The Option Investor Newsletter Sunday 2-13-2000 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 2-11 WE 2-4 WE 1-28 WE 1-20 DOW 10425.21 -538.59 10963.80 +224.93 10738.87 -512.84 -471.20 Nasdaq 4395.45 +151.31 4244.14 +357.07 3887.07 -348.33 +171.13 S&P-100 752.04 - 23.47 775.51 + 37.47 738.04 - 41.74 - 17.74 S&P-500 1387.12 - 37.25 1424.37 + 64.21 1360.16 - 81.20 - 23.79 RUT 537.10 + 11.58 525.52 + 20.90 504.62 - 29.33 + 25.84 TRAN 2436.13 -172.83 2608.96 + 27.21 2581.75 -169.74 -140.14 VIX 26.92 + 3.99 22.93 - 6.16 29.09 + 6.43 + .53 Put/Call .59 .45 .60 .47 ****************************************************************** February correction? Gosh, who would have thought we would see a correction in February? It is now official. The Dow has fallen -11.4% from the January high and is now officially in correction mode. The benchmark index closed out the week with a -218 point drop and a loss of -538 points for the week. The Dow did not even slow down as it passed through the 10550 milestone signifying a -10% correction. The selling on the Dow finally rubbed off on the Nasdaq as traders decided they would be better off taking profits Friday and sleeping easier over the weekend. The divergence between the Dow and the Nasdaq was becoming critical and market technicians were expressing alarm. Why? Who cares if nobody wants to buy MO, MMM, DD or IP? I think there is a valid reason for the split but it concerned technicians still stuck in historical trend analysis. The good news? Talk of bargain hunting on the Dow began near the close on Friday. Contrary to conventional wisdom the market fell again Friday after getting a weaker than expected January Retail Sales report. Sales in January only increased +0.3% instead of the +0.6% analysts expected. Normally this would have been positive and would have indicated the pace of consumption is slowing. The number that irritated the markets was the increase in the December number from +1.2% to +1.7% which is excessive in the Feds eyes. Personally I think the answer is obvious. A large number of consumers bought a much larger supply of a broad range of items to prepare for the feared Y2K shutdown. When the catastrophe did not materialize the public did not need to buy as much in January. The Dec/Jan retail sales discrepancy was simply a statistical representation of Y2K hype. The bond market cheered the reduced January number as evidence of a possible cooling of consumer spending. Sorry guys, you are wrong. The rebound in the bond market prompted a drop in yields to 6.25%. Dow financial stocks rallied on the news. AXP +2.06, JPM +2.69, C +1.25 but AXP and JPM both gave up their gains and ended the day negative. Another challenge to both the Dow and the Nasdaq came from Microsoft. A report published by CNet expressed concerns that the acceptance of Windows 2000 would be less than enthusiastic. Rumors of bugs and lack of computability to some current programs prompted a large number of investors to take profits from the +$15 gain in the last two weeks in anticipation of the Windows 2000 release. MSFT closed down -6.06. MSFT was responsible for more than -30 points of drop in both the Dow and Nasdaq. Ironically the keynote speaker at the Windows 2000 conference, Michael Dell, fired the first shot last night saying Linux was gaining momentum and there was no rush of corporate customers upgrading to Windows 2000. Dell said, "We just don't see a massive immediate acceleration into Windows 2000" Adding fuel to the fire was the technology-consulting firm Gartner Group who said in a report that one in four corporations would run into computability problems with existing software. These are not the kind of comments Microsoft investors want to hear. Warburg Dillion Read analyst Charles Wolf said these comments could hurt Microsoft for some time. Oops! Way to go Michael. I wonder if Bill Gates will invite him to any more group socials in the future? After a week of terrorist attacks on some of the largest websites by hackers there was another more serious attack on Wall Street. An unidentified male set off a pipe bomb at 4:40 AM at the Barclay building, 75 Wall Street. Nobody was injured but there was concern that the NYSE would shut down if any further devices were found. After a brief period of confusion the blast became just another excuse for the selling Friday. Give me a break! Why would a minor incident several blocks away and totally unrelated to the stock market impact stock prices to the tune of billions of dollars? The inflation outlook continues to be influenced by rising oil prices. Saudi Arabia, one of the largest OPEC distributors is rumored to be planning even more cuts in production and shipments to U.S. and European customers. Was it something we said? Oil prices hit another nine year high today on the news. Prices have not been this high since the gulf war. Maybe somebody should remind Saudi Arabia who bailed them out in 1991 with 500,000 soldiers and billions of dollars in war expenses. We got the afternoon sell off I was expecting on the Nasdaq. What I was not expecting was the big drop in the morning as well. Much of that drop was due to the Microsoft and Dell impact on the Nasdaq. Breadth remained terrible all day but what else would you expect during a serious Dow correction? While the Dow still looks sick the Nasdaq drop was not convincing. The volume was weaker than normal and there were still pockets of resistance. Intel for instance was only down -1.75 and many of the recent fast movers only gave back a small percentage of their gains. BEAS only dropped -.50 after gaining +$20 for the week. CSCO only gave back -5.00 after gaining +$35 in February. There were many examples like this but the other extreme was also represented. AMCC gave back -$28 of the +130 it has gained in February and YHOO dropped -22 on the eve of its split. Still out of the hundred or so fast movers on my current watch list only 14 lost more than $5 and only three more than $10. The question now becomes, "is this just another profit taking day like Wednesday and we can expect to be back in record territory on Monday" or is it the start of another "correction/buying opportunity". Sounds like a trick question on the "Who wants to be a Millionaire" show. If we knew the answer to this one it would be worth well more than a million dollars. The way I read this the Dow is very oversold. There was a bargain hunter bounce on the Dow (+50) at the close but it was not convincing. The Nasdaq also bounced about +40 before turning down again. After seeing the strength in the Nasdaq this week I don't think we can hit -10% again anytime soon. The liquidity coming into the market is enormous. I would look for 4300 to be the near term bottom on the Nasdaq. The Dow however could still have some room to drop in spite of the very oversold condition. Many of the Nasdaq stocks I researched had a rebound spike at the close but almost none of the NYSE stocks showed any life. It is entirely possible we will see another Monday like we had two weeks ago with the Dow and Nasdaq both giving ground at the open and then rebounding by the end of the day. I doubt however they will rebound very far. This is a killer week for economic reports and many analysts are expecting a retest of 10,000. That would be extreme in my book. Possible but extreme. The Dow is still not trading at parity with the broader market. The S&P has yet to close above the last day in 1999 and this has not happened since 1978. Over 20% of the S&P stocks are trading at 52 week lows. There is a bear market in almost everything but tech stocks. Other than the oversold conditions on the Dow there is nothing to make investors want to buy. The earnings news is over and the economic reports this week are giving bond traders nightmares. Monday is Business Inventories, Tuesday Industrial Production, Wednesday Housing Starts, Import/Export Price Index. But the real problems come on Thursday with the PPI and Friday with the CPI, Real Earnings and Consumer Sentiment. Just in case you have not heard, Greenspan is giving his twice yearly Humphrey Hawkins testimony to the House Banking Committee on Thursday. PPI, CPI, Housing, Jobs, Earnings and Greenspan, all in one week. Conventional wisdom would expect the market to languish and possibly test new lows before the big reports at the end of the week. Contrarian wisdom would have the markets prejudging the outcome and moving into rally mode on Tuesday. If you doubt the validity of contrarian thinking simply look at the market history the two days prior to the last three Fed meetings. Strong rally each time. Go figure. The market is the best discounter of future events known to man and if the markets decide the PPI/CPI numbers are going to be benign then who are we to complain. The Nasdaq did not even lose all of Thursday's gains and the Russell-2000 only lost -5.11 but has not been able to hold above 540 in a week. This bounce off the previous high is a point of concern but I think it is Dow related. The bottom line: Please keep your seatbelt fastened and remember the coming week last year was the low for the month. There could still be another dip before this rally roller coaster resumes its upward momentum. Options expire on Friday which normally provide an upward bias for the week. If we get a follow through dip on Monday to under 4300 on the Nasdaq I would buy it once it turns up. For both my readers who play Dow stocks you two are on your own. Seriously, we could see a bear trap rally on the Dow simply as a relief bounce from the severe oversold condition. I would continue to be skeptical of any Dow rally until it closed over 11000 convincingly and that is +600 points up from here. Basic materials stocks did not suddenly jump from 5% growth to 40% growth just because the Dow sold off. Just because GT was $75 and now it is $21 does not mean it is a bargain. It may still be overpriced. Even if it was under valued it still may not be a good trade. This sounds corny but we want to play the winners not try to pick the bottom on the losers. I have people who eamil me every week with I think XYZ is a great buy here and I look at a chart and it has been going down for months. Play the champs not the tramps. Be patient, pick your plays carefully and watch for the rebound. Once past this dip we may not see another for weeks as we head into March and the April earnings. Remember this chart from last year. Late February and early March would have been good months to go skiing or repaint the house. Many readers would have saved thousands of dollars by doing anything besides fight the market. Trade smart and sell too soon. Jim Brown Editor ************* READERS WRITE ************* Dear Jim, I've subscribed with you for a few years, and I see a different set of recommendations in the past few months compared to in the past. For one thing, 90% of your picks are EXPENSIVE options now. Unlike before, it is very rare to find recommendations under 800 - 900 - 1000 dollars or so. Many are 2000 or more. I guess you will reply that that's what the market is now, but I disagree. Now your picks are extremely volitle, and while you are right saying "sell too soon," you hide behind that message to cover your volitle picks. I think you should be honest and have another constant message - watch the market hourly. I think you have some great picks, but I also thing that I have to watch the market more closely to be successful with your picks. In your section that tells us your trades, you have demonstrated that by the storyline in which you watch by the hour, go out to lunch or something, and return with dramatic results. Why not a few more good picks that I can watch once a day or once every 2 days?? I don't have the time to tune in to the market every hour or so. I've had some great plays too - that have LOW PRICES, ARE NOT AS VOLITLE, AND FOLLOW THE THEME OF YOUR TREND ARTICLE. How about BNI, WEN, ED, ED ALL, CSX, and MYG (you used to have recommendations on this). I realize that these are put recommendations, but they have low option prices, are not as volitle, and have a trend. That's what I used to find in your newsletter - go check your archives. That's the type of pick I need when I don't watch the market every hour. How many of your picks next week will be $1000, $2000, $3000 options that need to be watched hourly?? 60%, 70%, 80% again?? I wish you would challange your staff to find the good options with lower prices more often. Cordially, Dave *** Dave, you are right! We have been playing the fast movers more often and ignoring the lower volatility stocks that only move $2-$3 a week. This appears to be what most traders are wanting. We track how many hits each play page gets on the website and the fast movers out number the slow pokes 20, 30, even 50 to 1. However, we feel your pain. Even we draw the line on several picks per week that have option prices larger than Dell's stock price. I do think the market has changed in the last three years. How many stocks went up +$10, $20 even $30 a day three years ago? One, maybe two? Today there are dozens every day. The potential for profit is incredible. However the potential for loss is much higher due to the volatility. How many 100 point Nasdaq days were there in 1999? Three. How many have we had in the first 28 trading days of 2000? Eight. Actually those eight all rank in the top ten point days on record for the Nasdaq. This is not the same market and the volatility is only going to grow. I spoke with the staff about this issue. I do believe there are quite a few readers who would like some lower risk trades. Starting next week we are going to try and maintain 5-6 "cheap" plays in the lineup at all times. We are also considering a risk indicator. If a play is a "1" it would be minimal risk, a "5" extreme risk. The problem here is one persons extreme risk is another persons boring play. It is up to you to determine which plays you like and are comfortable sleeping at night. Here is one we added this week. PCMS $18.75 The March $20 call is $2.13 (look in the play section) Here is one put that we added too: KRB $20.88 The March $20 put is $1.25 Also, a stock does not have to have a low price to be a cheap play. Take Lucent @ $53 today. The March $55 call is only $2.69. There is almost no risk because of the steep drop recently. We will attempt to identify and pick at least five of these plays each week starting next week. Hope this helps. Jim *********** JIM'S PLAYS *********** The continuing Dow sell off finally started impacting the Nasdaq on Wednesday and fearing another "Nasdaq correction" I closed out all my naked put plays for February. Many were down to under $1.00 and most were highly profitable. I am not going to list charts for each like last week. Everybody should understand the concept by now. I picked about 20 stocks that I think will make excellent naked puts for March and I have already programmed the put symbols into my Interquote and Qcharts. The option premiums on Friday were just incredible with many showing returns of over 40% for the month. Now comes the hard part. Last month I jumped the gun and sold the puts before the Nasdaq had bottomed which gave me several days of indigestion before the plays returned to profitability. The hard part will be waiting to see if the Nasdaq is going to sell off more in front of the PPI/CPI or was the dip on Friday the only entry point we are going to get. If we jump the gun again then we get the month of March off to a bad start and the experience will poison our trading habits for days to come. One or two bad trades can ruin a dozen good ones by making us wait too long to pull the trigger causing us to get in too late and get out too early. Patience, patience, patience. Easy to say, tough to do when your option premiums are bleeding value every day. This week I am going to pick three current plays that would be my choices for this week. These are my choices based on what I think will work this week and what I think most readers would be eager to play. You must decide, based on your risk profile, which would be right for you. Just because I chose them to write about this weekend does not give them any special status. Each could gap down -20 points at any time. ANAD - $124 - Straight call play The Anadigics play is a straight momentum call play. They make fiber optic equipment and that sector just will not quit. Ordinarily I would recommend waiting for a pullback to the lower channel around $120 before opening a call position but the lack of any drop on both Nasdaq down days last week shows incredible strength. Notice it was moving up all Friday afternoon. The downside to this play is the option prices. With the strong moves by ANAD it has run away from the available option symbols. The closest one to the stock price is the March-120 DQA-CD @$14.00. It is $4 ITM already. I would place a stop at $11.00. *********** Millennium Pharmaceuticals - Entry point? This looks like an entry point on MLNM. They have never broken the trend line since starting the move up on Jan-3rd. The big profit taking dip on Friday with the Nasdaq could give us an opportunity to start a new play. The only caution would be the flatness on the 8th-9th. This was after a big move up +30 points on the 4th-7th and I think it was just consolidating. Still many people have huge profits since this run started at Christmas around $100. I would want to confirm upward movement again before committing. **** CLRN - Straight call play on breakout This type of formation, the bullish wedge, is one of the strongest buy signals available. Once the stock price breaks out of the formation it can move upward very fast. The lower high portion clearly shows there is buying pressure from many buyers. This shows a steady progression of higher limit orders following the stock price upward to catch any dips. The March $110 call is $14.38 but I like the March $100 cal better at $18.88. It is $10 deeper in the money but the premium is only $4.50 more. The Delta on the $100 is much higher than the $110. Did I mention that they have a meeting to increase shares scheduled for next week? ********** As I stated above, my plan is to not jump the gun on the Nasdaq. I will try and wait out the PPI/CPI unless we get a clear upward move before then. I plan to sell naked puts on about ten stocks and open several call positions on the same stocks if they take off. I will post my Naked Put list separately today in the Naked Put Section. Be patient. Missed money is better than lost money. Jim ****************************** 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? *********** OPTIONS 101 *********** Free Trades By Jim Brown The Dell earnings event this week provided a prime example of the benefits of using combination plays to reduce your cash exposure and actually in some cases even make a profit just for entering the trade. Because this is a complicated subject I am going to start very basic. I used this simple example on the radio this week and I still got calls from people who did not understand the process. A call option gives you the right to buy stock at a set price by some future date. Using Dell Computer at $37 as an example, if you bought a May $37.50 call, that is when they announce earnings again, this call would allow you to buy Dell stock at $37.50 in May, even if Dell was over $50 again. With a call you have the right but not the obligation to buy stock at a fixed price. You can exercise your call and buy the stock or you can simply sell your call for the same profit. The opposite of a call is a put option. A put option allows you to sell stock at a fixed price on or before some future date. If you owned a $37.50 put on Dell you could sell Dell stock at $37.50 even if it was trading at $20 on the open market. With a put you have the right but not the obligation to sell stock or simply sell the option at a profit. Now for the fun part. If you think Dell will recover from the current eight month low of $37 and you like Dell then this is how you can own it for almost nothing. (prices are Thursdays) First you write or sell a May $37.50 put on Dell for $4.50. You are going to sell to somebody else the right to make you buy Dell stock at $37.50 on or before May 19th. Your risk here is exactly the same as if you bought Dell stock today for $37.50 except you are taking in $4.50 in cash for the put option you are selling. You can also limit your risk by placing a stop loss order for say $6.00. If Dell continued dropping and the option rose to $6.00 the put position would be closed for a $1.50 loss. Second you would use the money you received for selling the put to buy a May $37.50 call for $3.25. You would have a positive cash flow of $1.25. You sold the put for $4.50, you bought a call for $3.25 for a net credit of $1.25. There are now three possible outcomes. 1. Dell stays in the $36-38 range for the next three months and both options expire worthless. This is highly unlikely. 2. Dell drops under $36 and you may be asked to buy the stock depending on how far Dell dropped. You can also limit your risk by placing a stop loss order on the put for say $6.00. If Dell continued dropping and the option rose to $6.00 the put position would be closed for a $1.50 loss. So your maximum risk would be $1.50. Remember you entered the play with a $1.25 profit so you have no real risk. 3. Dell recovers from the Intel chip shortage and runs back up to $50 before May earnings. You sell your call option and pocket the $12.50 difference between $37.50 and $50.00. For every dollar Dell stock rises above $37.50 by May 19th that is one dollar of pure profit to you. Remember, it cost you nothing to enter the trade and the risk is exactly the same as buying the stock outright unless you use a stop loss which limits your risk to whatever amount you choose. This is basically a free trade and almost anyone can do it. The only requirement is a margin account (for the naked put) and $900 margin for every contract in your trade. What do you think? Will Dell still be $36 by May 19th? Consider using this type of strategy to lower your cost of entering call plays and increase your returns. Jim Brown ********** Stock News ********** Super Prospects in Store for Network Appliance By Cindy Christ Shares in Network Appliance (NTAP) zoomed 11 percent Friday, reaching a new 52-week high of $154.94 after Robertson Stephens raised per-share earnings estimates for the provider of network storage and caching products. "We are reiterating our Buy rating on Network Appliance, as we believe the company is the best-positioned network attached storage (NAS) vendor in the industry," said Robertson Stephens network storage analyst Dane Lewis in a research note. http://members.OptionInvestor.com/stocknews/021300_1.asp ******* Ask OIN ******* Who Wants To Be A Technician?? By Ryan Nelson Is that your final answer? A charting we will go, but first let's review from last week. I got a lot of e-mail about which charting service I use to create the Trend Lines or Rays. http://members.OptionInvestor.com/ask/021300_1.asp ************** Market Posture ************** As of Market Close - Friday, February 11, 2000 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,700 11,250 10,425 Bearish 2.10 SPX S&P 500 1,350 1,450 1,387 Neutral 2.01 OEX S&P 100 740 780 752 Neutral 2.01 RUT Russell 2000 500 540 537 Neutral 2.11 * NDX NASD 100 3,575 4,090 3,969 Neutral 2.11 * MSH High Tech 1,800 2,000 1,928 Neutral 2.11 * XCI Hardware 1,300 1,525 1,472 Neutral 2.11 * CWX Software 1,200 1,470 1,441 Neutral 2.11 * SOX Semiconductor 740 940 913 Neutral 2.11 * NWX Networking 900 1,020 1,012 Neutral 2.11 * INX Internet 700 800 749 Neutral 1.06 BIX Banking 640 690 514 BEARISH 11.30 XBD Brokerage 400 450 423 Neutral 11.30 IUX Insurance 580 600 514 BEARISH 11.30 RLX Retail 950 1,000 900 BEARISH 1.28 DRG Drug 340 380 334 BEARISH 2.11 * HCX Healthcare 700 750 695 BEARISH 2.11 * XAL Airline 160 180 119 BEARISH 5.21 OIX Oil & Gas 280 315 251 BEARISH 1.27 Posture Alert Following the potential powerful reversal signal Friday (2/11), we have turned Neutral across the technology group and Bearish across the blue chips and select industry sectors including the Drug and Healthcare. We also remain Bearish across Airline and financial stocks. After a very volatile trading week that saw many indices reach new territory, we have updated our key benchmark levels for each index. Please make a special note of these potential turning points. **************** Market Sentiment **************** Don't Even Think About It By Pinnacle Capital Advisors With the equity markets selling off precipitously, investors may be itching to buy this dip in hopes to get a head start on a next rally - but one of our trusted indicators suggests that we have not seen a selling climax yet. One of the market sentiment indicators Pinnacle tracks is the volume level of the Standard & Poors Depository Receipts or "spiders" (SPY) and Nasdaq 100 Trust shares or "Cubes" (QQQ). The SPY and QQQ are both American Stock Exchange (AMEX) traded securities designed to approximate 1/10 the value of the S&P 500 Composite Stock Price Index (SPX) and 1/20 the value of the Nasdaq 100 Index, respectively. By looking at the combined volume activity for these securities in association with market direction, one can gain a better understanding of what is likely driving that volume. Because the SPY and QQQ can be shorted on downticks, it is likely that spikes in the volume are the result of fear that has emerged from a market decline. Investors who desire a hedge against a market decline may take a short position in the SPY, or those who have become very bearish may even short the SPY as an aggressive position. As illustrated by the attached charts, Spikes in the SPY and QQQ volume may presage potential market bottoms Since it is likely that the volume spikes tend to represent extreme fear. Normally single day spikes in excess of 30,000,000 serve as these signals. Friday's decline off of recent highs was only met by 22.3 million QQQ-SPY-DIA volume. This is even lower than the 23.0 million seen on Wednesday (2/9) and 24.1 million seen during the decline on Tuesday, January 25. This may be too complacent of a reaction for Friday's (2/11) decline to be a short-term bottom forming day. 