UNIX and Linux environments. Review the news articles concerning their recent earnings and the company's investment in a Linux-based enterprise before opening any positions. PLAY (conservative - neutral/debit straddle): BUY CALL JUL-15 AUL-GC OI=175 A=$3.25 BUY PUT JUL-15 AUL-SC OI=10 A=$3.50 INITIAL NET DEBIT TARGET=6.50 TARGET ROI=50% Chart= /charts/charts.asp?symbol=APLX ************************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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