The Option Investor Newsletter Sunday 2-6-2000 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 2-4 WE 1-28 WE 1-20 WE 1-14 DOW 10963.80 +224.93 10738.87 -512.84 11251.71 -471.20 +200.42 Nasdaq 4244.14 +357.07 3887.07 -348.33 4235.40 +171.13 +181.65 S&P-100 775.51 + 37.47 738.04 - 41.74 779.78 - 17.74 + 14.03 S&P-500 1424.37 + 64.21 1360.16 - 81.20 1441.36 - 23.79 + 23.68 RUT 525.52 + 20.90 504.62 - 29.33 533.95 + 25.84 + 19.80 TRAN 2608.96 + 27.21 2581.75 -169.74 2751.49 -140.14 - 73.09 VIX 22.93 - 6.16 29.09 + 6.43 22.66 + .53 - 1.07 Put/Call .45 .60 .47 .42 ****************************************************************** Fasten your seatbelts. Get ready for a bumpy ride. Bungee trading anyone? Last Sunday the NASDAQ had just put in a -415 point week and the bears were tripping over each other to proclaim the end of the bull market. This week the NASDAQ gained +500 points from the intraday low on Monday. (+357 from the Friday close) Record high to a -11% correction and back to record high in just two weeks. Over bought to over sold to over bought. The Dow however, is not quite the picture of health that you would expect. I said last week that the Dow would suffer while the NASDAQ added strong gains but I think it was worse than we expected. After posting two back to back triple digit gains on Mon/Tue the Dow has not been able to muster any support. You would think it was the Dow that woke from its slumber and stuck its head out on Feb-2nd. After seeing the shadow we are now condemned to six more weeks of drops before the April earnings run. It may be a long time before you hear the terms "flight to quality" or "safety of bonds" again. The volatility in the bond market this week was extremely rare. Several days saw bonds gain or lose multiple points. There are rumors flying that several big hedge funds and large banks got hurt very badly. There was even a rumor that the Fed would hold an emergency meeting to address the problem. The actual problem is our fault. We are paying taxes at a record rate and the government said they would be cutting back on the number of bonds they sell and would be aggressively buying back some bonds already in circulation. The supply of the 30-yr bond is going to dry up. Companies and financial institutions, that use these bonds for hedging against the fluctuations in the financial markets, scrambled to buy and traders who were short bonds added to the panic. After the Fed announced they would not be meeting the bonds started easing. It is official, we are in the longest economic expansion in history at 107 months and counting. The economy continues to explode at almost twice the GDP the Fed wants. The Nonfarm payrolls on Friday were off the charts. There were 387,000 new jobs created in January and unemployment dropped to a 30 year low of 4%, a level Greenspan considers a trigger point. The estimate of new jobs was 250K and the actual number was over 50% higher. A Merrill Lynch Economist, Bruce Steinberg warned that new jobs must drop to 175,000 a month in order to maintain the 4% unemployment rate. Many economists expected the rate to fall below 4% this month. The huge increase in employment will push the GDP even higher. Normally a report like this would be the kiss of death to any tech rally but not today. Stocks continued the tale of two markets this week. The Nasdaq powered ahead but the Dow only managed +224 points. Much of the Dow's gains were made on an oversold bounce on Mon/Tue. Once the Fed meeting was over the reality set in on the Dow. The Fed may raise rates as many as three more times. Financials took it on the chin and started giving up ground. Materials stocks started dropping on fears that reduced demand caused by higher interest rates would impact their performance. Inflation might not be running rampant but nowhere is it dropping. Gold shot up +$23 an ounce after Placer Dome Mining said they were going to discontinue their hedging operation because they felt the price was going to move higher from here. Previously they would contract to sell future production at today's prices in order to protect against a fall in price. Rising gold prices are seen as a prelude to an inflationary cycle. The competition for PC sales just got tougher and prices just became significantly cheaper. Ford announced that they would be offering a fully featured HWP PC, printer and Internet access for only $5 per mo. When you consider Ford has 350,000 employees that became a huge sale for HWP. Ford only joined the list of companies "giving" away computers as perks for only a token amount. Delta, with 72,000 employees made the same announcement this week at $12 per month. This perk gives companies one more string to keep employees tied to their job and prevent having to bid for trained workers in the work place. The downside of course is the removal of these workers from the retail PC market place. If you are HWP you probably had to give away all but a very minimum profit margin to close an order of this size. As this trend catches on, more than a dozen companies currently offer this perk, the retail PC sellers will see not only their business but their clients slip away. Of course a smarter worker with a new computer needs software, joysticks, speakers, etc and the margins on those items are fatter than the margins on a PC. The real winner if this trend continues? Microsoft. Easily a couple million new copies of Win98 will go on these free computers this year. I told you last week that this coming Monday and Tuesday would be the key. We are four days into February and the Dow is now trending down and closed under the psychologically important 11000. The NASDAQ is showing signs of a failed rally at 4300. The NASDAQ did make a new record close by +9 points but dropped -52 points from the high of the day. The tech sector is showing signs of weakness. Not all the techs were in the rally. These heavyweights of the tech/Internet world, JDSU, QCOM, YHOO, BVSN, RHAT, VERT, EPNY, AMZN, BRCD, PUMA, ASKJ, INKT, EMLX, VIGN, INSP, NSOL, CMGI, ICGE, RNWK, CMRC, DCLK, ITWO, BRCM all ended the day down. Many were up strong intraday but fell in the afternoon. It could be just fear of darkness and pre-weekend profit taking but when that many stocks diverse stocks all fail at once I start looking under the surface. I think there is still a lot of complacency in the market. Investors are literally selling anything non-tech to buy tech stocks. The price is not important. They just want to be in techs and get those 100% returns "everybody" got last year. The publicity blitz is upon us. Every tech fund with outstanding results last year is promoting their record gains in an effort to seduce you to move your money into their wallets. Dozens of funds generated over +100% gains. Even the Munder Internet fund posted +110% for the year. Now the hunt is on. Which fund is going to be the winner this year. Cash out my Acme Market Loser and my Lost Value Advantage funds and throw money at the techs. While this sounds like a pure reason to buy techs now it is also a reason to be skeptical of market health. Past performance is no guarantee of future results is what all the brochures say. This means give me your money and we will invest it and we might return a profit. A sure way to not show a profit would be to throw this money at the NASDAQ after a possible failed rally signal like we had on Friday. Fund managers know this. There is a tremendous amount of money on the sidelines. They are waiting for a signal. The green light. The starters pistol. Instead we get a Fed rate hike, (do not pass go). The Fed warns they will probably raise rates again in March if not before, (pay the Fed tax). The nonfarm payrolls come in +50% more than expected, (speeding ticket, pay a fine). The wall of worry just keeps getting higher when we want it to go away. The main reason for market rallies just died. Earnings. Almost all the earnings announcements have passed. The stock split announcements and corresponding spike in prices is over. CSCO and DELL are about the only major tech stocks left to report and only one of those will be positive. Don't look now but there is another reason to sell stocks in February. Traders are faced with that yearly beating called income tax. With record gains last year and most of them trading gains, traders will have to convert a sizeable chunk of stock to cash for the tax man. If every online trader had to take only 10% out of his account for taxes, and that number is probably low, you would almost be able to hear the collective gasp as the market softened. This cash out does not have to happen in February and more than likely many will try and stretch it until the last minute in April but it begins in February. Next week is when the cash flow battle will begin. Managers will wait on the sidelines expectantly hoping for a pullback. Tech fund managers, flush with cash from people moving out of value funds, will be hard pressed to wait very long. Like a kid in a candy store with a pocket full of Christmas money they will be ready to scoop up techs by the arm full if there is no sign of a sell off. Monday and Tuesday will be key days. If we can hold around 11000 on the Dow, 1400 on the S&P and 4050 on the NASDAQ then we have a chance. If all slip under these numbers we could see yet another "correction". The most probable scenario is a tug of war between the buyers and the sellers and the result would be a highly volatile range bound market for the next two weeks. Remember last summer when we were locked in a trading range on the Dow for weeks at a time. This was the biggest week ever for the NASDAQ both in points gained and percentage gained. Since nothing goes up in a straight line that alone would be enough to make traders nervous about next week. This probably had a lot to do with the sell off in the last hour on Friday. Tuesday is the Nonfarm Productivity report and Friday hosts the Retail Sales report. These are not the heavyweights like the FOMC meeting or the Nonfarm payrolls but they will be watched. Volume on the NYSE continues to be heavy which makes the down indications worse. Advancers only beat decliners on the NASDAQ by 21:19 on a record day Friday. The wild cards Friday were the S&P and the RUT. The S&P closed above support of 1400 and the Russell-2000 finished at almost the high of the day. These indexes could be the real picture of the broader market and the drama surrounding the Dow and NASDAQ is just to keep us confused. I think this week boils down to "if you own it, hold it" and if you are planning to open new positions try to pick your entry points carefully. Fasten your seatbelts, volatility ahead. Trade smart, sell too soon. Jim Brown Editor ****************************** OptionInvestor/Optionetics Spring Advanced Seminar Series ****************************** The spring dates for the OptionInvestor/Optionetics seminar series are approaching fast. 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 *********** This was a pretty good week, with the exception of the dip on Monday that gave me some serious second thoughts. I closed some naked puts on the intraday dip on Thursday and then added some more when the market turned around again. I am trying not to trade much due to my concern for the market direction in February and a pressing work schedule. Because of the number of active plays I am not going to explain many since the concept is the same for most. After the dip on Monday I was in several much deeper than I wanted. This uneasiness made me gun shy when the Thursday drop started. On BRCM I had sold in the money because of the 3:1 split coming. After the big run I was worried we could see some pre-split selling and put a tight stop on the play. I really blew it on SILK. I should have had a stop but didn't. I should have covered immediately and didn't. I pulled a true rookie move and let it bleed thinking $140 support would hold. The Nasdaq was in rally mode and there was no news on SILK. Somebody was selling a big stake and I thought surely it would stop. Wrong idea. I got into this trap by having too many open positions and after the gap down I did not want to believe it would not bounce back up like the rest of the Nasdaq stocks. My loss, and it energized me to go back to placing GTC stop losses on every position. When I click submit to open the position I immediately change the 'sell open' to 'buy close' and put in my stop. Sometimes before the opening order is even filled. Discipline is the key. Over confidence is the flaw. Do as I say, not as I do. NOK - $170 Calls NEW POSITIONS THIS WEEK: The next three plays are a little out of my normal risk profile. They have very little risk, have very low margin and high return percentages on two week plays. INDEX PLAYS CLOSED: QQQ Calls purchased Friday 1/28. OEX - $760 calls purchased Friday 1/28 NEW INDEX PLAYS: You know my thoughts on market direction. Nothing goes in a straight line. After five up days on the Nasdaq and with the Dow looking weak I could not go into the weekend without a bunch of Puts on both the QQQ and the OEX to protect myself on being stopped out on some of the naked put plays above. If the market gaps down I am protected. I think the chances of a gap up are slim. This is way too many plays to maintain and watch carefully but the Naked Put plays require very little maintenance if you set them up right to start with. You have to be disciplined to set your GTC stop losses when you start the play and then raise them daily as the play progresses. I hope the market breaks out next week and runs all the way to April earnings. I don't see it but it would be nice. I am planning to keep my stops close in case of another correction. I want to be in cash if we get another one because I think it will be the last one until April. Entry points near the bottom are much easier to maintain. Good Luck Jim ************ Stock News ************ I Just Don't Get It By S.P. Brown I have to admit pro-wrestling has always been something of a head-scratcher to me. I just don't get the entertainment value of muscle-bound men and scantily-clad women pretending to pummel one another with inanimate objects and spine-jarring body slams. But then again, I don't get Ally McBeal, tractor pulls and Martha Stewart either. http://members.OptionInvestor.com/stocknews/020600_1.asp ******* Ask OIN ******* Man's Best Friend is a Trend Line, not a Dog. By Ryan Nelson Everyone needs a best friend. Whether it is a dog or a college buddy or a spouse or one of your children, it is someone you are comfortable with and can trust. Let me tell you about my best friend in the trading world. It is known as a Trend Line and is part of most interactive charting programs. For those of you unfamiliar with a Trend Line, it is a line that extends continually in one direction on your chart. We will look at some examples in the charts below. The beauty of the Trend Line is the ability of this simple device to take the emotion out of your trades. http://members.OptionInvestor.com/ask/020600_1.asp ************** Market Posture ************** As of Market Close - Friday, February 4, 2000 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,700 11,250 10,964 Neutral 2.01 SPX S&P 500 1,350 1,500 1,424 Neutral 2.01 OEX S&P 100 730 800 775 Neutral 2.01 RUT Russell 2000 475 500 525 BULLISH 11.12 NDX NASD 100 3,200 3,850 3,874 BULLISH 2.03 MSH High Tech 1,650 1,900 1,929 BULLISH 2.03 XCI Hardware 1,300 1,460 1,456 Neutral 1.28 CWX Software 1,200 1,420 1,393 Neutral 1.07 SOX Semiconductor 700 745 868 BULLISH 12.21 NWX Networking 800 900 971 BULLISH 2.03 INX Internet 700 800 763 Neutral 1.06 BIX Banking 645 690 532 BEARISH 11.30 XBD Brokerage 400 450 430 Neutral 11.30 IUX Insurance 625 650 556 BEARISH 11.30 RLX Retail 950 1,000 917 BEARISH 1.28 DRG Drug 340 400 355 Neutral 1.28 HCX Healthcare 700 790 741 Neutral 1.28 XAL Airline 180 190 127 BEARISH 5.21 OIX Oil & Gas 280 315 263 BEARISH 1.27 Posture Alert A favorable interpretation of January's employment report sparked the Nasdaq to close into record territory capping a biggest weekly advance for the technology market (+21%). Other broad market measures have rallied back to their respective 50-day moving averages while financial, airline and Oil & Gas sectors drift lower. ****************** Market Sentiment ****************** Sunday, February 6, 2000 A Record or Top Reversal Signal! By Pinnacle Capital Advisors With Nasdaq rallying sharply this week and closing in virgin territory, do we have a record or a top reversal signal? Don't look now, but the Nasdaq just revealed a nice BIG Doji and a second day of a three-day reversal pattern known as an evening star according to Candlestick charting technicians. If the Nasdaq gaps down on Monday (2/7) and loses more than 50 points, it will complete the three-day reversal signal and many market timers will be calling for a short-term top. More alarming, many media observers will be claiming that the Nasdaq could not hold it's gain and may deflate investor sentiment and spark a precipitous sell off. With so much on the line, let's take a closer look at what we really have from a top down perspective. First, it's true that Nasdaq rebounded sharply following the bond market rally that began last Monday (1/31). But the Nasdaq really broke record ground on the heels of two technology sectors - networking and semiconductors. These sectors were led primarily by Cisco (CSCO) and Intel (INTC), both of which registered new 52- week highs. Cisco reports its earnings next week so it basically on an earnings run. But if you look at Intel's Chart, you'll see a flaming shooting star - another potential top reversal signal. Sector Close Posture Since SOX Semiconductor 868 BULLISH 12/21 NWX Networking 971 BULLISH 2/03 Although Hardware, software and Internet recorded advances last week, they have NOT broken out yet and are just sitting above their respective 50-dma but in their potential failed rally zones. Sector Close Posture Since Failed Rally Zones XCI Hardware 1,456 Neutral 1/28 1,400 - 1,460 CWX Software 1,393 Neutral 1/07 1,380 - 1,400 INX Internet 763 Neutral 1/06 760 - 800 So much for technology sector. More problematic is the balance of the market. Don't look now, but the DJIA closed below 11,000 again and BELOW its 50-dma. There is an old saying that what was once support can also serve as resistance. Could the 11,000 level fall victim to the new line of defense. But most investors are writing off the DOW because it hosts many "Old Business" companies. Guys like International Paper (IP) and United Technologies (UTX) which have fallen on bad times. But the S&P 100 (OEX) and S&P 500 (SPX) doesn't look that much better. Both are sitting right at their respective 50-dma and coming off a potential reversal signal as well. Sector Close Posture Since Failed Rally Zone DOW Industrials 10,964 Neutral 2/01 11,000 - 11,600 SPX S&P 500 1,424 Neutral 2/01 1,425 - 1,460 OEX S&P 100 775 Neutral 2/01 770 - 800 Now normally in a Bull market one would expect the S&P 100 and 500 to bounce of their respective 50-dma and continue to lift the equity markets higher. But take a look at some of the sectors that make up the S&P 100 and 500. Sectors Close Posture As of Recent Action BIX Banking 532 BEARISH 11/30 FAILED below 50dma XBD Brokerage 430 Neutral 11/30 FAILED @ 50dma IUX Insurance 556 BEARISH 11/30 FAILED below 50dma RLX Retail 917 BEARISH 1/28 FAILED below 50dma DRG Drug 355 Neutral 1/28 FAILED below 50dma HCX Healthcare 741 Neutral 1/28 FAILED below 50dma XAL Airline 127 BEARISH 5/21 FAILED @ 50dma OIX Oil & Gas 263 BEARISH 1/27 FAILED below 50dma Not very good looking charts and it underscores why our market posture for many of these lagging sectors has been BEARISH. Now if you were a betting man, which direction would you expect the S&P 100 and 500 to move with Banking, Brokerage, Insurance, Retail, Drug, Healthcare, Airline and Oil & Gas all drifting south. Many market analysts believe that Networking and Biotech stocks will lead the market higher. From Pinnacle Capital Advisors' perspective, it's hard to imagine a scenario where the equity markets can get airborne with broader participation. BULLISH Signs: Corporate Earnings: Major corporate earnings continue to come out strong and ahead of analyst expectations. 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 (6.225): Although the bond market rally has helped bring the current yield down near 6.0 last week, it closed Friday (2/4) at 6.225. BEARISH Signs: Volatility Index (22.93): The VIX continues to prove that the low 30's are an excellent buying opportunity, and the low 20's continue to be a great selling opportunity. The VIX gapped down below 22.0 before snapping back and closing at 22.93 on Friday (2/4). 