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 on the NYSE is still very high, eclipsing 4 billion shares. The short interest on the Nasdaq is more than 2.4b shares. Mixed Signs: Interest Rates (6.293): Although the recent bond market rally has helped bring the current yield down near 6.0 last week, it closed Friday (2/11) at 6.293. Volatility Index (22.24): A review of the VIX"s daily chart suggests that the low 30's are an excellent buying opportunity, and the low 20's continue to be a great selling opportunity. The VIX peaked on an intraday basis Friday (2/11) at 28.4 before collapsing and closing at 26.98. This may serve as a potential reversal pattern and signal the end of the market's recent slide. BEARISH Signs: 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 (2/11) Overhead Resistance (760-860) 2.16 OEX Close 752.04 Underlying Support (700-750) 5.63 What the Pinnacle Index is telling us: Appears to be good sentiment support at the OEX's 100-dma (740) but overhead resistance is climbing and could stall a broad market advance. February Peak Open Interest (OEX) Tues Thurs Fri Strike/Contracts (2/8) (2/10) (2/11) Puts 740 / 9,312 740 / 9,937 740 / 10,138 Calls 800 / 7,222 800 / 7,806 800 / 8,058 Put/Call Ratio 1.29 1.27 1.25 March Peak Open Interest (OEX) Fri Strike/Contracts (2/11) Puts 700 / 5,211 Calls 850 / 4,027 Put/Call Ratio 1.29 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 18, 2000 Top 21.09 February 11, 2000 26.98 ************* COMING EVENTS ************* For the week of February 14th, 2000 Monday Business Inventories Dec Forecast: 0.4% Previous: 0.9% Atlanta Fed Index Jan Forecast: -- Previous: -16.6 Tuesday Industrial Production Jan Forecast: 0.5% Previous: 0.4% Capacity Utilization Jan Forecast: 81.5% Previous: 81.3% Wednesday Housing Starts Jan Forecast: 1.64M Previous: 1.71M Building Permits Jan Forecast: 1.61M Previous: 1.61M Import Prices Jan Forecast: -- Previous: 0.7% Export Prices Jan Forecast: -- Previous: 0.1% Thursday Greenspan testifies before House Banking Committee on state of economy Jobless Claims 2/11 Forecast: -- Previous: 301K Producer Price Index Jan Forecast: 0.2% Previous: 0.3% Philadelphia Fed Survey Feb Forecast: 11.9 Previous: 9.1 Friday Consumer Price Index Jan Forecast: 0.3% Previous: 0.2% Real Earnings Jan Forecast: -- Previous: 0.2% Univ Mich Sentiment Feb Forecast: -- Previous: 112 International Trade Jan Forecast: -26.4B Previous: -$26.5B Week of 2/21 2/24 Durable Goods Orders - Jan 2/24 Help Wanted Index - Jan 2/25 Gross Domestic Product - Q4-rev 2/25 Existing Home Sales - Jan ************* WOMAN'S WORLD ************* Straddling the OEX Warning: You may skip the first paragraph if you are a male or in a hurry. I don't wish to scare away all you terrific male readers as I really appreciate the comments, questions and suggestions I receive weekly but I now know that you gals are really out there. Last weeks article on "Camp Mom" generated the most "e-mails from females" I have gotten since I began writing for OIN. I was beginning to wonder if Renee, Mary and I were the only female OIN readers. I am now happy to report otherwise and I encourage you not to be intimidated by all the trading jargon. There is no such thing as a "dumb question". Believe me the guys know that and they're not afraid to ask. It's funny, some of the e-mails from the guys start -- "I was reluctant to admit I read Women's world BUT... would you mind explaining ..." O.K., O.K., enough of the soapbox and on to the nitty gritty. As I mentioned in my article last week, I will be going away (no articles from me for the next two weeks) so I needed to get my trading house in order. After rolling up and forward any unfavorable positions and closing out my February profitable ones, I am in pretty good shape to leave without worrying about my positions, short of a total market crash. This time has allowed me to review some new trading strategies that I would like to implement upon my return. I have been trading the OEX more often since following skybox for their key benchmarks. Although I don't follow the system in it's entirety, it gives me great signals for my own strategies. What I really love about writing for OIN, is that it forces me to do a lot of research to either identify successes or losses. This past week I looked into my OEX trades and tried to identify why I was successful or not on each of my trades over the last month. What I like to do is set up spreadsheets with data and run averages over different time frames. From those averages, a trading strategy usually emerges. I copied the monthly, weekly and daily data on the OEX directly from my software into a spreadsheet. Normally, I try to do this before I start trading something, so I have an idea of its daily, weekly and monthly trading ranges. The spreadsheet was set up with the following 8 headings: Date, Open, Hi, Low, Close, Open minus Close, Open minus Hi, and Open minus Low. The Average (High to Low) ranges were as follows: Daily = 12 points Weekly = 29 points Monthly =62 points The Average (Open to Low) ranges were as follows: Daily = 6 points Weekly = 15 points Monthly =28 points The Average (Open to High) ranges were as follows: Daily = 6 points Weekly = 14 points Monthly =35 points What this tells us is the OEX is a great trading vehicle. By buying the options (I personally don't short the market), you can have access to a fairly predictable, volatile AND liquid market. My goal is to develop a strategy that could be used in bull and bear markets and would not leave me totally exposed to market direction. Additionally, I want to develop an emotionless, totally objective criteria for trading that strategy. After reviewing the daily, weekly and monthly data, I decided to develop a strategy using weekly data. After going back 32 weeks (the limit of my historical data), I found that the average range of Open to High was 14 points and the average range of Open to Low was 15 points. This suggested to me that I could make money by trading straddles. I particularly like this strategy because I don't have to be right about market direction. In order for straddles to be profitable, the underlying must be capable of moving large amounts, which makes the OEX a perfect candidate. By looking at historic and current OEX option quotes and theoretical prices, I next tried to approximate an average cost of the ATM calls and puts with at least 2 weeks to expiration. Also I projected what the value of the OEX calls and puts would be if the OEX were move 5 or 10 points before expiration by looking at the current prices of calls and puts that were 10 points in and 10 points out of the money. That way I was able to approximate what the value of the option would be if the OEX moved 10 points in either direction. While this is very simplistic, it is a start. My entry point would be to buy a call AND a put at the "Open" each week, but I needed to have an objective exit strategy. From the limited data I had, the most profitable exit point was to sell the options after the OEX moved 10 points in either direction from the open of the week. After the OEX moved 10 points up from the open in a given week, I would sell the call, and after a 10-point decline I would sell the put. Out of 32 weeks, there were seventeen "10 point moves" upward from the open of the week and twenty-one "10 point moves" downward from the open of each week. I assumed that if the OEX did not move 10 points favorably in one direction or the other by expiration, I would let the option expire worthless. In this scenario, 6 of the call options and 4 of the put options would have expired worthless before their expiration. This is very conservative in that the unprofitable leg is assumed to be worthless at expiration. They might be worth anywhere from 1 to 9 points of intrinsic value and of course I wouldn't let them expire worthless. I will be working to tweak this aspect is the future by closing out the unprofitable leg with whatever premium is left during the last week before expiration or on expiration day itself. This should improve returns, but it then makes the system less objective and more subjective unless I determine a specific time and date to sell the unprofitable expiring leg regardless of its price. My assumptions for working this strategy are as follows: 1. The cost of the of the ATM calls is 22 and 18-1/4 for the ATM puts, based on the current theoretical five week ATM prices. (This is probably a little high because the average time premium would be 4 weeks.) 2. My projected profit on the sale of the options is 4-1/8 points on the puts and 6-3/8 on the calls. This is also based on the current theoretical five-week "10-point" ITM calls and puts. This is probably too high as well because some time value would be lost over the 1 or 2-week holding period. On balance, they would probably offset each other . 3. Current volatility is representative in the price of the current options and can be projected backward and forward in time over the 32-week study. The results of this first stab at an OEX trading strategy is a cumulative profit of 58 points over and above an initial investment of 40-1/4 points (22 for the call, 18-1/4 for the put). That is over 100% return in only 32 weeks. The point of this article is to get you thinking about the OEX and various option strategies you are comfortable with that you might be able to apply. Look at developing your own option trading strategies on stocks that you love to trade. I would love to receive your input or suggestions to enhance this strategy or to challenge any of my assumptions, particularly if you can provide a better variable to use. I will be gone after Thursday of this week until the February 29, so I will apologize in advance in case I am not able to respond to all of your e-mail. Contact Support ************* Stocks Versus Options I think the best time to buy an option is when it is more advantageous to buy the option than the stock, or when a combination strategy allows you protection against loss through hedging. In order to determine whether it is a good time to buy an option you need to use technical market indicators, a fundamental understanding of the stock and its trading pattern and your judgement about what you think is going to happen to the stock and the overall market. For example, if one of your favorite stocks has been flat for a period of time and you expect that the stock will perform well in the near future because of impending news, like earnings which you think will be good, a split,or a spinoff of a subsidiary you can look at various options. As long as your judgement about the stock and market are accurate, you may be able to make more money with the option strategy than you could with the stock. An example of this is the Qwest leaps I bought recently. I bought the leaps at 12 when the stock was 40. This week the stock hit 46, and the leaps hit 16 ½. The profit on the leaps was 4 ½ points, or 37.5%. If you had bought 100 shares of stock at 40 and it hit 46, your profit would have been 15%. In this situation, the capital outlay for the leaps was less than one third the outlay for the stock, and the profit was over twice what the profit would have been on the stock. Sometimes you may feel more comfortable buying the stock than the option. In order to be successful with options timing is crucial. If you misjudge the market in a short term option it can expire to zero. Another example when options may be more advantageous for certain individuals is in the case of an expensive stock, like Broadcom which hit 350 today. I have owned Broadcom in my stock portfolio for over 6 months, and I don't intend to sell it. However, you could have made a huge profit with less capital outlay in the last several weeks if you had purchased an option rather than the stock, since 100 shares of Broadcom would have cost over 30,000, and you could have bought an option for significantly less. I wanted to get back into CMGI this week for a number of reasons. I think the stock is going to perform very well this year, specifically over the next 6 months. This week several news items were released on CMGI: First that Silknet, which is one of their minority holdings was bought by Kana for a 21% premium over Silknet's price. Second, another CMGI minority held company, Vicinity, went public Wednesday in a very successful IPO which was priced at 17 and traded up to 42 7/8, raising 119 million dollars. Since CMGI owns 32% of the company, this is just a hunch, but don't you think this might add a nice healthy profit to this quarter's earnings? Also, CMGI entered a new agreeement with Nokia, Compaq and Softnet to develop hand held broadband internet access devices. They are also planning a big ipo of Alta Vista in the first half of this year, which should be a huge money maker. On Monday and Tuesday I thought that the VIX was too low to buy CMGI options, and on Wednesday I couldn't bring myself to buy options when the Dow seemed to be perched at the edge of a cliff trying to bring the Nasdaq down with it. So I bought back into the stock. If you don't feel right about the market it is best not to buy an option. No matter how strong a stock may be, if the entire market tanks, almost everything will go with it. We have been hearing about the two different markets, the technology market and the other market for so long now that some market analysts are wondering if it even matters anymore. Technology stocks have defied almost every obstacle which has tried to block their path, including higher interest rates, Fed increases, and higher oil prices, to continue their climb upwards. No one knows how long this can continue, however, a truly healthy market rally is one in which all major sectors including financials, pharmaceuticals and consumer staples participate. One clue which may help to explain why the techs and Nasdaq continue to rally even in the environment of a declining Dow, and whether this phenomenon might continue is the study of cash flows into mutual funds and money market funds. According to AMG Data Services ,in 1999 the cash flows into equity mutual funds totaled 111.9 billion, and cash into money market funds totaled 232.1 billion There's a lot of money out there! But more significant than just the numbers is the fact that large capitalization equity funds and technology funds took in over 75% of the total money. Technology funds took in approximately 30 billion, or 26.8 % of the total, and large cap equity funds took in 46.6 billion, or 41.6% of the total. Yet the technology sector funds make up only 2.1% of the total number of equity mutual funds. What conclusion can we draw? No market indicator is ever 100% accurate, but I think this is indicative that a lot of mutual fund families may be closing down generic non performing funds and opening up more tech funds. They have to give their customers what they want. According to both AMG data services and Trimtabs, February fund flows are off to a good start with the week ending Feb 2 showing cash inflows of over 8 billion in to equity funds and outflows of over 8.7 billion out of money market funds. Remember around this time of year people start writing two checks: One to the IRS, and one to their IRAs. Some retirement accounts have monthly or quarterly contributions throughout the year, but most brokerage firms and funds start seeing huge pickups in contributions from February through April. It is good to keep an eye on the money flows, but I think the combination of having to pay taxes and buying stocks in IRA accounts may cause increased volatility more than any specific direction. Contact Support MORE WOMANS WORLD IN SECTION TWO ******************************** ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to Contact Support with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 DISCLAIMER *********** This newsletter is a publication dedicated to the education of options traders. The newsletter is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The newsletter picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. The newsletter staff makes every effort to provide timely information to its subscribers but cannot guarantee specific delivery times due to factors beyond our control.
The Option Investor Newsletter 2-13-2000 Sunday 2 of 5 ************************* WOMAN'S WORLD - CONTINUED ************************* Tid Bits to Consider in a Downside Market. By Renee White Several readers mentioned that they did not know how to find the VIX, in order to follow it on a daily basis. Remember, the VIX (Volatility Index) is an index, so the extension is important. VIX.X is the symbol you need to follow. On Friday, it moved higher trading intra-day to 28.93. It closed at 26.98 and has been closer higher every day since February 8 th. The chart makes me feel like it still has more upside, which signals rocky roads and downside risks for Nasdaq. For those of you considering the QQQ as a hedge against your tech portfolio, spend a little time looking at the chart before jumping in. QQQ does not move as fast as the Nasdaq and the options for QQQ move even slower. I have one reader who buys or shorts, QQQ intra-day and plays it against the VIX. But, he buys 1000-2000 shares of QQQ at a time, and exits with 1 1/2 - 2 points profit or so. That is a nice day's work, but it requires a large investment and large number of shares. I've been following his plays and I can see why he would rather trade these intra-day rolls, than to worry about picking the right stock, then waiting on it to move in the right direction. If you can afford the investment, it works well. The larger the play, the less movement you need in the underlying to skim nice profits. But, you must be good at reading charts before trying this. Nothing is guaranteed and like any other play, it can sometimes bite you. Make sure you look at the charts on Nasdaq, QQQ and the options on QQQ first, and make sure you understand their actions before expecting to use them as a hedge. The options are really very slow moving, so they do require a larger number of contracts than many are accustomed with higher flying tech stocks. One other thing to keep in mind when learning how to hedge by playing the down side; it has its own learning curve. Choosing the play is only the first hurdle to learning how to play it. Most new option traders have a very difficult time thinking in terms of playing the downside or even, figuring out when to place a downside trade. Again, the charts will help you. If you look for over-head resistance levels, become familiar with downside charting patterns, juxtaposed against reading market sentiment while using various indicators, the odds help turn decisions a little in your favor. Add in knowledge of current market conditions, with a little foreshadowing, and decisions become a little easier. I think the biggest problem for a lot of traders (including myself at times), is deciding when to exit downside plays. Yes, you will look at the charts for support levels, but it is not as easy with these plays. It is easier to wait too long, and get hit with a gap open the next day. These days, sell-offs in Nasdaq have been occurring so rapidly, that you might not get more than 10 minutes, or a couple of hours before the buyers rush in. In the old days (a few months back), it might have lasted a couple of days or a week. How long will these short cycles last? We may find out this week. I could be wrong, but I am expecting more downside follow-through in the Nasdaq. I don't think the selling is over this time. On upside plays, you usually get several days in a row in which to profit. But, for some reason, the pain seems greater to many new traders, waiting on a downside play to perform. Many get confused if they bought the position for hedging or for profiting on swing moves, only to exit right before the market rolls over. What's odd is that many of these traders will hold calls too long hoping they will go up, only to watch them expire worthless. A hedge play is bought for a different mindset than a profit play. This is why I go with a larger stop loss on puts for hedging, when I feel the market is really very heavy. If the sell-off occurs, the put premiums will inflate as they become more popular to the masses. Remembering the honest reason you entered the play; to hedge, or to play, can help with your exiting decision on puts that aren't moving. On puts that do move profitably, watch intra-day charts and try to take smaller gains more frequently. You can always re-enter on a roll, if the downside is not over. Expecting to hold out for that one big profitable dip before exiting, is the most common mistake of new downside players. It causes many profitable put plays to quickly reverse, only to end up as a losing trade. Look at the charts and try to find your own patterns during downtrends. This is a nice time to consider if we are short term or long term investors and decide if you win more in markets going up, down, or sideways. For the most part, long-term portfolios should weather mild storms. In its favor, it creates long term capital gains, less paper work, fewer commission, and generally less stress. As long as the stock does not break down completely, the cycles are to be expected. I do not follow my long-term portfolio daily. I occasionally check them with daily charts. For the most part, my energy is spent with my various short-term trades. Short-term traders have more stress, which increases by the shorter their trades are. More frequent smaller profits, lots of paper work, lots of commissions, no free time for distracting phone calls or conversations, messy income tax accounting, and many more headaches, frequently typifies the intra-day trader. Bless their souls, they must juggle a lot of information and act on it very quickly meaning, many times, within seconds. A bad short-term trader churns their accounts, makes their broker rich from commissions, and ends up with less money trying too hard. If you cannot make the same proportion of "wins" playing all three markets, (up, down, and sideways), then use discipline to force yourself to trade less, or not at all, when the market is not in your favor. It's easy to make money in up markets. It takes practice and experience to make money in down markets. But, those sideways markets have a machine gun effect and can hurt everybody quickly......especially option traders. Looking at charts and learning just the basics, can help you know when to step aside. Over-trading when the odds are against you, is a common mistake that once recognized, can help keep money in your account which would have otherwise vaporized. Save your irritations for the little things in life that you can't do anything about, like the tree house my new neighbor is building which faces right into the whole backside of my heavily windowed house, where I've lived with the privacy from trees, for the past 12 years. Renee White Contact Support *************** TRADERS CORNER *************** Operations Plan 2000: Task Force Ripper By Janar Wasito One of the traders interviewed in Jack D. Schwager's Market Wizards says that you have to figure out how you see yourself -- had I stayed in the Marines, I would have been a company commander by now, so I suppose I see myself as a armored task force commander built on a rifle company, a platoon of tanks, armored amphibian vehicles, and other supporting elements. Whether the analogy that works for you is that you are a doctor, conductor, or skier, it really doesn't matter. The key is finding an analogy that helps you to plan and execute effectively, and to limit the impact of emotions on your trading... and vice versa. Situation. In the last 4 months, I have gone through some of my best periods in trading, as well as through some painful learning. In Oct99, I had a drawdown in my ST Options Account of 50%. The most beneficial thing that happened in this period was that I took a full week off in mid Oct. Rested, I recognized the importance of the large volume breakout on the last two days of Oct, and traded aggressively, making almost a 50% gain by Thanksgiving. Over Thanksgiving, I took 1.5 weeks off, and prepared for the December trading period. Over December, I traded full bore, scoring huge gains with QCOM, VRSN, YHOO and other plays. On Jan4, I made my best trade -- moving a large chunk of cash from my ST Options Account to my LT Stock Account. That single trade, not involving an option at all, insured that I will stay "in business" for at least a year, probably longer. Since then, it has been downhill. Since early Jan, my ST Options trading account (now rebalanced to about 12% of my assets) has lost about 30% in value; my LT Stock Account has lost maybe 3%. In that period, I have been switching strategies, in part because of the write ups in OIN regarding covered straddles, and in part because of a mentor who emphasizes the need to minimize drawdowns. Also, I have had no real break, although I had planned a trip which was canceled. Trading in this period has taken a toll on my personal relationships. The short strangle strategy has indeed been a strategy that resembles "picking up dimes in front of a bulldozer." As of last Friday, I had scored 8 straight days of gains. This week, things fell apart. Bad decisions (holding QQQ puts) lead to more bad decisions. VRSN moved up to the strike of my short calls (Feb210) and forced me to buy back some contracts, at a gain, but also forced me to hedge and unhedge. The biggest bright spot in the last two months has been selling puts, although on Thursday, I sold some puts (VRSN Feb200 and CMRC Feb150) that may break this trend of profitable short put plays. Intelligence Preparation of the Battlefield. What Brought Me Here? What Do I need to go forward? What Works? In 1998, I started investing in LT Stocks and have had some great returns; a natural corollary to this is LEAPs, which I am switching into for Gorilla stocks that I want to own over the next few years. In 1999, I started trading options with great results. Those are my core competencies, and I need to fall back on those strengths as I craft an operational plan for this year. Though I have lost some money in 2000, it has been the tuition in the school of learning some promising new strategies -- selling puts, covered calls & calendar spreads (on LEAPs). I have not had success in selling calls, and so the short strangle strategy is not a good one for me. However, the basic insight that if you are short a put and a call on the same stock has merit. I may be able to apply it by writing both puts and covered calls against core stock holdings. In this way, I am assured that at least one leg of the strangle will expire worthless. Mission. My goal is to return 100 to 200% on my total portfolio for the year. My secondary goal is to develop an investing/ trading style that I can sustain for the long run. Another goal is to use the process of investing to learn about promising sectors and companies. Execution. My concept of operation for this year is to execute about 5 related strategies. In any given month, I want to take 1.5 weeks off from active trading (though I will have open positions). LT Stock. No Maintenance Required. (40%) As I write this, LT Stocks represent about 14% of my portfolio. My goal, through purchasing LT Stock by selling puts, is to increase this to about 40%. My core stocks will come from a combination of sources such as the Wired40, thestreet.com Tech30, Money30, and the OIN picks. These will be stocks like JDSU, VRSN, BRCM, AFFX, INCY, CSCO, ARBA -- about 50 to 75 total on my watch list. My goal will be to own 10 to 20 at any given time. Covered Call Selling @ resistance during overbought conditions. Every month. Little or no maintenance required. For example, I sold covered calls on almost all of my LT Stock holdings over the last month. I should have waited until earnings to sell covered calls on CSCO, since I would rather not lose my stock when my short CSCO Feb 125 gets exercised. But it will be OK if that happens. This has been a good source of cash flow, and it promises to be even better when I start adding higher volatility stocks to my portfolio. LEAPs & Calendar Spreads (10%): sell calls against LEAPs @ resistance during overbought conditions. Every month. Straight Calls (maybe Spreads) @ support during oversold conditions. Close focus on good entry point with Preferred Trade. Only 2.5 weeks per month. (15%) I want to begin to take longer term positions, ie options with 2 - 3 months of time so that time decay is not so bad (selling options makes one very aware of this); I want to trade splits & earnings, as it appears that these will be profitable plays throughout the year, not just in certain months. Because of my poor record in 1999 & 2000 with OEX & QQQ Puts, I am avoiding these plays. Selling Puts @ support during oversold conditions. (35% of portfolio in cash). Admin & Logistics/ Command & Control. Tom Basso, another successful trader in Jack Schwager's The New Market Wizards, says that a trader needs to address a trading plan in 3 steps -- trading psychology; risk control; and strategies (above). Trading Psychology. I want to watch the market about 3 hours a day -- at the open, midday, and at the close. I want to prepare for the following week for about 5 hours each Sunday, inputting trades for each of the above 4 or 5 strategies into qcharts. I want to spend about an hour at night digesting information. I want to spend a full week and a half off per month. I think I will do better if I spend this much time -- but not more -- on trading. Too much time equates to over focus and leads to lower results. Risk Control. My risk control comes from asset allocation (a large cash position), and from targeting no more than 2%, and eventually 1%, per trade. I do not plan to use portfolio hedging to accomplish risk control; as I said, index puts have not been good plays for me. An update from Saturday afternoon... Trading really is a process of continual education. So, I have been going through some materials on the more advanced strategies in Optionetics. One of my lessons learned from the last month and a half is that I am really not altogether comfortable with selling naked options. The allure of "riskless" compounding of 5, 10, 15, even 25% per month is appealing, but the fact is that there is a lot of risk involved, both in financial terms and in personal terms. I am therefore moving very quickly towards updating my arsenal of strategies. 1. LT Stock -- still the basis for my knowing about 15 stocks very well. But these stocks will change as new sectors, such as biotech, emerge as leaders. 1a. Covered Calls -- I don't like the idea of buying a stock just to write a covered call against it. But, I would like to write covered calls against my long term stock holdings. 2. LEAPs & Calendar Spreads. Just getting educated about these, and I think that they offer a good source of steady cash flow. This is definitely a strategy I will employ, particularly as I tend to buy LEAPS or longer term options on the most volatile stocks. 3. Old Strategy: Straight Calls. New Strategy: Debit Spreads/Bull Call Spreads. I am at the point, financially, where I would prefer to limit my risk and accept lower returns. I need a means to put a greater amount of my total assets into play, and I can't see myself doing it with straight calls. As interesting as short naked strangles/ straddles appeared at first, this is not something I am totally comfortable with. Not on a financial level, nor at a personal level. 4. Old Strategy: Naked Puts. New Strategy: Credit Spreads/Bull Put Spreads. Again, I have had some initial success with selling naked puts in this past month. I actually like the strategy for acquiring LT Stock, and will probably use it for that purpose, but in very limited amounts. I will never calculate the maximum number of puts I could sell and then execute all of them. That is just too risky for me to execute as a long term policy. I don't ever want to lose my account, and I take it very seriously when the option handbooks I consult say that the risk is unlimited. It only takes one Oct97 to wipe out a years of gains with this strategy, however good the long term prospects for compounding look. What I am comfortable doing, however, is selling a put at a oversold level of support on a stock, while simultaneously buying a lower priced put to create a credit spread. I understand this strategy intuitively, having sold puts this last month with success. Buying the lower strike put is just a means of insuring that a bulldozer never completely flattens me. Respect Risk. Uneducated but brave soldiers lose to smart bullets in every battle. With this in mind, I will be unwinding my short naked option positions next week with some care, while simultaneously planning to execute some of the spread strategies in the March cycle. Good Luck. Janar Joseph Wasito Contact Support ************** An Osmotic Technical Point of View Do you feel any better? All righty then. Where to start, hhmm. In looking back at my trading for the past several years I must say that I am definitely doing much better by far. I guess that if I wasn't I would be totally broke and you would not be reading this. Although the learning curve is both steep and subtle, a successful traders education usually will put an Ivy League education to shame in its total cost. If I were to tally up just the trades that I have been in that I got out of early we are at 8 figures. Not counting the ones that were up and then ended being down. So don't feel bad if you blow out a trade a wee bit early. Unfortunately, you are going to make mistakes. Part of the education is in seeing your money do a Houdini. The good thing is, it is part of the learning process and it is normal. Here is just a partial list of plays that I should have kept that I remember off the top of my head. 10 contracts YAHOO 2001 120 calls. 2000 shares of JDSU at 32 before the last split. 500 shares of MST 3 splits ago. 1000 shares of TQNT at 42. 500 shares of CREE at 38. 200 shares CMGI at $54. 20 contracts of the May 50 calls of A. 800 shares of HGSI at 52. Plus and untold number of calls and puts that are up a ton from where I purchased them and I consider myself a fairly good trader. My point here is that you are going to make mistakes every once in awhile. Especially when you are beginning. The key is to stay in the game long enough so that you can get past your mistakes. Make sure you don't ever let your losses go past 50% on a play at the absolute worst. I prefer 15% or 20% Something that I do that seems to work for me is to also sell off 50% of my play at the end of the day if I have a double. I get my initial investment back and let the profit ride. This kept me in the game early on. How many times have you had a double then find out the next day you are down a couple bucks? Now I also know that all of the trading manuals tell you not to ever put more than 2% of your portfolio into one trade. Get real, when I first started out 2% of my portfolio was $200. 2% is just not realistic until you are well on your way. but, you should break up your portfolio as much as you can. So if you only have 10k to start, maybe do 4 trades. Do not put it all in one trade! The odds are stacked against you. Now that I have told you some of downside. There is a wonderful flip side to this very shiny coin. If you stick with it, the upside can be any number that you set your mind to. If you want to make $5,000 a month, $5,000 a week, or $5,000 an hour, there is nothing stopping you from doing it. If you apply yourself to learning the rules, this game will make you more money than all but a few jobs in the world. The only thing it depends on is you. The market is truly the largest equal opportunity employer that there has ever been. It doesn't care if you have a Masters degree or dropped out of high school, how old you are or if you are a man or a women or what color skin you have. You need only learn the rules and you are hired. Do you feel any better? Man, I love being a capitalist, stockaholic and all. I hope that all of you reading this were fortunate enough to play the TQNT calls that OIN notified you about. For those of you who did, you know exactly what I am talking about. For those of you who did not, take a look at the pick and then go chart it and see what happened. Use a 3 day moving average on it. This should be a reminder to all of us. For every play that we miss, there are ten more out there to find that can make you $100,000 when you find them. And believe me, when you do hit your first big one, it is very special. But, just to give you fair warning, you are then hooked. Oh, but I can tell you from experience, the bait is worth it! ETEK update. ETEK actually surpassed JDSU in price on Thursday. Only 19% more to go. Happy Trading! Contact SupportHarrison ************** BROKERS CORNER ************** Fear and Greed By Monty McCutcheon Outrageously high markets and outrageously low markets and even the ones in between require a re-hash of the Ten basic rules. Learn them Live them and Prosper. I have a client up over 1000% since last Jan. I'm beginning to hear "we could have made more" type statements. Greed, Greed, Greed. We all have it or we wouldn't be in the market to begin with. I actually think the greed part of the equation is much worse than fear. However, both should be squashed immediately when they begin to creep. In the good times investors will get it in their head that "it will keep going, let's buy an option further out." "Monty, your system works, but this would have worked better." That's is all well and fine if we knew unequivocally for sure that the market will be higher any given month. Greed will always lead to fear, if you let one side of it get you, then, without a doubt the other side will get you as well. Anytime you feel it creeping in and it affects the things that got you where you are, you need to get re-familiarized with the "Top Ten Rules". If the market were to gap down it would be "should have done this and should have done that". Unless you have the things in place to prevent getting walloped in the wallet. It's easy to look back, and with a market as powerful as this one, hindsight tells us we should have bought a March option back in October and we should have broken rules1, 3, 8, 9 and 10. Unfortunately, nobody is smart enough to predict that. The very reason that there are set rules for option trading is to help the investor avoid the pitfalls that so many of us have already experienced, THE HARD WAY. They are there to protect as well as enhance wealth. Just as fear should be addressed when markets look terrible, so should greed be addressed when everything looks like it can't go wrong. I am here to tell you that it can go wrong and it will go wrong, it is merely a matter of time. And so being motivated by a client letting emotion get the best of him, ( I am sure there are many out there) I am urging the OIN readers to take a few minutes and review the "Top Ten Rules". They are good ones and should be re-addressed from time to time. I have no doubt that Jim has established these rules through trial and error. They work. Use them. Don't deviate from them. Commit them to memory. And when you've done that........Do it again. Five years from now you will be glad that you did. Monty McCutcheon Vice President & Options Specialist Fahnestock & Co. Contact Support ****************** OPTION CLUB UPDATE ****************** Sunday, February 13, 2000 THE OPTION INVESTOR TRADING CLUBS HAVE EXCITING FORUMS AND INFORMATIVE SPEAKERS!!! Visit the trading club message boards and see what others have to say: http://boards.OptionInvestor.com/tradersclubs/ UPDATE FROM SALT LAKE CITY, UT ******************************* DATE: THURSDAY, FEB 17, 2000 TIME: 6:00 PM LOCATION: SANDY SENIOR CENTER, NORTH WEST CORNER 1300 E., 9400 S. AGENDA: GUEST SPEAKER, JODY OSBORN, OPTIONS 101, ASST Editor OIN Jody is a writer for the OIN Newsletter and lives in SLC. He will review and go into details of the strategies from Jim Brown's article mentioned in the 01\09\00 Sunday newsletter. You can go to OptionInvestor.com" and print out the article. If you are planning to attend, you might want to read this article and subsequent articles so that you will be familiar with the strategy and will better understand the presentation. Print a copy and bring it with you for reference. We will also have another staff member who will review charting technical analysis. The entrance to the Senior Center is from 1300 East. The building is about 1 lot North the NW corner of the intersection and sets back a bit. Hope to see you on Thursday the 17th. We usually hold the meetings on the second Thursday, do please note that this is the Third Thursday! Also, the March meeting will be on the third Thursday - March 16. If you are from an outlying area and wish to carpool, please let me know and I'll send you other members email address. Carol Mortensen If you would like to join contact us at Contact Support and Contact Support ******** MAILBAG ******** Concerning Covered-calls: Dear OIN: A question on your covered calls - in Wed summary of covered calls, you talk about your in the money calls that generate 5%/month income - when you sell calls, do you always do it in the money???? Don't you get called out a lot then? What if you want incremental income using covered calls but do NOT want to be called out, isn't it safer to sell out of the money calls???? Also, how do you choose which stocks to write calls on - other than on the ones that have 3 red arrows. I have been getting your newsletter for the past 6 months and am very confused about your covered call strategy. Also, when you put in a stop loss, say when you buy a call, the stop loss is based on the share price, not the option price - correct??? So the stop loss goes into effect when the stock price drops to that price - so you sell the stock or are you really selling the option. I guess my question is the stop loss is based on the stock price, but if the stop loss is met, the stock option gets sold right??? Thanks, CI Subj: Covered-Call Strategies Since our newsletter is geared towards the short-term, we don't concentrate on stock ownership. We follow a conservative, total return concept with our covered write strategy (explained in detail in chapter 2 of Lawrence McMillan's, 'Options: As a Strategic Investment'). We value downside protection when evaluating a potential return and are willing to have the stock called away to meet our objectives. We wish to take advantage of overvalued premiums which will allow a maximum profit even if the stock declines. We target a 5% (10% on margin) monthly return on investment, which equates to a 60% yearly return. We view the entire position as a "single entity" and are not predominately concerned with the results of stock ownership. We value a true conservative covered write that offers reduced risk and a good probability of making a profit. Check out this Sunday's Covered Call section - the narrative may answer some of your questions about selling OTM calls. As for searches, we combine several propriety searches, concentrating on technically healthy stocks in strong sectors as well as momentum plays (takeovers, mergers, etc.). We concentrate on finding stocks with overvalued premiums that have strong support near the sold strike or cost basis (break-even point). We do a cursory search of recent news but as our aim is not stock ownership but consistent monthly returns, we do not concentrate on the fundamentals of a company. Technicians tend to believe the fundamentals are revealed in the chart anyway. Again, we only provide a list of recommended candidates and fully expect our readership to perform their own due diligence before entering a position. This is predominately the way we trade. We don't like to lose money (very low risk tolerance) and have learned not to fall in love with stocks. It isn't glamorous in a strongly bullish environment, but withstands corrections quite well and our accounts grow, slowly, but consistantly. For almost two years, over 80% of our candidates have been profitable. We usually stay with stocks under $30.00 since the relative yield is higher. When you close a covered call position or roll to a new position, you must first buy back to "close" the calls on the original position. Then you are free to sell the stock or sell new calls. Since you write (sell) the call to open the position, the transaction to close the position is a buy order. You will need to ask your broker how they handle stop losses for covered writes. Most do not have the capability since it is a combination order (buy back the calls and sell the stock). Again, McMillan's book is well worth reading and should be available at the local library. The educational site at the CBOE is very good too: http://www.cboe.com/education/strategy/eo-2.htm OIN **** Strategy Selection: Spreads - Planning For Profit.. By Ray Cummins The key to success in any form of trading is to have a well-defined strategy, a plan of attack. The options market offers a variety of different ways to profit but the risk can often be significant. The easiest way to limit or control the potential for loss is to devise and follow a specific system or set of rules. The structure of this system will require a number of profitable strategies along with the knowledge to implement and manage them correctly. The primary requirement for profitable trading is the ability to achieve reasonable returns and control risk. A plan without specific targets and loss-limiting features is certain to fail in the long-run. A careful and deliberate approach to strategy selection is the first step in the process. After the principal techniques have been identified, it is imperative to execute them with precision and discipline. Discipline in option trading is the ability to maintain "self-control" and execute the plan. The most difficult skill that traders must learn for is the ability to overcome emotional impulses. When real money is at stake, the influences of greed and fear (of loss) will attempt to sway your judgment, hindering a rational thought process. If you can not overcome these effects, the chances of success are slim. That is the reason it is so important to utilize strategies that promote disciplined trading. Techniques that offer little opportunity for indecision generally provide more consistent returns and far less risk than those with a high level of maintenance. Successful trading strategies have a number of common traits; ease of execution, flexibility and well-defined principles, but the most important characteristic for the majority of investors is asset preservation. In the options market, the most profitable systems are those which employ sound defensive measures. The ability to protect and conserve portfolio capital, while achieving consistent returns is a fundamental quality of any technique. Fortunately, there are numerous option trading strategies that satisfy this criteria and our goal at the OIN is to help new investors discover the most appropriate combination of trading techniques and provide them with the tools necessary to profit on a regular basis. With that concept in mind, we continue our introduction to fundamental spread strategies. The majority of option traders use derivatives to speculate on the movement of stocks and indexes. The appealing feature of option ownership is leverage with limited risk. If a trader correctly predicts the market direction and takes the appropriate position, he can expect to make a profit. Unfortunately, that technique has a low probability of success. As you know, even when the market moves in the predicted direction, owning the correct position (CALL or PUT) will not necessarily be profitable. The reason is, over short periods of time (while the trader is waiting for the option to rise in value), the position is at risk from a variety of changes in the market. One method that experienced traders use to overcome that problem is spreading. Spread trading is simply a way to take advantage of mis-priced options, while at the same time reducing the effects of short-term changes in market conditions so that a position can be held to maturity. The majority of successful option traders engage in some form of combination, position or spread trading. The basic technique involves buying and selling simultaneous but opposing positions in different option series. The most common strategies are used to reduce the cost (and the risk) of a position while providing a higher probability of a limited return. Advanced methods of spreading rely strictly on pricing disparities. Experienced traders know there is an identifiable relationship between various series of options and when the relationship appears to be mis-priced, they will buy the under-priced position and sell the over-priced position. The spread will profit as the prices of the instruments return to a linear relationship. The wonderful thing about option trading is its diversity. There are an incredible number of strategies available, one for every type of market trend, character and outlook. Positions involving combinations of calls and puts, with different strike prices and expiration months, along with index and futures options, offer the astute trader a variety of ways to participate in the market. This assortment provides even the most conservative investor the ability to construct positions with an acceptable level of risk versus reward in almost any situation. In addition, students of option pricing theory can identify combinations with potentially superior returns when the relationships between the options are theoretically skewed. While there is no perfect position, successful traders learn to maximize profits and hedge their risk in as many different ways as possible, limiting the effects of short-term volatility and market gyrations. Obviously there is no way to completely eliminate risk but you can reduce it much more than that of a inexperienced trader who does not utilize all of the available strategies. Next week's Topic: Strategy Basics - Diagonal Spreads.. Ray Cummins Spreads Editor Click here to email Ray Cummins **** I would like to introduce Lee Lowell to our OIN readers. Lee is going to write weekly educational articles for the Options 101 section. I think you will like his style and input. Give him a read. Jim **** Hello everyone. I'd like to take this opportunity to thank Jim Brown for giving me the opportunity to add my own option trading articles to this already incredible website. I've done my fair share of surfing the web for reliable options trading websites, and I believe OIN is one of the best out there. I would like to give the readers a little background on myself and what I hope to achieve in upcoming articles. I've been an options trader for 8 years now with experience in both stock and commodities options. I've been a trader on the floor of the exchanges for 6 of those years with the last two years trading full-time from my home. I believe the opportunities for at-home traders like ourselves have come a great distance in just the last few years alone. The amount of information available to the home trader now is just staggering and with websites like OI, you can really increase your chances for success. Online trading is still just beginning and is poised to become the wave of the future. Online brokerages still need some work in terms of options trading availability, but they are making strides. It is in my opinion that pit trading will be phased out over the next 5-10 years and everyone trading from a PC now is way ahead of the game. The articles that I will write will mostly consist of educational pieces that will include examples. The focus of my articles will be to explain what the determinants of an option price are and how to apply them into different options strategies. I will spend a considerable amount of time explaining volatility and its different forms. I believe that understanding and knowing how to use volatility is the key to becoming a successful options trader. The types of trades that I want to cover include straddles, strangles, debit & credit spreads, backspreads, ratio spreads (my favorite), etc. As I get into writing these articles, I hope some of the readers will feel free to comment on my pieces and ask any questions they might have. I look forward to this opportunity and hope to add to the successes of each trader and to this fabulous website as well Regards, Lee Lowell **** "What's in an option anyway?" By Lee Lowell Welcome to the first installment of my options articles. Today I'd like to begin with a brief review of what makes up the price of an option and then focus in on one of the ingredients that I believe is the most confusing to beginning traders and the most vital in options pricing. For any advanced options traders, please bear with me, as I know this is elementary to you. The price of an option that trades in the marketplace is called the "premium" and is determined by the supply and demand of all the market participants. These participants can include you and me, floor traders, mutual funds, insurance companies, large speculators, etc. Most of the options that we trade are executed on various options exchanges around the country. Participants are influenced by their own reasons why the underlying security might go up or down. These reasons include speculation, news stories, rumors, fundamentals, technicals, etc. All forces are working against each other until a price is agreed upon by buyer and seller. An option's premium is made up of 6 different ingredients and is calculated using an options pricing model such as the "Black-Scholes" version: 1. Underlying stock price 2. Strike price of the option 3. Days to expiration 4. Volatility 5. Interest rates 6. Dividends of the underlying These 6 components can then be put into 2 groups: 1. "intrinsic value" 2. "extrinsic value" The relationship between the first 2 items in my list above make up the "intrinsic value" and the last 4 make up the "extrinsic value". An option is said to have "intrinsic value" (true value) when its strike price is "in-the-money". (For any novice traders, the "strike price" is the agreed upon price that the buyer of the option can buy or sell the underlying security if exercised) For a call to have "intrinsic value" (and be in-the- money), its strike price is lower than the current stock price, and for puts - its strike price is higher than the current stock price. This is the relationship between the first two items in my list above (underlying stock price and strike price of the option). The "extrinsic value" adds premium to an option's price above and beyond its intrinsic value. The volatility of the underlying stock and the amount of time before the option expires is what gives it this extra value. The