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 (2/4) Overhead Resistance (780-830) 4.76 OEX Close 775.51 Underlying Support (740-760) 2.10 Underlying Support (700-735) 10.31 What the Pinnacle Index is telling us: Overhead resistance is building and could stall a broad market advance. Put/Call Ratio Friday Strike/Contracts (2/4) CBOE Total P/C Ratio .45 CBOE Equity P/C Ratio .38 OEX P/C Ratio 1.05 Peak Open Interest (OEX) Friday Strike/Contracts (2/4) Puts 700 / 9,281 Calls 800 / 7,350 Put/Call Ratio 1.26 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 February 4, 2000 22.95 ************* COMING EVENTS ************* For the week of February 7th, 2000 Monday Consumer Credit Dec Forecast: $8.7B Previous: $15.6B Tuesday Non-farm Productivity Q4-pre Forecast: 5.1% Previous: 4.9% Unit Labor Costs Q4-pre Forecast: -- Previous: -0.2% Richmond Fed Survey Jan Forecast: -- Previous: 15 Wednesday Wholesale Inventories Dec Forecast: 0.7% Previous: 1.1% Thursday Jobless Claims 2/04 Forecast: -- Previous: 274K Friday Retail Sales Jan Forecast: 0.7% Previous: 1.2% Univ of Mich Sentiment Feb Forecast: -- Previous: 111.1 Chicago Fed Index Dec Forecast: -- Previous: 136.4 Week of 2/13 2/14 Business Inventories - Dec 2/15 Capacity Utilization - Jan 2/15 Industrial Production - Jan 2/16 Building Permits - Jan 2/16 Export Prices - Jan 2/16 Import Prices - Jan 2/16 Housing Starts - Jan 2/17 Producer Price Index - Jan 2/17 Philadelphia Fed Index - Feb 2/18 Consumer Price Index - Jan 2/18 International Trade - Dec ************ WOMANS WORLD ************ GETTING READY FOR CAMP MOM By Lynda Schuepp Every year I look forward to my winter break at "Camp Mom". I go to a spa in Mexico with 2 close friends and get pampered for one week. No kids, no husbands, no grocery shopping, no errands, no shoveling and no carpooling. Isolated in the Sierra Madres, this area has no faxes, TV, e-mails, IBD or Internet. The vacation is a most active and relaxing one at the same time. It is physically active with hiking, horseback riding, and of course "cheap" shopping. At the end of day we get massages, facials, roman bathes, pedicures, you name it. My brain goes on vacation and it is the only place in the world that I don't think about trading or what the market is doing. When I am in Mexico, I am comforted to know I have a large position in Tel Mex, which I bought in 1978 for $1 a share. At that time the stock was paying a 6% cash dividend and a 25% stock dividend! This stock is part of my treasure chest. I love to write calls on part of the position, as it is usually stable during a 30-day period, except for this past week. I will probably have to unwind my calls this week by buying back the February calls and selling twice as many March calls at a higher strike price for a cashless transaction. This strategy is a great way to unwind a bad covered call play by rolling forward. Stocks can't go up in a straight line forever, so eventually the calls will expire worthless. My experience has been, it usually occurs the following month. Of course, this assumes you have naked option writing capability. I'm leaving for "Camp Mom" on the day that the February Options expire so, in preparation for that vacation, I am adjusting my positions and strategies. One of my New Year's resolutions was to build up my long-term portfolio. I have started buying leaps on some stocks I'd like to have in what I call my "blue chip" portfolio. They include CMGI, GE, AOL, and SUNW to name a few. All have provided me with fairly good entry points at various points the last two weeks, some better than others. After purchasing the leaps, my next step is to write covered calls against them. However, with only 2 weeks to February's expiration date, the premiums are not high enough in some of these stocks for the level of risk. In light of the possibility of having to unwind positions the day before I leave, I decided my time that day might be better spent on other things namely, packing. The only leaps I wrote calls on were CMGI and SUNW. On Thursday CMGI formed a doji pattern, a hanging man. On Friday, when CMGI went below Thursdays close, I wrote the Feb 135 Calls for 3 and 3-1/8. By the close on Friday, they had dropped to 1-1/2. I probably will close this position for a quick profit on Monday to avoid any heart palpitations before leaving. I bought the SUNW leaps at a pretty good entry point very near the bottom on January 27th. Although when I look back, I'm not quite sure I didn't jump the gun. I sold the Feb 85 calls on Monday when it looked like SUNW hadn't bottomed and was going lower. I wanted to lock in some "safe, surefire profits" to protect my investment, famous last words. I got suckered in during amateur hour. That proved to be the low point for the week and SUNW ran for the rest of the week. On Friday SUNW touched my strike price of 85. Friday's candle was a doji. While I never trust a doji at the bottom, they are generally very reliable at the top of a run. Next week will probably be "squirming week". My leap is up 4 points and I'm only down 1-1/2 in my call. Worst case is I buy back the call at a loss and possibly rewrite some march calls to cover my expenses. Because the volatility is so low on GE, it didn't seem worth my effort to write calls and cap my upside so instead I wrote February 130 puts for 2-3/8 on January 28th. The puts were down to 50 cents on Friday. There is very strong support at 134 and with the time value premium evaporating by the minute, there really is very little risk left in this play. I had planned to be greedy on this one and let them expire worthless. However, Friday's candle was a bearish shooting star. I have found that 80% of shooting stars at the top of a range are retested, so hopefully this will not be problematic. While this is one stock I really don't mind owning, I would prefer to obtain it using option strategies over the next 12 months rather than being put the stock before I leave. I bought AOL Leaps and they have been sliding down ever since my purchase on January 25th. This purchase was probably just a case of bad timing and being antsy to implement my strategy in order to have everything in its neat little place. Trading seldom allows you to call the time frames. I kept waiting for AOL to stop its free fall when in hind site, I would have been better to sit this one out and if necessary buy the leaps after I came back. I'm not worried about this one because my time frame is long-term. Had this been a near term option I would have been out of this one in a heartbeat. It's amazing when you look back at the charts on a failed or poor trade. I never can seem to find the criteria I thought I saw when I entered the trade. Moral of this story: Never force fit a trade into your overall plan or you might get burned. 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. 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You may also fax the information to: 303-797-1333 DISCLAIMER *********** This newsletter is a publication dedicated to the education of options traders. The newsletter is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The newsletter picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. 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The Option Investor Newsletter 2-6-2000 Sunday 2 of 5 ********************** WOMANS WORLD CONTINUED ********************** Pharmaceutical Sector Under Attack By Mary Redmond One of my favorite stocks was on the move this week. CMGI went from 100 to over 120 this week. Unfortunately I was not able to get in on Tuesday because I had to be away from the computer, so I got back in to Feb 115 calls on Wed before Mr. Greenspan gave us the green light when the stock was 116 and sold them when the stock was 119.5 after the Fed decision was announced. My other positions were happy ones, buying 100 NT at 94 on Monday, JDSU at 200, and Qwest leaps. The only dud position is Lucent, which is stuck in a rut at 56. I am quickly losing patience and am going to dump it if it's not up to 60 in a few days. An important sector to watch in the coming months is going to be the major pharmaceutical company stocks. The sector has performed poorly over the last 12 months, and some analysts believe the sector will continue to be under pressure in this election year due to investor's concerns about potential legislation which would impact the pharmaceutical companies profits. Since JNJ and MRK are in the Dow, and the S & P 500 has a number of major pharmaceutical companies, their performance will impact the entire market, although perhaps not as much as the big technology stocks. In addition, it is important to watch health care and drug expenditures as a percentage of the GDP. In 1970 health care expenditures made up only 7.1% of the GDP, in 1990 they made up 12.2%. From the years of 1995 to 1999 health care has stayed between approximately 13.2 and 13.6% of the GDP. However, pharmaceutical expenditures continue to grow at twice the rate of overall health care spending, which is why drug costs are such a hot issue now. In an economy with relatively low inflation the drug costs are rising enough to concern everyone. Apparently, even the pharmaceutical company executives are concerned about their costs and profits, perhaps exemplified by the soap opera drama of who loves Warner Lambert the most which seems to have finally come to a conclusion. A closer look at the pharmaceutical industry and the factors in health care can reveal some interesting facts. Health care is going to be a big issue in the twenty first century for a number of reasons. The first and most obvious is the fact that the US population, and also the population of many other industrial countries is aging rapidly. In another twenty to thirty years, the generation born between 1945 and 1965 will be at the traditional retirement age and are predicted to place a big drain on our Medicare and social security system. I think that a couple of other factors may help to offset this phenomenon. One is the rising immigrant population in the US. It is predicted that the US population will double in the next 100 years, and most of the immigrants are of working age. In addition, the baby boom generation is a very independent, self-directed generation. The days of working for one company to retire at 65 on a pension, play golf, watch TV, and go on a cruise twice a year are over. New discoveries in medical technology are being made every day, and people are living much longer, more productive lives than they used to. Baby boomers are likely to continue working productively far longer than previous generations did. The concern among some investors and fund managers is that the government may impose price controls on the products of pharmaceutical companies, which could decrease their profit margins. However, the government does not completely control the price of prescription drugs, and it is unlikely that they will be able to do so in the future. Drug patent law is highly complex, but the government is generally restricted in the extent to which they can control the price of prescription drugs. Strict price controls are usually only levied on utilities and monopolies, and some insurance companies which have to apply to the state insurance boards to raise their rates. More probable legislation might include Medicare prescription drug plans which give a certain percentage discount to elderly Medicare patients. This might affect the profits of the pharmaceutical companies, but the exact estimates are unclear at this point. The pharmaceutical companies have difficult jobs. The competition in the drug industry is intense, and the companies have to spend very heavily on research and development of new drugs in order to survive. There are very few drug categories (like pain relief or blood pressure) in which a single pharmaceutical company actually has the only available drug. We hear about the famous ones, like Viagra or Prozac, but for every famous patented drug marketed, there is a pharmaceutical company attempting to develop another competitor. Since drug patents expire, and companies lose huge amounts of profits when the generic equivalents of their patented drugs come on the market, a large percentage of their gross profit is spent in the research area. The cost of getting a single drug through the FDA approval process can be as much as 50 to 100 million dollars, and the vast majority of chemicals starting out in the test tube don't make it to the approval process. The products' developers have to successfully finish preclincal trials, apply to begin Phase 1 clinical trials, finish Phase 1 successfully, apply to begin Phase2 clinicals, finish Phase 2 successfully, apply to begin Phase 3 clinicals, finish successfully, file a new drug application with the FDA and wait at least a year to hear the final approval results. During all of this time the major pharmaceuticals have to fund the state of the art laboratories, pay their scientists salaries and pay all of the costs of filing with the FDA. Is it any surprise that drug costs are going up? Some smaller pharmaceutical companies have been successful this decade, but usually only the ones, which have strategic marketing agreements with the major pharmaceutical companies. It's not enough to just get a drug approved by the FDA. Marketing this new drug to physicians and hospitals can be difficult. Without the advertising budget and sales force behind the big companies, few small companies would be able to successfully sell their products, no matter how good they are. There really is no easy solution to this issue. It affects everyone, from the rich to the working class. Most HMOs have been struggling to stay profitable with rising costs of medical equipment and prescription drugs, and some of their balance sheets look about as sick as their patients. Many insurance companies have closed their HMOs due to lack of profitability, and two major HMOs in the Northeast have recently closed. As exciting as the recent developments in biotechnology have been, somewhere along the line someone has to pay the bill. How it is going to be paid will effect all of us and the entire economy of the US in the twenty first century Contact Support **** IT'S A GOOD TIME FOR A STOP LOSS REVIEW By Renee White A reader reminded me that we haven't discussed stop losses for a while. The discussion is really more about money management and discipline. -Hi Renee: -With all disclaimers in effect, and knowing that we take -responsibility for all of our options trading, with the comfort of -knowing that we can lose all the premiums, etc., etc. We realize -that placing "stops" is a personal decision based on amount of -risk that we are comfortable with. However, can you give some -guidance on the following: We have a paper gain of around -$2,000 on NEM and a paper gain of $1750 on SBUX Feb. options. -We realize that this is probably pennies to you--but--we are -trying to build up some money so that we can play with the big -boys/girls. Anyway, do you have any suggestions on where we -might want to place the "stops". We are referring to the MACD, -Stochastics, and 30 day moving average and feel that the stocks -will continue to go up. While we'd like to preserve some of the -gain, we'd hate to place the stops too tight and be forced out of -the position. Any comments? -Regards, Liana & Gary Thank you Liana & Gary. This was a great question. Your profits are certainly not pennies to me. I could go shopping on that!! Stop losses are so important to your growth and success in option trading. They sometimes appear just too simple and many ignore their virtues only to end up losing their profits. This whole subject matter is one of the biggest hurdles of gaining success in trading. Options are high risk and by their nature, they attract a lot of attention. Unfortunately, some only see the upside and do not protect their gains once they have them. Timing plays correctly is something only experience can teach you, and then it still is a major challenge. Until you feel you are experienced, it is best to not take unnecessary risks by waiting too long, to take your profits. This though, is the confusion for novices. They don't know what point is considered too late or too soon. Usually, one learns it was too late, when they lose money. I have told the story of leaving town for a conference, with a lot of healthy open plays on the table. (That's a dumb thing to do!) While sitting in the conference, my underlying stocks crashed on a rapid sell-off, which of course, deflates the option premiums. Fortunately, it was at that conference that I was turned-on to this newsletter. I'll never forget the first time I read OIN, and the end of Jim Brown's article with "Sell Too Soon". It was just days after I had taken a big loss. I remember, I just rolled my eyes and chuckled thinking, "Now You Tell Me!". The impact of that phrase at the heels of my loss, had a huge effect on me. It is such a simple statement, but one that has made me so much more money and improved my trading immensely. Suddenly, all the ducks were lining up in a row and I realized that EVERY successful option teacher/presenter/guru, etc., ALWAYS talked about being happy taking profitsANY profit. NONE of them tell you to hold on, and on, and on, for the pie in the sky returns. These are successful traders that have already walked down the paths I was just learning. They already knew the secret path to success, while I was trying to find north on the compass. So, now I do things differently, occasionally selling too soon, but never complaining for the profit I take, since I can always re-enter if the play is still strong. Just keep some money in your pocket, move your strike price up, and don't re-invest the whole enchilada again. Also, ALWAYS review your bad plays. You are right, different everyone has a different risk tolerance. The difference in the volatility of the underlying is also a consideration making it hard to set hard and fast rules. Obviously a volatile issue requires more wiggle room (and therefore risk), than a stable one. The OIN Stop Loss figure is only a guideline and is generally about 20-25% loss, unless the option is over $15. Then we peg a 22% loss figure to the nearest $0.25. Remember the saying, "never play with money you can't afford to lose". If you can't afford to lose the profit you just made, then you've reached your own stop loss. Don't be foolish and try to match someone else's stop loss if you are happy with your gain. Again, you can always re-enter with a portion of your winnings, with a near term at-the-money option which will move faster (in either direction). Of course an alternative is selling part of your position to secure your profit, leaving the balance at risk to go higher (and of course at risk to go lower, also). As for using various indicators to help with your decisions, I think that it is an individual decision based on how skilled you are at using charts and indicators. Every trader has a different style unique to himself or herself and their interpretation of their data may change, depending on the history of movement of the underlying. Some of my good friends live by daily charts alone, and only use entry/exit signals from indicators on those charts. Other friends I have only use intra-day parameters. I use a combination of each depending on what I "feel" is going to be happening in the future, near term. Sometimes it changes depending on the underlying, the sector, current market levels, economic reports due out, the newsall sorts of things. My daily chart friends use indicators for their exit and entry decisions, probably more than they use a hard stop loss figure. Again, I use a combination of both. On Stop Losses, I watch the underlying, and SL price until it is close. I then use my indicators to tell me when to exit intra-day at the highest point possible. I also do this to help me get good entries on dips. When things look hot, I go from candlesticks, to a longer-term bar chart, which helps me see severe quick dips, which look out of proportion with the market. If I am lucky enough to catch it, I just got a great entry at a support level. I do this during sell-offs. My other indicators are usually all sitting on oversold. On intra-day exits, I use the indicators to help me sit on my hands for a while, as I try to squeeze a few more dollars out of the play before it rolls over, signaling me to exit. We are all different. I try to limit my losses to roughly a 20%. I may re-enter the trade once the slide is over, at then a better price. Sometimes I screw up, like my QQQ play last week, when I exited during a momentary sell-off. It ended up being at the bottom (after a really great entry), then I wasn't able to get back in. Last time I looked, I had lost $8 of potential profit per contract, if I had stayed in (over a 100% gain). BUT then again, I still had a 33% gain on the stop-loss exit I took. My mistake was letting it slide more than the 20% stops I had placed, causing me to exit late, at the bottom. If I had caught it earlier, exited at the 20% loss as planned, I could have bought back anywhere after the bounce back up. It would have been a beautiful play. Sometimes, getting distracted by phone calls cost you money by not watching your plays. As you become more experienced, you will have a better feel for things. Just consider it impossible to trade options without losing money. Now decide how much you are willing to lose. If your answer is "None", then either don't play options, or get out of the trade with money in your pocket Renee White Contact Support *************** TRADERS CORNER *************** Silicon Valley Ethos By Janar Wasito OK, just to get the trades out of the way, I have made gains in the last straight 8 days using some of the short put & short call strategies which the newsletter has been outlining in the Options 101 and other columns. VRSN is working like a champ, with my short Feb210 Calls bleeding time value even as the stock moves up; I should have stayed short those Feb145 Puts too, but I closed it for a profit. I am still short BRCM Feb270 Calls. I should also have stayed short those AFFX Feb210 Calls. No problemo, just learning the ropes. Sold VOD Feb65 Calls when the stock started rolling over after the merger announcement. Another example of a tech stock paying a dividend (and if I get called away at that price, fine). Cash flow, cash flow, cash flow. This weekend, I am planning to set up short put trades which take advantage of any major sell off next week. To give you an idea of what I am looking for, here are some of my "weapons free" indicators for pulling the trigger -- 1. VIX above 28, preferably above 30. 2. DOW, NASDAQ, OEX all well below their 10 day EMA (see Marty Schwartz, a former jarhead and trading champ, in his book, Pit Bull, last chapter, for the significance of this and other indicators) 3. Similarly, big losses in the tech sector 4. Big losses in the individual stock (eg, AFFX, BRCM, VRSN) 5. Some kind of support levels (connect the dots with the lows from the last few months; not rocket science, more of a scientific wild assed guess) Then, sell Feb puts 10 - 20 points below those levels of support when the stocks approach those levels. Have the buying power on hand to purchase the stock if put too. If the puts expire worthless, all the better. On Friday, I opened a QQQ Put position because the VIX touched 20 and was at 22, and the averages, especially the NAS were above the 10 day EMA. If the market continues up on Monday, I would still expect a pull back no later than Tues. If that doesn't happen, I close the pos for a loss. Already up slightly. I really wanted to throw in a quick summary of a terrific presentation that I went to on Friday night. The speaker was the Chief Marketing Officer of Scient (SCNT). The venue was the Stanford Industrial Engineering program's Technology Thought Leader's series. It is ironic. Stanford undergrads have access to presentations that are more cutting edge and relevant to the direction of our economy than Wall Street Investment Bankers (at least the ones in New York). Who the hell would want to grow up? It is more fun building cool companies and developing cutting edge technology. Anyway, the speaker outlined 10 elements to supercharging your career in the Internet Economy, which serve as a pretty good window on the Ethos of Silicon Valley. And the ironic truth is, that while money does matter, the people who do the best are the ones who worry about it the least. To wit, the 10 rules -- 1.Build Legendary Companies. 2.Be Big. Be a Big Impact Player. Do It. 3.Brainiacs. Seek Them Out. Avoid boring wonks. 4.Take Huge Risks. You Fail, So What. 5.Learn Tons. Stupid Sucks. 6.Get Coached. From the Best. Coaches: See openings on the field & Stand for your commitments. 7.Be Flexible. 80% of your assumptions will be wrong. 8.Market. All great execs are great marketers. 9.Be Entertaining. Work IS entertainment. 