higher the volatility and more time before expiration, the more it will bump up the extrinsic portion of the premium. Although interest rates and dividends play a part in options pricing, it is this author's opinion that these two components do not affect the price of an option enough to warrant extended explanation. Just know that higher interest rates and higher dividend payments will increase an option's premium and vice versa. Just to sum up: Intrinsic + Extrinsic = option's premium. Here's a fictitious example. IBM is trading at $100. IBM FEB $90 call = $13. Intrinsic value (in-the-money value) = $10 (current price of IBM - strike price = $10) Extrinsic value = $3 (total option premium - intrinsic value = $3) The extrinsic value is what I'd like to focus most of my attention on at this point. All "out-of-the-money" options: for a call - the strike price is above the underlying stock price and for the put - its strike price is below the underlying stock price, have no real value (no intrinsic value). So it is said that this type of option is only made up of "extrinsic value". If you remember, extrinsic value is made up of the "volatility" and "time to expiration" components from my list above. The longer the option has until expiration day, the higher its premium will be. This is because the more time an option has, the more of a chance it could move into- the-money. A six-month option will have a higher premium than a one-month option. This brings us to the second component of the option's "extrinsic value" - volatility. It is in my opinion that this is one of the most important and least understood components of an option's price. This is why I will spend significant time in upcoming articles on this issue, and it is volatility that becomes the basis for most of my options trading decisions. I will briefly describe the different types of volatility here and save a more detailed discussion for the next installment. There are a few different forms of volatility: 1. "historical" (or "statistical"), 2. "forecast", 3. "future" and 4. "implied" volatility. In short, historical volatility tells us how erratic, or not erratic, a stock has been over some period in the past. It is a mathematical number expressed as a % that describes a stock's movement (up or down) over a certain time frame. In statistical terms, the stock's volatility is also its standard deviation. A stock that has small movements over the year will have a very low volatility number, say 20%. A stock with extreme movements can have a volatility of well over 100%. Here's an example of what the historical volatility number can tell you. If a stock is priced at $100/share and has a volatility of 25%, then over the next year, this stock should trade in a range of $75 - $125 (that's 25% above and below $100). This is accurate about 68% of the time for the next year. Options traders can look at the 30 day, 60 day, 90 day, 1 year, 5 year, etc. historical volatilities of the underlying stock to give them an idea of how it has moved either up or down over those time frames. Each time frame can result in a slightly different picture and I will expand on that in an upcoming article. Historical volatility charts and data are readily available at certain websites. Another form of volatility is called "implied volatility". This is also a number expressed in a % but has to do with the volatility of the option itself and not the underlying stock. This number is what the market in general believes what the range of the stock will be until expiration. In essence, the market is making a prediction of the underlying's "future volatility" (see below). In order to find out what the option's implied volatility is, you must plug in the actual price of the option as it's trading in the market and run it through your Black-Scholes model. Along with the option's current price, you input the other 5 components (stock price, strike price, days to exp., interest rates, & dividends) and the model will spit out an implied volatility number for you. In most cases, historical volatility and implied volatility will be different. The last 2 types of volatility are "future" and "forecast" volatility. Forecast volatility is what each individual trader thinks the volatility of the option should be over its time to expiration. It's what we feed into our option-pricing model to get a theoretical value. Future volatility is what every trader hopes to know - how the underlying stock will fluctuate until the day of the option's expiration. Since nobody can predict the future, our "forecast volatility" has to be guessed upon by using past historical volatility patterns. Just as stock technicians look at past price patterns on stock charts to give them an idea of how the stock will move in the future, option traders will look at past "historical volatility" numbers to make a guess of "future volatility". I know all this sounds a little confusing but I will expand on this in upcoming articles and discuss how to use all kinds of volatility in your own options trading. Most of the time, historical, implied, future, and forecast volatility are not the same and this is what leads to trading opportunities. Lastly, "out-of-the-money" options trade a great deal more in volume mostly because these options only consist of "time value"(extrinsic value). These cheaper options appeal to most consumers not only because they are cheaper in dollar terms but because the returns can be extremely dramatic if you can catch a big move quickly. Look at all the traders that bought far out- of-the-money calls on QCOM in November and December 1999 when it was trading at $250/share. Who would've thought that if you bought a QCOM $600 call, ($350 dollars out of the money), that you could easily have made hundreds of thousands, even millions in a matter of weeks!! I believe our friend Janar, who also writes for this newsletter, had the vision to do just that with QCOM. Congrats. I hope that this piece has given you an idea of the basics of an option's premium and I will further explain each item in more detail in upcoming articles. Good luck, Lee Lowell Contact Support ************************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 2-13-2000 Sunday 3 of 5 LAST WEEKS CHANGE FOR THIS WEEKS PICKS: *************************************** Daily Results Index Last Week Dow 10425.21 -538.59 Nasdaq 4395.45 151.21 $OEX 752.04 -23.47 $SPX 1387.12 -37.25 $RUT 537.10 11.58 $TRAN 2436.13 -172.83 $VIX 26.92 3.99 Calls Week AMCC 230.03 44.22 Up $72 for the week going into Fri. INSP 191.31 41.19 Is this just the beginning for INSP? NTAP 154.94 27.00 Dropped, earnings on Tuesday ISLD 114.25 26.19 New, evidence of intact momentum ANAD 124.00 23.97 New, market validates this sector MUSE 209.50 22.38 Stock splits 2:1 on February 23rd LHSP 82.00 21.38 New, looking to catch a ride on wave BEAS 108.00 18.75 Makes it through virtually unscathed EMLX 123.88 15.88 New, EMLX bucked the trend on Friday ADIC 68.00 9.63 Incredible relative strength on Fri. COVD 84.63 8.06 Covad's upward trend still intact ASPT 67.88 7.88 Momentum is fueling Internet rocket CLRN 106.25 7.25 Kept the staircase intact on Friday SNDK 149.06 7.06 SNDK continuing to see profits soar CUBE 87.19 7.00 One of the strongest in its sector HYSL 48.88 5.63 New, a hot contender in B2B arena TXN 137.63 5.63 An incredible move by the Semis! LLTC 105.50 4.06 One of the most ubiquitous products ICIX 52.13 2.88 Dropped, earnings on Wednesday MFNX 80.13 1.81 Dropped, volume tapering off for MFNX PCMS 18.75 -0.31 New, smaller price with big potential BCE 118.03 -0.97 Spinning off 95% of its stake in NT MLNM 212.50 -5.50 Decline just what the doctor ordered? EBAY 153.38 -14.69 Dropped, fell like a led balloon Fri. Puts VERT 213.00 -13.00 Microsoft; once a gift, now a burden PVN 65.38 -12.94 The real basis for play is technical PGR 54.00 -6.25 Nobody wants to pick a bottom here! MMM 82.94 -6.13 MMM was off and running backwards! CAT 36.00 -5.81 CAT gets dragged across the floor! KMG 48.13 -5.75 OPEC meeting fuels the fears on KMG JNJ 77.44 -4.69 New, suffered an intense sell-off GD 41.44 -4.13 GD still remains under a dark cloud UAL 52.00 -3.50 Dropped, has UAL landed at a bottom? KRB 20.81 -2.38 New, plenty of problems for KRB PG 93.75 -1.00 Dropped, PG may begin to recover STOCKS ADDED TO THE PICK LIST ***************************** Calls HYSL - Hyperion Solutions EMLX - Emulex Corp. PCMS - P-COM Inc ISLD - Digital Island ANAD - Anadigics LHSP - Lernout & Hauspie Speech Products Puts KRB - MBNA Corporation JNJ - Johnson & Johnson *************************** 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 NTAP $154.94 (+27.00) The rumors were flying on NTAP all day Friday. We won't jump into that pit, but here's what we know. NTAP gapped up over $5 at the open, made a new high at $159.13 and saw a tremendous amount of buying in the last hour of the day. NTAP gained 11% on a day when the Nasdaq gave back between 2%. In short, it was the final leg of our earnings run kicking into gear, right before our very eyes. NTAP is scheduled to report earnings Tuesday after the close, which is why we are dropping it this weekend. Most analysts are looking for NTAP to report $0.12, with some predicting EPS to be as high as $0.20. Dane Lewis, an analyst at Robertson Stephens, reiterated his Buy rating on NTAP and raised his 2000 & 2001 EPS estimates to $0.40 and $0.58, from $0.39 and $0.54 respectively. There very well could be other news coming from the company, but right now we will focus on our position and leave the rumors in the mill. NTAP has support at $153 and $148. Adjust your stops according to your risk profile and be sure to close this one by the end of business on Tuesday. EBAY $153.38 (-14.69) EBAY's share price was holding up pretty well amidst the hacker invasion scare this week. It managed to keep a position between the 10-dma and 5-dma on Wednesday and Thursday. This downdraft teased us with possible entry points. However Friday there was no breakout through short-term resistance at $165. Instead EBAY fell like a lead balloon on strong volume in the afternoon. It did bounce back off its low at $151.75, but couldn't penetrate $156 in a last minute ditch to recapture its losses. EBAY is now positioned just above the 50-dma ($149.50) and this coupled with the strong descent indicates to us the momentum play is over. MFNX $80.13 (+1.81) Nothing fundamentally wrong, it's just that volume is tapering off, and any moves in the stock price are fairly whimsical. Why's that? No news or events to drive investors into MFNX's stock. In fact, given MFNX IR's lack of direction on their earnings date, we're moving on to more predictable plays where there's at least a reason for the move. We can no longer find one here. For those interested, MFNX reports earnings in (we swear, this is what IR said) "the third or fourth week of March; very little chance of anything in February". They are also a split candidate above $50, but even that has an outcome about as predictable as "pin the tail on the donkey". Next! ICIX $52.13 (-2.88) Because earnings are scheduled to be announced on Wednesday, we are cutting ICIX loose from our call list. ICIX has done a nice job for us and we are disappointed that this play was cut short. ICIX demonstrated some nice relative strength against Friday's down market and we are still optimistic about the future of ICIX. Because ICIX is set to announce on Wednesday before the open, be sure to have all of your positions closed out by Tuesday. ICIX is definitely one for your radar screens going forward. Also, don't forget that DIGX (a subsidiary of ICIX) is due to start trading options of its own on Monday, the 14th. PUTS UAL $52.00 (-3.50) On Friday UAL showed strength at the current $52 level and this is a bullish sentiment. In an environment where the DOW is dropping fast, it was expected that UAL would have lost ground. Instead it appeared to hit bottom at $51.13. Perhaps traders are finally considering this a buy opportunity or simply are in "hold mode". No matter, we're exiting this weekend for better profit opportunities. PG $93.75 (-1.00) On Thursday, there was certainly a glimmer of "more losses to come" as PG broke through its comfortable support at $92-$93 and closed at $91.44. However it now appears PG has indeed hit bottom and may begin to recover. In Friday's session as the DOW continued to loose its footing, PG made valiant efforts to move higher. We see this as a clear-cut sign that it's time to close up shop and move on to more advantageous plays. STOCK SPLIT CANDIDATES *********************** Current Split Candidates MLNM - Millennium Pharmaceuticals AMCC - Applied Micro Circuits Corp. TXN - Texas Instruments CLRN - Clarent Corporation Split Candidates that are not current plays IMNX - Immunex EMC - EMC Corp CMVT - Comverse Tech. NXLK - Nextlink Comm. Recent announcements we predicted CSCO (most recent pick) - Cisco Systems STOCKS WITH UPCOMING SPLITS **************************** We don't list all splits available, only those we feel may have play possibilities. Symbol - Stock Splits/Date 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 02-22 PRGN - Peregrine Sys 2:1 02-18-00 ex-date 02-22 CRA - Celera 2:1 02-18-00 ex-date 02-22 PEB - PE Bio 2:1 02-18-00 ex-date 02-22 TIBX - Tibco Software 3:1 02-18-00 ex-date 02-22 SNDK - SanDisk 2:1 02-22-00 ex-date 02-23 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 VIAN - Viant Corp 2:1 02-23-00 ex-date 02-24 USAI - USA Networks 2:1 02-24-00 ex-date 02-25 ESIO - Electro Scient 2:1 02-24-00 ex-date 02-25 EMMS - Emmis Corp 2:1 02-24-00 ex-date 02-25 PXCM - Proxicom 2:1 02-24-00 ex-date 02-25 ITRU - InterTrust 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 GSPN - Globespan 3:1 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 DS - Dallas Semi 2:1 02-28-00 ex-date 02-29 SDLI - SDL Inc 2:1 02-29-00 ex-date 03-01 GTLL - Global Tech 3:2 02-29-00 ex-date 03-01 TMPW - TMP Worldwide 2:1 02-29-00 ex-date 03-01 WEBT - WebTrends 2:1 02-29-00 ex-date 03-01 ANAD - Anadigics 3:2 02-29-00 ex-date 03-01 MMPT - Modem Media 2:1 03-01-00 ex-date 03-02 ONXS - Onyx Soft 2:1 03-01-00 ex-date 03-02 JMED - Jones Pharma 3:2 03-01-00 ex-date 03-02 WCII - Winstar 3:2 03-02-00 ex-date 03-03 VRTS - Veritas 3:2 03-03-00 ex-date 03-04 XLA - Xcelera 2:1 03-03-00 ex-date 03-04 SLR - Solectron 2:1 03-08-00 ex-date 03-09 JDSU - JDS Uniphase 2:1 03-10-00 ex-date 03-13 SDLI - SDL Inc 2:1 03-13-00 ex-date 03-14 BVSN - Broadvision 3:1 03-13-00 ex-date 03-14 LRCX - Lam Research 3:1 03-16-00 ex-date 03-17 SANM - Sanmina 2:1 03-22-00 ex-date 03-23 CSCO - Cisco 2:1 03-22-00 ex-date 03-23 LLTC - Linear Tech 2:1 03-27-00 ex-date 03-28 GE - General Elec 3:1 04-26-00 shareholder mtg AXP - American Exprs 3:1 05-10-00 ex-date 05-11 SNE - Sony Corp 2:1 05-19-00 ex-date 05-22 AA - Alcoa 2:1 06-09-00 ex-date 06-12 For a complete list of all the coming splits check out the "split calendar" on the side of the online edition newsletter page. ******************** THE PLAYS OF THE DAY ******************** With all the great plays each week we can never decide on just one so take your pick. Call plays of the day: ********************** CLRN - Clarent Corporation $106.25 (+7.25) See details in sector list Chart = /charts.asp?symbol=CLRN **** INSP - InfoSpace.com Inc $191.31 (+41.19) See details in sector list Chart = /charts.asp?symbol=INSP **** ISLD - Digital Island $114.25 (+26.19) See details in sector list Chart = /charts.asp?symbol=ISLD Put play of the day: ******************** PGR - The Progressive Corporation $54.00 (-6.25)(-1.88) See details in put list Chart = /charts.asp?symbol=PGR ************* 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. $149.06 (+7.06)(+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. How can you go wrong with a company that makes the lion's share of those cute little memory cards we put in our digital cameras and palmtop computers? With demand for its products increasing at a furious pace, SNDK is continuing to see its profits soar. Earnings were a huge upside surprise, but the real excitement is the 2-for-1 split which occurs on February 22nd. Investors should start to show up in droves, driving both volume and price higher as the date approaches. We are still waiting for a convincing break out of our pennant formation, which comes to a point at $150 within the next 2 days. So we should see that breakout soon. A pullback is always possible, with the skittish behavior of the broader markets, but it was nice to see the strong action in SNDK last week. The chart continues to present us with higher-lows, making us very happy and providing daily entry points. Mild support has now moved up to $147, with stronger support at $144. Look for a bounce at either level or a break through $153 to trigger your entry into this play. Dan Niles at Robertson Stephens reiterated his Buy rating Wednesday and issued a six-month price target of $200. The latest product news is over a week old, but worth reiterating. 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.". BUY CALL MAR-145 SWQ-CX OI=36 at $22.25 SL=17.25 BUY CALL MAR-150 SWQ-CY OI=69 at $20.00 SL=15.50 BUY CALL MAR-155*SWQ-CZ OI=22 at $17.88 SL=13.75 BUY CALL MAR-160 SWQ-CW OI=30 at $16.13 SL=12.50 SELL PUT FEB-140 SWQ-NH OI=88 at $ 3.00 SL= 4.25 (See risks of selling puts in play legend) Picked on Feb 03rd at $135.06 P/E = 173 Change since picked +14.00 52-week high=$156.00 Analysts Ratings 1-4-0-0-0 52-week low =$ 17.00 Last earnings 01/00 est= 0.22 actual= 0.30 Next earnings 04-26 est= 0.28 versus= 0.15 Average Daily Volume = 822 K /charts/charts.asp?symbol=SNDK **** EMLX - Emulex Corp. $123.88 (+15.88) Emulex Corp is a leading developer and supplier of fibre channel technology, an ANSI standard communications interface that delivers unprecedented bandwidth, connectivity and reliability networking applications. They design three types of connectivity products: network access servers, print servers and high-speed fibre channel products. They sell their products worldwide to OEM and end users, through other distribution channels including value-added resellers, systems integrators and others. Don't tell shareholders of EMLX that the major indices had a rough day Friday. Right now they don't care, because EMLX bucked the trend and finished the day and week with solid gains. Actually the majority of the shareholders in EMLX are well aware of Friday's debacle, since over 83% of the company's outstanding shares are owned by institutions. That's right the heavy hitters, are heavily invested in one of our latest additions to our play list. What's behind the latest push in EMLX? Besides reporting fantastic earnings late in January, and being an extremely well run company, EMLX is in the business of providing storage for data and giving people the ability to manage and access that data. Right now companies that do that, and do it well, are hot. EMLX has created a great niche for itself. Two of its competitors, QLGC and INTC, finished Friday's session with losses, while EMLX added +6.75 for the day. That in itself speaks well. EMLX is coming out of its post earnings sell-off and has mounted an assault on the $125 level, which has provided a bit resistance recently. EMLX closed near its high of $124, making the beginning of the week look more positive too. As for the technical picture, many arrows point higher including MACD and Stochastics. Support is at $121 and $117, although we don't believe the latter will be tested. A close above $125 could clear the way for a move to $140 area. Earlier this week, Shannon Reid, a fund manager for Evergreen Select Strategic Growth Fund, commented on his holdings in the technology arena. Reid said "with the explosion of information being passed around the world, it creates a big opportunity for companies in the business of providing storage". Reid's favorites in that area included EMLX, EMC and QLGC. BUY CALL MAR-115 UMQ-CC OI=109 at $22.00 SL=17.00 BUY CALL MAR-120 UMQ-CD OI= 66 at $19.50 SL=15.25 BUY CALL MAR-125 UMQ-CE OI= 34 at $17.25 SL=13.50 BUY CALL MAR-130*UMQ-CF OI=107 at $15.25 SL=12.00 Picked on Feb 13th at $123.88 P/E = 225 Change since picked +0.00 52-week high=$170.25 Analysts Ratings 3-3-0-1-0 52-week low =$ 6.63 Last earnings 01/00 est=0.14 actual=0.23 Next earnings 04-25 est=0.16 versus=0.05 Average Daily Volume = 948 K /charts/charts.asp?symbol=EMLX ************* SEMICONDUCTOR ************* TXN - Texas Instruments $137.63 (+5.63) How about Semiconductors R Us? TXN has broad-based exposure to the semiconductor market, especially in digital signal processors and analog integrated circuits. TXN's products are used in a diverse range of electronic systems, including digital cell phones, computers, printers, hard disk drives, networking equipment, and digital cameras. TXN also supplies electronic controls equipment, sensors, radio-frequency identification systems, and sophisticated graphing calculators. Is this our entry point? Seemingly oblivious to the gyrations of the broader markets for the past week, TXN finally took a rest as investors cashed in some of their gains. TXN came down and tested support at the by-now-familiar $137 level. The stock looks poised to take the next set of investors higher. Mild resistance sits at $142, and then at the most recent 52-week high of $145. This move is being driven by the incredible strength in the Semiconductor industry (see news below), along with TXN's leading role in digital signal processing and analog circuits. Eighty percent of all digital cell phones shipped worldwide have TXN semiconductors inside. With that kind of exposure in a market that is exploding like wireless telecommunications, it is no wonder TXN shares are taking off. Volume on Friday's decline was just about average, and it was encouraging to see the volume pick up in the last hour as prices bounced near $137. Going forward, look for this level to hold as support as TXN prepares itself for a fresh assault on the 52-week high. Volume on TXN is a particularly good indicator of the strength of an advance or decline; use it for confirmation before opening any new positions. Giles Delfassy, VP of TXN's worldwide wireless communications business continued to crow about the growth and opportunity in the wireless market. Speaking at the Goldman Sachs Technology Symposium on Thursday, he estimated 60% growth in digital wireless handsets this year. According to Delfassey, "The next step is enabling new features in wireless handsets like streaming audio, video and mobile e-commerce". Further strengthening its leadership in analog circuits, TXN introduced new process technology on Monday that enables 20 times greater integration of Digital logic with Analog blocks in Broadband applications BUY CALL MAR-135 TNZ-CG OI= 780 at $10.75 SL= 8.50 BUY CALL MAR-140*TNZ-CH OI= 394 at $ 8.50 SL= 6.50 BUY CALL MAR-145 TNZ-CI OI= 427 at $ 6.50 SL= 4.75 BUY CALL APR-140 TNZ-DH OI= 174 at $12.50 SL=10.00 BUY CALL APR-145 TNZ-DI OI= 241 at $10.25 SL= 7.75 SELL PUT FEB-135 SWQ-NG OI=1265 at $ 3.00 SL= 4.25 (See risks of selling puts in play legend) Picked on Feb 8th at $138.38 P/E = 86 Change since picked -0.75 52-week high=$145.00 Analysts Ratings 14-14-5-1-0 52-week low =$ 43.00 Last earnings 01/00 est= 0.47 actual= 0.51 Next earnings 04-24 est= 0.51 versus= 0.32 Average Daily Volume = 4.12 mln /charts/charts.asp?symbol=TXN **** LLTC - Linear Technology $105.50 (+4.06)(+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 Technology's semiconductor products may be the most ubiquitous of the industry. Their chips are used for a vast array of applications. This fact is perhaps why LLTC has been an institutional favorite for many years. Sure, they do not make the sexy cutting edge chips that grab the headlines, they just make the chips that everybody needs. With semiconductor stocks becoming the new market leaders, LLTC is a "safe" way to capitalize on this trend. LLTC will be rewarding shareholders with a 2-for-1 stock split on March 27th. Although this split is probably too far down the road to make an immediate impact on very short-term traders it still, nevertheless, underscores management's confidence for stability in the share price of their company. One of the reasons why semiconductor stocks have been leading the market is due to a stellar earnings period that saw several upside surprises and LLTC was among them. LLTC posted sales up 35% and earnings up 41%. Perhaps the more significant announcement was that LLTC offered guidance that the current quarter will also be very strong. After a nice run which saw the stock make new highs six days in a row LLTC has become a little more volatile up here. The big ranges of the past few days are indicative of a tug-of-war between profit takers and new investors. We have noticed that LLTC is perhaps best purchased on pullbacks as opposed to making purchases on breakouts. We are looking for LLTC to hold above $100 to keep the rally alive. The trading range of the past few days could continue for awhile giving intraday traders an opportunity for some profits. Longer term traders may have to be patient and watch and see if LLTC has entered a consolidation phase. Could the next wave for growth in technology be found in the so- called e-appliance sector? Merrill Lynch seems to think so and LLTC could be one of the biggest beneficiaries of this trend by supplying the chips for such products as digital cameras, video games, digital set-top boxes and Palm Pilot devices. Since LLTC is trading in these 4-6 point ranges very experienced option traders may want to consider selling some of the February time value premium on rallies up to short-term resistance against their long March calls thereby constructing a bullish calendar spread for expiration week. Please do not attempt to do this if you do not fully understand the risks inherent in this strategy. BUY CALL MAR- 95 LLQ-CS OI=114 at $14.75 SL=11.50 BUY CALL MAR-100 LLQ-CT OI=218 at $11.88 SL= 9.25 BUY CALL MAR-105*LLQ-CA OI=184 at $ 9.00 SL= 6.75 BUY CALL MAR-110 LLQ-CB OI=277 at $ 6.88 SL= 5.00 Picked on Feb 1st at $97.69 P/E = 78 Change since picked +7.81 52-week high=$111.50 Analysts Ratings 7-10-4-0-0 52-week low =$ 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 **** AMCC - Applied Micro Circuits Corp. $230.03 (+44.22)(+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. Up $72 for the week going into Friday, the final 7.5 hours of trading weren't pretty, unless you sold into the highs during the first 5 minutes of the day. After that, AMCC was dropped kicked for a $28 loss during trading for the rest of the day. If there was a saving grace, it's that a few buyers appeared late in the day and added some volume, thereby keeping AMCC from closing at its $221 low of the day. There is nothing in the news that will account for the drop. However, slightly seasoned traders know that trees don't grow to the sky, etc., and AMCC was due for a reversal given its 8-day sprint to the top. Technically, it isn't as bad as it looks. AMCC still maintains its strong position