10.Create Massive Economic Results. For your customers and partners. That will take care of you. I am going to apply all of these ideas in one way or another. Most immediately, to a project in which a fellow grad student an I put a Mexican high school on the 'net. Go out there, and create some havoc in your own corner of the web! Janar Joseph Wasito janar@OptionInvestor.com ************** BROKERS CORNER ************** TIME IS ON YOUR SIDE!!! YES IT IS!!! Would you pay to have extra time to accomplish the things that you want? In the options market we do have the luxury of buying all of the time that we want. All we have to do is pay for it. Unfortunately the number one factor contributing to unsuccessful trades and lost money is the lack of time. Everyone has been in the uncomfortable situation of being correct on the direction of a particular stock or indexes and not making money with the trade because time runs out on an option. Professional traders make their living out of selling short-term options that retail customers buy because they are CHEAP. Besides the strike price the most important decision to make is how much time to purchase. Do the best you can to take the time decay factor out of the equation. Even if the move you are looking for occurs in a very short period you are going to benefit. But most importantly the extra time value that you paid for provides cushion and allows for the market to fluctuate without forcing you to make a tough decision to stay with a position or not. Many people are successful trading shorter time horizons. But I like not having to be as precise. It requires a lot more work and closer attention to hit the short-term home run with the odds against you. Ideally, I recommend buying an option with two to three months of time or more. In addition, because of the accelerated time decay in the last thirty days prior to expiration, I suggest exiting positions prior to three weeks before expiration. Inside that time frame the options will melt away if nothing significant happens to the underlying stock or index. Like time through the hourglassas the saying goes. If you find yourself running out of time; rollout to the next month or two in order to take the time-component out of the equation. Try to make your trading as stress free as possible by formulating a plan and being disciplined. Mathematically you are better off to spend the extra premium to get the additional time even if you never use it. Buying the more expensive option and risking half of the premium will yield better results than buying the cheap option and risking the whole thing. If you are correct they will both be profitable and that extra time value you purchased allows for you to be less exact with your timing. Now if I could only find the extra time to Alan Knuckman and Andrew Aronson LaSalle St. Securities (888) 281-9569 ************* READERS WRITE ************* Dear sirs, I've been trading the OEX options since September, not very long at all but I do like it better than trading stock. I got into trading the OEX after following the skybox...I like it. Stocks were whipping me around left and right and one good trade was leveled by one bad trade thus I had to find something better. I believe that I was meant to trade only the overall market and not individual stocks. I have been fine tuning my strategy and with the help and guidance from the skybox, I am putting it to the test. When I don't break the 'rules', I can profit but of course every now and then you get emotional and then everything goes bonkers...that's when it's time to take a break... The best thing about the advisory service is the guidance. With the skybox, I get confirmation on what I'm thinking and doing. I like, enjoy and appreciate the short commentaries on the market as I am not good at accessing and diagnosing the ailments of the market. The market is such a hypochondriac that I get so confused as to what's ailing it day to day or hour by hour... I have not followed the most recent trades that the OEX made and thus have not made a good profit...a real bummer...I broke my own rules thus keeping me out of the market...ever done that? I'm learning and the with the help of the skybox, I'm can honestly say that I'm learning at a much faster pace. I hope you will continue to provide this great service. I am mainly keeping my subscription to OIN because of Jim Brown's commentaries and the OEX skybox... Thank you for your great service... Liane ************ Dear Jim: All my friends and people I know have lost money in the stock market this month except me. You were right on when you said "Some will give their profits back and then some". I am not going to give you 100 percent of the credit but your newsletter deserves 80 percent; you deserve 10 percent; and, I deserve the remaining 10 percent. Here is why: Your newsletter gave us the facts, numbers and the plays. You provided us with your overall opinion and the general direction of where we are today. And, I on the other hand had the discipline to hold the impulse to buy and wait for the entry points (you may even recall I wrote to complain about it). I, then bought and sold the OEX puts following the Skybox's game plan. The end result is I made more money when I should have been losing money just like my friends and people I know. What is the difference? The education I have received from the OIN newsletter for the past 16 months. It has been a hell of a ride (UP) and lots of hard work away from my family. Thank you very much. You have helped me become a savy mature stock investor. Mario Garcia ************* When I joined OI in May, 1999, I (like others) expected to go to a few key spots on the OI site and find Excaliber waiting for me. It took some weeks to 'settle in' to the format and content of OIN material. It was a period of adjusting my focus on the pertinent (for me) OI material as well as adjusting my trading/investing style to focus on those strategies I fully understood (leaving the wierd-willies to those far brighter or ambitious than I). Today, I am much more comforatable with my investment decisions and make more educated moves. I do not expect to be totally at ease nor do I want to be. It's sort of like the old saying about motorcycles: "When it no longer scares you, park or sell it!!" I respect the market for its power and fear its ability to humble you quickly when you get too arrogant. As a result, your trading rules, when followed, serve as a sound, fundamental insurance policy against disaster. Keep up the good work and may the wind be at your back!! Don ******* Mailbag ******* Concerning Covered-calls: Dear Sir, I have a question about writing covered calls. If you write a covered call on a stock, (either by selling a leap or a one month call) and then the underlying stock spins-off part of its stock as a separate company, do the calls you wrote change to reflect this in some way as they would do with an ordinary stock split? Thank you in advance for your reply GM Subj: Spin-offs Usually, when a stock spins off a subsidiary, shareholders of record receive a designated amount of shares of the new company, for each share they currently own. When GM spun off Delphi, GM shareholders received something like 0.7 shares of Delphi for each share of GM they held. Therefore, a call that was written before the spin-off will reflect the value of the original position (GM + Delphi). New options will be produced with a different symbol that reflect the post spin-off and will be at a vastly different value. Your broker will be able to tell you the exact value of your option and what it represents. OIN ************** Concerning Covered-calls: Dear OIN, Thank you for your wonderful newsletter. I have a general question. I am interested in covered calls. Your last newsletter on Sunday addressed covered write strategies. Is it possible you may add a covered call strategy where you would look at stock ownership first and then write covered calls on that specific stock for income. This seams to be a different strategy than your current strategy addressed last Sunday. I am new to covered calls. Sincerely, RV Subj: Covered Calls... Unfortunately, the nature of our newsletter is short-term, aiming to take advantage of ever-changing trends. We search through hundreds of stocks each weekend and with the timeliness of publishing constraints, are unable to do a thorough fundamental evaluation of each company. At a time of astronomical evaluations, when even the pros are having trouble determining fair value, a total return concept seems highly appropriate. Quite simply, we favor our current approach for its historical probability of success and consistent monthly income. OIN ************** Concerning Covered-calls: Note: This question was edited (paraphrased). Dear OIN, In the summary of the Covered-calls section; Stock Price Last Mon Strike Opt Profit ROI Monthly Sym Picked Price Price Bid /Loss ROI 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% Are the prices listed on the options targets? That doesn't seem to make sense. I thought these were buy-write strategies for the most part. The stock price is updated, shouldn't the call price in the summary move too? All the other option prices are updated on the Sunday newsletter. Can you update these prices as well? Thanks, G Subj: CC's summary... I believe you are referring to the "SUMMARY OF PREVIOUS PICKS." At times, it may appear to be a PICK list, which it is not. In the summary, the bid price isn't current. It is simply a list to track the results of our plays. When we offered the position, MUEI was at 12.75 and the $10 call was for 3.25 for a cost basis of 9.50. The current price and option may meet the original (net debit) criteria at certain times but that is not something we monitor. If we favor the play as a new pick, it will be listed in the "candidates" section with a complete narrative and stock/option quote. That doesn't prevent you from playing the position after it has been offered in previous newsletters, just be aware that we are offering the play based on the technicals and current position of the stock/option/strike prices. We can't know what's going to occur a day later so use good judgment and remember that you are always responsible for any trades you make. Do your own research and be knowledgeable of all the facts surrounding the issue. If you still like the play after you have performed thorough due diligence, and a review of the option prices/cost basis, then go for it! OIN ************** Concerning Spreads: Dear OIN, I constantly own LONG CALLS that are ITM or DITM. As the earnings date approaches, I would like to keep my long position held through the earnings date. This is because most of my good stock picks have strong earnings and subsequent splits that rally the stock even further. I am willing to risk the earnings volatility. If my current call is ITM or DITM...I would like to take action the DAY BEFORE earnings to protect myself a little bit on the volatility of the stock in case in turns downward after the earnings. What alternatives should I consider? Also, when I sell an ATM or ITM put; I am worried about being assigned. I want to cover/buyback prior to being assigned. How do I calculate when I should cover/buyback this position just prior to being assigned? Do I put a buy-stop on the option itself or do I base decision upon how far down the underlying stock goes. Thanks, F Subj: Spreading gains and risk It sounds like you understand the situation fairly well and there are certainly many alternatives. One of the most common floor trading practices for the scenario you have described (after you have the position, but with an event approaching) is to sell an OTM call and a deep OTM put, taking advantage of the high IV on both sides of the issue. (Look for overpriced options - obviously). The position has a high statistical probability of success and only loses potential when the underlying makes a significant move in either direction. Even then, it usually profits in a much greater range on the downside and only limits profits slightly on the upside. As far as early assignment As long as there is time value in the sold options, you have very little chance of being exercised. Some people worry too much about being called early or assigned. Unfortunately, although it rarely happens, it is true that it often occurs at the worst time. Statistically the odds are low that it will be YOUR options. Just watch the time value in the options; when they trade at parity, it may be time to go. If you can't cover the assignment or offset it (by selling short etc), then don't take the risk. Obviously, it's important to be notified in a timely manner! Your broker needs to tell you right away so you have a choice as to how to fulfill your obligation. OIN ************** Concerning Spreads: Hi there, First I wanted to commend you on publishing the best financial service I read along with the Wall Street Journal. Anyway, my question deals with spreads. You recommend to sell a call and buy a call at a lower price. For example in thursday's write-up, Ray details a spread whereby one should sell a Siebel $95 call and buy a $85 call. I do understand that I am purchasing for $7.75 the potential spread to be worth $10 at options expiration date in Feb. I also understand that as long as Siebel closes above $95 that I will owe my broker 100 shares at $95, offset by the $85 call. My question is this: will my broker (Schwab) automatically do the offsetting upon expiration? Or am I to sell this spread on the last day of expiration? Thanks for your help in advance. GW Subj: Spreads and auto-exercise. Some personal brokers will auto-exercise ITM calls at expiration but don't count on it. The guidelines are generally $0.25 ITM for institutional positions and $0.75 ITM for retail positions. It's your responsibility to manage your trades and your positions and in most cases with spreads, it's far cheaper to buy/sell to close the spread at expiration; rather than exercise and/or accept assignment. OIN ************** Concerning Spreads: Dear OIN, I am interested in your service, and have looked at some of your recommendations on spreads. I trade with Ameritrade, and found that a major portion of your ROI calculations is gobbled up by trade commissions. For example, at Ameritrade, a debit spread, if the options were both exercised, would cost $96 in commissions. In one of your recommendations for a debit spread your ROI is 29%. Since they were both in the money and would presumably be exercised, the ROI would only be 16.6% (depending on where you put the commissions in the calculations). I was wondering if you have any suggest or recommend any brokerage houses which are less expensive for options trading. Sincerely, CR Subj: Spreads and commissions First of all, it sounds like you are considering one-contract trades, which simply won't work with all but the most expensive issues. The majority of our spread positions (and those of most options traders), are 10 and 20 contract plays; occasionally, but almost never less than 5 contracts. The broker I use is Preferred Trade and I believe the commissions are in the same range as Ameritrade. For example, a 10 contract option trade of a $5.00 position is about $30. But when you trade 10 contracts in a debit spread for a $1 return on $9 (for example), the commissions have very little affect on the outcome. In this case, if you opted to exercise and be assigned, the commissions would be about 10% of your profit or $100; leaving you with $900 on $9,000 invested. A reasonable return for sure OIN LAST WEEKS CHANGE FOR THIS WEEKS PICKS: *************************************** Daily Results Index Last Week Dow 10963.80 224.93 Nasdaq 4244.14 357.07 $OEX 775.51 37.47 $SPX 1424.37 64.21 $RUT 525.52 20.90 $TRAN 2608.96 27.21 $VIX 22.93 -6.16 Calls Week PMCS 247.19 57.13 A fantastic week for PMCS split play TQNT 205.34 44.84 Looks like one of new years strongest AMCC 185.81 36.69 New, AMCC is a stock split candidate NTAP 127.94 28.75 Last week turned out to be even better BRCM 311.00 27.00 BRCM offers chance to get on board MUSE 187.13 24.25 MUSE proves its better late then never SNDK 142.00 24.06 Sandisk is seeing incredible growth EBAY 168.06 20.50 EBAY is an emerging momentum play BCE 119.00 20.38 A play about unlocking the value MFNX 78.31 13.16 MetroMedia delivers big daily gains CMGI 118.56 13.06 Lots of intraday entry point potential PSIX 92.63 12.00 PSINet is not wasting any of its time LLTC 101.44 10.69 A core institutional holding for years BGEN 99.13 6.88 Dropped, lacks the momentum we need BEAS 89.25 6.56 We are rolling out the red carpet! ADIC 58.38 6.44 New, earnings announcement Feb 16th VECO 61.38 5.38 VECO is a strong beneficiary of trend ICIX 49.25 4.25 Slow and steady picks up the pace COVD 76.56 3.38 COVD kicks into gear after rocky start VOD 57.81 3.19 Dropped, investors jump ship on VOD LU 57.00 1.69 A great play for conservative trader FRX 66.00 -3.25 Dropped, weak relative strength SILK 138.50 -23.50 Dropped, a silk purse from sows ear? Puts VERT 226.00 -40.00 New, looks like VERT wants to fill gap GBIX 40.00 -5.84 Too much, too fast hurts GBIX shares PG 94.75 -5.56 New, spending causes PG to lose ground SCAI 29.00 -5.38 New, investors frantically selling MMM 89.06 -3.19 New, things not looking good for MMM UAL 55.50 -2.38 Skyrocketing fuel costs put on squeeze PGR 60.25 -1.88 Bad earnings help to drive PGR down IPG 50.06 3.06 Dropped, approaching train slows down BBY 56.88 8.13 Dropped, the operative word is Buy! STOCKS ADDED TO THE PICK LIST ***************************** Calls ADIC - Advanced Digital Information Corp. AMCC - Applied Micro Circuits Corp. BEAS - BEA Systems Puts SCAI - Sanchez Computer Associates Inc. VERT - VerticalNet Inc. MMM - Minnesota Mining and Manufacturing PG - Proctor & Gamble Co. ************************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 2-6-2000 Sunday 3 of 5 *************************** 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 SILK $138.50 (-23.50) How does that saying go about making a silk purse out of a sows ear? We've been waiting all week for SILK to turn around and make a run towards higher ground. Recall that the sticking point throughout this play has been very light volume. We kept the play this week because the decline also took place on light volume. After 5 down days, SILK finally bounced at the 50-dma and moved up on Friday. Unfortunately, as soon as SILK reached the 30-dma, sellers reappeared and pushed the price down to close near the low of the day. Given the strength in the NASDAQ and the anemic volume in SILK, we must conclude that investors have lost interest. With all the other opportunities available, we choose to let SILK roll around in the mud while we put our money to use elsewhere. VOD $57.81 (+3.19) In typical "buy the rumor, sell the news" fashion, investors bid the price of VOD up this week in anticipation of the Mannesmann merger, only to jump ship as soon as news of the agreement between the two companies became public. VOD gave us a nice quick run, moving as high as $63.63 on Wednesday. Now that all the news is out, it appears that nervousness about the details of the $190 billion merger agreement will require a consolidation near current levels. Until investors sort out their feelings about the merger, we will move on to greener pastures. FRX $66.00 (-3.25) There is nothing wrong with Forest Labs. We just feel that with so many other good plays out there that it is time to drop this call play. The relative strength of FRX has dropped all week as money has poured into other stocks. We had remarked previously that FRX was forming a potentially bullish right-side-triangle formation. It appears that the formation is now a bit tenuous as the stock is barely staying above its trend line. On a risk/reward basis it is time to look elsewhere for some potential profits. If the stock can finally emerge from the doldrums and make a new high we may revisit this drug stock. BGEN $99.13 (+6.88) Its first full week in the S&P 500 was volatile to say the least. Seems the old buy the rumor-sell the news frame of mind is alive and well. Actually BGEN did manage to gain +6.88 this week, but it was Friday's trade that it discouraging. The Biotech sector gained over 5.0% Friday, while BGEN gave back over 3.0% of Thursday gains. BGEN could see more downside pressure. Although BGEN has given us several opportunities, we haven't really seen the upward momentum we were looking for when adding BGEN to our call list. BGEN will most likely find itself on our list of favorites in the future, but for now, it's time to move on. PUTS BBY $56.88 (+8.13) The operative word here is Buy! The battle over the $52 resistance level turned into a rout on Friday. We got the bounce we were waiting for at $52; unfortunately it was in the wrong direction. Gapping up through strong resistance was not a good initial sign for our put play. Buyers showed up early and came back often, pushing the price through both the 30-dma and 50-dma, for a closing gain of nearly $5. Encouraged by reports of strong consumer electronics sales, the bulls have made a strong case for a near-term bottom in BBY. IPG $50.06 (+3.06) It appeared as we lay tied to the tracks over the past few days that the approaching train was slowing. Especially after Thursday's promising performance that hinted IPG would begin to trend back done. Plain and simple we got faked out. Granted there wasn't much of an upward move on Friday and IPG still couldn't crack overhead resistance at $51, but let's not ignore the signs. The stock closed above both the 5-dma ($48.31) and 10-dma ($48.94) in active trading. There are better plays to be made. We're dropping IPG from our put list this weekend. STOCK SPLIT CANDIDATES *********************** Current Split Candidates NTAP - Network Apliances EBAY - Ebay MFNX - MetroMedia Split candidates that aren't current plays CSCO - Cisco Systems CMVT - Comverse Technology IMNX - Immunex EMC - EMC Corp. Recent announcements we predicted No changes from last week STOCKS WITH UPCOMING SPLITS **************************** We don't list all splits available, only those we feel may have play possibilities. Symbol - Stock Splits/Date MCHP - Microchip Tech 3:2 02-07-00 ex-date 02-08 QLGC - Qlogic Corp 2:1 02-08-00 ex-date 02-09 INFY - Infosys 2:1 02-11-00 ex-date 02-14 MERQ - Mercury Interact 2:1 02-11-00 ex-date 02-14 PSIX - PSINet Inc 2:1 02-11-00 ex-date 02-14 BRCM - Broadcom 2:1 02-11-00 ex-date 02-14 PMCS - PMC-Sierra 2:1 02-11-00 ex-date 02-14 YHOO - Yahoo! 