in the optical bandwidth expansion business. While a big part of their revenue (40%) comes from NT, NT is the right horse to ride since it is the leader in the optical switching business (and growing faster at Lucent's expense). Back to those technicals. Near-term support is at $220, where AMCC found support on Wednesday, Thursday, and even Friday. Careful though. Any further market fears could put AMCC back on a southerly heading for $210 and $200, followed in $10 increments to $140, though we doubt it will get that low since even a 100% retracement is $170. Though not a guarantee, we think 50% to 62% is reasonable. That would range from $215 to $204. $200 will certainly provide a psychological barrier, and $197 is the 10- dma. Target shoot to your level of risk tolerance. With the huge time premiums, another strategy to consider is Jim's covered straddle, or for the slightly more conservative, the covered strangle. Using a simple margin account, your return could easily exceed 50% by March 17 if you are reasonably attentive to the price swings. AMCC is also a split candidate. They last announced a 2:1 split in August when the stock traded at $95, which became effective in mid-September at $105. AMCC is way past that mark, and they have enough shares for a 3:1 without further shareholder vote. Earnings will not happen again until April 10 (estimate). Thus we could have a long wait unless the BOD gives us a nice surprise. Not that it mattered much this week, but CSFB resumed its Strong Buy rating with a $240 price target (it got there), while Deutsche Bank upgraded AMCC to a Strong Buy with a $250 price target (it got there too.). BUY CALL MAR-220 AEX-CW OI=481 at $35.75 SL=28.00 BUY CALL MAR-230*AZF-CF OI=137 at $32.88 SL=25.50 BUY CALL MAR-240 AZV-CH OI= 4 at $28.63 SL=22.25 low OI BUY CALL MAY-230 AZV-EF OI= 45 at $48.13 SL=37.50 BUY CALL MAY-240 AZF-EH OI= 15 at $44.38 SL=34.50 low OI Picked on Feb 5th at $185.81 P/E = 478 Change since picked +44.22 52 week high=$261.69 Analysts Ratings 9-3-0-0-0 52 week low =$ 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 = 1.28 mln /charts/charts.asp?symbol=AMCC **** CUBE - C-Cube Microsystems $87.19 (+7.00) C-Cube is the industry leader in the development and delivery of highly integrated digital video silicon and systems solutions. C-Cube's Semiconductor Division delivers digital video silicon and systems solutions for the communications and consumer electronics markets. C-Cube's DiviCom Division is a leader in the deployment of digital video networks. In this investment world where Mutual Fund managers need to chase each other's picks to stay with the pack and earn their market performance pay, you will see a herd mentality. As more and more money chases fewer sectors, leaders emerge and most of the rest of the stocks in the market wallow direction-less. Since the start of the year we have seen the SOX rally over 200 points, closing on Friday at 912.20. We found CUBE as a call play by trying to identify the strongest stocks within this sector. C-Cube has also done very well recently because it is a leading supplier of chips to the home electronics industry. When the economy is booming people like to buy a lot of expensive toys. Also contributing to CUBE's rally was a very strong earnings report in January that saw the company beat the Street's estimates by three pennies. Last week saw CUBE stage a very nice rally with a close above $90 on Thursday. We have noticed that many stocks seem to stage a rally straight to $100 and perhaps beyond when they close above $90. We would like to see CUBE recover quickly with a new high to confirm that this pattern will be realized. Unfortunately, the NASDAQ ran into some healthy profit-taking on Friday and CUBE was not spared. The pullback could prove to be a good entry level for the next potential rally. Be careful. Breaks in the NASDAQ have been very quick, but a bit severe lasting 2-3 days so keep an eye on those support levels at $85 and $80. Recent analyst commentary has come from H.C. Wainwright which saw fit to place a $110 price target for the stock and Robertson Stephens which reiterated a buy rating. Michael Murphy, the manager for the market outperforming Monterey New World Technology Fund, announced that he has been recently buying shares of C-Cube. BUY CALL MAR-80 UQB-CP OI=201 at $12.25 SL=9.75 BUY CALL MAR-85*UQB-CQ OI=677 at $ 9.25 SL=7.00 BUY CALL MAR-90 UQB-CO OI=127 at $ 6.75 SL=4.75 Picked on Feb 8th at $85.69 P/E = 71 Change since picked +1.50 52-week high=$93.88 Analysts Ratings 3-3-1-0-0 52-week low =$17.25 Last earnings 01/00 est= 0.37 actual= 0.40 Next earnings 04-20 est= 0.34 versus= 0.34 Average Daily Volume = 835 K /charts/charts.asp?symbol=CUBE ******** Internet ******** ISLD - Digital Island $114.25 (+26.19) Digital Island is a leading global e-business delivery network company. They offer hosting, content delivery, network management, and support for mission critical applications. The company has regional Data Centers in New York, Santa Clara, Honolulu, and London, connecting directly into 21 countries with content distribution sites in nine markets worldwide. Its clients are multinational corporations that use the Internet for day-to-day business operations. ISLD is leading edge when it comes to delivering content-on- demand via multiple Internet devices. Many broadband experts believe their technology is critical to the further development and growth of the industry. Rebounding from depressed levels, ISLD shot upwards $23.75, or 26.2% from Monday's close of $90.50. Other stocks in this emerging market of "Enhanced TV and Broadband" such as OpenTV (OPTV), Wink Communications (WINK), and Liberty Digital (LDIG) also sprung forward this week while most of the Internets suffered the crushing wrath of security worries. The extensive upswing by ISLD ultimately cracked January 3rd's overhead resistance ($115.25) during intraday trading on Friday. Take a look at a three-month chart and notice ISLD had made three previous attempts but failed. Therefore it's evident that this momentum is intact and very powerful. Over the past two sessions, short-term support has evolved at $108 to $110 and is firmer below the 5-dma ($104.41) at the $100 level. A dip to the latter technical indicator followed by a definitive bounce would be a solid entry point; although be careful of any pullback below that. If ISLD takes off like a champion racehorse out of the gates on Monday, wait until after amateur hour, confirm direction, make the intraday volatility your ally, and target shoot for an entry. Bottom- line this a pure momentum play. This week CareerNext.com, a leading career portal that brings individuals seeking employment across Asia Pacific together with recruiters, and AudioCast.net, a pioneer in streaming media technology, both joined Digital Island's growing client list. BUY CALL MAR-105*SUH-CA OI= 340 at $21.38 SL=16.75 BUY CALL MAR-110 SUH-CB OI= 0 at $19.00 SL=14.75 Just opened BUY CALL MAR-115 SUH-CC OI= 0 at $16.50 SL=12.75 Just opened BUY CALL MAY-115 SUH-EC OI= 12 at $24.38 SL=19.00 low OI BUY CALL MAY-120 SUH-ED OI=1521 at $26.00 SL=20.25 Picked on Feb 13th at $114.25 P/E = N/A Change since picked +0.00 52-week high=$156.94 Analysts Ratings 4-2-0-0-0 52-week low =$ 8.66 Last earnings 12/99 est=-0.71 actual=-0.61 Next earnings 05-02 est=-0.77 versus= N/A Average daily volume = 1.17 mln /charts/charts.asp?symbol=ISLD **** CLRN - Clarent Corporation $106.25 (+7.25) Bent on keeping information moving, CLRN is a leading provider of scalable Internet protocol (IP) telephony systems which permit the simultaneous transmission of voice, fax and data over the Internet. The Clarent system is built around packet- switched technology, which breaks information into pieces, transmits it, and reassembles it at its destination. This method makes more efficient use of network bandwidth because it only takes up space during the actual transmission. AT&T accounts for 36% of sales and customers outside the US make up another 50%. Keeping the staircase of higher highs and lows intact on Friday, investors pushed shares of CLRN higher on more than triple the ADV. The move that began after strong earnings on January 20th will be running on higher octane fuel later this week. The annual shareholder meeting is on Tuesday, and the agenda calls for a vote to increase the authorized shares from 50 to 200 million shares. Does anyone else smell a split coming? The old resistance level at $100 now looks like support and a bounce near this level could provide a nice entry. Because of the stair-step pattern of CLRN, we have an easier time picking entry points. Currently CLRN is right in the middle of its up-trending channel, and the logical pullback (to the bottom of the channel), would put it right at $100. But we can't fail to mention the great support at $105.25 on Friday. Resistance comes at the 52-week high at $110.25, and if volume remains strong, we could be in blue sky territory before you can say "NASDAQ 5000". Consider new entries on a return to support, followed by a bounce. This is a breakout (momentum) play, and as such, it requires volume to continue on its ascent. Of course the specter of a split always makes investors happy. More aggressive traders may want to open positions on a break to new highs, but make sure the volume is there. Use stops to protect your gains and tighten them if volume starts to dry up. Speaking to SmartMoney.com Wednesday, COO Rich Hopps crystallized the company's focus, stating "Voice is, if you look downstream, the most lucrative application of a converged voice and data network". On February 3rd, CLRN and ACT teleconferencing, a full-service global provider of audio, video, data and Internet conferencing products and services, introduced the first-ever full duplex IP telephony conferencing solution. The new solution, Action VOIP gives customers the ability to conduct attended, unattended and fully automated audio conferences via IP telephony, regardless of the location of conference participants. BUY CALL MAR-100 KGQ-CT OI= 23 at $18.88 SL=14.75 low OI BUY CALL MAR-105 KGQ-CA OI= 2 at $16.50 SL=12.75 low OI BUY CALL MAR-110*KGQ-CB OI=866 at $14.38 SL=11.50 BUY CALL MAY-105 KGQ-EA OI=100 at $26.75 SL=20.75 BUY CALL MAY-110 KGQ-EB OI= 42 at $23.63 SL=18.50 SELL PUT FEB-100 KGQ-NT OI= 0 at $2.56 SL= 4.00 (See risks of selling puts in play legend) Picked on Feb 10th at $102.69 P/E = N/A Change since picked +3.56 52-week high=$110.25 Analysts Ratings 1-4-0-0-0 52-week low =$ 19.88 Last earnings 01/00 est=-0.10 actual=-0.05 Next earnings 04-20 est=-0.04 versus= N/A Average Daily Volume = 462 K /charts/charts.asp?symbol=CLRN **** INSP - InfoSpace.com Inc $191.31 (+41.19) InfoSpace.com provides content and commerce solutions for Web sites and Internet appliances. Their focus is on content such as yellow pages, maps, classified ads, real-time stock quotes, sports and other information. InfoSpace.com has 100+ online customers including the likes of American Online and Microsoft. Founder and CEO, Naveen Jain, has a 38% stake while Acorn Ventures owns 12% of the company. InfoSpace.com's share price has multiplied by more than 40-fold since its $15 IPO in December 1998. Many analysts believe it's just the beginning and predict INSP will rise significantly as the demand for cell-phone Web services grows. Now come on you must be thinking, that sounds like a pitch for investors! Honestly it's just a bit of background information. Our play takes on a different twist and is short-term. We've added INSP as a pure and simple split run. On January 31st, the company's BoD announced its second 2:1 stock split this year (subject to shareholders' approval). A vote to increase authorized shares from 200 mln to 900 mln is expected by written consent and if all goes according to plan, the stock dividend will be payable on March 15th. Currently there are 48.2 mln shares issued following the recent 2:1 stock split on January 4th. January was certainly a busy month for InfoSpace.com! Just after that split, they announced stellar earnings on January 26th. Earnings came in at $0.09 shooting past 4Q estimates of $0.00 by a First Call consensus. From that point on traders have lost no time driving up the share price over 43% to Friday's new 52-week record at $200.44! Near-term support is first at $190 and $185, but the vicinity of $180 just above the 5-dma ($177.93) is more solid. Open Interest did pick up on Friday, which is a good sign, but still be cautious about opening new positions. Lots of analysts have a positive outlook when it comes to this stock. Merrill Lynch's infamous Internet analyst, Mr. Blodgett, has INSP tagged with a Buy rating and both Dain Rauscher Wessels and US Bancorp Piper Jaffray have Strong Buy recommendations out. Recently Merrill Lynch also upped their price target to $175 and Paine Webber raised their target price to $200 from $160. BUY CALL MAR-185 FHY-CQ OI= 2 at $31.13 SL=24.25 low OI BUY CALL MAR-190*FHY-CR OI= 10 at $29.38 SL=23.00 BUY CALL MAR-195 FHY-CS OI= 0 at $26.63 SL=20.75 Wait for OI! BUY CALL MAR-200 FHY-CT OI=103 at $24.63 SL=19.25 Picked on Feb 10th at $191.50 P/E = N/A Change since picked -0.19 52-week high=$200.44 Analysts Ratings 6-3-0-0-0 52-week low =$ 10.00 Last earnings 12/99 est= 0.00 actual= 0.09 Next earnings 05-01 est=-0.12 versus=-0.01 Average Daily Volume = 1.70 mln /charts/charts.asp?symbol=INSP **** COVD - Covad Communications $84.63 (+8.06)(+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. How do you know when the traders are committed to sticking with their positions? Volume, is one the keys to determining what's really going on inside the mind of the trading public. That's why we really aren't concerned about COVD's pullback Friday. COVD gave back $1.75 Friday, on less than half its ADV. We view the retracement as a buying opportunity, assuming the broad market cooperates. COVD came within $0.50 of touching its 5-dma at $82.91 late in the day. Actually the way COVD traded on Friday was very promising. It did trade lower for most of the session, but the decline was slow and gradual, not the "just get me out" mentality seen when traders want to dispose of a stock at any price. The upgrade earlier in the week from E*Offering and the addition of COVD to Merrill Lynch's competitive local exchange carriers(CLECs) list with a Buy rating, seems to have thrown COVD to the forefront. Although COVD did explode right out of the gate Monday morning, the retracement to support at $78 and the subsequent bounce late Tuesday and early Wednesday is what really provided us with warm fuzzies and the added confidence in this play. One bit of caution before adding any new positions in COVD. We will wait to see the mood of investors as they return to work next week. COVD's trend is intact, but it can't go it alone. If Friday's decline at the Nasdaq was just a warm up for things to come, then keep your stops close. In a press release Friday, COVD, announced it would host Vice President Al Gore's speech focusing on the technology industry's impact on the growing American economy. Vice President Gore's visit comes on the occasion of the fourth anniversary of the passage of the Telecommunications Act of 1996, which opened up competition in the Telecom marketplace. BUY CALL MAR-75 COU-CO OI=187 at $14.38 SL=11.25 BUY CALL MAR-80 COU-CP OI= 88 at $11.38 SL= 8.75 BUY CALL MAR-85*COU-CQ OI=163 at $ 8.75 SL= 6.75 BUY CALL MAR-90 COU-CR OI=190 at $ 6.88 SL= 5.25 SELL PUT FEB-80 COU-NP OI= 39 at $ 1.38 SL= 2.63 (See risks of selling puts in play legend) Picked on Feb 01st at $74.00 PE = N/A Change since picked +10.63 52-week high=$88.13 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=-1.06 versus=-0.56 Average daily volume = 2.27 mln /charts/charts.asp?symbol=COVD ********* SOFTWARE ********* HYSL - Hyperion Solutions $48.88 (+5.63) The worldwide analytic application software leader, Hyperion Solutions Corporation gives today's knowledge workers the "freedom to succeed" with software, services and partner offerings that help them understand and optimize their businesses. More than 6,000 organizations worldwide use Hyperion's analytic application software products, which include market-leading packaged analytic applications, and OLAP server technology and tools. In addition, more than 350 leading data warehousing, OLAP tools, services, ERP, packaged application, and platform alliance partners extend the value of Hyperion's products and services to deliver maximum flexibility and choice to customers. Let us begin our play on Hyperion Solutions with a brief lesson in Greek mythology. Hyperion was a Titan, which is any of a family of giants born of Uranus and Gaea and ruling the earth until overthrown by the Olympian gods. You take a name like that and add it to a company, which is making itself well known in the explosive e-business/business-to-business arena and how can you possibly go wrong? In all seriousness, HYSL has done a nice job of establishing itself in the B2B arena and boasts a rather impressive clientele list, not to mention some potentially lucrative partnerships (see a few of these referenced in the third paragraph). Other than the obvious being in the right place, i.e., B2B, at the right time factor, HYSL looks to have many bullish indications, which have landed this play on our call list. HYSL has been forming what looks to be a very nice wedge as it has consistently traded down to higher-lows and then steadily moved up to tag higher highs. Friday was no exception, as HYSL fought the declining market, reached a new 52-week high and managed to only lose pennies for the session. Another favorable factor is the support backing HYSL. It looks to have some immediate support right around $46. Hyperion's 5-dma, which is currently at $45.50, has also done a nice job of holding throughout February. HYSL has further support at $43 and $40. Looking ahead, the only formidable resistance in the near-term path of Hyperion is the $50 level, which can be a bit of a psychological obstacle when approached with a lack of momentum. Also, HYSL was mentioned recently in Smart Money magazine as value tech play. Value tech, huh? OK, the more good print the better. CRM (customer relationship management) has been the place to be and HYSL is now getting more recognition. HYSL has spent the last couple of weeks building up its arsenal of allies. Recently, HYSL has announced partner agreements and co-development agreements with such notables as Red Hat (RHAT), Purdue University, Regional Economic Research and CAM-I to further development and delivery. HYSL looks to be putting everything in place to make itself known as one of the titans in the B2B world. BUY CALL MAR-45 WQE-CI OI=37 at $ 8.38 SL=6.25 BUY CALL MAR-50*WQE-CJ OI=14 at $ 5.25 SL=3.50 BUY CALL MAY-45 WQE-EI OI=36 at $11.13 SL=8.75 BUY CALL MAY-50 WQE-EJ OI=27 at $ 8.75 SL=6.50 Picked on Jan 30th at $48.88 P/E = 69 Change since picked +0.00 52-week high=$49.25 Analysts Ratings 2-3-5-0-0 52-week low =$ 9.88 Last earnings 01/00 est= 0.20 actual= 0.21 Next earnings 04-24 est= 0.22 versus= 0.08 Average Daily Volume = 598 K http://OptionInvestor.com/charts/charts.asp?symbol=HYSL **** ASPT - Aspect Communications $67.88 (+7.88) Aspect Communications provides customer relationship management solutions worldwide. Their hardware and software enables companies consistent interactions with their customers via the telephone, Web, electronic mail, and fax. Clients include Daimler Chrysler, E*Trade, ICT Group, Bank United, and PacificCare Health Systems. A recent acquisition announcement initially fired up ASPT on February 1st, but it's momentum, momentum, momentum that is fueling this Internet rocket. The acquisition of privately held PakNetX Corp is important because the combined technology will for the first time allow seamless integration of video, voice, conferencing, and Web interactions from a centrally managed software switch, thereby eliminating the traditional PBX. As a result of the $55 mln cash deal, Aspect will take a one-time charge in the 1Q, but this factor obviously did not impact the share price. Since the announcement ASPT has risen upwards of 43%, climbing from the depths of $48 to an impressive new high of $69.94 on Friday. Although it's disappointing to note that volume levels have tapered off; and yet, the stock has stretched into new territory five out of the past six trading sessions! Near-term support on Friday was at $67 and $68, but it's more rooted near the 5-dma ($64.78). Look to this reference point for entries into this HIGH-RISK and potentially VOLATILE momentum play. Keep in mind too that players will eventually want to take some chips off the table. On Friday First Securities came in with a Strong Buy recommendation upgrading ASPT's rating from an Accumulate. Also this week Aspect announced the integration of its Aspect Portal applications with Clarify, Remedy, and Vantive front-office systems. This "out-of-the-box" solution provides a seamless system that can be easily customized to meet a client's need. And closer to home, the company appointed two new VP's "to strengthen and enhance customer support and consulting services". BUY CALL MAR-60 ATQ-CL OI=256 at $12.63 SL=10.00 BUY CALL MAR-65*ATQ-CM OI=139 at $ 9.88 SL= 7.50 BUY CALL MAR-70 ATQ-CN OI= 11 at $ 7.13 SL= 5.25 low OI Picked on Feb 8th at $64.50 P/E = N/A Change since picked +3.38 52-week high=$69.94 Analysts Ratings 1-9-1-0-0 52-week low =$ 6.00 Last earnings 12/99 est=-0.03 actual= 0.01 Next earnings 04-14 est= 0.00 versus=-0.27 Average Daily Volume = 1.05 mln /charts/charts.asp?symbol=ASPT **** BEAS - BEA Systems $108.00 (+18.75)(+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. The only thing BEAS suffered from Friday was a real lack of new buyers. BEAS made it through the broad market decline, virtually unscathed, ending the day down just $0.50. That's a real positive in our book and marks the second time this week the company's stock has held up, with selling going on all around it. Actually BEAS did better this second go-around than it did Wednesday, when traders got up on the wrong side of the bed. Friday BEAS, begrudgingly traded down to $107, before investors bid the price back up. Another check in the plus column for this play shows that since the Jan 31st, BEAS has shot up over $32 and still refuses to give way, when presented with opportunities to head south. This doesn't mean BEAS, couldn't give way to continued outside pressures, but we are very pleased with it's performance so far. BEAS broke through the $90 level and the century mark to make new highs. $110 is the current high and the next target for BEAS to surpass. Earnings for the BEAS are due to come out Feb 22nd and the expectations of solid quarterly results should continue to give this play the push it needs to continue higher. Note that technically, Stochastics, RSI and several other indicators show BEAS to be getting a bit overdone. Not that we couldn't see a retracement, but how many times have you seen a stock travel in over-bought territory for weeks with very little correction? Case in point, the Nasdaq. We aren't throwing the technicals out, but in this kind of market, target shoot you entry points off support and resistance, and set your stops accordingly. For BEAS those points are $108, $106 and $102. The top news of the week for BEAS had to be the comments made by Jim Burkart, co-leader of the Kemper Technology Fund. Burkart stressed the important place that BEAS and similar smaller companies have in their fund. Although they own many of the big names, Burkart said that "bigger is not necessarily better" stating that BEAS was on his list of favorites. BUY CALL MAR-100 BUC-CT OI=1874 at $19.75 SL=15.50 BUY CALL MAR-105*BUC-CA OI= 278 at $17.50 SL=13.63 BUY CALL MAR-110 BUC-CB OI= 73 at $14.75 SL=11.50 SELL PUT FEB-100 BUC-NT OI= 81 at $ 2.06 SL= 3.75 (See risks of selling puts in play legend) Picked on Feb 06th at $89.25 PE = N/A Change since picked +18.75 52-week high=$110.00 Analysts Ratings 10-1-1-0-0 52-week low =$ 3.53 Last earnings 11/99 est= 0.05 actual= 0.06 Next earnings 02-22 est= 0.07 versus=-0.03 Average daily volume = 2.84 mln /charts/charts.asp?symbol=BEAS ***************************************** SOFTWARE - CALLS - CONTINUED IN SECTION 4 ***************************************** ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************************* CALLS CONTINUED IN SECTION FOUR ******************************* SEE DISCLAIMER IN SECTION ONE
The Option Investor Newsletter 2-13-2000 Sunday 4 of 5 ******************** SOFTWARE - CONTINUED ******************** ADIC - Advanced Digital Information Corp $68.00 (+9.63)(+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. Some of the biggest investors in new publicly traded companies are other more seasoned publicly traded companies. Companies such as Intel and MSFT have utilized this strategy of investing in their partners for a long time. But it is not just a game for the "big boys" and that brings us to ADIC. ADIC has a sizable investment in one of the hottest stocks of the past two weeks, Crossroads Systems (NASDAQ:CRDS). Crossroads is a storage router manufacturer and these companies, JNPR and CSCO to name a couple of others, have been flying due to the reality that Internet companies simply can not buy enough new equipment to keep up with the demand for their services. CRDS has risen over 100 points in the past seven trading days to close at $175.25 on Friday. The 2.6 million shares that ADIC owns, have resulted in an astounding paper profit of over $364 million since the October IPO. We have witnessed in previous Call Plays in this section that sometimes it takes the Street a little while to get a clue about the value of these types of underlying assets. When they figure it out the shares of the beneficial owners can really explode. Some of this underlying wealth seems to have been realized in recent trading days. After meandering for awhile during a pullback from new highs, the share price of ADIC has begun to make its next move. What really impresses us is the incredible relative strength in the shares on Friday while most of the rest of the technology world suffered profit taking. The new high established, coupled with pretty decent volume, indicates to us that ADIC could well be on its way to a nice move to the upside. Look for momentum investors to jump on board if the stock can make a move above Friday's newly established all-time high of $71. If ADIC happens to be dragged down due to overall weakness in the early Monday, new positions established at support levels of $65 and perhaps as low as $62 could be profitable. Just remember to get out before the close on Wednesday due to earnings. ADIC is a fast growing company in its own right. Recently they added new Fibre Channel routers to their suite of Open SAN backup Solution packages, making them the first company to build support for direct-to-tape, serverless backup within SAN's. Earnings are coming out on Wednesday and with a strong quarter a possibility, we may get a nice run early next week. We saw a big increase in call option volume towards the end of the week which could be indicative of some bets being placed in anticipation of a solid earnings report. BUY CALL MAR-60 QXG-CL OI=283 at $15.75 SL=12.25 BUY CALL MAR-65*QXG-CM OI=125 at $13.50 SL=10.75 BUY CALL MAR-70 QXG-CN OI= 27 at $11.25 SL= 9.00 Picked on Feb 6th at $58.38 P/E = 86 Change since picked +9.63 52-week high=$71.00 Analysts Ratings 3-3-0-0-0 52-week low =$ 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 = 420 K /charts/charts.asp?symbol=ADIC **** MUSE - Micromuse Inc. $209.50 (+22.38)(+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. The result of having one of the hottest software products on the market for managing the systems of some of the fastest growing companies in America, ISP's and communications companies, has given MUSE a very strong stock price. Helping to drive excitement for the stock is a pending 2-for-1 split with a payable date of February 22nd. Investors are placing their money in the stocks of communications software companies because they feel that this sector is poised for solid growth due to information carriers increasing reliance on software for future growth. Last year MUSE was 21st on Bloomberg's list of the best price performers among 1999's publicly traded stocks and it is off to a good start to make similar lists this year. All this year we have witnessed that some of the best performing stocks are those companies who sell advanced technology products to other technology companies. This symbiosis was recently commented upon by the CEO of Micromuse when he said, "The explosive growth of the Internet, telecom and cable networks are major drivers of our business." MUSE made a small new high almost everyday last week. This strong stair-stepping pattern is encouraging for the possibility of further new highs to come. Despite Friday's selloff, MUSE was able to stay comfortably above the always important $200 price level. If the selling continues, look for support just above that price as a possible entry point for the next move higher. If $200 does not hold, be a little patient and wait for the selling to subside before entering any new positions. The stock could pull all the way back to the breakout area of $190 and still be in a solid short term uptrend. Last week saw another new edition to the ever growing list of users of MUSE's Netcool software product. Genosys Technology Management is a global technology company providing network operations center services, technology hosting and professional services for client's deployed technology assets. This recent addition to the Netcool family is a continuing trend that has generated further buying interest in MUSE's stock. BUY CALL MAR-190 QVM-CR OI= 0 at $38.88 SL=30.38 Wait for OI! BUY CALL MAR-195 QVM-CS OI= 0 at $35.75 SL=27.88 Wait for OI! BUY CALL MAR-200*QVM-CT OI=53 at $28.88 SL=22.50 BUY CALL MAR-210 QVM-CB OI=20 at $24.50 SL=19.13 Picked on Jan 27th at $166.69 P/E = 487 Change since picked +42.81 52-week high=$220.00 Analysts Ratings 5-6-0-0-0 52-week low =$ 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 = 276 K /charts/charts.asp?symbol=MUSE ******* Telecom ******* ANAD - Anadigics $124 (+23.97) Anadigics designs and manufactures radio frequency integrated circuit (RFIC) solutions for growing broadband and wireless communications markets (broadband, cable, fiber optic and PCS). The company's innovative high frequency RFICs enable manufacturers of communications equipment to enhance overall system performance, manufacturing cost, and time to market. By utilizing state-of-the-art manufacturing processes for its RFICs, ANAD achieves the high-volume, and cost-effective products required by leading companies in its targeted high- growth communications markets. ANAD was the first GaAs (Gallium Arsenide) IC manufacturer to receive ISO 9001 certification. With wireless broadband, cable, fiber and the need for hardware to support it growing by leaps and bounds, the market continues to validate this sector as the next great frontier. So how is this important to ANAD? They make the high frequency radio circuitry that makes the transmission possible. How's business? Glad you asked. They announced a 38% earnings surprise on January 28 with the stock trading at about $77. No post earnings depression here. The issue has zoomed ahead its current price of $124 with not even a day of breathing time. That came to an end on Friday and also gave us what may be an entry point. Though it spiked up to $129 during the first five minutes of amateur hour, it immediately spiked back down to its low of the day of $116.75. From there, the rest of Friday's chart is a thing of beauty with a steady ascent all the way back to $124 - this while the rest of the market was headed the other way. Talk about bucking a headwind! With volume as strong as it was at the close, it looked like a continuation of Thursday's closing breakout. ANAD has wobbly support at $122, pretty strong support at $117, and stronger support yet at $110. Target shoot to your comfort level, or let volume fill the issue to carry it convincingly over $125. Since earnings, pullbacks have been limited to only about $5, that may be all the break we get for a good entry. But a correcting technology market (AKA NASDAQ) could make it worse. You'll have to make your own judgement call on this one. Recent price gains and lack of OI make these inherently risky. No we haven't forgotten about the split announced with earnings on January 28. The ratio is 3:2 and is just over two weeks away on February 29, with March 1 as the execution date. With maybe a breather or two, we are looking for the split run to continue through that date, though maybe not at as strong a pace as in the last two weeks. ***Caution - No OI on any strikes listed*** BUY CALL MAR-120 DQA-CD OI= 0 at $17.00 SL=13.25 BUY CALL MAR-125*AUZ-CE OI= 0 at $14.25 SL=11.25 BUY CALL APR-120 DQA-DD OI= 0 at $22.63 SL=17.50 BUY CALL APR-125 AUZ-DE OI= 0 at $20.00 SL=15.50 Picked on Feb 13th at $124.00 P/E = 478 Change since picked +0.00 52-week high=$129.38 Analysts Ratings 3-2-1-0-0 52-week low =$ 13.00 Last earnings 01/00 est= 0.16 actual= 0.22 surprise=38% Next earnings 04-28 est= 0.20 versus= 0.08 Average Daily Volume = 393 K /charts/charts.asp?symbol=ANAD **** PCMS - P-COM Inc $18.75 (-0.31) Their company logo says they are the Leading Supplier of telecom distribution equipment and services for end user access to the World-Wide Network. The company's products are based on common system architecture and are designed to carry various combinations of voice, data and video traffic and to be easily configurable based on the needs of its customers. PCMS contracts out the majority of its manufacturing, and also provides related software and networking support. Most of PCMS's revenues come from outside the United States. If you look at the price of this stock you might wonder why we've included PCMS in our newsletter. PMCS made our list of favorites for several reasons, not the least of which is the potential profit offered in this play. PCMS is an inexpensive stock compared to what we normally put in the newsletter, but don't let that fool you. Early in February PMCS broke through the $16 level which had provided resistance on several different occasions. The company had just reported earnings that were in-line with analysts estimates. The day after reporting earnings, no less than four different brokers either reiterated or upped their rating on PCMS. Analysts at CIBC raised their 12-month price target from $17 to $35. What are the analysts seeing in P-Com? The company's fixed wireless technologies are gaining increased prominence as a high-speed alternative to laying cable. Basically the stock is viewed as broadband at a discount and has certainly attacked investors attention. Tuesday PCMS hit a new high at $19.69 and retraced to form an intraday base at $17.50. Friday PCMS ended the day with a gain of $0.75, which isn't bad considering the profit-taking seen at the Nasdaq. Technically PCMS has formed a beautiful channel since late December and almost double in price since the first of the year. How many of the larger cap companies have doubled in price since the first of the year? Ok, maybe a few but you get the idea. Look for bounces of support at $18.25 and $17.50 should we see a retracement before PCMS moves higher. The most recent news on PCMS is the numerous upgrades seen late in January, but they seem to have drawn investor attention back to a company that many ignored in the past. BUY CALL MAR-15 PQP-CC OI= 628 at $5.00 SL=3.25 BUY CALL MAR-20*PQP-CD OI= 589 at $2.13 SL=1.00 BUY CALL MAY-15 PQP-EC OI=1592 at $6.00 SL=4.25 BUY CALL MAY-20 PQP-ED OI= 192 at $4.00 SL=2.50 Picked on Feb 13th at $18.75 PE = N/A Change since picked +0.00 52-week high=$19.69 Analysts Ratings 3-4-3-0-0 52-week low =$ 3.69 Last earnings 01/00 est=-0.10 actual=-0.10 Next earnings 04-27 est=-0.06 versus=-0.27 Average daily volume = 1.98 mln /charts/charts.asp?symbol=PCMS **** BCE - BCE Inc. $118.03 (-0.97)(+20.31) 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. Before the we get started telling you about the locked up value soon to be unlocked by virtue of BCE selling its stake in Nortel (NT), we would be remiss if we didn't also note that ugly Friday's slide may not be over. If that's true, don't rush out first thing Monday to take a position looking for the immediate payoff. That said, 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 $78 bln. NT has a market cap of about $167 bln. With a 39% interest in NT worth about $65 bln., the market is valuing the remainder of BCE at only about $13 bln. What's troubling is that $13 bln in value hasn't changed since last week. Investors seem only willing to bid BCE up in lockstep with NT. If the market thought this would be truly valuable to BCE shareholders after the spin-off, they would be tripping over themselves to buy BCE now. They are not. The big issue seems to be on how the distribution will be treated tax-wise - it could be an expensive capital gain, something most shareholders don't want. If BCE can solve that issue, the BCE value net of NT could then move up. Until then, it will trade in lockstep with NT, maintaining its' $13 bln net value. Thus, we need to keep an eye on NT as a guide. (Nothing to worry about here. In terms of market share, they are smoking their competition, and had a great earnings report.) There really isn't any news until we hear of a tax ruling on the distribution. Thus we'll need to watch the technicals closely. While RSI, MACD, and momentum are still high, weekly volume fell back noticeably this week causing these indicators to show signs of rolling over. Daily volume is still above the ADV, but the trend has reversed, which tells us that buying pressure is easing. Target shoot if you like at support levels of $117, $115 and $113.50 (also the 10-dma), but we suggest you consider holding off until the Nasdaq market shakes off the cold and causes the technicals to turn positive again. As always, confirm that the market direction is in your favor. BUY CALL MAR-110 BCE-CB OI=706 at $15.88 SL=12.50 BUY CALL MAR-115*BCE-CC OI=441 at $10.00 SL= 7.50 BUY CALL MAR-120 BCE-CD OI=348 at $ 7.13 SL= 5.25 Picked on Feb 02nd at $109.63 P/E = 21 Change since picked +8.40 52-week high=$124.56 Analysts Ratings 4-4-0-1-0 52-week low =$ 38.31 Last earnings 01/00 est= N/A actual= N/A Next earnings 04-00 est= N/A versus= N/A Average Daily Volume = 889 K /charts/charts.asp?symbol=BCE ************* Miscellaneous ************* LHSP - Lernout & Hauspie Speech Products $82.00 (+21.38) On the cutting edge of interfacing man to his machines, LHSP is the world's leading provider of speech and language technology products and services. Included in the company's broad array of products and services are the following; speech recognition for more than 15 languages (another 20 are on the way), digital speech and music compression, language translation, text-to-speech, Web-based translations, and dictation of continuous speech. LHSP is collaborating with Microsoft (who owns 7% of LHSP) on its own speech recognition interface. Forget E.F. Hutton! When LHSP speaks, investors listen. Continuing to drive technology toward the nirvana of reliable voice communication to computers (large and small), LHSP made a big step this week. The company unveiled a handheld device with the capability to handle continuous speech-to-text translation (see news below). Sluggish and unloved for most of last year, LHSP started catching investor's ears in December. Making almost no progress last month, February has been a different story. Between the positive press, new products and strong revenues (LHSP beat estimates by 2 cents on Wednesday), you'd think the stock would be skyrocketing. You'd be right, as the price has jumped from under $50 to over $80 in the last week and a half. The price was juiced on the 7th, owing to the successful demonstration of the product described below. The prototype was based on the Linux operating system; do you think that has anything to do with investor excitement for LHSP? Oh, and just to make sure the package was complete, the company announced a 2-for-1 split along with earnings. The date is not set, and a shareholder vote will be required, but this company is definitely on the move. Remember that nothing moves in a straight line, and with the huge run-up this week, LHSP may be due to take a breather. If it does, we may be presented with some attractive entry points. The 5-dma ($78) has provided support this week, and then we have stronger support at $75 and $71. Look for a pullback to one of these support levels to create a good entry point, and then ride the wave into the future. At Demo 2000 on Monday, LHSP showcased its ability to move speech and language technologies beyond the desktop. The company demonstrated an industry first; its prototype handheld device (with a large vocabulary continuous speech dictation engine) has the ability to easily send and receive e-mail, surf the Web, and conduct e-commerce transactions. No big deal until you realize everything can be done by voice, rather than scribbling or typing on a tiny keyboard. BUY CALL MAR-80 XQL-CP OI=283 at $ 9.00 SL= 6.75 BUY CALL MAR-85*XQL-CQ OI= 34 at $ 6.88 SL= 5.00 BUY CALL MAR-90 XQL-CR OI=105 at $ 5.38 SL= 3.50 BUY CALL JUN-85 XQL-FQ OI= 45 at $13.25 SL=10.50 BUY CALL JUN-90 XQL-FR OI=323 at $11.50 SL= 9.25 Picked on Feb 12th at $82.00 P/E = 113 Change since picked +0.00 52-week high=$84.75 Analysts Ratings 1-1-1-0-0 52-week low =$25.75 Last earnings 02/00 est= 0.20 actual= 0.22 Next earnings 05-10 est= 0.18 versus= 0.12 Average Daily Volume = 747 K /charts/charts.asp?symbol=LHSP **** MLNM - Millennium Pharmaceuticals $212.50 (-5.50) Millennium Pharmaceuticals is a leading drug discovery and development company. They incorporate large-scale genetics, genomics, high throughput screening and informatics in an integrated science and technology platform. MLNM develops treatments and diagnostics for such conditions as obesity, type II diabetes, asthma and cancer. They have a number of research and development alliances with Hoffmann-La Roche, Eli Lilly and Bayer. MLNM also licenses technology to Monsanto for use in plant agriculture and human health care. Our play in MLNM proved a couple of times this week the theory of "what's good for the goose, is be good for the gander". Earlier in the week MLNM broke through the $200 level on news of the discovery of a family of proteins that eventually could be beneficial in the treatment of disorders such as anxiety, depression, ischemia and epilepsy. Thursday MLNM joined in making a new high on the news that CuraGen(CRGN) had made an important scientific breakthrough, in completing the first protein-interaction map for an entire model organism--yeast. MLNM gained about 5% Thursday proving that what was good for the goose,(CRGN), wasn't bad for the gander. Well on Thursday after the close, HGSI, one of our recent favorites reported fourth quarter earnings. They missed the street estimates by 10%, reporting a bigger loss than had been expected. Friday morning the goose theory, kicked in again. This time however, what was bad for the goose, proved to be terrible for the gander. HGSI lost about 4.0% Friday, while MLNM fell over 7.0%. Believe it or not, we may be able to profit quite nicely from Friday's sell-off. MLNM fell through the $220 level of support all the way the way to a low of $207.63. MLNM has strong support at $200 which combined with Friday's free fall may provide us with a great entry point for our play. We will give MLNM that $200 support level, but not much after that with abandoning ship. MLNM did bounce off $210 late in the day, but we would wait to see the mood of traders on Monday, after a weekend of licking their wounds before jumping into this play. Be patient and you may be rewarded. The only other news affecting the price of MLNM this week was the $100 million IPO filed by Lexicon Genetics. MLNM has established collaborative agreements with Lexicon and others for research and again any funds raised though an IPO could be beneficial for all concerned. BUY CALL MAR-200*QMR-CT OI=35 at $35.75 SL=27.95 BUY CALL MAR-210 QMR-CB OI=91 at $30.63 SL=23.95 BUY CALL MAR-220 QMR-CD OI=13 at $25.88 SL=20.25 low OI Picked on Feb 10th at $232.31 PE = N/A Change since picked -19.81 52-week high=$237.25 Analysts Ratings 3-3-2-0-0 52-week low =$ 28.00 Last earnings 01/00 est= 0.02 actual= 0.05 Next earnings 04-25 est=-0.35 versus= 0.05 Average daily volume = 680 K /charts/charts.asp?symbol=MLNM ********************** LEAPS by Mark Phillips ********************** What a ride! The dichotomy between the major indices provides some interesting opportunities. As the DOW rolled downhill, the VIX marched steadily upwards, closing the week at 26.92. The utility of this indicator is uncanny, repeatedly calling out the market tops near 20 and the bottoms near 30. Speaking of bottoms, we hope this is it for LU. We are concerned with our LU play and are putting it on probation this week. As if sitting right on support wasn't bad enough, it is now starting to look like the problems at the company may take more than 1-2 quarters to correct. Remember, we look to buy LEAPS with a good likelihood of growth over the next several months; a company with problems doesn't fit that model and a break of $50 will be grounds for expulsion. Keep your eye out for that next entry point, especially if the VIX can get into the low 30s. Current Plays SYMBOL SINCE LEAPS SYMBOL PICKED CURRENT RETURN EMC 11/07/99 JAN-2001 $ 80 ZOH-AP $15.38 $45.75 197.46% JAN-2002 $ 90 WUE-AR $19.00 $49.75 161.84% GPS 11/07/99 JAN-2001 $ 40 ZGS-AH $ 5.75 $15.13 163.13% JAN-2002 $ 45 WGS-AI $ 7.88 $17.13 117.39% IBM 11/07/99 JAN-2001 $100 ZIB-AT $13.63 $28.63 110.05% JAN-2002 $110 WIB-AB $16.50 $32.38 96.24% LU 11/14/99 JAN-2001 $ 80 ZEU-AP $12.88 $ 4.00 -68.94% JAN-2002 $ 90 WEU-AR $16.13 $ 7.38 -54.25% CSCO 11/14/99 JAN-2001 $ 80 ZCY-AP $19.13 $59.38 210.40% JAN-2002 $ 90 WIV-AR $22.00 $60.25 173.87% GE 11/21/99 JAN-2001 $150 ZGR-AU $16.25 $15.38 - 5.35% JAN-2002 $150 WGE-AU $25.50 $25.50 0.00% NT 11/28/99 JAN-2001 $ 75 ZOO-AO $22.25 $54.25 143.82% JAN-2002 $ 75 WNT-AO $30.25 $63.25 109.09% VOD 12/05/99 JAN-2001 $ 50 ZAT-AJ $10.75 $14.75 37.21% JAN-2002 $ 50 WHV-AJ $15.00 $19.88 32.53% TXN 12/12/99 JAN-2001 $110 ZTN-AB $22.25 $43.63 96.09% JAN-2002 $120 WGZ-AD $28.50 $49.25 72.81% NXTL 12/19/99 JAN-2001 $ 90 ZFU-AR $23.50 $48.38 105.87% JAN-2002 $100 WFU-AT $27.25 $53.63 96.81% SUNW 12/19/99 JAN-2001 $ 80 ZJX-AP $17.63 $29.00 64.49% JAN-2002 $ 90 WJX-AR $22.00 $33.75 53.41% AOL 12/23/99 JAN-2001 $ 90 ZKS-AR $20.13 $ 5.00 -75.16% JAN-2002 $100 WAN-AT $25.63 $ 9.50 -62.93% LU 01/09/00 JAN-2001 $ 50 ZEU-AJ $13.63 $13.13 - 3.69% MOT 01/09/00 JAN-2001 $125 ZMA-AE $31.13 $46.13 48.19% JAN-2002 $125 WMA-AE $41.50 $57.75 39.16% CY 01/16/00 JAN-2001 $ 40 ZSY-AH $ 9.13 $11.50 25.96% JAN-2002 $ 40 WSY-AH $12.63 $16.00 26.68% ERICY 01/30/00 JAN-2001 $ 65 ZYD-AM $19.75 $35.13 77.87% JAN-2002 $ 65 WRY-AM $27.00 $42.50 57.41% MSFT 01/30/00 JAN-2001 $100 ZMF-AT $17.63 $19.13 8.51% JAN-2002 $110 WMF-AB $21.63 $23.00 6.38% ICIX 02/06/00 JAN-2001 $ 55 ZLJ-AK $12.00 $14.88 24.00% JAN-2002 $ 55 WLJ-AK $18.00 $20.38 13.22% 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 Q - Qwest Communications $46.25 Receiving an encouraging upgrade this week, Q looks to be getting over the hump of concern shown over its pending merger with Baby Bell US West. To wit, Eric Strumminger of PaineWebber said Wednesday he is "no longer concerned about Qwest's ability to parallel process the US West merger and maintain its growth rate/competitive positioning in the Internet." Q continues to build out their broadband capabilities and will likely be a formidable player in the market long-term. Investors seem to be paying attention as Q moves out to new highs. Based on the pattern of higher lows since the first of the month, Q looks to have mild support near $45. Much stronger support sits at $43. A retreat to either of these levels followed by a bounce would make the best entry. BUY LEAP JAN-2001 $50.00 ZWK-AJ at $ 5.88 BUY LEAP JAN-2002 $50.00 WWH-AJ at $10.88 /charts.asp?symbol=Q **** CS - Cabletron Systems $39.00 Clearly coming back to life after a couple dark years, CS has been moving up nicely over the past 3 months. To underscore that the recovery is for real, the company announced Friday that they would be splitting CS into 4 divisions, which will be spun off to shareholders within the year. Following the announcement, Goldman Sachs upgraded the company to Market Outperform and shares closed at their highest level since 1997. The move to break up the company should unlock more of the shareholder value and several analysts value the four pieces somewhere north of $50 per share. Strong support at $28.50 would provide a gift of an entry point, but is unlikely. More realistically, look for a pullback to $34-35 to fill the gap from Friday's strong move. BUY LEAP JAN-2001 $30.00 ZLJ-AK at $14.25 BUY LEAP JAN-2002 $30.00 WLJ-AK at $18.25 /charts.asp?symbol=CS Drops GTW $55.88 A victim of the margin pressures that are affecting all of the box-makers, GTW continues to move lower. Although the company is solid, investors seem to be waking up to the fact that paper-thin profit margins are not conducive to a continued upward move in price, unless the company is also growing market share. It is not enough to pick LEAPS on a stock that is at a low - we need good growth prospects. Right now GTW and the rest of the box-makers are not very attractive and we will move on to other plays until the outlook improves. ***************** PUTS, PUTS, PUTS ***************** Put plays can be very profitable but have a larger risk than call plays. When a stock is falling the entire investment community (except the shorts) is hoping it will reverse and start back up. The company management is also doing everything they can to shore up their stock price. The company issues press releases, brokers talk it up, analysts try to put a positive spin on everything. Then of course there is the death knell, the "buy recommendation" simply because the price has dropped to some level that analysts feel attractive again. Buyers who like the stock wait until it appears a bottom has been reached and then jump on it in a feeding frenzy. They may already have a large position and are averaging down. Many factors can stop a free falling stock in mid drop. **** PGR - The Progressive Corporation $54.00 (-6.25)(-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. Are there any buyers out there? It certainly does not seem like anybody wants to step up to the plate and try and pick a bottom on this down trending stock. The company has succumbed to events outside of its control. First of all PGR reported terribly disappointing earnings back in January due to huge losses stemming from automobile damage claims as the result of Hurricane Irene. Operating Income was $0.06 vs. $1.38 a year ago. The losses could not come at a worse time when cash would be very beneficial to defend against a rising interest rate environment. The Fed wants to slow down the economy. One of the first things to slow down when interest rates rise is the purchase of big ticket items such as automobiles. Fewer purchases of higher priced cars means smaller premiums for Progressive. It is a simple story. Another factor possibly affecting the share price of PGR is the markets penchant for pounding losers and chasing after winners. As long as this trend continues, PGR could possibly keep going lower. Strangely, Lehman Brothers initiated coverage two weeks ago with a Neutral rating, hardly a ringing endorsement. You could not ask for a better looking technical trend than the downsloping chart of PGR. As we suggested last week, buying puts on small rallies has proven to be very profitable. We see no reason why this can not continue. That said, look to keep adding positions as long as PGR does not trade above any previous day's high. BUY PUT MAR-65 PGR-OM OI= 12 at $10.00 SL=7.50 low OI BUY PUT MAR-60*PGR-OL OI=169 at $ 7.38 SL=5.25 BUY PUT MAR-55 PGR-OK OI= 0 at $ 4.13 SL=2.50 Wait for OI! Average Daily Volume = 395 K /charts/charts.asp?symbol=PGR **** GD - General Dynamics $41.44 (-4.13) General Dynamics, headquartered in Falls Church, Virginia, employs approximately 44,000 people worldwide and has annualized sales of about $10 billion. The company has leading market positions in shipbuilding and marine systems, amphibious and land combat systems, information systems, and business aviation. GD still remains under a dark cloud. With another down day and nothing positive in the forecast it doesn't look good for GD. Investors have turned a cold shoulder to the whole defense industry. Even though some companies have maintained earnings (like GD) the few key players have not and are pushing down the entire sector. The big sector players are all suffering from the same problems. Rising research-and-development costs, shrinking federal defense budgets and difficulty digesting the mergers in the industry does not give investors cause to be optimistic. As we've mentioned before, we see that indicated in GD's volume day by day. Support is holding good at $41.50 as GD really has just dipped in and out if that level for the last couple of days. However Friday's close was under that level so on Monday, depending on market conditions, we could be past that support level and on our way down. We might hold up again at $40 so watch to see if we get some support there. Any bounces off the rebounds would be good entry points. GD has had no major news this week. BUY PUT MAR-45*GD-0I OI=18 at $4.63 SL=2.50 BUY PUT MAR-40 GD-OH OI= 0 at $1.94 SL=0.88 Wait for OI! Average Daily Volume = 1.19 mln /charts/charts.asp?symbol=GD **** CAT - Caterpillar Inc. $36.00 (-5.81) Headquartered in Peoria, Ill., Caterpillar is the world's largest manufacturer of construction and mining equipment, diesel and natural