2:1 02-14-00 ex-date 02-15 HRL - Hormel 2:1 02-15-00 ex-date 02-16 EMMS - Emmis Comm 2:1 02-15-00 ex-date 02-16 EXAR - Exar Corp 3:2 02-15-00 ex-date 02-16 ADCT - ADC Telecom 2:1 02-15-00 ex-date 02-16 DITC - Ditech Comm 2:1 02-16-00 ex-date 02-17 CTXS - Citrix Systems 2:1 02-16-00 ex-date 02-17 ITWO - I2 Tech 2:1 02-17-00 ex-date 02-18 CBXC - Cybex Comp Prod 3:2 02-18-00 ex-date 02-21 PRGN - Peregrine Sys 2:1 02-18-00 ex-date 02-21 TQNT - Triquint 2:1 02-22-00 ex-date 02-23 KANA - Kana Corp 2:1 02-22-00 ex-date 02-23 IVX - IVAX Corp 3:2 02-22-00 ex-date 02-23 SANM - Sanmina Corp 2:1 02-22-00 ex-date 02-23 MUSE - Micromuse 2:1 02-22-00 ex-date 02-23 USAI - USA Networks 2:1 02-24-00 ex-date 02-25 ESIO - Electro Scient 2:1 02-24-00 ex-date 02-25 MGG - MGM Grand 2:1 02-25-00 ex-date 02-28 SEPR - Sepracor 2:1 02-25-00 ex-date 02-28 SILI - Siliconix 3:1 02-28-00 ex-date 02-29 NSOL - Network Solution 2:1 02-28-00 ex-date 02-29 SDLI - SDL Inc 2:1 02-29-00 ex-date 03-01 GTLL - Global Tech 3:2 02-29-00 ex-date 03-01 TMPW - TMP Worldwide 2:1 02-29-00 ex-date 03-01 SLR - Solectron 2:1 03-08-00 ex-date 03-09 JDSU - JDS Uniphase 2:1 03-10-00 ex-date 03-13 LLTC - Linear Tech 2:1 03-27-00 ex-date 03-28 GE - General Elec 3:1 04-26-00 shareholder mtg SNE - Sony Corp 2:1 05-19-00 ex-date 05-22 AA - Alcoa 2:1 06-09-00 ex-date 06-12 For a complete list of all the coming splits check out the "split calendar" on the side of the online edition newsletter page. ******************** THE PLAYS OF THE DAY ******************** With all the great plays each week we can never decide on just one so take your pick. Call plays of the day: ********************** EBAY - eBay Inc $168.06 (+20.50) See details in sector list Chart = /charts/charts.asp?symbol=EBAY **** MFNX - MetroMedia Fiber Network $78.31 (+13.16)(P3W +17.11) See details in sector list Chart = /charts/charts.asp?symbol=MFNX Put play of the day: ******************** MMM - Minnesota Mining and Manufacturing $89.06 (-3.19) See details in put list Chart = /charts/charts.asp?symbol=MMM ************* 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 *********** Hardware ******** SNDK - Sandisk Corp. $142.00 (+24.06) What's in a name? SNDK provides computer storage sans disk. The company is a leading provider of flash memory storage devices - integrated circuits that retain data when power is off. The company is involved in all aspects of flash memory process development, chip design, controller development, and system-level integration. SNDK has customized its products to address the needs of many emerging applications in the consumer electronics and industrial/communications markets, including digital cameras, smart phones, personal digital assistants (PDA), and MP3 portable music players. SNDK is seeing incredible growth, announcing on Wednesday that the company shipped over 3 million CompactFlash memory cards in 1999. This represents more than a 140% increase over 1998 and helps to explain the increase in the stock price over the past month. As if that weren't enough, SNDK announced stellar earnings on January 26th (8 cents above estimates), and then announced a 2:1 stock split, payable on February 22nd. On Friday, SNDK finally broke through the $137 resistance level on a surge of buying volume and closed at $142. This resistance should now become support, backed up by $129. SNDK is now in blue-sky territory, with the only resistance being Friday's high of $149.50. Entries can be considered on a pullback near $140 or on a breakout to new highs. The move up on Friday came on very strong volume (nearly twice the ADV) and we expect buyers will continue to flock to SNDK as the split date approaches. Sandisk continues to improve its market position, announcing Thursday that it will supply CompactFlash memory cards for the new Hewlett Packard PhotoSmart C618 and C912 digital cameras. Nelson Chan, senior VP for marketing at SNDK said, "HP's decision to use SanDisk CompactFlash memory cards in its most advanced digital cameras demonstrates the capability of the SanDisk CF card to support not only high-resolution image storage, but also next generation features such as continuous shooting and audio recording". ***February contracts expire in two weeks*** BUY CALL FEB-135 SWQ-BG OI= 55 at $21.25 SL=16.50 BUY CALL FEB-140*SWQ-BH OI=104 at $17.88 SL=14.00 BUY CALL MAR-135 SWQ-CG OI= 30 at $31.63 SL=24.50 BUY CALL MAR-140 SWQ-CH OI= 17 at $29.25 SL=22.75 low OI SELL PUT FEB-125 SWQ-NE OI= 44 at $ 8.00 SL=10.25 (See risks of selling puts in play legend) Picked on Feb 3rd at $135.06 P/E = 158 Change since picked +6.94 52-week high=$149.50 Analysts Ratings 1-4-0-0-0 52-week low =$ 17.00 Last earnings 01/00 est= 0.22 actual= 0.30 Next earnings 04-26 est= 0.29 versus= 0.15 Average Daily Volume = 925 K /charts/charts.asp?symbol=SNDK ************* SEMICONDUCTOR ************* AMCC - Applied Micro Circuits Corp. $185.81 (+36.69) Applied Micro Circuits designs, develops, manufactures and markets high-performance, high bandwidth silicon connectivity for optical networks. The company uses high-frequency, mixed- signal design expertise, higher layer digital content and multiple silicon process technologies to offer integrated circuit products for the data/telecom markets. With the company's acquisition of Cimaron Communications in March 1999, AMCC is positioned to provide industry-leading, fiber-to-switch silicon solutions, including framers, mappers, PMD and physical layer devices. Among AMCC's customers are Alcatel, Cisco Systems, Juniper Networks, Lucent technologies, Nokia, Nortel Networks, Siemens and 3Com. Let's face it, it's just plain sexy to be in the optical networking and bandwidth expansion business. Witness NT, JDSU, SDLI, QCOM, NOK, GLW, BRCM, etc. To that end, we bring you AMCC as a strong silicon arms merchant in the same war. AMCC has been tearing up the chart since it announced a 17% earnings surprise on January 10. While some might consider revenue exposure from a single client (40% +/- of AMCC's revenue comes from NT), we consider it an asset. AMCC has hitched their wagon to NT, while LU got pounded. Isn't that good? Look who jumped ahead in the optical networking war - NT. Now that analysts are buzzing that NT's revenue growth rate should be more like 25% instead of 21%, logically AMCC should be along for the ride. Since finding strong support at $138 on Monday, historical support has been moving up roughly $10 per day, and actually found support at $182 on Friday. Other support levels are $175, $173, $170, and $165. With such a huge run in the last five days without time off, AMCC is due for a pullback. In fact, not to scare you, but from a purely technical standpoint, AMCC broke out of its 2-month trading channel to set a new high on Friday. Thus, if it is to remain true to its channel, a retracement to $155 over the next few days would not be unexpected, especially if the NASDAQ rolls over back into its trading range. The point is to be careful with your entry. Don't rush to buy this thing Monday morning unless you see a positive market, advancers beating decliners and AMCC moving up on strong volume after amateur hour. Want the gravy now? AMCC is also a split candidate. It's last one (2:1) announced on August 3 when the stock traded at $95 was effective on September 10 at $105. The split price was then $57.50 from where it has since risen. AMCC has 180 mln authorized shares, but only 54 mln issued. That leaves enough for a 3:1 (one can only hope). Anyway, AMCC is nearly double the price of its last announcement and the long-term trend is right in the sweet spot. No shareholder meeting is necessary. The announcement could come any time there is a BOD meeting. We'll let you know if and when we find a firm date. ***February contracts expire in two weeks*** BUY CALL FEB-160 AEX-BL OI=467 at $30.75 SL=24.00 BUY CALL FEB-170 AEX-BN OI=290 at $23.50 SL=18.25 BUY CALL*MAR-170 AEX-CN OI=209 at $30.50 SL=24.00 BUY CALL MAR-180 AEX-CP OI= 27 at $25.25 SL=19.75 BUY CALL MAR-190 AEX-CR OI= 98 at $20.75 SL=16.25 Picked on Feb 6th at $185.81 P/E = 332 Change since picked +0.00 52-week high=$188.63 Analysts Ratings 9-3-0-0-0 52-week low =$ 16.88 Last earning 01/00 est= 0.18 actual= 0.21 surprise=12% Next earning 04-10 est= 0.22 versus= 0.10 Average Daily Volume = 1.15 mln /charts/charts.asp?symbol=AMCC **** PMCS - PMC-Sierra Inc. $247.19 (+57.13)(-1.13) 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. Up $57.13 for the week. That pretty much sums it up. We were trying to think of a way to open today's write up on PMCS that would convey our delight with the stellar performance that PMCS has given us since we first initiated this play on the 25th of January. We finally decided that sometimes, the simple facts are all you need. We are entering the final leg of this split run since the stock is set to split 2:1 next Friday the 11th. As always, to avoid a post split depression, it is important to close out your positions before the actual split. Resistance is really not a factor at this point since PMCS has been trading to new highs on a daily basis. PMCS closed Friday's session just over $2 under the high for the day, so PMCS could be set to continue right where it left off on Monday. As we did in Thursday's write up, we must again note the possibility of some profit-taking in the near future. Since PMCS has made such a big gain in such a short period of time, there are bound to be some investors locking in their profits before long. This is why it is so important to adjust your stops as the stock moves up to protect your own profits. Another reason to keep those stops tight is that, because PMCS has traded up so quickly, it has some room to fall back before encountering any notable support levels. PMCS did make one small "bounce" at $240 on Friday, though this level may not prove to provide very solid since PMCS has not really had a chance to test it. The closest, tested, solid looking support level for PMCS looks to be at the 5-dma of $216.50, obviously some distance back. This level could be backed by support at $205 and $200. Exercise caution going forward, particularly as we approach the split date. Otherwise, we hope you are enjoying the ride. You may be thinking that investors are showing quite a bit of enthusiasm for a split run. There are indeed other factors playing into PMCS's recent performance, namely the performance of the Semiconductor sector as a whole. The Philadelphia Semiconductor Index (SOX) traded up to new highs last week, and though it was down slightly on Friday, it still had a fairly strong session. A report issued by Banc of America Securities on Friday documented comments made by two of their senior semiconductor analysts at the Securities Technology Conference held last week. One of the analysts, Alex Guana, was quoted as saying, "Given the pure communications focus of the broadband semiconductor companies on our coverage universe, and the vast work remaining to be done in enriching and extending the power of the Internet, we believe magnificent 1999 results can readily be surpassed in 2000," Guana went on to specifically name PMCS as being one of the four leaders in the semiconductor arena. Banc of America Securities has PMCS rated at a Strong Buy. ***February contracts expire in two weeks*** BUY CALL FEB-220 SDL-BD OI=834 at $34.50 SL=27.00 BUY CALL FEB-230*SDL-BF OI=148 at $27.88 SL=21.75 BUY CALL FEB-240 SDL-BH OI=136 at $22.00 SL=17.00 BUY CALL MAR-230 SDL-CF OI= 86 at $38.38 SL=30.00 BUY CALL MAR-240 SDL-CH OI= 35 at $33.25 SL=26.00 SELL PUT FEB-220 SDL-ND OI= 66 at $ 6.63 SL= 8.50 (See risks of selling puts in play legend) Picked on Jan 25th at $196.88 P/E = 160 Change since picked +50.31 52-week high=$249.63 Analysts Ratings 15-6-2-0-0 52-week low =$ 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 = 1.63 mln /charts/charts.asp?symbol=PMCS **** TQNT - TriQuint Semiconductor $205.34 (+44.84)(+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. TQNT continues its increasingly comfortable role of being one of the strongest stocks of the new year. Two weeks ago, TQNT rallied in the face of some pretty strong selling. Last week, TQNT exploded as investors adopted a very sunny disposition for tech stocks in general. One of the reasons for this continued accumulation of TQNT's shares seems to be based upon the fact that TriQuint is a pure play for both the Semiconductor and Telecommunications sectors. With both sectors presenting themselves as leading groups for investment dollars it appears that TQNT is attracting a lot of money from any investor interested in either or both groups. Last week we were waiting for the shareholder approval to authorize more shares to enable the stock to split 2-for-1 February 22nd. Although it was a foregone conclusion that the authorization would happen, it appears that investors were cheered by the fact that the authorization was for a whopping 200 million shares vs. the current 25 million shares thus giving the company plenty of room for more splits. Doink! That is the sound we heard as TQNT banged its head right into the always psychologically important resistance point of $200 on Friday's opening. Sometimes you can't keep a good momentum stock down as TQNT pulled back gathered its strength and soared right past $200 to cap off a fantastic week. The close above $200 is very encouraging for the possibility that the run is not over. Resistance is the new high of $215.06. The trading pattern we have remarked upon over the past few weeks is still intact. Day traders have had the opportunity to sell the gap ups, get an intraday pullback, followed by late rallies that make new intraday highs. $200 could prove to be an important pivot point for traders next week. Be cautious about support. After such a nice run, real support can not be found until $160, the old consolidation range. One possible contributory factor to TQNT's runup last week was their presentation on Thursday at The Banc of America Securities Technology 2000 Conference. We finally have some more "affordable" options available for TQNT, as the Exchanges have finally caught up to the stock's meteoric rise. ***February contracts expire in two weeks*** ***All contracts have low OI*** BUY CALL FEB-190 TNN-BR OI= 5 at $21.50 SL=16.75 BUY CALL FEB-195 TNN-BS OI= 2 at $18.25 SL=14.25 BUY CALL FEB-200 TNN-BT OI= 1 at $15.13 SL=11.75 BUY CALL MAR-195 TNN-CS OI= 2 at $26.38 SL=20.50 BUY CALL MAR-200*TNN-CT OI=10 at $24.25 SL=18.88 Picked on Jan 13th at $130.00 P/E = 176 Change since picked +75.34 52-week high=$215.06 Analysts Ratings 5-4-4-0-0 52-week low =$ 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 = 425 K /charts/charts.asp?symbol=TQNT **** VECO - Veeco Instruments Inc. $61.38 (+5.38)(+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. Veeco is a strong beneficiary of the trend of major technology manufacturers sorely needing to upgrade their equipment in order to stay competitive. Every new innovation requires more sophisticated tools and Veeco supplies them. The race to upgrade is evident in the fact that Veeco has already received $7 million in new product orders this year. Veeco also seems to have a history of rallying this time of year and you couple that with the fact that the market seems to be broadening out to include some more of the midcap stocks and we may have set the stage for some more price increases for the stock. Interest in the stock seemed to peak, topping out at resistance of $64.50, right after Veeco gave a presentation at the Banc of America Securities Technology 2000 Conference on Tuesday. The rest of the week saw the stock make a small, but steady move higher to re-test that high. Earnings are due out February 10th after the close. Perhaps we can get an earnings based rally this week. It is very important to look at the very long-term chart when studying Veeco. The stock has lower highs going back four years. It is entirely possible that the stock may be peaking soon, so do not be afraid to take profits if the stock starts to weaken. There is overhead resistance caused by shareholders who may have been "stuck" in the stock for a long time and just can not wait to sell. On the plus side, a break above $65 could result in a nice run to $74 or higher. A week ago it was announced that 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 $1 million. It appears that the stock has been able to shrug off this negative news. It should also be noted that volume has picked up a little in the past week. ***February contracts expire in two weeks*** BUY CALL FEB-55*QVC-BK OI=149 at $8.13 SL=6.25 BUY CALL FEB-60 QVC-BL OI=156 at $4.50 SL=2.75 BUY CALL MAR-55 QVC-CK OI= 41 at $9.75 SL=7.25 BUY CALL MAR-60 QVC-CL OI= 39 at $6.25 SL=4.25 BUY CALL MAR-65 QVC-CM OI=111 at $4.88 SL=2.75 Picked on Jan 25th at $56.00 P/E = 45 Change since picked +5.38 52-week high=$64.50 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 = 350 K /charts/charts.asp?symbol=VECO **** LLTC - Linear Technology $101.44 (+10.69) Linear Technology is a manufacturer of high performance linear integrated circuits. LLTC products include operational, instrumentation and audio amplifiers; voltage regulators, power management devices, DC-DC converters and voltage references; communications interface circuits and sample-and-hold devices. Applications for LLTC's circuits include telecommunications, cellular telephones, networking products and satellite systems, notebook and desk top computers, computer peripherals, video/multimedia, automotive electronics and military and space systems. Linear Tech could be the most quiet major technology company in the NASDAQ 100. Their products are critical for a vast array of industries and their electrical components can be used in a mind numbing number of different applications. This is why LLTC has been a core institutional holding for many years. Sideline cash began piling into some of the old technology stalwarts last week, INTC and CSCO to name two, and it appears that LLTC has been getting a good chunk of that cash as well. Add to that, the announcement of a 2-for-1 split payable March 27th (a bit far off for a split run but a potentially positive influence) and LLTC seems poised to continue its stair-step climb into new high ground. Semiconductor stocks were very hot in January and LLTC was definitely one of them. The stock rallied from day one of this year, climbing from $73 to just under $100 before pulling back and consolidating. In the past week LLTC has completed a very bullish cup-and-handle pattern by closing above $100. We have observed some stocks in the past that have staged nice moves after completing this pattern. A possible move to $120 or higher is certainly possible. Although LLTC has made new highs in each of the past three days, it has the annoying habit of pulling back and actually going negative intraday. If this continues you may be able to utilize this pattern for more advantageous entry prices. Major support can be found at the breakout point of $95. As long as the stock keeps making new highs, we will be able to hold on to this profitable position. You may want to protect yourself if the stock drops below $100. A strong earnings season was one reason that Semiconductor stocks gathered a big chunk of investor's money last month. LLTC had one of the more stellar reports with sales up over 35% and earnings up 41%. The company gave analysts guidance that the current quarter will also be very strong. ***February contracts expire in two weeks*** BUY CALL FEB- 95 LLQ-BS OI=323 at $ 8.75 SL=6.50 BUY CALL FEB-100 LLQ-BT OI=768 at $ 5.25 SL=3.50 BUY CALL FEB-105 LLQ-BA OI= 20 at $ 3.13 SL=1.50 low OI BUY CALL MAR- 95 LLQ-CS OI=145 at $12.13 SL=9.50 BUY CALL MAR-100*LLQ-CT OI=268 at $ 9.50 SL=7.00 SELL PUT FEB- 95 LLQ-NS OI=367 at $ 1.81 SL=3.50 (See risks of selling puts in play legend) Picked on Feb 1st at $97.69 P/E = 72 Change since picked +3.75 52-week high=$103.50 Analysts Ratings 7-10-4-0-0 52-week low =$ 41.75 Last earnings 01/00 est= 0.38 actual= 0.40 Next earnings 04-13 est= 0.41 versus= 0.31 Average Daily Volume = 1.6 mln /charts/charts.asp?symbol=LLTC ******** Internet ******** COVD - Covad Communications $76.56 (+3.38) Covad communications is in the high speed Internet business. The motto at their Web site says "The Internet, the way it should be". COVD has more than 350 qualified ISP partners across the U.S. to offer Covad DSL. They concentrate primarily in the metro areas, operating more than 16,700 lines. They have formed strategic alliances with AT&T, Nextlink and Quest. Operating over existing copper phone lines allows the company to offer lower rates and 24 hour connectivity. Their primary competition comes from NorthPoint and Rhythms Netconnections. After a rocky start, COVD kicked into gear Friday, as buyers bid shares of the communications company $6.19 higher. Morgan Stanley Dean Witter may have helped initiate COVD's move after reiterating an Outperform rating, and raising their target price to $82. Actually several brokerage companies have reiterated or raised their rating on COVD recently. Since reporting earnings in late January, COVD had suffered from a sell the news mentality seen in the markets this earnings season. COVD beat the street handily by 17%, and experienced about 15% decline in the price of their stock. Investors woke up to the fact COVD is a great buy at these levels, and one that could be included for those looking to add a good Telecom company to their portfolio. Analysts at DLJ recently adjusted their price target from $75 to $90. COVD's claim to fame, is their focus on developing DSL services to Metro areas, where 24 hour connectivity has not been available. When it comes to the Internet, speed and reliability is second to none. During the last quarter COVD installed more DSL lines than its two primary competitors combined. Thursday's late day bounce continued Friday and provided us with a good entry point for our play. The volume Friday was about average and we'd like to see it pick up, along with a continued move higher. If we see a pullback early in the week, support is seen at $75, $74 and $72. Wednesday, President Clinton proposed a $2.4 billion program of tax incentives for companies aimed at increasing America's access to computers, the Internet and technology. He is seeking the deployment of high-speed Internet services to rural and poor urban communities. If some version of the program is approved it could prove to be a gold mine for COVD, Dell and others in the industry. ***February contracts expire in two weeks*** BUY CALL FEB-65 COU-BM OI=402 at $13.00 SL=10.25 BUY CALL FEB-70 COU-BN OI=548 at $ 8.88 SL= 6.50 BUY CALL FEB-75 COU-BO OI=289 at $ 5.75 SL= 4.00 BUY CALL MAR-70 COU-CN OI=453 at $12.63 SL=10.00 BUY CALL MAR-75 COU-CO OI=110 at $ 9.63 SL= 7.50 SELL PUT FEB-70 COU-NN OI= 172 at $1.81 SL= 3.25 (See risks of selling puts in play legend) Picked on Feb 01st at $74.00 PE = N/A Change since picked +2.56 52-week high=$81.00 Analysts Ratings 6-6-1-0-0 52-week low =$24.83 Last earnings 01/00 est=-0.97 actual=-0.80 Next earnings 04-25 est=-1.05 versus=-0.56 Average daily volume = 2.61 mln /charts/charts.asp?symbol=COVD **** CMGI - CMG Information Services Inc $118.56 (+13.06)(-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. It was evident buyers were lined up to buy this stock early Monday morning. After the second bounce off $100 the momentum took hold and our play was right on track. Once it was clear that the Fed wasn't going to do anything drastic, the share price reached an impressive $126.75 by Friday. For our new readers, CMGI was added as a call play last Sunday on the premise that after it retraced 50% of its share price since hitting an all-time high of $163.50 (split-adjusted) on January 3rd, buyers would start nibbling on this Internet powerhouse. Essentially our forecast was that this low share price would entice investors and thus, create upward momentum. And yes, we'll take credit where credit is due, the timing was on the money so to speak. If you missed the initial buying opportunity on Monday, there were plenty of intraday entry points on the climb during the week. However Friday's finale may be the true blessing in disguise. The downdraft left us with a potential entry going into next week. After the stock shattered the near- term resistance at $125 and traded consistently at this level, profit-takers came rushing out of the wings during the last hours of trading. CMGI slipped to the proximity of the 5-dma ($118.11) on increasing volume and this has left us wondering. Will CMGI hold at this at this support level on Monday? If it does not, the next step is at the $10-dma ($114.40) and your radar should be making a clatter. Otherwise simply wait for a confirming bounce (after amateur hour of course!) before beginning any new positions. Remember too, it's important to pay attention to market sentiment. On Tuesday Prudential reiterated a Strong Buy rating and upped their 12-month price target to $216 from $200. In other news, CMGI announced on Friday that it will take a 4.9% stake in Divine InterVentures, an Internet company focused on the B2B market. This move will expand CMGI's reach into the Midwest markets. ***February contracts expire in two weeks*** BUY CALL FEB-115*GCD-BC OI=1904 at $ 8.63 SL= 6.50 BUY CALL FEB-120 GCD-BD OI=3129 at $ 6.25 SL= 4.50 BUY CALL FEB-125 GCD-BE OI=2821 at $ 4.38 SL= 2.75 BUY CALL MAR-120 GCD-CD OI=2043 at $13.13 SL=10.75 BUY CALL MAR-125 GCD-CE OI=2016 at $10.75 SL= 8.75 Picked on Jan 30th at $105.50 PE = 91 Change since picked +13.06 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 = 6.47 mln /charts/charts.asp?symbol=CMGI **** EBAY - eBay Inc $168.06 (+20.50) eBay is an Internet auction service in which users buy and sell personal property. The sellers pay a fee to have heir items placed on the company's Web site and the buyers get to browse and make bids on the merchandise. If an item sells, eBay charges the seller a percentage of the closing price. The company's rivals in the auctioning arena are Yahoo! and Amazon.com. On Thursday evening we added EBAY to our call list as an emerging momentum play. We took into consideration that the Fed's expected rate hike of 25 basis points was now a memory clearing the runway for interest-rate sensitive stocks to take off. Plus Amazon.com's (AMZN) delivery of solid earnings' also helped traders cozy back up the these high-flying Internets. Previously on January 26th, we watched eBay also deliver solid 4Q earnings. The company came it at $0.04 p/s, which beat estimates by a significant $0.02! The share price rose a sharp 11.7%, or $16.06, but it slammed into strong resistance at $158.75 despite the supplementary slew of positive analyst comments. For instance, Robertson Stephens, Lehman Brothers, and DLJ all reiterated a Buy recommendation with the latter firm "calling EBAY a core Internet holding and saying it should outperform much of the Internet sector for the year". Then just two days later, Paine Webber also started coverage with a Buy rating citing eBay is "fundamentally changing the way transactions take place tend to be the best investment opportunities as these business models are based more on technology and software platforms, rather than fixed assets". The firm also issued a $225 price target. Nonetheless, EBAY channeled primarily between $145 and $155. Then on Thursday, EBAY made a strong move through the resistance at $158.75 on increasing volume. To us this signaled the potential of a very profitable run. In addition, EBAY's close above the 5-dma (now at $157.05) and 10-dma ($151.46) as well as its finish in the proximity of the intraday high at $166.38 further characterized a bullish sentiment. W.R. Hambrecht's new coverage of a Market Outperform with a $225 price target on Thursday just put the icing on the cake. We obviously like to stack the odds in our favor. Friday's trading was active. Unfortunately if you missed the early pullback back to old resistance at $158 and $160, you entry points were higher. Your best bet turned out to be intraday dips near $165. If the upward momentum continues to build then target shooting will be the name of the game. Near-term support is at $165, then $160 with overhead resistance at $170 and $180. The 52-week record is much higher at $234, but EBAY becomes a split-candidate before that at the $200 mark. Proceed with caution and know your risk tolerance for volatility. Use stops carefully. eBay came under scrutiny this week for allowing Ku Klux Klan- related products on its site. This follows earlier criticism of the sale of Nazi items that can be obtained on the auction site. As a result of the negative media surrounding this hot issue, the company announced on Thursday evening that such items will now have to meet certain criteria to be listed for sale on the site. On Friday, it hit the press that eBay is under preliminary investigation by US anti-trust enforcers. The company is being questioned for allegedly interfering with online software that searches multiple auction sites. This is already a non-event. ***February contracts expire in two weeks*** BUY CALL FEB-160 QXB-BL OI=1956 at $13.00 SL=10.50 BUY CALL FEB-165 QXB-BU OI= 961 at $10.00 SL= 7.50 BUY CALL FEB-170*QXB-BV OI=1839 at $ 7.50 SL= 5.75 BUY CALL FEB-175 QXB-BX OI=2202 at $ 5.50 SL= 3.75 BUY CALL MAR-170 QXB-CV OI= 251 at $16.50 SL=12.75 BUY CALL MAR-175 QXB-CX OI= 54 at $14.25 SL=11.25 Picked on Feb 3rd at $165.00 P/E = 2952 Change since picked +3.06 52-week high=$234.00 Analysts Ratings 9-7-6-0-0 52-week low =$ 64.00 Last earnings 01/00 est= 0.02 actual= 0.04 Next earnings 04-24 est= 0.03 versus= 0.04 Average Daily Volume = 3.28 mln /charts/charts.asp?symbol=EBAY ****************************************** CALLS - INTERNET 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! /charts/charts.asp?symbol=NTAP **** PSIX - PSINet Inc. $92.63 (+12.00) PSINet wants to hook you up. Providing Internet access to businesses, government agencies, and ISPs in 22 countries, the company offers dial-up and dedicated Internet access, Web hosting, remote access to enterprise networks and e-commerce solutions. Much of the company's recent growth has come through the acquisition of an assortment of ISPs in several countries. PSIX isn't wasting any time. Investors began returning on Tuesday and pushed shares higher for the next 3 days. After tacking on over $16 in three days, PSIX took a rest to consolidate its gains on Friday. Contributing to the week-end weakness was news of the company's continued acquisition binge (see news below). The primary catalyst for our play is the combination of earnings, scheduled for the week of the 21st (the company has not released the actual date), and a 2:1 split, payable this Friday. Support is intact at the 10-dma ($89.50) and should provide a good base to push higher as the split date approaches. A break through the $95 level, supported by continued buying interest, should give PSIX the strength it needs to make a run at its 52-week high ($107.19), set 2 weeks ago. Another bounce near $89 would be an ideal entry point, although more conservative investors may want to wait for a break through of last week's high of $97.75. As always, volume will be the key to a strong move upwards. PSIX can have large intraday moves, providing ample entry points and underscoring the need to play with stops. Continuing on its growth-through-acquisition quest, PSIX agreed to buy Lebanon's fifth largest ISP, New Com, for an undisclosed amount. A key benefit of this purchase is New Com's direct fiber-optic line to New York, making for easier integration into PSIX's worldwide network. As the first major ISP to start moving into this part of the world, PSIX will use the acquisition as a launching pad into the Middle East, India and Africa. As further evidence that the company is serious about growth, PSIX announced last week that it would spend over $380 million to expand in Hong Kong over the next 10 years. On Thursday, Robertson Stephens reiterated their Buy rating on PSIX and issued a price target of $172. ***February contracts expire in two weeks*** BUY CALL FEB- 90*SQP-BR OI=1351 at $ 8.88 SL= 6.75 BUY CALL FEB- 95 SQP-BS OI=2202 at $ 6.38 SL= 4.75 BUY CALL FEB-100 SQP-BT OI=1238 at $ 4.50 SL= 2.75 BUY CALL MAR- 95 SQP-CS OI= 206 at $12.88 SL=10.50 BUY CALL MAR-100 SQP-CT OI= 79 at $10.13 SL= 7.50 Picked on Feb 1st at $86.75 P/E = N/A Change since picked +5.88 52-week high=$107.19 Analysts Ratings 10-3-1-0-0 52-week low =$ 30.38 Last earnings 10/99 est=-1.38 actual=-1.35 Next earnings 02-21 est=-1.75 versus=-1.02 Average Daily Volume = 1.95 mln /charts/charts.asp?symbol=PSIX ********* SOFTWARE ********* BEAS - BEA Systems $89.25 (+6.56) Founded in 1995 BEA Systems has become widely known as a leading provider of middleware for enterprise applications. This is largely because of the success of BEA Tuxedo and BEA WebLogic, which together comprise approximately 46 percent of the transaction server market. Amazon.com, FedEx and Ericsson use BEA TUXEDO, to process millions of transactions daily. BEAS entered the market for application servers, Java- based software used in developing and integrating e-commerce and other Internet based applications with BEA WebLogic. BEAS provides complete solutions to its customers through a full range of services including, developing customer components, consulting, training and support. We will roll out the red carpet for this one. BEAS, will enter our play list with all the fanfare it deserves. 10 out of 12 of the analysts that follow BEAS have rated it a Strong Buy. The other two have issued a Buy and a Hold rating, but we feel confident they will soon choose to join the majority. Last week analysts at First Boston reiterated their Strong Buy rating based on discussions with the company's COO. Analysts feel BEAS will exceed the $138 million in revenues and $0.07 EPS, currently projected. BEAS is scheduled to report earnings February 22, after the close. With the momentum seen recently in BEAS, this could be the beginning of a very profitable earnings run. With the exception of a brief decline at the beginning of the year and a round of profit-taking early last week, BEAS has seen the momentum continue since its 2-for-1 split December 20th. BEAS made a new high at $95 on January 24th. During the profit-taking last Monday BEAS made a low of $68.88 and didn't even stop to catch its breath as it made its way back to $90 on Friday. BEAS appears to be preparing to move into uncharted territory. We would view move through $90 as a chance to buy calls. If we see any pullback a followed by a bounce the $88 and $85 levels would also provide a suitable entry point. The latest addition to the BEAS family of satisfied customers came this week as BEAS announced eDaycare.com is using BEA WebLogic Server, as the core application server technology for its 3-month old site. According to the eDaycare founder, after polling several Internet firms, they discovered BEA WebLogic Server is fast becoming and industry standard for dotcom companies. ***February contracts expire in two weeks*** BUY CALL FEB-85 BUC-BQ OI=1035 at $ 9.25 SL= 7.00 BUY CALL FEB-90*BUC-BR OI=2348 at $ 6.75 SL= 5.00 BUY CALL FEB-95 BUC-BS OI=1383 at $ 4.63 SL= 2.75 BUY CALL MAR-85 BUC-CQ OI= 582 at $16.88 SL=13.25 BUY CALL MAR-90 BUC-CR OI=1191 at $14.25 SL=11.25 SELL PUT FEB-80 BUC-NP OI= 400 at $ 2.75 SL= 4.50 (See risks of selling puts in play legend) Picked on Feb 06th at $89.25 PE = N/A Change since picked +0.00 52-week high=$95.00 Analysts Ratings 10-1-1-0-0 52-week low =$ 3.38 Last earnings 11/99 est= 0.05 actual= 0.06 Next earnings 02-22 est= 0.07 versus=-0.03 Average daily volume = 2.61 mln /charts/charts.asp?symbol=BEAS **** ADIC - Advanced Digital Information Corp $58.38 (+6.44) ADIC is a leading global provider in the market to manage and protect information for computer networks. The company has over 50,000 automated tape libraries installed and a suite of software solutions and Storage Area Networking (SAN) products. These products are marketed under ADIC and ADIC/GRAU brands of OEM partners including Dell, Exabyte and Unisys. The company's own storage management tools include AMASS, FileServ and CentraVision which are software products that provide users with shared access to network data. If there is one universal desire in the technological age, it is to have as much memory capacity and access to it as possible. ADIC is one company that seeks to provide the most cutting edge tools to allow companies to fulfill their ever growing capacity needs. Smaller technology firms are starting to participate again and ADIC is no exception. With earnings expected after the close on February 16th, we are looking for the possibility of a continued run of the company's share price. ADIC announced year end results in early December that showed a 95% increase in sales for the year and they beat the Street's estimate by $0.04. If those trends continue then it is entirely possible that an earnings run could occur as investors are always interested in the fastest growing companies. After establishing a new high in mid-January after breaking out of a nice base around $50, ADIC has had a very volatile past two weeks which has seen the stock reverse course and start to head back up higher. The selloff down below $43 appears to have been an aberration and the stock has recovered nicely. Friday's move beyond $56.38 was an encouraging sign that the stock may be back on its way to challenge for another new high. If we get a selloff you may want to try and go long around $55 where we find some pretty good support. If ADIC takes out Friday's high print of $60.13 an attempt for a new high could occur very quickly. Part of the recent excitement about ADIC occurred after a new product was revealed last Tuesday. The company has added new Fibre Channel routers to its suite of Open SAN Backup Solution products, making the package the first in the industry to build support for direct-to-tape, server-less backup within SAN's. Also, ADIC will hold its annual shareholder meeting on the 16th, the same day as their earnings release. Look for more good news to be announced at that time. CEO's rarely say anything but good news and investors know it so don't expect much selling in ADIC ahead of this date. ***February contracts expire in two weeks*** BUY CALL FEB-55 QXG-BK OI=106 at $5.38 SL=3.50 BUY CALL FEB-60*QXG-BL OI=169 at $2.75 SL=1.25 BUY CALL FEB-65 QXG-BM OI= 45 at $1.56 SL=0.75 low OI BUY CALL MAR-55 QXG-CK OI=187 at $8.25 SL=6.25 BUY CALL MAR-60 QXG-CL OI=118 at $5.88 SL=4.00 SELL PUT FEB-55 QXG-NK OI= 54 at $1.88 SL=3.50 (See risks of selling puts in play legend) Picked on Feb 6th at $58.38 P/E = 77 Change since picked +0.00 52-week high=$66.38 Analysts Ratings 3-3-0-0-0 52-week low =$ 6.63 Last earnings 12/99 est= 0.22 actual= 0.26 Next earnings 02-16 est= 0.23 versus= 0.13 Average Daily Volume = 422 K /charts/charts.asp?symbol=ADIC **** MUSE - Micromuse Inc. $187.13 (+24.25)(-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. This sizzling hot Internet software company sure has one "cool" product. Netcool software is fast becoming a dominating standard for helping ISP's manage their networks. Helping to drive excitement in the stock is a pending 2-for-1 stock split with a scheduled payable date of February 23rd. There was also a significant technology conference sponsored by Banc of America last week. One of the strongest investment opinions to come out of the week of presentations came from B of A's senior communications services and software analyst David Raezer. It is his assertion that communications software companies are well-positioned and will offer solid investment opportunities due to information carriers increasing reliance on software for future growth. MUSE was singled out as one of the best companies to benefit from this growth. This new assertion is hardly a surprise as MUSE is coming off of a year where it was 21st in Bloomberg's list of best price performers among 1999's publicly traded stocks. A common theme among last week's biggest stock price winners was technology companies that sell new technologies to Internet companies. This symbiosis was recently commented upon by the CEO of Micromuse when he said, "The explosive growth of Internet, telecom and cable networks are major drivers of our business." MUSE sure took its sweet time to catch up with the explosion in NASDAQ shares last week. Better late than never as MUSE had an excellent Friday which saw the share price of the stock take out resistance at $184 and finish the day up $14.25. If the market can stay strong, MUSE certainly seems poised to test its all-time high of $192.50 next week. A break above that level could get the stock really rolling out of its recent sideways action that has established good support in the mid $160's. MUSE acquired two new clients last week that helped to confirm the strength and popularity of Netcool Software. Knology, a cable modem Internet service provider and Cox Communications, one of the nation's largest broadband communications companies, will now both use Netcool to help manage their fast growing networks. ***February contracts expire in two weeks*** BUY CALL FEB-175 QVM-BO OI= 45 at $19.25 SL=15.00 BUY CALL FEB-180 QVM-BP OI= 96 at $15.00 SL=11.75 BUY CALL FEB-185*QVM-BQ OI=107 at $12.88 SL=10.25 BUY CALL MAR-175 QVM-CO OI= 1 at $30.63 SL=23.88 low OI BUY CALL MAR-180 QVM-CP OI= 5 at $28.13 SL=22.00 low OI Picked on Jan 27th at $166.69 P/E = 393 Change since picked +20.44 52-week high=$192.50 Analysts Ratings 5-6-0-0-0 52-week low =$ 28.13 Last earnings 01/00 est= 0.13 actual= 0.13 Next earnings 04-19 est= 0.14 versus= 0.07 Average Daily Volume = 289 K /charts/charts.asp?symbol=MUSE ******* Telecom ******* BRCM - Broadcom Corp. $311.00 (+27.00)(-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. The bears certainly had their way with BRCM Friday. Frankly we view this as chance to get in on the last leg of a great split run play. As we have said time and again, nothing goes straight up or down. From its low of $266 on Monday, BRCM ran up $64.25 to a high at $330.25 on Thursday. That's a 24% percent move in four days. It stands to reason we would see a retracement. A 50% pullback would put BRCM at $298.13, which just happens to be near its 10-dma at $295.84. We would all love to see our plays continue to move higher without any interruption, but that rarely happens. We would hope you entered this split run play and have pocketed some of your profits by now. We are anticipating another opportunity to enter the last this play, as we have about one week before the 2-for-1 split next Monday. If we see any weakness in BRCM and the Nasdaq early next week, a bounce off support near $300 could provide the opportunity we are looking for. The Semiconductor sector has outpaced all other sectors since the first of the year. Although their will be bumps along the way, we expect the strength in the BRCM and the chip sector to continue. Friday analysts at the Bank of America Securities Technology Conference commented on BRCM. Alex Gauna, a senior semi- conductor analyst, said he believes there's no better-positioned company, than Broadcom going into 2000. He went on to say the premium seen in BRCM is warranted given the instrumental role the company is playing in the evolution of next generation Internet communications. For further analysis, see this week's AskOIN article. ***February contracts expire in two weeks*** BUY CALL FEB-300*RDW-BT OI=1629 at $26.00 SL=20.50 BUY CALL FEB-310 RDW-BB OI= 657 at $20.75 SL=16.25 BUY CALL FEB-320 RDW-BD OI= 921 at $16.25 SL=12.75 Picked on Jan 30th at $284.00 PE = 432 Change since picked +27.00 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 /charts/charts.asp?symbol=BRCM **** MFNX - MetroMedia Fiber Network $78.31 (+13.16)(P3W +17.11) 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. With the exception of two trading days, MFNX has delivered big daily gains every time the volume exceeds 3 mln shares since late December - that's just 100K over the ADV of 2.9 mln. Applying a bit of logic tells us that barely breaking the ADV usually produces nice gains. We can further interpret that most days are spent under the ADV. Why the exercise? It's just a reminder that MFNX is volatile and needs volume in excess of the ADV to put on the big moves. Anyway, Friday's chart shows a textbook breakout. Take a look for yourself on the 5-minute chart. Following a gap up at the open and a price spike in amateur hour to $76.50, MFNX fell back, then regained upward movement. In the 11 o'clock hour, it flattened out testing resistance that just happens to be the high reached during amateur hour. In the next 5 minutes as price eked above $76.50, technical traders piled in driving the price higher. Voila' - instant breakout. Note too that later in the day $76.50 was tested twice to the down side. On both occasions $76.50 held. In total, there were three occasions to take a position. The first on the first breakout over the amateur hour high; the second and third on the successive tests and bounces off $76.50. Normally we wouldn't spend as much time on the technical aspects of a play. However, we thought this one was instructional with something to be learned from the detail. Anyway, here's a quiz for MFNX veterans. How much news was released from the company to move the price? Is that your final answer? Right - none!! That said, we're still waiting for an earnings date from their IR department. Zack's has February 15 listed, but that is unconfirmed by the company. When we finally do get earnings, we could also get a split announcement since they have announced previous splits between $50 and $85. As noted above, support is $76.50, but if NASDAQ takes a breather after setting a new record, it won't likely hold. However, as a previous high, $75 is pretty strong, followed solidly by $70. Target shoot your entry to suit your risk profile and pay particular attention to the intraday volume. The gains happen when the volume is big. Two analyst recommendations: first, Wasserstein Perella rated MFNX a Buy with an $85 target; second, Advanced Equities (we haven't heard of 'em either) set an $80 target coupled with a Buy rating late last week. News is scarce, but you already knew that. ***February contracts expire in two weeks*** BUY CALL FEB-70 QFN-BN OI= 578 at $ 9.88 SL=7.50 BUY CALL FEB-75 QFN-BO OI=1453 at $ 6.38 SL=4.50 BUY CALL FEB-80 QFN-BP OI= 430 at $ 3.25 SL=1.50 BUY CALL MAR-75*QFN-CO OI= 241 at $10.00 SL=7.50 BUY CALL MAR-80 QFN-CP OI= 269 at $ 7.50 SL=5.75 Picked on Jan 16th at $57.13 P/E = N/A Change since picked +21.18 52-week high=$79.38 Analysts Ratings 18-8-0-0-0 52-week low =$17.38 Last earnings 11/99 est=-0.12 actual=-0.16 Surprise=-33% Next earnings 02-15 est=-0.26 versus= N/A Average Daily Volume = 2.9 mln /charts/charts.asp?symbol=MFNX **** LU - Lucent Technologies $57.00 (+1.69)(-2.63) 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. Those of you wanting a fast action play may want to skip to the next write-up. LU has been moving at a snail's pace, which for the conservative trader is a good thing. Our basis for the play is that all the bad news (missed earnings, poor short-term outlook, crummy conference call) is out. So are the serious sellers? LU found a bottom at $50 and has been inching up ever since January 19, with support moving up $1 at a time. $57 held Friday, but $56 is pretty solid. Resistance is holding firmly at $58. Anyone see a pattern here? With higher-lows and resistance planted at $58, LU is forming an ascending pennant. The formation has been accompanied by gradually increasing volume over the ADV for the last three days. We think LU is getting ready for a breakout as long as the rest of the market cooperates. Careful though. Lots of OI at the FEB-60 and MAR-60 strikes could provide strong resistance. It's not like there's a whole lotta fluctuation in the price, so target shooting has less meaning. It also means price moves will likely be small. Thus, be content with smaller gains on this one. Enter according to your risk profile or let volume be your guide when the stock reaches $58. In the news, LU is buying assets from VCT for $100 mln cash. The acquisition is of a semiconductor division that makes semiconductor components to computer hard disk drive manufacturers. Class action lawsuits are still flying too. But those are usually settled without a trial and the potential expense