gas engines and industrial gas turbines. As one of the Fortune 500, Caterpillar and its dealers sell products in nearly 200 countries and sponsor events that promote the company's growth-oriented, high-tech strategy. Investors have the CAT by the tail and no matter how hard it tries to dig its claws in, it is getting dragged across the floor. CAT lost over two points in Friday's session, moving down to spend a taking the time to stretch out for a bit of a "cat nap" across the $35 level. CAT did make an unimpressive late day attempt at move up and made it up to an even $36 to end the week. Volume was over three times the daily average on Friday, a solid bearish indication letting us know there are plenty of investors looking to leave their shares of CAT by the roadside. Though CAT did find support at the $35 level, we don't believe the selling is over yet. Watch for the negative momentum to push CAT through $35. These brief intraday rallies may serve well for target shooting (we won't even attempt a CAT play on words with this one) your way into a new entry point. CAT looks to have a bit of resistance to conquer at each dollar level though the more formidable resistance looks to be somewhere in the neighborhood of $41. On Friday, Caterpillar CEO, Glen Barton, announced that CAT had not only changed the date but also the location of their upcoming 2000 annual shareholders meeting. The new date is April 12th and the location is the company's headquarters location, Chicago, IL. Barton went on to explain that the meeting format changes had been made because CAT was looking to be more cost effective while maintaining effective shareholder communications. Let us translate...We are hurting folks and we are looking to cut any corner that we can to ease the pain. Note: There were no animals hurt in any way in the writing of this play. BUY PUT MAR-40*CAT-OH OI=773 at $5.00 SL=3.25 BUY PUT MAR-35 CAT-OG OI= 0 at $1.88 SL=0.75 Fri.'s vol=283 Average Daily Volume = 1.98 mln /charts/charts.asp?symbol=CAT **** KMG - Kerr-McGee Corp. $48.13 (-5.75) Kerr-McGee Corporation is an Oklahoma City-based company engaged in two worldwide businesses. One is oil and gas exploration and the other is production and marketing of titanium dioxide pigment. The company purchased Oryx Energy in 1999, making it one of the top US non-integrated oil and gas companies. Though KMG managed to slide through Friday's down market and come up with a small gain, we were not at all impressed and more than happy to keep a spot open for this oil and gas exploration company. KMG was the recipient of an upgrade from Goldman Sachs on Friday. Goldman Sachs raised KMG from a Market Outperform to a Trading Buy (don't you just love these ratings they come up with?). Investors seemed to wrestle around with the news, trading KMG across $48.50 for the majority of the session before finally deciding that they weren't buying the upgrade and weren't buying the stock; trading or otherwise. It seems as though investors are a little skittish about the idea of making any kind of commitment to an oil exploration company at this point. As we mentioned last week when we initiated this play, KMG is suffering due to fears that OPEC may have to alleviate some of the building oil price pressures and "dip" into reserves to loosen the supply. Who would be hurt the most by the move? The companies that have benefited the most from the surging oil prices, i.e., oil exploration companies such as KMG. KMG did manage to dig up some support at $48 and $47.75 on Friday, and we are looking for a drop below these levels to confirm continuing negative momentum. KMG looks to have resistance overhead at $48.50, which is backed with further resistance between $49 and $50. Confirm direction before trying to slip into this one. BUY PUT MAR-50*KMG-OJ OI=135 at $4.00 SL=2.50 BUY PUT MAR-45 KMG-OI OI= 62 at $2.00 SL=1.00 Average Daily Volume = 699 K /charts/charts.asp?symbol=KMG **** VERT - VerticalNet Inc. $213.00 (-13.00)(-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. Once a gift, now a burden. When we initiated coverage on VERT, we noted that we were looking for VERT to fill the gap which was formed as a result of a very good day for VERT. It was on this day that Microsoft (MSFT) announced that it would be investing $100 million in VERT for a 2% stake. If you followed Friday's market at all, you probably know that Microsoft was one of the leaders in Friday's tech market decline. Obviously, VERT felt the pressure on its own not to mention the pressure it must have felt as a result of the newly formed ties with the software giant, MSFT. The above referenced gap, which could take VERT back to $200, continues to narrow. Should the rate fears continue to plague the market, particularly the tech stocks, VERT could finish the move down to $200. Dare we hope for a little extra? One point to note was the fact that the volume backing Friday's nine and a half point drop, was light, about half of the daily average. We would certainly like to see a pickup in this number on the down days to confirm negative investor sentiment toward VERT. Then again, we still were the beneficiaries of over a nine-point drop, so we won't complain too loudly. VERT looks to have some resistance at $215 and $225, so watch for these levels to hold VERT back on any up days. Should these levels hold, they could serve as potential entry points for new plays. Should VERT continue right on downhill, new entries are still feasible, but be sure to keep your stops tight, particularly as we approach our $200 goal. BUY PUT MAR-220 ERW-OD OI= 38 at $31.38 SL=24.50 BUY PUT MAR-210*ERW-OB OI= 49 at $24.00 SL=18.75 BUY PUT MAR-200 ERW-OT OI=139 at $20.75 SL=16.25 Average Daily Volume = 1.47 mln /charts/charts.asp?symbol=VERT **** PVN - Providian Financial Corp. $65.38 (-12.94)(-5.13) Providian is a provider of lending and deposit products to customers nationwide and also offers credit cards in the United Kingdom. Providian serves a broad market with loan products including credit cards, home equity loans, secured cards and membership services. With a commitment to 100% customer satisfaction, Providian's mission is to help its customers build or rebuild, protect and responsibly use credit by providing a quality borrowing experience that leads to active and lasting customer relationships (code for "C" grade consumer credit). Providian has $23 billion in assets under management and over 12 million customers. While rumors of a Federal lawsuit against PVN have so far remained unconfirmed by either side, the writing was on the wall as early as seven months ago. Forbes Magazine then noted in a published article that there were already four lawsuits filed in San Francisco that accuse Providian of charging consumers for credit products and services they didn't want, transferring balances from other credit cards without customer approval and imposing excessive late fees. Ok, fine. But the real basis for the play has become technical. As we noted in Thursday's update, PVN has violated every moving average ever invented by technicians. PVN had been moving down at such a rapid clip that despite a $1 gain on Friday, PVN still could not get over its 3- dma, let alone its 10, 50, and 200-dma. We also noted that a good entry would be on a bounce south from $65 to $67. Just our luck! Around 11:00 ET on Friday, PVN topped out at $66.75 before moving down for the rest of the day. We suggest you consider the same strategy again. However, this time we want to keep a closer eye on the volume since it tapered back on Friday. That may be a signal that sellers are dwindling, which could have PVN moving back up from here on any positive news. Then again, it may have just been a slow Friday. No matter, we need to watch $67 from here. A move back over $67 with any volume (amateur hour doesn't count) would probably be our cue that the play is over. A bounce south of $67 would make a good entry and set PVN up for a test of $60. Just watch the market for overall direction before making the play. BUY PUT MAR-75 PVN-OO OI= 447 at $11.88 SL=9.50 BUY PUT MAR-70*PVN-ON OI=1244 at $ 8.38 SL=6.50 BUY PUT MAR-65 PVN-OM OI= 82 at $ 5.50 SL=3.75 Average Daily Volume = 1.07 mln /charts/charts.asp?symbol=PVN **** MMM - Minnesota Mining and Manufacturing $82.94 (-6.13) 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. Go, baby, go! MMM was off to the races this week - running the wrong direction, but who cares when you are betting against them? Weighing heavily on the shares this week was the continued divergence between the DOW and the NASDAQ. As we've mentioned before, MMM will have a hard time heading up as long as the DOW is headed lower. Don't look now, but we are rapidly approaching the $80-81 support level, and volume is remaining strong (50% over the ADV on Friday). With all the other moving averages left in the dust, the 5-dma ($86.38) is providing excellent resistance as MMM continues its descent. New entries can be considered as MMM rolls over near the 5-dma, but tighten up your stops as we approach support. The fundamental picture remains bleak also as cyclicals continue suffer from rate fears. That is the story most economists are selling, but you also have to take into account that no one wants slow growth stocks like MMM. The money is leaving and heading over to the tech sector. Until this phenomenon changes, the Nasdaq is the place to be. BUY PUT MAR-90 MMM-OR OI=710 at $8.88 SL=6.75 BUY PUT MAR-85*MMM-OQ OI=105 at $5.38 SL=3.50 Average Daily Volume = 1.32 mln /charts/charts.asp?symbol=MMM **** KRB - MBNA Corporation $20.81 (-2.38) MBNA Corporation, a bank holding company and parent of MBNA America, N.A., a national bank, has $72.3 billion in managed loans. MBNA, the largest independent credit card lender in the world, also provides retail deposit, consumer loan, and insurance products. KRB was able to fight off the Y2K scare, but they've got other problems to face. Since mid-January they have been on a steady decline. Investors are not putting their money or trust with KRB either as we are seeing above average volume on the point drops. The interest rate concerns have investors leaving in droves. With a bigger problem occurring on Friday, that is breaking the old support level that has been in place since October of last year. That doesn't go over too well with technicians. If we pass this level, who know how low we may go. Since KRB is shadowing the Dow, Monday will be a crucial day for KRB. More weakness will spill over to KRB and send it heading down. Next support is at $16-$17. An aggressive entry would be any rebounds that KRB tries to make above support. A more conservative entry would be to wait and see if the $20 level is broken and then enter on any rebounds after that. The beauty of this play is the low premiums. BUY PUT MAR-25 KRB-OE OI=822 at $4.38 SL=2.75 BUY PUT MAR-20*KRB-OD OI=291 at $1.25 SL=0.00 Average Daily Volume = 2.46 mln /charts/charts.asp?symbol=KRB **** JNJ - Johnson & Johnson $77.44 (-4.69) Johnson & Johnson is one of the world's largest and diversified makers of healthcare products. JNJ has three distinct business segments serving the consumer, professional, and pharmaceutical markets. As a consumer you're probably most familiar with their over-the-counter brands like Tylenol, Band-Aids, and "no tears" baby shampoo. But Johnson & Johnson reaches beyond that realm and expands all aspects of its product lines through acquisitions. They are truly a healthcare giant. JNJ has suffered an intense sell-off this week as its sector struggles to keep its head above water. As more time passes, it seems the high-flying techs are winning over even the most prudent of investors. The furious flee from such stand-up companies like JNJ is daunting, but as traders we can play current either way. For the past three sessions volume has been heavy on the descent at almost double the ADV. This bearish sign puts more odds in our favor for a successful put play. Wednesday marked JNJ's fall under the 10-dma ($82.06) although better confirmation came on Thursday and Friday. The stock not only slipped under the 5-dma ($79.79), but more importantly, closed under $78, which appeared to be emerging as a potential near-term support level. Looking at a 52-week calendar, JNJ is in the gutter so to speak. The stock hasn't seen price levels this low since 1998. In summary, the broad negative pressure within its sector should continue to drive JNJ even lower, but it'd be wise to use trailing stops to protect against money coming in off the sidelines. After hours on Friday, JNJ announced it completed its $85 mln merger with Innovasive Devices (IDEA), a manufacturer of surgical devices and instrumentation. Innovasive shareholders approved the deal and will receive 0.948 shares of JNJ common stock for every share of Innovasive stock they own. JNJ also reported that over the next 90 days it will buy back the number of shares used in the merger. In other news JNJ sold off 283K shares of Amylin Pharmaceuticals, a drug developing company, between Feb 8th and 10th cutting its stake in the company to 4.99%. BUY PUT MAR-85 JNJ-OQ OI= 698 at $9.38 SL=7.00 BUY PUT MAR-80*JNJ-OP OI=1320 at $5.75 SL=4.00 BUY PUT MAR-75 JNJ-OO OI=1003 at $3.00 SL=1.50 Average Daily Volume = 3.12 mln /charts/charts.asp?symbol=JNJ ************************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 2-13-2000 Sunday 5 of 5 ************* COVERED CALLS ************* Covered-Calls: Strategies and Techniques... One of our readers, whose primary interest is stock ownership, requested an explanation regarding the correct approach for writing calls on long-term portfolio positions. The situation: I have 900 shares of CSCO and have been pondering writing covered calls against my long position for some time. I have been hesitant to do it because I do not want to part with the stock as it has given excellent returns. I wanted to see if you could provide a method/strategy for writing covered calls against this position. One trader's analysis: Most investors use covered writing to increase their income over outright stock ownership; selling deep out-of-the-money (OTM) positions (time premium) and hoping they expire worthless. In most cases, deep OTM calls have the lowest risk of assignment though they provide little downside protection. The problem in the case of CSCO, is deciding which strike to sell. The key is to identify a balance between (sold) premium and upside potential. Obviously, you want to select a strike price that provides a reasonable return yet is far enough out-of-the-money that it will most likely expire worthless. Since CSCO just announced a split and beat the consensus earnings estimates to boot, this task could be difficult. If an investor does not want to lose his stock, he should always be prepared to buy back the written calls should the stock price rise above the sold strike. This means that to even consider writing calls on a stock you do not want to lose, you must have the resources to repurchase the calls should the need arise. In volatile stocks, which can run up quite quickly in a short time, the capital expenditure could become quite large, forcing you to let the stock be called away. If you decide to write calls on CSCO and the strike you sold moves in-the-money (ITM), you would buy back the calls when their value nears parity. You need not worry about early assignment as long as there is some time premium left in the call. However, once the call trades at parity, or worse, at a discount, the probability of early assignment rises significantly. This occurs when the written calls become deep ITM or are near expiration. At that point, you would buy back the written calls to close the position. You could then roll forward by selling longer term OTM calls, raising your profit potential. Of course, that also increases your exposure to loss if a technical (trend) reversal should occur. Some investors will write at-the-money (ATM) calls, which have the most time value, or the nearest OTM calls, depending on their risk tolerance. Essentially, they are trading options against their stock position, selling time and buying-back parity. They try to time short-term tops, writing inflated calls on market strength, and buying them back a few days (weeks) later on weakness. They usually don't wait for the written calls to move to parity, a momentary deflation in the call option's premium is all that's needed. Obviously, this approach is much more aggressive and time consuming. The advantage is that you are selling into strength, when the premiums are most inflated, by call buyers. The primary disadvantage is readily apparent: If the stock moves up too far and too fast without a pullback, you could lose it to early assignment. Using regression channels (read Jim's Options 101 - Entry Points) and short term oscillators may be helpful in picking entry points. As they say, nothing goes up in a straight line, but CSCO does have a history of making strong runs (and don't forget Murphy's Law). Lawrence McMillan discusses the covered write strategy at length in chapter II of his book, "Options: As a Strategic Investment." The book should be available at your local library and is well worth reading. Next week (as previously promised): A Review Of Candlesticks.. SUMMARY OF PREVIOUS PICKS NOTE: Using Margin doubles the listed Monthly Return! Stock Price Last Call Strike Price Profit Monthly Symbol Picked Price Month Sold Picked /Loss Return CYOE 5.50 7.81 FEB 5.00 1.44 *$ 0.94 21.3% TERA 4.41 7.50 FEB 5.00 0.50 *$ 1.09 20.2% WAVX 13.94 19.06 FEB 12.50 2.00 *$ 0.56 10.2% MCRE 11.88 13.38 FEB 10.00 2.50 *$ 0.62 9.6% WDC 5.50 4.94 FEB 5.00 1.13 $ 0.57 9.4% GMGC 6.84 9.88 FEB 5.00 2.38 *$ 0.54 8.8% GMGC 7.50 9.88 FEB 5.00 2.88 *$ 0.38 7.6% MESG 17.31 18.00 FEB 15.00 3.25 *$ 0.94 7.3% ESPI 9.22 10.56 FEB 7.50 2.19 *$ 0.47 7.3% CCCG 16.88 26.38 FEB 15.00 2.56 *$ 0.68 6.9% CCUR 18.38 17.00 FEB 15.00 4.38 *$ 1.00 6.6% KELL 8.81 7.44 FEB 7.50 1.69 $ 0.32 6.5% ESPI 11.06 10.56 FEB 7.50 3.88 *$ 0.32 6.5% JDAS 22.69 21.56 FEB 20.00 3.25 *$ 0.56 6.3% VLNC 34.56 34.63 FEB 25.00 10.25 *$ 0.69 6.2% BRKT 25.75 35.75 FEB 22.50 4.13 *$ 0.88 5.9% ASFT 21.50 20.63 FEB 15.00 7.38 *$ 0.88 5.7% VTS 17.75 18.38 FEB 15.00 3.50 *$ 0.75 5.7% PRST 19.63 24.81 FEB 17.50 2.75 *$ 0.62 5.3% NZRO 35.00 29.38 FEB 25.00 10.88 *$ 0.88 5.3% VOYN 13.06 11.88 FEB 10.00 3.50 *$ 0.44 5.0% HRC 5.81 5.31 FEB 5.00 1.13 *$ 0.32 5.0% EAII 14.25 13.00 FEB 10.00 4.75 *$ 0.50 4.9% MUEI 12.75 10.56 FEB 10.00 3.25 *$ 0.50 4.9% CORL 22.13 17.50 FEB 15.00 7.75 *$ 0.62 4.7% DBCC 9.19 11.13 FEB 7.50 2.00 *$ 0.31 4.7% MSGI 19.13 24.88 FEB 15.00 4.75 *$ 0.62 4.7% PCMS 10.06 18.75 FEB 7.50 3.00 *$ 0.44 4.5% HMK 9.88 8.31 FEB 7.50 2.81 *$ 0.43 4.4% XICO 22.56 19.25 FEB 17.50 5.75 *$ 0.69 3.8% IFCI 10.13 16.25 FEB 7.50 3.00 *$ 0.37 3.8% ERTH 6.03 4.53 FEB 5.00 1.38 $ -0.12 0.0% FSII 17.81 18.88 MAR 15.00 4.25 *$ 1.44 7.7% UBET 6.25 5.81 MAR 5.00 1.63 *$ 0.38 6.0% MCRE 15.50 13.38 MAR 12.50 3.88 *$ 0.88 5.5% SIII 15.00 15.94 MAR 12.50 3.38 *$ 0.88 5.5% GELX 17.81 20.31 MAR 15.00 3.75 *$ 0.94 3.6% *$ = Stock price is above the sold striking price. Comments: Geltex Pharma (GELX) choose to rally the week we rolled down to the MAR-$15 call. Better safe than sorry! Western Digital (WDC) appears to be headed lower. Concurrent (CCUR) broke below its 50 dma and should be monitored closely. Kellstrom (KELL) is reacting negatively to the resignation of its CFO and has moved to a new low. Earthshell (ERTH) is testing its recent lows but hopefully it will get a boost from earnings this week. Several stocks appear ready to move up again, market permitting. Closed: Gst Telecom (GSTX) - closed below $8 - time to move on. NEW PICKS ********* Sequenced by Company Stock Last Call Strike Option Last Open Cost Return Return Symbol Price Month Price Symbol Bid Intr Basis Called Unchanged AND 8.88 MAR 7.50 AND CU 1.94 654 6.94 8.1% 8.1% EPIC 9.56 MAR 7.50 PQS CU 2.50 175 7.06 6.2% 6.2% GZTC 29.13 MAR 22.50 GEQ CX 8.38 113 20.75 8.4% 8.4% MSGI 24.88 MAR 20.00 UMS CD 6.00 95 18.88 5.9% 5.9% PTEK 8.94 MAR 7.50 TQO CU 2.13 485 6.81 10.1% 10.1% RNBO 30.88 MAR 25.00 BQO CE 7.00 14 23.88 4.7% 4.7% SCTC 22.31 MAR 20.00 YQS CD 3.75 51 18.56 7.8% 7.8% Sequenced by Return Called (& Not Called) Stock Last Call Strike Option Last Open Cost Return Return Symbol Price Month Price Symbol Bid Intr Basis Called Unchanged PTEK 8.94 MAR 7.50 TQO CU 2.13 485 6.81 10.1% 10.1% GZTC 29.13 MAR 22.50 GEQ CX 8.38 113 20.75 8.4% 8.4% AND 8.88 MAR 7.50 AND CU 1.94 654 6.94 8.1% 8.1% SCTC 22.31 MAR 20.00 YQS CD 3.75 51 18.56 7.8% 7.8% EPIC 9.56 MAR 7.50 PQS CU 2.50 175 7.06 6.2% 6.2% MSGI 24.88 MAR 20.00 UMS CD 6.00 95 18.88 5.9% 5.9% RNBO 30.88 MAR 25.00 BQO CE 7.00 14 23.88 4.7% 4.7% Company Descriptions: OI - Open Interest CB - Cost Basis or break-even point RC - Return Called RNC - Return Not Called (Stock unchanged) **** AND - Andrea Electronics $8.88 *** New Strength? *** Andrea designs, develops and manufactures audio technologies and equipment for enhancing applications that require high performance and high quality voice input. The Company's has several patented and Patent-pending audio products that enhance a wide range of audio products to eliminate background noise and ensure the optimum performance of voice applications. Though revenues were lower for the fourth quarter, Andrea has expanded its technology portfolio and strategic alliances, most recently with Voyetra Turtle Beach. A BUY rating this week and improving technicals suggest Andrea is ready to move out of its stage I base. MAR 7.50 AND CU Bid=1.94 OI=654 CB=6.94 RC=8.1% RNC=8.1% Chart = /charts/charts.asp?symbol=AND **** EPIC - Epicor $9.56 *** Still Climbing! *** Epicor is an enterprise software supplier focused exclusively on the real-world requirements of mid-market companies. The company delivers business performance solutions including Front Office, Back Office and eBusiness capabilities, that enable companies to automate on their own terms and outperform their competition by capitalizing on customer relationships. Investors appear pleased by Epicor's aggressive reorganization and cost-cutting measures to position itself for success in 2000. The recent spike in price occurred when a fund manager mentioned Epicor on CNBC. With the technical picture improving, we will take advantage of inflated premiums providing a cost basis near support. MAR 7.50 PQS CU Bid=2.50 OI=175 CB=7.06 RC=6.2% RNC=6.2% Chart = /charts/charts.asp?symbol=EPIC **** GZTC - Genzyme Transgenics $29.13 *** Favorable results! *** Genzyme Transgenics is a leader in the application of transgenic technology to the development and production of monoclonal antibodies and other recombinant proteins for therapeutic and biomedical uses. To date, the Company has formed more than a dozen collaboration agreements which provide for transgenic production of targeted proteins. Genzyme's stock jumped in January after the company announced (successful) results of their phase III trial evaluating the ability of transgenically produced recombinant human antithrombin III (rhATIII). An ensuing pact with Alexion Pharmaceuticals, a BUY rating from Warburg Dillon Read, and a successful public offering have all driven the stock higher. We favor a conservative entry point near the 30 dma on a fast moving issue. Research thoroughly! MAR 22.50 GEQ CX Bid=8.38 OI=113 CB=20.75 RC=8.4% RNC=8.4% Chart = /charts/charts.asp?symbol=GZTC **** MSGI - Marketing Services $24.88 *** Earnings Run! *** Marketing Services is organized into two business divisions: The Internet Group and The Direct Group. The Internet Group's mission is to acquire, invest in and incubate Internet companies. The Direct Group provides strategic planning, direct marketing, database marketing, telemarketing, telefundraising, media planning and buying. MSGi's revenues have grown from $16 million in fiscal 1996 to in excess of $100 million on an annualized basis. GE and CMGI both have positions in MSGI and we wouldn't mind owning the issue near the four-month consolidation area. Earnings are due this week. MAR 20.00 UMS CD Bid=6.00 OI=95 CB=18.88 RC=5.9% RNC=5.9% Chart = /charts/charts.asp?symbol=MSGI **** PTEK - Premiere Technologies $8.94 *** Break Out? *** Premiere Tech is a holding company of leading Internet-based and telephony-based B2B service providers. Its operating companies include Premiere Conferencing, Premiere Document Distribution, and Premiere Messaging. The Company's PTEKVentures.com investment arm has ownership interests in Healtheon/WebMD(HLTH), S1 (SONE), USA.NET, Webforia, and Derivion. Premiere Tech has continued to pay off debt; sign new agreements; received a favorable ruling in a lawsuit; and recently announced its fourth quarter will beat analysts' estimates. The technicals are strong and the recent breakout above its stage one base appears promising. MAR 7.50 TQO CU Bid=2.13 OI=485 CB=6.81 RC=10.1% RNC=10.1% Chart = /charts/charts.asp?symbol=PTEK **** RNBO - Rainbow Technologies $30.88 *** Web Security *** Rainbow Technologies develops and supplies computer network security products that secure the rights to software and other digital content, and that provide privacy and security for computer network and Internet communications and commerce. Their products are designed for anti-piracy, license management and tracking and software distribution over the Internet. They also provide Internet security products computer transaction servers engaged in Internet commerce, electronic brokerage and financial services, and encrypted processing and acceleration for original manufacturers of routers and switching equipment. A great company in a hot sector with a bullish chart pattern. Very conservative! MAR 25.00 BQO CE Bid=7.00 OI=14 CB=23.88 RC=4.7% RNC=4.7% Chart = /charts/charts.asp?symbol=RNBO **** SCTC - Systems & Computer Tech $22.31 *** Hot B2B Sector *** Systems & Computer Technology develops, licenses and supports a suite of client/server, enterprise software and provides a range of information technology services, including outsourcing, systems implementation, systems integration and maintenance/enhancements. The Company offers information technology solutions ranging from application software to large-scale outsourcing contracts. SCT claims its fourth quarter was impacted by business delays due to industry Y2K concerns and investors appear to agree. The stock closed at a 52-week high and appears ready to run for a new all time high. As the issue is overextended in the near term, we favor a cost basis at technical support. MAR 20.00 YQS CD Bid=3.75 OI=51 CB=18.56 RC=7.8% RNC=7.8% Chart = /charts/charts.asp?symbol=SCTC ************************* NAKED PUT PERCENTAGE LIST ************************* This is strictly a list of possible naked put candidates which have the highest put premiums but are still an up trending stock. We make no representations about the safety or suitability of these plays. You should look at a chart on each symbol and decide which strike price you would be comfortable selling. Everyone has a different risk profile. These