is already factored into the price. ***February contracts expire in two weeks*** BUY CALL FEB-50 LU-BJ OI= 2947 at $7.88 SL=6.00 BUY CALL FEB-55*LU-BK OI=13704 at $3.50 SL=1.75 BUY CALL FEB-60 LU-BL OI=23795 at $0.91 SL=0.00 High Risk! BUY CALL MAR-55 LU-CK OI= 2452 at $5.25 SL=3.50 BUY CALL MAR-60 LU-CL OI=11340 at $2.75 SL=1.25 Picked on Jan 27th at $57.44 P/E = 81 Change since picked -0.44 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 **** BCE - BCE Inc. $119.00 (+20.38) BCE is Canada's largest communications company. Through its operations in communications services, BCE provides residence and business customers in Canada with terrestrial and wireless communications products and applications, satellite communications and direct-to-home television services, systems integration expertise, electronic commerce solutions, Internet access and high-speed data services, and directories. Abroad, through Bell Canada International's investee companies, BCE provides communications services to more than 6 million customers in Asia and Latin America. BCE also has an extensive international presence through its 39% ownership of Nortel Networks, a network designer and builder of communications networks, as well as through Teleglobe, an international telecommunications carrier. Here's the deal. This play is really about unlocking the value of BCE's Nortel Networks holdings. BCE is about to spin off 95% of its ownership, or 39% of Nortel as a dividend to BCE shareholders. Here's the math. BCE has a market cap of about $70 bln. NT has a market cap of about $145 bln. With a 39% interest in NT worth about $57 bln., the market is valuing the remainder of BCE at only about $13 bln. As the owner of 80% of Bell Canada, Canada's largest phone company with over $9 bln in sales, BCE is undervalued. For every share of BCE owned, shareholders will receive .78 shares of NT (for every $100 of BCE, shareholders will get the equivalent of a $78 dividend in the form of NT shares). In short, BCE is way too cheap and should be considered a value/arbitrage play based on Nortel's growing value, and the market's realization that the remainder of BCE is more valuable too. Also contributing to BCE's magnificent jump on Friday was the NT roadshow, wherein analysts came away with revenue growth revisions of 25% up from 21% previously estimated. With NT up $12 on the day, so went BCE. We hope you got a piece of it. Those wanting into the play, be aware that Friday's finish was a bit weak, which means that there could be a pullback. Experienced traders almost expect it given the steep rise. Support is tough to find, but $118 is the first and weakest level, followed by $115 and $110. BCE's 10-dma, which has typically provided good support is way back at $103. NT has blown way out of the channel too and really has no support until about $107. Watch that one for clues. The point is there is room to fall so pick your entry carefully, and enjoy the ride as NT's roadshow continues. The news is above. However, always on the lookout for unlocking value, BCE signed a joint venture agreement with Lycos to form a new Internet portal with Canadian content for the business to consumer market. The venture is called Sympatico-Lycos. ***February contracts expire in two weeks*** BUY CALL FEB-110*BCE-BB OI=700 at $11.00 SL=8.75 BUY CALL FEB-115 BCE-BC OI=158 at $ 7.38 SL=5.50 BUY CALL FEB-120 BCE-BD OI= 42 at $ 4.50 SL=2.75 BUY CALL MAR-115 BCE-CC OI= 3 at $11.88 SL=9.50 low OI BUY CALL MAR-120 BCE-CD OI= 40 at $ 9.38 SL=7.00 Picked on Feb 3rd at $109.63 P/E = 19 Change since picked +9.38 52-week high=$109.88 Analysts Ratings 4-4-0-1-0 52-week low =$38.31 Last earnings 01/99 est= N/A actual= N/A Next earnings 04-00 est= N/A versus= N/A Average Daily Volume = 785 K /charts/charts.asp?symbol=BCE **** ICIX - Intermedia Communications $49.25 (+4.25)(+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. Slow and steady ICIX decided to pick up the pace for us on Friday, as it gained $3.13 and traded up to a new 52-week high of $50.38. Though we saw some nice momentum backed with solid volume, ICIX struggled at the $50 level and could not manage to break through. Admittedly, we are concerned regarding the number of short positions out there on ICIX (roughly 50%). As we mentioned in Thursday's write up, it is rare to see such a high number of short positions without finding some problems lurking underneath a few unturned stones. We are not saying that this is the case here, but we feel it is important to note the concern. Otherwise, ICIX is really shaping up nicely for us. The $50 level could continue to provide resistance being that it is a strong psychological number. Should ICIX make the break, we could be cleared to continue this positive momentum, possibly soon to be earnings (see news below), run. ICIX looks to have some nice support shaping up right around $45.50-$46. Should ICIX move above $50, this level could serve well for possible points of entry. Obviously, confirm momentum and remember to tighten your stops to protect profits on the way up. We did dig up an article on ICIX, which came out last Monday. This article had a very bullish stance on ICIX and stated that based on their analysis of the company, ICIX should be trading in the neighborhood of $318 a share. The author went on to say that ICIX seemed to have everything in place to really begin drawing some attention. Be sure to keep in mind that the $318 number is only that, and not a price target. There seems to be quite a bit of discussion out there as to the pending earnings announcement. We did try and confirm the date with the company last Thursday and were told that they have yet to set a specific date, but were planning to announce toward the end of this month. We will keep you posted. Though this is a play on ICIX, we must also take note of new developments for Digex (DIGX). As we have mentioned previously, ICIX owns over 80% of DIGX, so obviously what happens to DIGX effects ICIX. On Friday, Preferred Capital Markets reiterated their Buy rating on DIGX and raised their price target to $120. DIGX is currently trading at $97.25 and was up $1.88 on Friday, following a positive earnings announcement on Thursday. ***February contracts expire in two weeks*** BUY CALL FEB-45*QIX-BI OI=2253 at $6.00 SL=4.25 BUY CALL FEB-50 QIX-BJ OI=1889 at $2.88 SL=1.50 BUY CALL FEB-55 QIX-BK OI= 0 at $1.19 SL=0.00 High Risk! BUY CALL MAR-45 QIX-CI OI=1743 at $8.25 SL=6.25 BUY CALL MAR-50 QIX-CJ OI= 247 at $5.88 SL=4.25 Picked on Jan 30th at $45.00 P/E = N/A Change since picked +4.25 52-week high=$50.38 Analysts Ratings 6-5-3-0-0 52-week low =$13.50 Last earnings 11/99 est=-2.98 actual=-2.97 Next earnings 02-26 est=-3.08 versus=-2.84 Average Daily Volume = 1.46 mln /charts/charts.asp?symbol=ICIX ***** LEAPS ***** by Mark Phillips The weighting of our LEAPS portfolio towards tech stocks was rewarded this week as the NASDAQ marched up to flirt with record territory again. The VIX once again demonstrated its utility as an indicator of market tops and bottoms, as it rolled over near 29 on Monday and closed the week at 22.93. Our CSCO play has given us a nice run and has earnings scheduled for Tuesday afternoon. Evaluate your investment objectives; you may want to consider taking some profits off the table in advance of the usual post-earnings dip. The outcome of the VOD merger with Mannesmann produced the usual post-news drop. This play will likely be rangebound until investors decide how they feel about the details of the agreement. Keep watching for that next entry point! Current Plays SYMBOL SINCE LEAPS SYMBOL PICKED CURRENT RETURN EMC 11/07/99 JAN-2001 $ 80 ZOH-AP $15.38 $42.50 176.33% JAN-2002 $ 90 WUE-AR $19.00 $46.75 146.05% GPS 11/07/99 JAN-2001 $ 40 ZGS-AH $ 5.75 $17.63 206.61% JAN-2002 $ 45 WGS-AI $ 7.88 $19.38 145.94% IBM 11/07/99 JAN-2001 $100 ZIB-AT $13.63 $28.88 111.89% JAN-2002 $110 WIB-AB $16.50 $32.63 97.76% LU 11/14/99 JAN-2001 $ 80 ZEU-AP $12.88 $ 5.50 -57.30% JAN-2002 $ 90 WEU-AR $16.13 $ 9.25 -42.65% CSCO 11/14/99 JAN-2001 $ 80 ZCY-AP $19.13 $49.88 160.74% JAN-2002 $ 90 WIV-AR $22.00 $51.13 132.40% GE 11/21/99 JAN-2001 $150 ZGR-AU $16.25 $19.63 20.80% JAN-2002 $150 WGE-AU $25.50 $30.13 18.16% GTW 11/21/99 JAN-2001 $ 90 ZWB-AR $17.75 $ 6.88 -61.24% JAN-2002 $100 WGB-AT $22.50 $11.25 -50.00% NT 11/28/99 JAN-2001 $ 75 ZOO-AO $22.25 $56.38 153.39% JAN-2002 $ 75 WNT-AO $30.25 $65.25 115.70% VOD 12/05/99 JAN-2001 $ 50 ZAT-AJ $10.75 $17.38 61.67% JAN-2002 $ 50 WHV-AJ $15.00 $22.88 52.53% TXN 12/12/99 JAN-2001 $110 ZTN-AB $22.25 $39.75 78.65% JAN-2002 $120 WGZ-AD $28.50 $45.38 59.23% NXTL 12/19/99 JAN-2001 $ 90 ZFU-AR $23.50 $42.75 81.91% JAN-2002 $100 WFU-AT $27.25 $48.00 76.15% SUNW 12/19/99 JAN-2001 $ 80 ZJX-AP $17.63 $21.75 23.37% JAN-2002 $ 90 WJX-AR $22.00 $26.88 22.18% AOL 12/23/99 JAN-2001 $ 90 ZKS-AR $20.13 $ 5.63 -72.03% JAN-2002 $100 WAN-AT $25.63 $10.00 -60.98% LU 01/09/00 JAN-2001 $ 50 ZEU-AJ $13.63 $16.00 14.81% GTW 01/09/00 JAN-2001 $ 60 ZWB-AL $15.88 $15.63 - 1.57% MOT 01/09/00 JAN-2001 $125 ZMA-AE $31.13 $50.00 60.62% JAN-2002 $125 WMA-AE $41.50 $62.00 49.40% CY 01/16/00 JAN-2001 $ 40 ZSY-AH $ 9.13 $ 9.13 0.00% JAN-2002 $ 40 WSY-AH $12.63 $13.25 4.91% ERICY 01/30/00 JAN-2001 $ 65 ZYD-AM $19.75 $31.63 60.15% JAN-2002 $ 65 WRY-AM $27.00 $39.13 44.93% MSFT 01/30/00 JAN-2001 $100 ZMF-AT $17.63 $23.13 31.20% JAN-2002 $110 WMF-AB $21.63 $27.13 25.43% 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 ICIX - Intermedia Communications $49.25 ICIX presents a mixed bag of information for investors to digest. This is currently a play in the Calls section, and we are adding it as a LEAP to take advantage of the near term uncertainty. Refer to the play in the Calls section for all the details, but here are the major issues. The company owns over 80% of Digex (DIGX), a Web site application hosting company that had its IPO last July. The strong earnings posted by DIGX this week would lead one to think ICIX would be screaming higher along with DIGX. But this is where it gets interesting; half the outstanding shares are currently shorted, leading us to think there may be some hidden issues with the company that may take some time to sort out. Using the 5-dma as support last week, ICIX finally broke through the $45 resistance level with a spurt of buying on Friday. A retreat back to this level could present a good buying opportunity. Just be aware that this play could take some time to really get moving while investors try to sort out the conflicting signals. BUY LEAP JAN-2001 $55.00 ZLJ-AK at $12.00 BUY LEAP JAN-2002 $55.00 WLJ-AK at $18.00 chart = /charts/charts.asp?symbol=ICIX Drops With the Nasdaq roaring, we will hold all the current plays. ***************** 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. **** PGR - The Progressive Corporation $60.25 (-1.88) In business since 1937, Progressive is one of the nation's largest auto insurers. Progressive offers all types of vehicle insurance and property-casualty insurance through 30,000 independent agencies, the Internet and through affiliate programs. PGR is a holding company for 82 subsidiaries. PGR also has one mutual insurance company affiliate. It is time for us to go back to the put play that just keeps giving. We last had PGR as a put play back in December when Y2K concerns kept driving the share price down. Somehow the world survived the passing of Y2K and Progressive is still in a downtrend. One contributing factor was PGR's lousy earnings report on January 25th. The company missed estimates badly due to an unexpectedly large number of automobile damage claims stemming from Hurricane Irene. Operating Income was a disappointing $.06 per share vs. $1.38 a year ago. Estimates were for profits of $0.21 per share. After the earnings, Prudential initiated coverage of the stock with a "Neutral" rating. The losses could not come at a worse time. Couple the bad earnings with rising interest rates and there could be more problems for PGR down the road. The Fed is raising rates to attempt to slow down the economy. One of the biggest benefits of a supercharged economy is the purchase of big ticket items like automobiles. Being one of the biggest insurers of automobiles, a slowdown can not help PGR. There is a very strong technical reason for our interest in PGR as a Put Play. The stock is in a very well defined downtrend with the most recent breakdown dating all the way back to November 17th when the stock broke below support on three times normal volume. Since then it has been nothing but one new low after another with the occasional value investor buying bounce. As long as the trend stays negative it appears that one could place profitable put positions in their accounts. Look to place positions on mini-rallies that do not take out any previous day's high. ***February contracts expire in two weeks*** BUY PUT FEB-65 PGR-NM OI= 275 at $5.75 SL=4.00 BUY PUT FEB-60 PGR-NL OI=1225 at $2.13 SL=1.25 BUY PUT MAR-60*PGR-OL OI= 104 at $4.00 SL=2.50 Average Daily Volume = 380 K /charts/charts.asp?symbol=PGR **** GBIX - Globix Corp. $40.00 (-5.84) Globix Corporation is a leading provider of Internet connectivity and advanced Internet services for businesses in the United States and Europe. Through its high-speed, fault-tolerant, fiber-optic network and state-of-the-art Internet Data Centers in New York City, Santa Clara, and London, Globix delivers superior reliability, security and performance to companies using the Internet to deploy mission- critical business strategies. Cutting-edge applications include Co-Location, Web Hosting, Dedicated Access, Streaming Media, E-Commerce and Internet Security. Is this a case of Globix warming? Alright, that was a bit of a stretch for a pun. In taking a look at a chart for Globix, one is not likely to see a clear indication of momentum in either direction. Obviously, we would like to see GBIX take a turn and head south. We are slightly concerned as Friday's session saw not only a $2 gain for GBIX, but also volume that was nearly double the daily average. Are the buyers ready to step back into the ring for GBIX? We are betting not. Remember, one day does not make a trend and we believe that GBIX still has a lot to recover from. The two 2:1 stock splits within the last month and a half, the negative earnings report just over a week ago and a lack of positive news to recapture the hearts of investors, are all factors that could work to keep the lid on GBIX for a while longer. We will be keeping an eye on GBIX. Should we see more sessions like Friday's GBIX's time on our put play list may be limited. GBIX spent Friday's session flirting around $40 and finally settled for a close there. GBIX does have a bit of pre-established support at this level not to mention that GBIX's 30-dma is moving in to play back up support at $38.50. Exercise caution as GBIX decides what direction to head. GBIX does have some immediate resistance lurking overhead at $41 and $45. Should GBIX continue to move up, encounter resistance and start to pull back these resistance levels could provide room for some potential entry points. Although, if you are going to try and target shoot your way in here, remember to take the above mentioned support levels into account. Until we see some consistent trading below these levels, new entries could be risky. ***February contracts expire in two weeks*** BUY PUT FEB-40*GUI-NH OI= 8 at $4.13 SL=2.50 low OI BUY PUT FEB-35 GUI-NG OI=22 at $1.75 SL=0.75 Average Daily Volume = 509 K /charts/charts.asp?symbol=GBIX **** UAL - UAL Corp $55.50 (-2.38)(-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. The airline sector as a whole has been in a general downtrend since January. The skyrocketing fuel costs have put quite a squeeze on their bottom-line. UAL added insult to injury when it abruptly announced on January 13th its fiscal 200 financial forecast would be well below analyst expectations. The shares stumbled significantly losing 13% in one day. Despite solid 4Q earnings on January 19th, UAL continued its descent. The flight disruptions on January 25th resulting from the east coast blizzard was the straw that finally broke the camel's back. You've got to realize too that consumers have been less than satisfied with airline's customer service. There is a constant stream of complaints about delays and rude treatment. It seems investors have taken this sentiment to heart and are putting their money in other equities. First UAL slipped under firm support at $60, then quickly flirted with $57. Now the $56 support level has been shattered. Currently the 5-dma is at $57.30. Look for a bounce off this indicator if you want an entry into this put play. But still the question remains. Where's the bottom? Honestly at this point it's hard to determine so let's not guess. Be prepared with stops and pay close attention to stock and market direction. In the news this week, UAL announced its January traffic decreased by 2.8% versus a comparable month in 1999. ***February contracts expire in two weeks*** BUY PUT FEB-60*UAL-NL OI=807 at $5.00 SL=3.25 BUY PUT FEB-55 UAL-NK OI=994 at $1.69 SL=0.75 Average Daily Volume = 704 K /charts/charts.asp?symbol=UAL **** SCAI - Sanchez Computer Associates Inc $29.00 (-5.38) Sanchezis a market leader in providing enterprise banking software systems and services for financial institutions worldwide and maintains its corporate headquarters in Malvern, Pa. Sanchez directs its international operations out of its headquarters in Chester, U.K. Additionally, the company maintains offices in San Francisco, London, Warsaw and Singapore. Its principal product is PROFILEŽ/Anyware, a highly flexible, multi-currency, multi-language, enterprise banking system that also supports emerging delivery channel technologies. If you ever thought that all stocks would do great if the markets were doing great, you were wrong. Some stocks like SCAI, our new put play, are not affected by the records being broken around them. This was one the best week in history of the Nasdaq and SCAI couldn't capitalize on it. We are looking right now at support around $22 as the next stopping place for SCAI. The 10-dma of $33 will provide resistance on each rally and would be a great entry point. Something to look forward to this week is earnings announcements. SCAI will announce their fourth quarter earnings on Feb. 10th (confirmed date). So watch to see if they come out better or worse than expected. We typically don't hold calls over earnings for the selloff that may occur after, but that would obviously favor puts. The effect could be more trouble for SCAI. Earnings don't look like they will help SCAI that much as the stock has been on the decline for over a month now. SCAI has had no major news over the last month so there is no obvious indicator as to why the decline, but looking at increasing volume we see that investors are still frantically selling. Backing each day's loss has been volume greater than the average. Place your stops just above the 10-dma resistance level in case of an turnaround. ***February contracts expire in two weeks*** BUY PUT FEB-35*SUU-NG OI=29 at $5.00 SL=3.25 BUY PUT FEB-30 SUU-NF OI=95 at $3.00 SL=1.50 Average Daily Volume = 230 K /charts/charts.asp?symbol=SCAI **** VERT - VerticalNet Inc. $226.00 (-40.00) VerticalNet, Inc. owns and operates 55 industry-specific Web sites designed as online business-to-business communities, known as vertical trade communities. These vertical trade communities provide users with comprehensive sources of information, interaction and e-commerce. Additionally, VerticalNet provides auctions, catalogs, bookstores, career services and other e-commerce capabilities horizontally across its communities with sites like Industry Deals.com, IT CareerHub.com, LabX.com, Professional Store.com. VerticalNet's NECX Exchange provides an exchange for the electronic components industry. January 21st was a very good day for VerticalNet. It was on this day that Microsoft (MSFT) announced that it would be investing $100 million in VERT for a 2% stake. Shares of VERT, which had ended the previous day at $193.56, shot up as high as $272 on the news. Needless to say, this left a gap and it looks as though VERT may be trying to fill it. VERT traded up to a new high of $289.56 back on January 26th and started to roll over the next day. For the most part, VERT been headed downhill since. February 1st also turned out to be a big day for VERT. VERT started the day by announcing a joint venture with British Telecom (BT) and Internet Capital Group (ICGE). Then VERT announced Q4 earnings, coming in 8 cents per share better than analyst's expectations. VERT decided to put a little icing on the cake and announce a 2:1 stock split to be payable on March 31st. We believe that VERT is currently experiencing a case of the post earnings/split announcement blues and though we don't think that VERT's rollover is long-term, we are going to try and profit from the reminder of it. Being that VERT's split is not until the end of March, we do not think that there is a possibility of a split run for some time yet. As we mentioned, VERT has a gap to fill and though it may not trade all the way back down to $193, we do think it is possible that VERT may see $200 again. It may be a short play but it looks to have the potential to be a sweet one. This is a high-risk play so take your own risk tolerance into account before entering and remember to use your stops. VERT has been known to move big and move fast. ***February contracts expire in two weeks*** BUY PUT FEB-220*ERW-ND OI=1625 at $12.75 SL=11.00 BUY PUT FEB-210 ERW-NB OI= 233 at $ 7.75 SL= 5.75 BUY PUT FEB-200 ERW-NT OI= 852 at $ 5.00 SL= 3.25 Average Daily Volume = 1.61 mln /charts/charts.asp?symbol=VERT **** MMM - Minnesota Mining and Manufacturing $89.06 (-3.19) Commonly known as the maker of the ubiquitous, adhesive-backed Post-It Notes, MMM is also a leading manufacturer of a variety of industrial, consumer, and medical products. Reflective sheeting on highway signs, respirators, spill-control sorbents, and Thinsulate brand insulations are just some of the company's industrial products. MMM also makes microbiology products, making it easier for food processors to test for the microbiological quality of food. Buyers and sellers have been locked in a tug of war since early August, relegating MMM to a fairly wide trading range between $89 and $103. Each time the lower end of this range has been tested, buyers have stepped up to lend support to the sagging share price. This time things look different though, as the decline over the past three weeks has been on much stronger volume. A failure of the $89 support level, could open the door for a decline down to $80-81. Amplifying the bearish tone on Friday, the 10-dma crossed below the 200-dma for the first time since April of last year. Going forward, resistance at the 10-dma ($93) may provide for a good entry point. Entries can also be considered on a decline through support as long as volume remains strong. Beating earnings estimates by 8 cents on January 26th had little effect on the share price and an upgrade (Under Perform to Market Perform) from Banc of America Securities only elicited more yawns. There has been little news of any importance other than the company's frequent announcements of new products and alliances. ***February contracts expire in two weeks*** BUY PUT FEB-95*MMM-NS OI=1015 at $6.88 SL=5.00 BUY PUT FEB-90 MMM-NR OI=1285 at $3.13 SL=1.50 Average Daily Volume = 1.26 mln /charts/charts.asp?symbol=MMM **** PG - Proctor & Gamble Co $94.75 (-5.56) Proctor & Gamble is the #1 manufacturer of consumer goods in the US. The company operates worldwide in five main business segments: laundry and cleaning, paper products, beauty care, food and beverages, and health care. Some of the brand names you are likely familiar with include Tide detergent, Pampers, Crest toothpaste, Iams premium pet food, and Vicks cold products. They also make PUR drinking water systems. In a separate arena, P&G are the television producers of Guiding Light and As the World Turns. Plans to accelerate marketing spending in the 3Q have caused PG to lose more ground. The company's announcement came along with "rather flat" earnings on January 25th. Bottom-line the company was pre-warning of a weaker 3Q. This went over like a lead balloon. Share prices continued to edge lower yet still found support above $98. Although this week the downward momentum picked up speed. By Thursday PG slipped under the converging 5-dma ($98.35) and 200-dma ($98.79) giving us a hint that further deterioration may be on its way. Sure enough, on Friday we saw more evidence of its demise as the stock lost $3.06, or 3.1% and closed bearishly just a fraction away from its daily low. Other technical indicators like the MACD and Stochastic are in negative mode too. Generally speaking, others in the consumer sectors are also weaker, but the basis of this play is pure momentum and PG's technical breakdown. Optimum entry points would be to catch bounces off support at $98. If the market doesn't provide that opportunity, wait for resistance at $94 to become new support and then make your move. ***February contracts expire in two weeks*** BUY PUT FEB-100 PG-NT OI=3277 at $6.38 SL=4.75 BUY PUT FEB- 95*PG-NS OI=1256 at $3.25 SL=1.75 BUY PUT FEB- 90 PG-NR OI=1307 at $1.31 SL=0.75 Average Daily Volume = 2.66 mln /charts/charts.asp?symbol=PG ************************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 2-6-2000 Sunday 5 of 5 ************* COVERED CALLS ************* Success Basics: Fundamentals Of Charting... This week we received a request for an explanation of the most popular charting styles and their benefits and limitations. While there are many different types of charts available, the majority of traders use some combination of the following; Bar charts, Point and Figure Graphs and Japanese Candlesticks. The most common type of stock chart is the bar or line chart. It depicts the high, low and closing price along with volume and a number of other (optional) indicators for a specific time frame. Another popular charting method is the point and figure approach, which records only price changes while ignoring time and volume. X's are place in boxes representing up days; and O's are placed in boxes representing down days. There is no provision for time in point and figure charting. As long as the trend remains the same, the X's or O's are placed above or below each other. When a reversal occurs, a new vertical column depicts the next trend. Point and figure charts are useful for spotting unique formations and identifying areas of support and resistance. However, they should never be used alone since there is no volume indication. The most unique chart style is the Candlestick, a charting method originally developed in Japan. The high and low are described as shadows and plotted as a single line. The price range between the open and close is plotted as a rectangle on the single line. If the closing price is above the opening price, the body of the rectangle is white. If the close is below the open, the rectangle is black. There a number of common technical formations in each of these methods that can be used to generate profitable trading signals. This week, we will focus on bar charts. It's important for new traders to understand the fundamentals of bar chart analysis. The first requirement is to select a time frame. Charts that track a stock's movement on a daily closing basis are the most common. This time period is usually best for short-term trading, where optimal resolution is important. Another useful time frame is the monthly chart and it often employed by long term investors; those who are looking for trends of several years. There are a number of basic components that novice traders should recognize and understand before they can use charts to develop a profitable trading plan. The most significant item to identify on a historical bar or line chart is the closing price. The stock's price is the fundamental indicator on the chart because it forms the pattern that will eventually dictate its future character or trend. The second factor is the amount of daily trading volume. It's considered a favorable signal when volume expands as a stock rises and decreases as a stock declines. Increasing volume on a break-out indicates powerful buying that will propel the stock to significantly higher prices. When identifying a bullish candidate, be sure to confirm that trading volume supports the trend. Another common indicator on the basic price chart is the Moving Average. For general analysis, most traders use a 150-day weighted average, where the most recent action is more significant than the older movement. This effect makes the moving average sensitive to current activity and helps the indicator reflect character changes in a shorter time frame. The primary quality of moving averages is their ability to help determine the overall trend. One well-known rule to remember; never buy a stock when it is trading below its declining 150-day moving average, no matter how cheap it appears or how fundamentally sound the company. This indication of price performance is a clear signal to avoid the issue. An additional indicator commonly used by professional traders is the Relative Strength Line. Relative strength reflects how well the issue is performing when compared to the overall market. For stock buyers, the rules are simple. If the relative strength line is in a downtrend, avoid the stock and look for a new candidate. The relative strength line can also be used to identify situations where a reversal is in progress. When the indicator moves from negative territory (below the median line) to positive territory, that is a favorable signal. When an upside breakout is accompanied by a move of the relative strength line into positive territory, the probability of a successful outcome is significantly increased. One final characteristic that can often be the deciding factor in a trade is the long-range history or background of the issue. A long range (weekly) chart can help you put the current price activity into historical context. When an upside break-out is also a new long-term high, the situation becomes extremely favorable. In that case, there is no further resistance or supply above the current price. The stock is in "blue sky" territory and when there are few sellers trying to unload their shares (from previous losses), the issue can move higher with little or no difficulty. As with most elements of the market, it's all based on human nature. Next week, Candlesticks and other red hot techniques.. SUMMARY OF PREVIOUS PICKS Stock Price Last Mon Strike Opt Profit ROI Monthly Sym Picked Price Price Bid /Loss ROI CYOE 5.50 9.03 FEB 5.00 1.44 *$ 0.94 23.2% 21.3% TERA 4.41 7.69 FEB 5.00 0.50 *$ 1.09 27.9% 20.2% WDC 5.50 5.06 FEB 5.00 1.13 *$ 0.63 14.4% 10.4% MCRE 11.88 15.25 FEB 10.00 2.50 *$ 0.62 6.6% 9.6% GMGC 6.84 8.50 FEB 5.00 2.38 *$ 0.54 12.1% 8.8% KELL 8.81 8.25 FEB 7.50 1.69 *$ 0.38 5.3% 7.7% GMGC 7.50 8.50 FEB 5.00 2.88 *$ 0.38 8.2% 7.6% GELX 20.38 17.69 FEB 17.50 4.00 *$ 1.12 6.8% 7.4% MESG 17.31 19.88 FEB 15.00 3.25 *$ 0.94 6.7% 7.3% ESPI 9.22 9.81 FEB 7.50 2.19 *$ 0.47 6.7% 7.3% ERTH 6.03 5.13 FEB 5.00 1.38 *$ 0.35 7.5% 6.9% CCCG 16.88 24.06 FEB 15.00 2.56 *$ 0.68 4.7% 6.9% CCUR 18.38 18.63 FEB 15.00 4.38 *$ 1.00 7.1% 6.6% ESPI 11.06 9.81 FEB 7.50 3.88 *$ 0.32 4.5% 6.5% BRKT 25.75 36.88 FEB 22.50 4.13 *$ 0.88 4.1% 5.9% ASFT 21.50 17.88 FEB 15.00 7.38 *$ 0.88 6.2% 5.7% VTS 17.75 16.06 FEB 15.00 3.50 *$ 0.75 5.3% 5.7% PRST 19.63 20.81 FEB 17.50 2.75 *$ 0.62 3.7% 5.3% NZRO 35.00 32.75 FEB 25.00 10.88 *$ 0.88 3.6% 5.3% VOYN 13.06 12.50 FEB 10.00 3.50 *$ 0.44 4.6% 5.0% HRC 5.81 5.69 FEB 5.00 1.13 *$ 0.32 6.8% 5.0% EAII 14.25 13.69 FEB 10.00 4.75 *$ 0.50 5.3% 4.9% MUEI 12.75 10.69 FEB 10.00 3.25 *$ 0.50 5.3% 4.9% CORL 22.13 20.00 FEB 15.00 7.75 *$ 0.62 4.3% 4.7% DBCC 9.19 9.13 FEB 7.50 2.00 *$ 0.31 4.3% 4.7% MSGI 19.13 19.94 FEB 15.00 4.75 *$ 0.62 4.3% 4.7% PCMS 10.06 19.06 FEB 7.50 3.00 *$ 0.44 6.2% 4.5% HMK 9.88 9.00 FEB 7.50 2.81 *$ 0.43 6.1% 4.4% XICO 22.56 18.13 FEB 17.50 5.75 *$ 0.69 4.1% 3.8% IFCI 10.13 15.81 FEB 7.50 3.00 *$ 0.37 5.2% 3.8% GSTX 10.69 8.44 FEB 10.00 1.63 $ -0.62 -6.8% 0.0% *$ = Stock price is above the sold striking price. Gst Telecom's (GSTX) chart remains somewhat ambiguous though the issue is oversold in the short term. Since rolling down to the March $7.50 call is not an option (yet), a close below $8.00 could be considered an exit signal. Although Geltex Pharma (GELX) rebounded, the technical strength is suspect in the short term. Next week we will roll the position down to the March $15 strike. Our current cost basis is $16.38. Buying back the February $17.50 for $1.44 and selling the March $15 for $3.75 will obtain a net credit of $2.37. This will reduce our cost basis to $14.07, near strong technical support. Those interested in greater downside protection should consider the April series. 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 JDAS 22.69 FEB 20.00 QAH BD 3.25 125 19.44 2.9% 2.9% VLNC 34.56 FEB 25.00 VHQ BE 10.25 2165 24.31 2.8% 2.8% WAVX 13.94 FEB 12.50 AXU BV 2.00 1336 11.94 4.7% 4.7% FSII 17.81 MAR 15.00 FQH CC 4.25 270 13.56 10.6% 10.6% MCRE 15.50 MAR 12.50 MQZ CV 3.88 33 11.62 7.6% 7.6% SIII 15.00 MAR 12.50 SQI CV 3.38 57 11.62 7.6% 7.6% UBET 6.25 MAR 5.00 BUB CA 1.63 98 4.62 8.2% 8.2% Sequenced by Return Called (& Not Called) Stock Price Mon Strike Option Opt Open Cost RC RNC Sym Price Symbol Bid Intr Basis WAVX 13.94 FEB 12.50 AXU BV 2.00 1336 11.94 4.7% 4.7% JDAS 22.69 FEB 20.00 QAH BD 3.25 125 19.44 2.9% 2.9% VLNC 34.56 FEB 25.00 VHQ BE 10.25 2165 24.31 2.8% 2.8% FSII 17.81 MAR 15.00 FQH CC 4.25 270 13.56 10.6% 10.6% UBET 6.25 MAR 5.00 BUB CA 1.63 98 4.62 8.2% 8.2% MCRE 15.50 MAR 12.50 MQZ CV 3.88 33 11.62 7.6% 7.6% SIII 15.00 MAR 12.50 SQI CV 3.38 57 11.62 7.6% 7.6% Company Descriptions FEBRUARY PLAYS JDAS - JDA Software $22.69 *** The Uptrend Resumes *** JDA Software is the leading global provider of integrated retail software products and professional services with more than 700 clients in over 50 countries. Addressing the requirements of both brick and mortar and Internet companies, JDA's state-of-the-art solutions include merchandising, planning, allocation, decision support and financial systems; warehouse management and logistics systems; point-of-sale and back-office in-store systems; and the industry's first integrated commercial e-retail applications. JDA reported a profitable 4th quarter, beating estimates, after a year of rebuilding. JDA continues to increase its license revenues, recently signing an agreement with Office Depot. The technicals are improving and JDA appears ready to resume its up-trend. FEB 20.00 QAH BD Bid=3.25 OI=125 CB=19.44 RC=2.9% RNC=2.9% Chart = /charts/charts.asp?symbol=JDAS **** VLNC - Valence Technology $34.56 *** Powering Up *** Valence Technology, a leader in the development of lithium polymer batteries, has more than 400 battery patents awarded and pending. The company operates facilities in Henderson, Nev.; Seattle, Wash.; and Mallusk, Northern Ireland. It also has a 50% owned subsidiary, Hanil Valence, in South Korea. Valence has blasted into Blue Sky territory after receiving a couple of major purchase orders for its advanced Lithium Polymer batteries. Recently, CIBC World Markets initiated coverage of the stock with a "strong buy" rating and a price target of $40. With the quick rise in value, we favor the support near the December high. FEB 25.00 VHQ BE Bid=10.25 OI=2165 CB=24.31 RC=2.8% RNC=2.8% Chart = /charts/charts.asp?symbol=VLNC **** WAVX - Wave Systems $13.94 *** Web Movies *** Wave Systems is trying to create the world's best technologies and services to secure and sell digital information. With the recently completed acquisition of N*Able Tech., Wave now has a comprehensive line of trusted client co-processor systems. Wave's technology is an inexpensive, open standards, hardware and software-based device that enables secure transaction processing and distributed information metering in users' PCs. A recently announced partnership with ITVU will enable content providers to make money streaming content in a secure environment. Kanakaris Communications, which provides full- length movies over the web, has now signed an agreement with WAVX. The technical signals are increasingly bullish with Wave Systems closing above its 150 dma on Friday. FEB 12.50 AXU BV Bid=2.00 OI=1336 CB=11.94 RC=4.7% RNC=4.7% Chart = /charts/charts.asp?symbol=WAVX **** MARCH PLAYS FSII - FSI International $17.81 *** Higher and Higher *** FSI is a leading global supplier of processing equipment used at key production steps to manufacture microelectronics, including semiconductor devices and thin film heads. The Company develops, manufactures, markets and supports products used in the technology areas of microlithography, surface conditioning and spin-on dielectrics. FSI has recently agreed to add a two-year independent director evaluation (TIDE) provision to its Share Rights Plan as per EQSF Advisers request, to further shareholders' interests. FSII has since resumed climbing (no news) but we favor an entry point with a cost basis below the February low. MAR 15.00 FQH CC Bid=4.25 OI=270 CB=13.56 RC=10.6% RNC=10.6% Chart = /charts/charts.asp?symbol=FSII **** MCRE - MetaCreations $15.50 *** Blast Off *** MetaCreations is focused on e-commerce visualization solutions for the World Wide Web. MetaCreations' strategy is centered on the Company's MetaStream technology and software tools designed to make the interactive use of photo-realistic 3D on the Web practical and pervasive. MCRE's continuing operations are focused exclusively on its subsidiary, MetaStream.com, the leading provider of complete end-to-end solutions for creating and deploying virtual products for e-commerce. MetaStream.com is 80% owned by MCRE and 20% by Computer Associates. MCRE's fourth quarter revenues were lower than prior quarter's as a result of the decision to no longer focus on one-time MetaStream technology licenses, in favor of implementing a recurring broadcast licensing model. The drop at the open after the earnings, proved to be a buying opportunity. We favor a cost basis below the end-of-December low. MAR 12.50 MQZ CV Bid=3.88 OI=33 CB=11.62 RC=7.6% RNC=7.6% Chart = /charts/charts.asp?symbol=MCRE **** SIII - S3 $15.00 *** Technical Entry Point *** S3 is building on the technology, distribution and brand strengths of its Communications, Multimedia and Professional Graphics divisions. S3 is committed to delivering targeted products for the PC and Consumer/Internet Appliance markets. S3's recent acquisition of Diamond Multimedia adds consumer brands such as the ViperTM and StealthTM series of graphics accelerators, the Rio(TM) series of Internet audio appliances, the SupraTM series of modems, and the HomeFree line of home networking products. S3 reported a net loss for the fourth quarter of $0.09 per diluted share compared to a net loss for the fourth quarter of 1998 of $1.36 per share. After Preferred Capital Markets downgraded S3, citing uncertainty in the graphics portion of the Company's business, S3 announced the release of customized levels of Quake III Arena (TM), the third installment of the PC gaming franchise from id Software. We favor a cost basis at technical support in case of post-earnings blues. MAR 12.50 SQI CV Bid=3.38 OI=57 CB=11.62 RC=7.6% RNC=7.6% Chart = /charts/charts.asp?symbol=SIII **** UBET - Youbet.com $6.25 *** Another Wager *** Youbet.com currently provides members the ability to watch and, in most states, the ability to wager on a wide selection of coast-to- coast thoroughbred and harness horse racing, via its exclusive closed-loop network. Youbet.com does not actually accept or place any wagers. Wagers are accepted and placed only by a state licensed wagering entity, currently the Ladbroke Pennsylvania facility. Youbet tanked when the LAPD raided its Los Angeles data center in October. Youbet recently announced that it has since reached a civil resolution of the investigation. Investors reacted favorably to this news and now Youbet is showing signs of heavy accumulation. We will try to make our money back on this issue, though cautiously, betting on a cost basis at technical support. MAR 5.00 BUB CA Bid=1.63 OI=98 CB=4.62 RC=8.2% RNC=8.2% Chart = /charts/charts.asp?symbol=UBET ***************** NAKED PUT SECTION ***************** Option Basics: Floor Brokers and Market-Makers... A number of readers have requested an explanation of the methods and techniques that floor traders use to provide a liquid market. The system of order flow and execution at a major exchange is relatively simple. Option orders are routed to the exchange by brokerages. Trades are filled by floor brokers or market-makers. These specialists have distinct roles in assuring that customer orders are executed in a fair and timely manner. Floor brokers are agents who execute orders on behalf of the public and other firms. They receive a fee for their service. Market-makers trade for personal (or sponsored) accounts, profiting from their skill and ability. They are entrepreneurs who risk their own capital in order to compete with other market-makers for options orders. At the CBOE, there is an additional class of trader; the order book official. Order book officials are salaried employees who maintain the public customer limit order book. These specialists are responsible for the log of unfilled orders. They execute each trade when the specified (limit) price is achieved. Order book officials have no personal financial interest in any trades that occur. An impartial and equitable opportunity to participate in the market is the essence of the system. The majority of methods employed by floor specialists to profit from trading in options and their associated stocks are based on pricing theory and statistical probability. There are also a number of scalping techniques; the most common of which occurs when heavily traded options are bought at the bid and sold at the ask, generating a spread credit for the market maker. Specialists who participate in risk-free transactions utilize simple arbitrage techniques. The concept of put-call parity identifies mis-priced relationships between the call, put, and the stock. If the call is overpriced relative to the put, then the put is purchased and a synthetic put, made up of a short call and long stock, is sold. This technique is called a conversion. If the call is under-priced relative to the put, then the call is bought and a short synthetic call, made up of a short put and short stock, is sold. The is the opposite of a conversion and is often called a reversal (or reverse conversion). Specialists also favor box spreads; two call options with different strike prices and two put options with strike prices equivalent to the calls. Once again, box spreads are only initiated when the options are mis-priced on a relative basis. Professional traders regularly use pricing models to help create profitable option positions. Some use the Black-Scholes formula to identify hedge ratios that are created when options are mis-priced. After the premium disparity is identified, ratio spreads between various options for the same stock can be initiated. Comparative algorithms are used to determine the number of options to trade and which option series should be purchased or sold. Of course, these strategies require dynamic changes in the hedge ratio as the input variables change. The maintenance requirements for this type of option arbitrage make it far more difficult than box spreads and conversions. When an individual wants to buy a call or put option, the market- maker generally has two choices. He can retain a short position in the option series, until there is a demand for that position, or he create a synthetic call or synthetic put to offset the transaction. This is the foundation of option trading for retail participants and floor traders profit from these positions when they earn the bid-ask spread or when demand causes option prices to move in their favor. Next week, we will examine this technique in greater detail. Good Luck *** 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 TSEMF 14.38 15.75 FEB 12.50 0.75 *$ 0.75 16.2% 23.5% MCRE 12.56 15.25 FEB 10.00 0.69 *$ 0.69 21.6% 23.4% PCMS 15.00 19.06 FEB 12.50 0.50 *$ 0.50 12.5% 18.1% TRVL 15.50 14.44 FEB 12.50 0.44 *$ 0.44 12.1% 17.5% WSTL 11.44 20.06 FEB 7.50 0.50 *$ 0.50 17.9% 16.5% MSGI 18.50 19.94 FEB 15.00 0.50 *$ 0.50 11.4% 16.5% MESG 18.31 19.88 FEB 15.00 0.50 *$ 0.50 11.1% 16.1% OTEX 20.63 26.88 FEB 17.50 0.56 *$ 0.56 9.9% 14.3% HSAC 23.00 20.06 FEB 17.50 0.69 *$ 0.69 13.0% 14.2% DMRK 22.38 30.75 FEB 17.50 0.69 *$ 0.69 13.3% 12.3% SMSC 14.25 13.06 FEB 12.50 0.50 *$ 0.50 11.2% 12.2% NSPK 22.25 23.69 FEB 15.00 0.56 *$ 0.56 11.2% 12.1% NZRO 33.25 32.75 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% XICO 19.75 18.13 FEB 15.00 0.31 *$ 0.31 7.3% 10.5% TLCM 20.25 21.75 FEB 15.00 0.50 *$ 0.50 11.0% 10.1% QTRN 24.44 30.25 FEB 17.50 0.50 *$ 0.50 9.3% 10.1% NPLS 23.06 27.81 FEB 17.50 0.44 *$ 0.44 8.7% 9.5% PGEX 22.81 21.13 FEB 15.00 0.50 *$ 0.50 9.9% 9.1% TLCM 23.13 21.75 FEB 17.50 0.31 *$ 0.31 6.3% 9.1% PILT 25.94 28.13 FEB 17.50 0.56 *$ 0.56 9.7% 9.0% CPQ 32.00 27.38 FEB 25.00 0.56 *$ 0.56 8.0% 8.7% NOVL 33.69 36.00 FEB 25.00 0.63 *$ 0.63 8.5% 7.9% GSTRF 34.19 33.00 FEB 22.50 0.63 *$ 0.63 8.4% 7.8% EMIS 35.63 39.25 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: Compaq (CPQ) is holding at its 50 dma and the Hewlett-Packard (HWP) merger rumor should help. There is strong technical support above the sold strike. 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 NFLD 16.19 FEB 12.50 DHQ NV 0.38 296 12.12 10.5% NSPK 23.69 FEB 20.00 NNQ ND 0.38 93 19.62 6.2% VDAT 12.50 FEB 10.00 UDT NB 0.31 194 9.69 11.0% DRD 28.00 MAR 20.00 DRD OD 0.56 0 19.44 9.1% PTEC 20.63 MAR 15.00 PKQ OC 0.63 110 14.37 13.2% RWAV 10.56 MAR 7.50 RQR OU 0.31 20 7.19 12.8% ZONA 7.69 MAR 5.00 NQZ OA 0.31 0 4.69 16.8% Sequenced by ROI Stock Price Mon Strike Option Opt Open Cost ROI Opt Sym Price Symbol Bid Intr Basis Expired VDAT 12.50 FEB 10.00 UDT NB 0.31 194 9.69 11.0% NFLD 16.19 FEB 12.50 DHQ NV 0.38 296 12.12 10.5% NSPK 23.69 FEB 20.00 NNQ ND 0.38 93 19.62 6.2% ZONA 7.69 MAR 5.00 NQZ OA 0.31 0 4.69 16.8% PTEC 20.63 MAR 15.00 PKQ OC 0.63 110 14.37 13.2% RWAV 10.56 MAR 7.50 RQR OU 0.31 20 7.19 12.8% DRD 28.00 MAR 20.00 DRD OD 0.56 0 19.44 9.1% Company Descriptions FEBRUARY PLAYS NFLD - Northfield Laboratories $16.19 *** What's Up? *** Northfield Laboratories is engaged in the development of a safe and effective alternative to transfused blood for use in the treatment of acute blood loss. The company's PolyHeme blood product is a solution of chemically modified hemoglobin derived from human blood. Clinical studies indicate that PolyHeme carries as much oxygen, and loads and unloads oxygen in the same manner, as transfused blood. Infusion of PolyHeme also restores blood volume. PolyHeme may eventually be effective as a resuscitative fluid in the treatment of hemorrhagic shock resulting from extensive blood loss. Clinical studies indicate that PolyHeme is universally compatible and accordingly should not require blood typing prior to infusion. Speculation concerning an upcoming NDA is moving this issue higher. Research thoroughly before opening any positions. FEB 12.50 DHQ NV Bid=0.38 OI=296 CB=12.12 ROI=10.5% Chart = /charts/charts.asp?symbol=NFLD **** NSPK - Netspeak $23.69 *** On The Move Again! *** NetSpeak develops, markets, licenses and supports a suite of intelligent software modules that provide business solutions for real-time interactive voice, video and data communications over packetized data networks such as the Internet, Lan's and Wan's. NetSpeak's products allow organizations to build new voice and video-enabled communications networks. Their products consist of call management software, gateway systems and software based client telephones. The company has recently announced several significant events, which further solidify its transition to a product and market focused company. The break-out on Friday suggests this issue is moving to a new range and our cost basis is a reasonable entry point on a popular issue in a hot sector. FEB 20.00 NNQ ND Bid=0.38 OI=93 CB=19.62 ROI=6.2% Chart = /charts/charts.asp?symbol=NSPK **** VDAT - Visual Data Corporation $12.50 *** Big Move! *** Visual Data is a digital multi-media content provider in the advertising industry. It is also a full service production and distribution company capable of aggregating, broadcasting and globally transmitting rich media content specifically developed for the Internet and interactive television. VDAT's products include video libraries on topics such as travel, corporate information and healthcare. The company develops multi-media libraries of interactive visual information which can be sold and distributed on the Internet and other online services, laser disc, DVD and eventually, Interactive Television. The company's products and services are marketed through a number of business divisions, which provide administration, marketing and sales for their respective brands. Once again a significant move on Friday may be the impetus for an upcoming rally. FEB 10.00 UDT NB Bid=0.31 OI=194 CB=9.69 ROI=11.0% Chart = /charts/charts.asp?symbol=VDAT MARCH PLAYS DRD - Duane Reade $28.00 *** A Healthy Big Apple! *** Duane Reade is the largest drugstore chain in New York City, with 75 of its 128 stores located in Manhattan's high-traffic business and residential districts. Their drugstores offer a wide variety of brand name and private label products; oral, skin, hair care products, bath supplies, vitamins/nutritional supplements, feminine hygiene products, family planning and baby care products. The company also has same-day photo-finishing services in all stores and has installed 1-hour photo-finishing in twenty stores. Duane Reade also offers home delivery and prescription-by-fax services. A nice chart pattern with a clear reversal in progress. MAR 20.00 DRD OD Bid=0.56 OI=0 CB=19.44 ROI=9.1% Chart = /charts/charts.asp?symbol=DRD **** PTEC - Phoenix Technologies $20.63 *** Solid Growth! *** Phoenix Technologies designs, develops and markets system and chip level software for personal computers, peripheral devices and information appliances. This unique software provides compatibility, connectivity and manageability of the various components and technologies used in PCs, peripheral devices and information appliances. The company provides these products primarily to manufacturers of personal computers, peripheral equipment, integrated circuits, and system boards. The company recently reported solid revenues and strong operating profits along with a positive outlook for the coming year. We favor the bullish technical outlook. MAR 15.00 PKQ OC Bid=0.63 OI=110 CB=14.37 ROI=13.2% Chart = /charts/charts.asp?symbol=PTEC **** RWAV - Rogue Wave Software $10.56 *** Software Ruffian *** Rogue Wave is engaged in the development, sale and support of object-oriented software systems and related tools. They are one of the leading providers of solutions for building profitable business to business e-commerce systems. Rogue Wave Software's development tools and Professional Services Group enable companies to develop applications on Internet time. Rogue Wave products support more than 300,000 developers worldwide at leading Fortune 500 e-businesses including 3Com, AT&T, Banc of America, Cisco, Fujitsu, Hewlett Packard, IBM, MCI, Merrill Lynch, Morgan Stanley, and Sun Microsystems. Friday's close above a recent resistance area near $10 may be the first step to a higher trading range. MAR 7.50 RQR OU Bid=0.31 OI=20 CB=7.19 ROI=12.8% Chart = /charts/charts.asp?symbol=RWAV **** ZONA - Zonagen $7.69 *** On The Rebound! *** Zonagen is a biopharmaceutical company that is engaged in the development of pharmaceutical products for the reproductive system; sexual dysfunction, urology, contraception and infertility. ZONA has a worldwide sales and marketing agreement with Schering-Plough corporation for Vasomax, the company's rapidly disintegrating oral formulation of phentolamine mesylate for Male Erectile Dysfunction. The position offers a favorable entry price on another speculative drug issue with bullish technicals. Once again, due-diligence is a prerequisite to any new position. MAR 5.00 NQZ OA Bid=0.31 OI=0 CB=4.69 ROI=16.8% Chart = /charts/charts.asp?symbol=ZONA ************************ LARGE CAP NAKED PUT LIST ************************ These are the highest premium puts I would be comfortable selling in this market. There were a lot of ugly charts after the Friday afternoon drop and I ignored the most likely candidates as too risky. All put selling has risk but there is no reason to accept more than necessary. If you write puts like these, please put in a GTC stop loss order immediately. Jim The margin is calculated using 25% of the underlying which is what Preferred and most other brokers require. If your broker requires more then your percentage of return would be less. Stock Stock Strike Out Of Option Option Margin Rtn% SymbolPrice Price Money Symbol Prem Amt IIJI 81.00 80 1.00 IUJ-NP 5.13 20 25% IIJI 81.00 75 6.00 IUJ-NO 4.00 20 20% PUMA 82.63 75 7.63 PUP-NO 3.75 21 18% PUMA 82.63 80 2.63 PUP-NP 5.75 21 28% ISLD 86.94 80 6.94 SUH-NP 4.50 22 21% ISLD 86.94 75 11.94 SUH-NO 2.75 22 13% DTPI 89.25 80 9.25 DUP-NP 3.75 22 17% MCOM 90.63 85 5.63 MQM-NQ 3.88 23 17% PSIX 92.38 85 7.38 SQP-NQ 3.50 23 15% FFIV 94.25 90 4.25 FQL-NR 6.00 24 25% FFIV 94.25 85 9.25 FQL-NQ 4.00 24 17% HLIT 110.88 105 5.88 LQL-NA 5.13 28 19% HLIT 110.88 100 10.88 LQL-NT 3.25 28 12% ADAP 116.00 110 6.00 CQI-NB 5.75 29 20% ARTG 116.63 110 6.63 AYQ-NB 8.88 29 30% ARTG 116.83 105 11.83 AYQ-NA 6.88 29 24% ARTG 116.83 100 16.83 AYQ-NT 5.25 29 18% EXDS 124.88 110 14.88 DUB-NB 3.13 31 10% EXDS 124.88 115 9.88 DUB-NC 4.75 31 15% EXDS 124.88 120 4.88 QED-ND 6.63 31 21% FDRY 133.50 130 3.50 OQ-NF 8.38 33 25% LRCX 137.00 125 12.00 MLC-NE 3.25 34 9% QCOM 137.50 130 7.50 AUA-NF 4.13 34 12% QCOM 137.50 125 12.50 AAF-NE 2.50 34 7% SILK 138.50 125 13.50 ULI-NE 6.88 35 20% DITC 140.06 120 20.06 DUI-ND 3.88 35 11% DITC 140.06 125 15.06 DUI-NE 10.50 35 30% SFE 149.50 140 9.50 SFE-NH 4.25 37 11% INSP 150.19 140 10.19 OHY-NH 6.13 38 16% IMNX 151.63 140 11.63 IUU-NH 6.63 38 17% TMPW 155.38 145 10.38 BSQ-NW 7.13 39 18% TMPW 155.38 150 5.38 BSQ-NU 9.25 39 24% VRTS 156.88 140 16.88 VUQ-NH 4.13 39 11% VRTS 156.88 145 11.88 VUQ-NI 5.50 39 14% RNWK 157.34 145 12.34 RNO-NI 5.00 39 13% ARBA 185.25 165 20.25 IUR-NM 4.38 46 9% VRSN 189.06 175 14.06 QVZ-NO 5.38 47 11% RBAK 198.50 180 18.50 BUK-NP 4.63 50 9% JDSU 211.00 180 31.00 XXZ-NP 3.75 53 7% JDSU 211.00 200 11.00 UCQ-NT 9.50 53 18% ************************ SPREADS/STRADDLES/COMBOS ************************ Another day, Another Record! Friday, February 4 Optimistic investors drove technology stocks to record highs today as speculation over improving corporate earnings dominated the market. The Nasdaq Composite rose 33 points to 4,244, a new all-time high while the Dow Industrial Average fell 49 points to 10,963. The S&P 500 Index ended unchanged at 1,424. On the NYSE, declining issues led advances 1,564 to 1,420 on active volume of 1.3 billion shares. The benchmark 30-year U.S. Treasury Bond was down 1-26/32, with the yield rising to 6.27%. Thursday's new plays (positions/opening prices/strategy): Deluxe Corp. DLX APR25C/FEB30C $3.75 debit diagonal Bea Systems BEAS MAR50C/MAR65C $12.38 debit bull-call Tupperware TUP APR15C/APR17C $1.25 debit bull-call Portfolio plays: Friday's technology rally capped the Nasdaq's best week ever and our portfolio had a number of big winners. Triquint (TQNT) tacked on another $13 to close at $205 after completing their presentation at the The Banc of America Securities Technology Week 2000 conference in San Francisco. Our recent bullish debit spread appears safe at $140. Corning (GLW) romped $10.62 to end at $165 after reporting it is investing $750 million to expand its global fiber-making capacity by 50% within three years. The world's leading supplier of optical fiber and cable said it wants to begin offering its customers "one-stop shopping" by getting a bigger foothold in the optical equipment field; developing the components that amplify and redirect laser light pulses carrying information at hyper-speed through fiber-optic grids. Our bullish credit spread at $130 should expire comfortably out-of-the-money. BCE Incorporated (BCE) rocketed almost $10 on the heels of the telecom rally. One of their largest holdings, Canada's Nortel Networks (NT) added $13 to end at $119, driving BCE's valuation well into the triple digits. Nortel is another company that is increasing the capacity of their optical manufacturing. In its fourth-quarter results released on January 26, Nortel reported that optical sales could soar to $10 billion in 2000 and they are already planning a $400-million expansion to triple optical production capacity this year. Unfortunately, our conservative position reached maximum profit at $85. Aspect Development (ASDV) rebounded from a serious consolidation, gathering $6.75 on its way to a closing price of $80. The volatile issue has managed to return to our original price and we expect it to finish well above the sold strike at $65. Today's move came after company officials announced they will hold a Media and Analyst briefing to reveal Aspects eMarkets business and product strategy roadmap. The event, to be held next week, will include reports on Aspect's eCommerce solutions, its Aspect Content Network, and key eCommerce business partnership agreements. Another surprising issue was Biovail (BVF). Today the stock rallied $4 to $58 after the company announced that Phase III clinical trials have begun on Buspirone, a product used in the treatment of generalized anxiety disorders. Biovail also stated that it is in late stage development of three additional formulations in the therapeutic classes of anxiety disorders, diabetes and pain management. The company expects the initiation of a number of Phase III clinical trials over the next 18 months. In this case, our bullish debit position is deep in-the-money at $50. In the long-term portfolio, Adobe Systems (ADBE) was again the leader, climbing $5 to a recent high near $74. Our previously losing LEAPS/CC's position is now at 200% profit after only two months in play. Medtronics (MDT) was also a big winner, rising to a new all-time high near $48. The sector has been on the move recently and with the upside potential in our position shrinking, we decided to roll out and up to MAR-$45 options. Our LEAPS/CC's spread is now a LJAN37C/MAR45C at $6.25 debit. Telecommunications stocks jumped on news that Britain's Vodafone AirTouch Plc (VOD) and Germany's Mannesmann AG agreed to a $178 billion merger, the largest corporate deal in history. Vodafone shares fell almost $4 on the news of its blockbuster buy-out, with the stock the most active on the NYSE. Fortunately, support at $55 (our sold strike) appears to be relatively solid and the position achieves maximum profit above that price. Smaller telecom issues rallied on speculation of further mergers and the top performers in that group were P-Coms (PCMS) up $2 to a new all-time high at $19, and Tekelec (TKLC) with a $2 move to $34.50. Other low-priced stocks that made the leader board were Marketing Services Group (MSGI) and Zoltek (ZOLT). Both of these issues climbed higher without news or speculation, a good sign for the long-term outlook. Our final surprise was Covance (CVD). After Thursday's thrilling ride to the low 12's, the stock began to rebound significantly, ending today's session at $15. Again there was no news or widespread speculation to support the move. In the Straddles section, Jones Pharmaceuticals (JMED) continues to exceed all but the most optimistic expectations. This week our March straddle (opened in December) reached 300% profit. That's $24 returned on an initial investment of $8.12 only 6 week ago. Another recent winner is Ciber (CBR). The neutral (May) position is now "in the black" and currently offers a $1.00 profit. With any luck, the issue will continue to decline, providing a higher return in the coming weeks. Questions & comments on spreads/combos to Contact Support ********* NEW PLAYS ********* Last week's group of speculation plays received good reviews so we decided to continue the search for merger/takeover candidates. **** MI - Marshall & Ilsley $56.00 *** Merger, Or Not? *** Marshall & Ilsley is a bank and savings & loan holding company providing financial services and general banking business. The company's bank and savings association subsidiaries provide a full-range of banking services to individuals, businesses and governments throughout Wisconsin and in Phoenix, Arizona. These subsidiaries offer retail, institutional, international, business and correspondent banking, investment and trust services through the operation of almost 250 offices. MI is on the move and there has been some interesting option activity in conjunction with the recent rally. Apparently, the Business Journal of Milwaukee reported that Northwestern Mutual Life was interested in a potential purchase of the company. Of course Northwestern denied the report but Marshall & Ilsley has often been rumored as an acquisition target because of its strong position in the Wisconsin banking market and its desirable trust operation. Aside from its banking and trust business, Marshall also operates M&I Data Service, which provides transaction data processing services. Analysts are mixed on the viability of the deal but there are generally other factors that surface when a rumor like this one becomes public news. In many cases, another suitor will emerge and the speculation will begin again. If you like the chart and the possibility of a two week profit, there are some favorable disparities in the call options. Most of the activity exists in the March series but we will use February options in our position. PLAY (very speculative - bullish/debit spread): BUY CALL FEB-50 MI-BJ OI=0 A=$6.12 SELL CALL FEB-55 MI-BK OI=64 B=$2.81 INITIAL NET DEBIT TARGET=$3.00-$3.12 ROI(max)=60% Chart = ray@OptionInvestor.com **** BMCS - BMC Software $42.31 *** Bottom Fishing! *** BMC Software develops, markets and provides maintenance and support services for systems software products that improve the performance, reliability, and manageability of large mainframe systems software. BMC's software products address the three predominant operating environments of enterprise computing: the IBM OS/390 mainframe operating system; the various Unix operating systems employed by hardware manufacturers like Hewlett Packard, Sun Microsystems, IBM and Compaq; and Microsoft's emerging MS Windows NT operating system. BMC's goal is to help improve the efficiency and productivity of their customer's mainframe and distributed IT systems. BMC is definitely looking for the bottom and with the stock at greatly reduced multiples, traders have begun to speculate on rumors of a buyout. The company's share value has fallen sharply since last month's warning that it might take several quarters before stronger growth returns. Now the issue is beginning to consolidate and the recent activity suggests something is up. On Friday a BMC official declined to comment on speculation the software maker was in takeover talks with International Business Machines (IBM) but option buyers were convinced of a future deal. With implied volatility and volume rising on the rumors, there are a number of favorable positions for those who want to speculate on the eventual outcome. Our outlook is limited risk and bullish with a favorable profit potential. PLAY (aggressive - bullish/diagonal spread): BUY CALL MAR-40 BCQ-CH OI=951 A=$5.88 SELL CALL FEB-45 BCQ-BI OI=2521 B=$1.81 INITIAL NET DEBIT TARGET=$3.75-$3.88 TARGET ROI=25% Chart = /charts/charts.asp?symbol=BMCS *************** 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 disparities in option pricing. Current news and market sentiment will have an effect on these issues. Review each play individually and make your own decision about the future outcome of the position. **** SNDK - SanDisk $142.00 *** New All-Time High! *** SanDisk designs, manufactures and markets flash memory data storage products used in a wide variety of electronic systems. Since its inception, the company has been involved in all aspects of flash memory process development, chip design, controller development and system-level integration to ensure the creation of fully integrated, broadly inter-operable products that are compatible with both existing and new system platforms. The company has optimized its flash memory storage solution, known as system flash, to address the needs of many emerging applications in the consumer electronics, industrial and communications markets. SanDisk has applied its technology to the markets for digital cameras and other electronic devices such as smart phones, personal digital assistants (PDA) and MP3 portable music players. SanDisk recently announced that it shipped more than three million CompactFlash memory cards in 1999, an increase of 140% over the previous year. The incredible sales of CompactFlash, SanDisk's leading product, were driven in part by the growing popularity of digital cameras, many of which use the small, removable, matchbook-sized cards as reusable digital film. There are a number of other consumer products that use the technology including hand-held PC's, photo printers, Internet music players, medical monitors, set-top boxes and recorders. With the demand for their products rising exponentially, Sandisk has enjoyed significant gains in the last six months and the chart shows no signs of weakness. In fact, Friday's closing high suggests the stock will continue its stage II climb on improving technical strength. Any pullback should meet strong support near $100, provided by the August-September and December highs (which coincide with the 50 dma). That sounds like a great plan for the next two weeks. PLAY (conservative - bullish/credit spread): BUY PUT FEB-95 SWQ-NS OI=150 A=$1.43 SELL PUT FEB-105 SWQ-NA OI=49 B=$2.43 INITIAL NET CREDIT TARGET=$1.12 ROI=12% Chart = /charts/charts.asp?symbol=SNDK **** PEP - PepsiCo $32.75 *** It's Not The One! *** PepsiCo consists of the Pepsi-Cola Company beverage company, Frito-Lay Company, a manufacturer and distributor of snack chips, and Tropicana Products, a marketer and producer of branded juices. Pepsi-Cola's business units manufacture, sell and distribute Pepsi and beverages bearing the Pepsi-Cola or Pepsi trademarks such as Pepsi-Cola, Diet Pepsi, Pepsi One and Pepsi Max, and other brands owned by Pepsico including Mountain Dew, 7UP (outside the United States), Slice, Mug, Aquafina and Mirinda. Tropicana manufactures and sells its products under trademarks such as Tropicana Pure Premium, Tropicana Season's Best and Dole Foods. The Frito-Lay company manufactures and sells Lay's and Ruffles potato chips, Doritos and Tostitos tortilla chips, Fritos cornchips, Cheetos cheese flavored snacks, Rold Gold pretzels, Sunchips multigrain snacks, as well as Wow! potato and tortilla chips. Wow is right! What a mouthful of goodies. Unfortunately, the recent chart pattern is not so yummy. PEP's technical strength continues to weaken and a test of the October low is likely as the support near $34 failed in the last sell-off. Any upside movement will now meet resistance in the $34 to $35 range and that's all we need to make this play profitable in two weeks. Note: Earnings are expected on February 9. PLAY (conservative - bearish/credit spread): BUY CALL FEB-37.50 PEP-CU OI=193 A=$0.31 SELL CALL FEB-35.00 PEP-CG OI=164 B=$0.62 INITIAL NET CREDIT TARGET=$0.38 ROI(max)=17% Chart = /charts/charts.asp?symbol=PEP ********************* STRADDLES & STRANGLES ********************* Here is a play for those of you that favor Jim's premium selling strategies. Although this is not one of the high-flying technology issues, the position is statistically more favorable than most of the candidates in that group. Be sure to review the techniques for covering a naked position in the recent "Options 101" series. The best explanation is at: http://members.OptionInvestor.com/options101/010900_2.asp **** SDW - Southdown Incorporated $54.94 *** Merger Candidate *** Southdown is a cement and ready-mixed concrete company that is engaged in the production and distribution of Portland and masonry cements. The company operates a number of cement-making plants plus a network of cement distribution terminals. They also mine, process and sell construction aggregates and specialty mineral products in the eastern half of the United States and in California, and operate a subsidiary that installs highway safety systems such as guardrails, traffic signals, signage and lighting. In addition, the company markets ready-mixed concrete products. This position also involves merger speculation and it is quite complex. The cement-maker had been the target of British building materials company Blue Circle Industries but negotiations ended near the first of the year after pricing disagreements. Now Blue Blue Circle Industries is facing a hostile bid from France's Lafarge and it is unlikely they will revive talks with Southdown. Regardless of the possibility of a merger, Southdown has been active in recent weeks and the option premiums are inflated. The technical trading range of this volatile issue ($46-$63) provides a favorable background for our speculative position. Review the news thoroughly before participating in this play. PLAY (aggressive - neutral/credit strangle): SELL CALL FEB-60 SDW-BL OI=171 B=$1.31 SELL PUT FEB-50 SDW-NJ OI=45 B=$1.18 INITIAL NET CREDIT TARGET=$2.50-$2.62 ROI=18% Chart = /charts/charts.asp?symbol=SDW ************************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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