stocks fit my profile. Jim This list is available as a download in Excel format. Simply click on this link and save to your computer. http://www.OptionInvestor.com/downloads/hpfeb-14.xls Stock Stock Strike Option OptionMargin Percent Comment Symbol Price Price Symbol Price At 25% Return AFCI 52.44 45 AQF-0I 4.50 13.11 34% LOW MARGIN AFCI 52.44 50 AQF-OJ 6.88 13.11 52% LOW MARGIN AFFX 259.75 240 FUE-OH 19.25 64.94 30% AMAT 164.94 160 ANC-OL 10.63 41.24 26% AMCC 230.00 210 AEX-OV 20.63 57.50 36% APNT 64.50 55 UAP-OK 5.50 16.13 34% LOW MARGIN APNT 64.50 60 UAP-OL 7.75 16.13 48% LOW MARGIN ARBA 212.13 190 IUR-OR 12.13 53.03 23% ARBA 212.13 200 IUR-OT 15.38 53.03 29% BEAS 108.00 100 BUC-OT 10.13 27.00 38% BVSN 172.13 160 BZV-OL 16.00 43.03 37% BVSN 172.13 165 BZV-OM 18.50 43.03 43% CKFR 73.50 65 FCQ-OM 5.38 18.38 29% LOW MARGIN CKFR 73.50 70 FCQ-NN 6.13 18.38 33% Feb CKFR 73.50 70 FCQ-ON 10.13 18.38 55% LOW MARGIN CLRN 106.25 100 KGQ-OT 11.63 26.56 44% CNCX 47.69 45 QXF-OI 2.56 11.92 21% NXLK BUY@45 COVD 84.63 80 COU-OP 5.38 21.16 25% CRA 251.06 240 CZA-NH 8.75 62.77 14% FEB CRA 251.06 240 CZA-OH 25.38 62.77 40% CTXS 175.81 170 XWW-ON 14.25 43.95 32% DITC 170.00 155 DUI-OK 17.50 42.50 41% EMLX 123.88 110 UMQ-OB 9.13 30.97 29% EMLX 123.88 120 UMQ-ND 7.13 30.97 23% FEB EMLX 123.88 120 UMQ-OD 14.25 30.97 46% ENMD 48.56 40 QMA-OH 3.63 12.14 30% LOW MARGIN ENMD 48.56 45 QMA-OI 5.75 12.14 47% LOW MARGIN ETEK 201.75 195 FNY-OS 16.50 50.44 33% JDSU BUYING FFIV 98.38 90 FQL-OR 8.75 24.60 36% HLIT 123.00 120 LQL-ND 4.00 30.75 13% FEB HLIT 123.00 120 LQL-OD 11.50 30.75 37% INSP 191.25 170 FHY-ON 14.38 47.81 30% INSP 191.25 180 FHY-OP 21.00 47.81 44% ISLD 114.75 105 SUH-OA 13.63 28.69 48% ISLD 114.75 110 SUH-NB 4.00 28.69 14% FEB ITWO 239.88 220 QYJ-OD 20.13 59.97 34% JNPR 216.00 200 JUY-OT 17.38 54.00 32% JNPR 216.00 210 JUY-NB 9.50 54.00 18% FEB JNPR 216.00 210 JUY-OB 22.00 54.00 41% LDIG 58.00 50 DUL-OJ 4.63 14.50 32% LOW MARGIN LRCX 140.19 135 MLC-NG 3.38 35.05 10% FEB LRCX 140.19 135 MLC-OG 12.63 35.05 36% MCOM 97.50 95 MQM-OS 10.13 24.38 42% MLNM 212.94 200 QMR-OT 15.63 53.24 29% MRVC 79.56 70 VQX-ON 6.50 19.89 33% LOW MARGIN MRVC 79.56 75 VQX-OO 8.25 19.89 41% LOW MARGIN MUSE 209.50 200 QVM-OT 16.88 52.38 32% NPIX 72.44 65 XMQ-OM 5.63 18.11 31% LOW MARGIN NPIX 72.44 70 XMQ-ON 8.00 18.11 44% LOW MARGIN NXTV 119.31 110 NUX-OB 8.50 29.83 28% RBAK 215.50 200 BUK-OT 12.50 53.88 23% RBAK 215.50 210 BUK-NB 5.13 53.88 10% FEB RBAK 215.50 210 BUK-OB 14.25 53.88 26% RNWK 177.63 170 RNO-NN 4.88 44.41 11% FEB RNWK 177.63 170 RNO-ON 16.00 44.41 36% SONE 129.25 125 QFB-OD 12.75 32.31 39% VRSN 209.03 200 QVZ-NT 5.38 52.26 10% FEB VRSN 209.03 200 QVZ-OT 18.00 52.26 34% VRTS 173.00 165 UQJ-OM 13.63 43.25 32% VRTS 173.00 170 UQJ-NN 5.38 43.25 12% FEB VRTS 173.00 170 UQJ-ON 14.88 43.25 34% Sorted by return percentage Stock Stock Strike Option OptionMargin Percent Comment Symbol Price Price Symbol Price At 25% Return RBAK 215.50 210 BUK-NB 5.13 53.88 10% FEB LRCX 140.19 135 MLC-NG 3.38 35.05 10% FEB VRSN 209.03 200 QVZ-NT 5.38 52.26 10% FEB RNWK 177.63 170 RNO-NN 4.88 44.41 11% FEB VRTS 173.00 170 UQJ-NN 5.38 43.25 12% FEB HLIT 123.00 120 LQL-ND 4.00 30.75 13% FEB CRA 251.06 240 CZA-NH 8.75 62.77 14% FEB ISLD 114.75 110 SUH-NB 4.00 28.69 14% FEB JNPR 216.00 210 JUY-NB 9.50 54.00 18% FEB CNCX 47.69 45 QXF-OI 2.56 11.92 21% NXLK BUY@45 ARBA 212.13 190 IUR-OR 12.13 53.03 23% EMLX 123.88 120 UMQ-ND 7.13 30.97 23% FEB RBAK 215.50 200 BUK-OT 12.50 53.88 23% COVD 84.63 80 COU-OP 5.38 21.16 25% AMAT 164.94 160 ANC-OL 10.63 41.24 26% RBAK 215.50 210 BUK-OB 14.25 53.88 26% NXTV 119.31 110 NUX-OB 8.50 29.83 28% ARBA 212.13 200 IUR-OT 15.38 53.03 29% CKFR 73.50 65 FCQ-OM 5.38 18.38 29% LOW MARGIN MLNM 212.94 200 QMR-OT 15.63 53.24 29% EMLX 123.88 110 UMQ-OB 9.13 30.97 29% AFFX 259.75 240 FUE-OH 19.25 64.94 30% ENMD 48.56 40 QMA-OH 3.63 12.14 30% LOW MARGIN INSP 191.25 170 FHY-ON 14.38 47.81 30% NPIX 72.44 65 XMQ-OM 5.63 18.11 31% LOW MARGIN VRTS 173.00 165 UQJ-OM 13.63 43.25 32% LDIG 58.00 50 DUL-OJ 4.63 14.50 32% LOW MARGIN JNPR 216.00 200 JUY-OT 17.38 54.00 32% MUSE 209.50 200 QVM-OT 16.88 52.38 32% CTXS 175.81 170 XWW-ON 14.25 43.95 32% MRVC 79.56 70 VQX-ON 6.50 19.89 33% LOW MARGIN ETEK 201.75 195 FNY-OS 16.50 50.44 33% JDSU BUYING CKFR 73.50 70 FCQ-NN 6.13 18.38 33% Feb ITWO 239.88 220 QYJ-OD 20.13 59.97 34% APNT 64.50 55 UAP-OK 5.50 16.13 34% LOW MARGIN AFCI 52.44 45 AQF-0I 4.50 13.11 34% LOW MARGIN VRTS 173.00 170 UQJ-ON 14.88 43.25 34% VRSN 209.03 200 QVZ-OT 18.00 52.26 34% FFIV 98.38 90 FQL-OR 8.75 24.60 36% AMCC 230.00 210 AEX-OV 20.63 57.50 36% RNWK 177.63 170 RNO-ON 16.00 44.41 36% LRCX 140.19 135 MLC-OG 12.63 35.05 36% BVSN 172.13 160 BZV-OL 16.00 43.03 37% HLIT 123.00 120 LQL-OD 11.50 30.75 37% BEAS 108.00 100 BUC-OT 10.13 27.00 38% SONE 129.25 125 QFB-OD 12.75 32.31 39% CRA 251.06 240 CZA-OH 25.38 62.77 40% JNPR 216.00 210 JUY-OB 22.00 54.00 41% DITC 170.00 155 DUI-OK 17.50 42.50 41% MRVC 79.56 75 VQX-OO 8.25 19.89 41% LOW MARGIN MCOM 97.50 95 MQM-OS 10.13 24.38 42% BVSN 172.13 165 BZV-OM 18.50 43.03 43% CLRN 106.25 100 KGQ-OT 11.63 26.56 44% INSP 191.25 180 FHY-OP 21.00 47.81 44% NPIX 72.44 70 XMQ-ON 8.00 18.11 44% LOW MARGIN EMLX 123.88 120 UMQ-OD 14.25 30.97 46% ENMD 48.56 45 QMA-OI 5.75 12.14 47% LOW MARGIN ISLD 114.75 105 SUH-OA 13.63 28.69 48% APNT 64.50 60 UAP-OL 7.75 16.13 48% LOW MARGIN AFCI 52.44 50 AQF-OJ 6.88 13.11 52% LOW MARGIN CKFR 73.50 70 FCQ-ON 10.13 18.38 55% LOW MARGIN ***************** NAKED PUT SECTION ***************** Option Trading Basics: Conversions And Reversals... This week we continue our discussion of option trading techniques and the methods used by floor brokers to provide a liquid market. In our last segment, we learned that market-makers use a number of arbitrage techniques to create liquidity for retail traders. The majority of specialists favor box-spreads and conversions or reversals (reverse conversions). A box spread consists of two call options with different strike prices and two put options with strike prices equivalent to the calls. Box spreads are initiated when the options are miss-priced on a relative basis. The price risk of the call spread is offset by the opposite position in the put spread thus guaranteeing a risk-free profit. Unfortunately, opportunities for this type of position are available primarily to floor traders who can instantly exploit the miss-pricing among the options. The ongoing execution of orders in a liquid market eventually returns the prices to their relative fair values. Conversions involve calls, puts, and the underlying stock. For example, the conversion is used when a retail trader is interested in buying a call option. To offer the position, a specialist will buy an under-priced put and sell an overpriced or fairly priced synthetic put (a short call and long stock position). The initial profit is achieved when the transaction yields a credit. If the value of the (sold) call option goes up, the (long) stock position will offset the change. If the value of the (long) stock falls, the put is exercised to cover the loss. In this manner, the floor broker trades risk-free and profits from the initial transaction. Of course funds must be borrowed to finance the purchase of the stock and the current interest rate is always figured into the overall position. The technique for a reversal (reverse conversion) is simply the opposite. When a retail trader desires to sell a call option, a floor broker will attempt to buy the call at a discount and sell an overpriced or fairly priced synthetic call (a short put and short stock). The initial credit received is risk-free profit. In the case of a reversal, the funds received from the (shorted) stock are placed in a risk-free, short-term investment. At expiration, the call will be exercised to purchase the underlying or the stock is received via assignment, replacing that which was borrowed in the initial transaction. There are no up-front funds needed for this technique but because of the rules (sales on the up-tick only) and difficulty in short selling, specialists generally do not receive all of the funds from the short sale. That's where the risk-free investment interest figures into the overall equation. All of these techniques are risk-free transactions since the price change on the option purchased is offset with the sale of synthetic positions. The knowledge of option pricing is the primary manner in which the specialist profits from these transactions. For the majority of traders, box spreads; where only options are involved, are the favored method of arbitrage. The specialist does not need to purchase the underlying issue to participate in the strategy. Another advantage of these techniques is they do not require the management of hedge values needed for complex ratio spreads and other model-driven systems. Box spreads and conversions are the most common forms of option arbitrage and once you understand the basics of each method, your relationship with the market-maker will be a much happier one. *** 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 Put Strike Price Profit Monthly Symbol Picked Price Month Sold Picked /Loss Return VDAT 12.50 12.75 FEB 10.00 0.31 *$ 0.31 24.0% TSEMF 14.38 20.13 FEB 12.50 0.75 *$ 0.75 23.5% MCRE 12.56 13.38 FEB 10.00 0.69 *$ 0.69 23.4% NFLD 16.19 15.50 FEB 12.50 0.38 *$ 0.38 22.8% PCMS 15.00 18.75 FEB 12.50 0.50 *$ 0.50 18.1% TRVL 15.50 15.44 FEB 12.50 0.44 *$ 0.44 17.5% WSTL 11.44 26.44 FEB 7.50 0.50 *$ 0.50 16.5% MSGI 18.50 24.88 FEB 15.00 0.50 *$ 0.50 16.5% MESG 18.31 18.00 FEB 15.00 0.50 *$ 0.50 16.1% OTEX 20.63 29.44 FEB 17.50 0.56 *$ 0.56 14.3% HSAC 23.00 20.06 FEB 17.50 0.69 *$ 0.69 14.2% NSPK 23.69 22.63 FEB 20.00 0.38 *$ 0.38 13.4% DMRK 22.38 38.00 FEB 17.50 0.69 *$ 0.69 12.3% SMSC 14.25 14.25 FEB 12.50 0.50 *$ 0.50 12.2% NSPK 22.25 22.63 FEB 15.00 0.56 *$ 0.56 12.1% NZRO 33.25 29.38 FEB 22.50 0.75 *$ 0.75 11.0% RNBO 24.75 30.88 FEB 20.00 0.56 *$ 0.56 10.7% XICO 19.75 19.25 FEB 15.00 0.31 *$ 0.31 10.5% TLCM 20.25 21.75 FEB 15.00 0.50 *$ 0.50 10.1% QTRN 24.44 28.50 FEB 17.50 0.50 *$ 0.50 10.1% NPLS 23.06 29.63 FEB 17.50 0.44 *$ 0.44 9.5% PGEX 22.81 23.13 FEB 15.00 0.50 *$ 0.50 9.1% TLCM 23.13 21.75 FEB 17.50 0.31 *$ 0.31 9.1% PILT 25.94 33.94 FEB 17.50 0.56 *$ 0.56 9.0% CPQ 32.00 25.69 FEB 25.00 0.56 *$ 0.56 8.7% NOVL 33.69 38.88 FEB 25.00 0.63 *$ 0.63 7.9% GSTRF 34.19 31.75 FEB 22.50 0.63 *$ 0.63 7.8% EMIS 35.63 55.44 FEB 25.00 0.63 *$ 0.63 7.5% NETA 28.00 31.50 FEB 20.00 0.38 *$ 0.38 5.9% ZONA 7.69 7.00 MAR 5.00 0.31 *$ 0.31 12.1% PTEC 20.63 23.06 MAR 15.00 0.63 *$ 0.63 9.6% RWAV 10.56 10.56 MAR 7.50 0.31 *$ 0.31 9.3% DRD 28.00 27.56 MAR 20.00 0.56 *$ 0.56 6.6% *$ = Stock price is above the sold striking price. Comments: Compaq (CPQ) is threatening to move below the sold strike. It could be closed now at break-even; something to consider unless you want to own the stock. NEW PICKS ********* Sequenced by Company Stock Last Put Strike Option Last Open Cost ROI Opt Symbol Price Month Price Symbol Bid Intr Basis Expired PRGY 25.75 FEB 22.50 PUY NX 0.31 304 22.19 4.2% AXTI 31.94 MAR 17.50 AQX OW 0.50 100 17.00 7.3% MSGI 24.88 MAR 17.50 UMS OW 0.44 65 17.06 8.1% PGEX 23.13 MAR 17.50 QAE OW 0.50 46 17.00 9.8% PILT 33.94 MAR 22.50 PTU OX 0.63 15 21.87 8.5% PTEC 23.06 MAR 17.50 PKQ OW 0.38 110 17.12 7.6% RNBO 30.88 MAR 22.50 BQO OX 0.38 0 22.12 5.8% TSEMF 20.13 MAR 15.00 TWQ OC 0.56 150 14.44 12.2% Sequenced by Return On Investment (ROI) Stock Last Put Strike Option Last Open Cost ROI Opt Symbol Price Month Price Symbol Bid Intr Basis Expired PRGY 25.75 FEB 22.50 PUY NX 0.31 304 22.19 4.2% TSEMF 20.13 MAR 15.00 TWQ OC 0.56 150 14.44 12.2% PGEX 23.13 MAR 17.50 QAE OW 0.50 46 17.00 9.8% PILT 33.94 MAR 22.50 PTU OX 0.63 15 21.87 8.5% MSGI 24.88 MAR 17.50 UMS OW 0.44 65 17.06 8.1% PTEC 23.06 MAR 17.50 PKQ OW 0.38 110 17.12 7.6% AXTI 31.94 MAR 17.50 AQX OW 0.50 100 17.00 7.3% RNBO 30.88 MAR 22.50 BQO OX 0.38 0 22.12 5.8% Company Descriptions: OI - Open Interest CB - Cost Basis or break-even point ROI - Return On Investment ************* February Puts ************* PRGY - Prodigy $25.75 *** One Week Play! *** Prodigy Communications is an Internet Service Provider that offers fast and reliable Internet access and related value-added services. The Prodigy Internet service provides subscribers with high-speed Internet access, an electronic mailbox, graphics and multimedia messages, and disk space to host a personal Web page. The Marketplace on Prodigy Internet provides links to numerous Web-based retailers and they have also formed a business services division to develop and market web-based services to commercial entities. With earnings expected on February 15, this would be considered a speculative position. FEB 22.50 PUY NX Bid=0.31 OI=304 CB=22.19 ROI=4.2% Chart = /charts/charts.asp?symbol=PRGY ********** March Puts ********** AXTI - American Xtal Technology $31.94 *** Strange Stuff! *** American Xtal Technology uses a proprietary vertical gradient freeze (VGF) technique to produce high-performance compound semiconductor base materials, or substrates, for use in a variety of electronic and opto-electronic applications. American uses this technology to manufacture and sell gallium arsenide, indium phosphide and germanium substrates. They also have R&D contracts with the Department of Defense for developing GaAs and other substrates. A very unique issue and recently upgraded by Prudential to a STRONG BUY. We'll play this volatile position at a recent technical support level. MAR 17.50 AQX OW Bid=0.50 OI=100 CB=17.00 ROI=7.3% Chart = /charts/charts.asp?symbol=AXTI **** MSGI - Marketing Services $24.88 *** Earnings Run! *** Marketing Services is organized into two business divisions: The Internet Group and The Direct Group. The Internet Group's mission is to acquire, invest in and incubate Internet companies. The Direct Group provides strategic planning, direct marketing, database marketing, telemarketing, telefundraising, media planning and buying. MSGi's revenues have grown from $16 million in fiscal 1996 to in excess of $100 million on an annualized basis. GE and CMGI both have positions in MSGI and we wouldn't mind owning the issue near the four-month consolidation area. Earnings are due this week. MAR 17.50 UMS OW Bid=0.44 OI=65 CB=17.06 ROI=8.1% Chart = /charts/charts.asp?symbol=MSGI **** PGEX - Pacific Gateway $23.13 *** Testing The Tops *** Pacific Gateway provides international telecom services to worldwide long distance providers worldwide as well as retail customers. Their international switched services consist of calls that either originate in the United States or constitute return traffic to the U.S. from foreign long-distance carriers. Pacific also operates gateway switches in the continental U.S. Domestic services consist of switched long distance calls and dedicated point-to-point connections between the U.S. and other foreign locations. A majority of their users are multinational corporations or government agencies that have a high volume of voice and data communications between two or more international locations. PGEX is once again attempting to break the recent resistance level near $24 and in the event it fails, we want to be near the bottom of the fall. MAR 17.50 QAE OW Bid=0.50 OI=46 CB=17.00 ROI=9.8% Chart = /charts/charts.asp?symbol=PGEX **** PILT - Pilot Network Services $33.94 *** An OIN Favorite *** Pilot Network Services provides a wide range of secure Internet services that incorporate high-bandwidth connectivity and enable secure electronic business over the Internet. Pilot's services include secure access and gateway services, secure hosting and electronic commerce services, and secure extranet and virtual private networking services. These services enable remote users and wide-area networks to securely communicate enterprise-wide and over the Internet. Pilot provides these services through a number of geographically dispersed Network Security Centers. A very conservative position on a bullish issue in a great sector. MAR 22.50 PTU OX Bid=0.63 OI=15 CB=21.87 ROI=8.5% Chart = /charts/charts.asp?symbol=PILT **** PTEC - Phoenix Technologies $23.06 *** 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 outlook and technical support near the cost basis. MAR 17.50 PKQ OW Bid=0.38 OI=110 CB=17.12 ROI=7.6% Chart = /charts/charts.asp?symbol=PTEC **** RNBO - Rainbow Technologies $30.88 *** Web Security *** Rainbow Technologies develops and supplies computer network security products that secure the rights to software and other digital content, and that provide privacy and security for computer network and Internet communications and commerce. Their products are designed for anti-piracy, license management and tracking and software distribution over the Internet. They also provide Internet security products computer transaction servers engaged in Internet commerce, electronic brokerage and financial services, and encrypted processing and acceleration for original manufacturers of routers and switching equipment. A great company in a hot sector with a bullish chart pattern. Very conservative! MAR 22.50 BQO OX Bid=0.38 OI=0 CB=22.12 ROI=5.8% Chart = /charts/charts.asp?symbol=RNBO **** TSEMF - Tower Semiconductor $20.13 *** Own This One! *** Tower semiconductor is an independent manufacturer of integrated circuits on silicon wafers and a provider of related services. As a foundry, Tower provides IC design, manufacturing and turnkey services using advanced production capabilities and the proprietary IC designs of its customers, and is specializing in providing solutions for embedded non-volatile memory devices and CMOS image sensors. ICs manufactured by Tower are adapted into a wide range of products in diverse and rapidly growing markets, including computer and office equipment, communication products and consumer electronics. Investors have boosted Tower out of a recent trading range and we favor the support near our cost basis. MAR 15.00 TWQ OC Bid=0.56 OI=150 CB=14.44 ROI=12.2% Chart = /charts/charts.asp?symbol=TSEMF ************************ SPREADS/STRADDLES/COMBOS ************************ Time For A Breather.. Friday, February 11 Technology stocks joined flagging blue-chip issues in a massive, long overdue sell-off. The Dow Jones Industrials fell ominously, closing down 218 points at 10,425. The Nasdaq Composite finished 89 points lower at 4396. The S&P 500 Index dropped 29 points to 1387. Trading volume on the NYSE reached 1 billion shares with declines outpacing advances 2-to-1. The 30-year bond was up 22/32, bid at 99 20/32, pushing its yield down to 6.28%. Thursday's new plays (positions/opening prices/strategy): RMI Net RMII MAY5C/MAY10C $3.62 debit bull-call Duramed DRMD JUN5C/MAR10C $3.93 debit diagonal E.spire ESPI JUN5C/MAR10C $4.38 debit diagonal E.spire ESPI MAR12/FEB12C $0.62 debit calendar Portfolio plays: The market foundered Friday as traders succumbed to the negative sentiment that has plagued blue-chip issues all week. Cyclical stocks led the way down with fears of rising interest rates and a spike in commodity prices affecting the majority of industries. A number of technology companies posted large losses as investors lightened positions in the high-flying issues. Our portfolio was lucky enough to escape relatively unscathed but the majority of analysts agree that if the Dow fails to hold at this level, the Nasdaq will eventually follow it lower. The names on our leader-board haven't changed much this week and once again, Triquint (TQNT) topped the list of winners. Today the stock climbed another $30, closing at $257 after Banc of America Securities raised its investment rating along with earnings and revenue estimates for the company. On Thursday Triquint reported fourth quarter earnings of $0.48, which surpassed estimates by $0.11. Banc of America happily reiterated its STRONG BUY rating, announcing a new target of $300. This company has enjoyed a $120 rally since the issue was selected as a spread candidate in early January. I hate to say it but, I wish we had just bought the calls! Seibel Systems (SEBL) has also been a pleasant surprise over the last few weeks and today it moved up another $8.62 to end at $110. The company said Thursday that IBM will run SEBL's software for its 55,000 internal users and 30,000 business partners. SEBL said it's the largest deal it has ever booked and the company's share value jumped on the news. Emulex (EMLX) rebounded $6.75 to $123 after positive comments from the CEO were published in a special Morgan Keegan Storage Networking Issue. Emulex CEO Paul Folino said the company is the market leader in fibre-channel adapters and owns the critical expertise and core technologies vital to the industry sector, including ASICs, software and network management and gigabit transmission technology. Helix (HELX) finally made a positive move, climbing $4.38 to $56 on speculation regarding next week's earnings report. Our position at $45 appears safe for now. With one week until expiration, the Spreads/Combos portfolio has avoided the majority of down-trending issues and should finish the month with another excellent performance. Our conservative debit and credit spread sections have achieved a near perfect success rate and the majority of diagonal spreads are profitable. The long-term portfolio enjoyed a number of new winners including Adobe (ADBE), Network Associates (NETA) and Vodaphone (VOD), and the Jones Pharmaceutical (JMED) straddle was the top play in the section with a 375% return in just two months. The few positions that failed to profit were speculative plays on merger/spin-off candidates and low-cost calendar spreads that were closed early (well before expiration) to conserve capital. Unfortunately, the number of open positions has again grown to an unmanageable level. With over 100 issues to track on a daily basis, the quality of the ongoing narrative is at an all-time low. With that in mind we are going to do some housekeeping, closing the majority of positions that are significantly profitable as well as the remaining few that have little or no short-term profit potential. Those of you with questions about outstanding positions can send your requests to me personally. While I will not offer advice, I am always happy to provide opinions and ideas concerning possible adjustments or exits. Questions & comments on spreads/combos to Click here to email Ray Cummins ********* NEW PLAYS ********* WAVO - WavePhore $7.88 *** On The Move! *** WavePhore partners with prominent providers of news, business data, Internet-based content and multimedia programming to deliver selective unique intelligence and quality content to an information dependent society. Their products and services include: WaveTop, a free multimedia Internet broadcast service that enables a nationwide wireless broadcast medium for the home PC; Newscast, a premier business information source designed for information professionals; Networks, a service providing wireless data broadcasting, network services and related equipment to providers of financial data, news and other information; eWatch, a service providing a subscription-based, comprehensive Internet monitoring service for business customers and WavePhore Labs, a fee-based, in-house professional service aimed at delivering custom news and information integration solutions for corporate customers. WAVO recently partnered with Virgin Entertainment to create JamCast, the first Web site and service to offer select digital tracks by popular artists from Virgin's library of music. The selections are available in digital download format, a growing technology for music buyers to acquire tracks by their favorite artists. WAVO officials were upbeat about the deal and said it was the first of several announcements they will make in the near future as they intend to expand their participation in the electronic distribution of digital music. The Internet info/entertainment industry is growing exponentially and WAVO is positioned to benefit from that expansion. With the renewed interest in the issue, this position has an excellent probability of a profitable outcome. PLAY (conservative - bullish/diagonal spread): BUY CALL MAY-5.00 WKQ-EA OI=2082 A=$3.50 SELL CALL MAR-7.50 WKQ-CU OI=7042 B=$1.31 INITIAL NET DEBIT TARGET=$2.00 TRAGET ROI=25% Chart = /charts/charts.asp?symbol=WAVO **** FBR - Friedman Billings Ramsey $15.00 ** A Strange One! *** Friedman Billings Ramsey is a full service investment banking firm focused on investment banking, research, institutional brokerage and asset management. FBR seeks to identify rapidly changing industries and those that are not fully understood or appropriately valued by the market. Once identified, FBR develops a thorough understanding of the fundamentals and opportunities of that industry. FBR offers significant underwriting capabilities and brokerage services as well as advisory services in mergers, acquisitions and strategic partnerships. FBR expected a sizeable fourth-quarter profit and they got it when the company reported a 255% increase in revenue for the period. The company said that activity in its Internet-focused technology businesses, notably venture capital and investment banking, was the primary driver of revenue in the fourth quarter. Friedman's price spiked February 7 when it said that its managed venture capital fund (FBR Technology Venture Partners) owns a substantial position in webMethods (WEBM). On Friday, WebMethods shares soared $177 to $212 after the B2B software developer sold 4 million shares at $35 each in its IPO, generating $143 million. The chart on Friedman Billings Ramsey had been improving even before the webMethods related movement, suggesting that somebody knew of future activities. FBR recently moved out of a rounded bottom formation on increasing volume and ended very close to a new all-time high on Thursday. Though some volatility is expected, any consolidation should meet technical support in the $8 to $9 range. In the event the stock finishes inside our spread, we may decide to take ownership of the issue and sell calls to recover any losses. PLAY (aggressive - bullish credit spread): BUY PUT MAR-7.50 FBR-OU OI=150 A=$0.43 SELL PUT MAR-10.00 FBR-OB OI=157 B=$0.93 INITIAL NET CREDIT TARGET=$0.62 ROI(max)= Chart = /charts/charts.asp?symbol=FBR **** PTEK - Premiere Technologies $8.94 *** Long-term Play *** Premiere provides a comprehensive, integrated suite of information and telecommunication services to a wide range of users. Premiere delivers its services through its network management services platform which provides users with a single, user-friendly point of access to its services. This platform is accessible from virtually any telephone in the world and is designed to communicate with PC'S, facsimile machines and pagers. Premiere's proprietary software enables it to customize its services at the individual subscriber level and to easily expands system capacity. Premiere's operating companies include Premiere Conferencing, Premiere Document Distribution, and Premiere Messaging. The company's PTEKVentures.com investment arm has ownership interests in a number of speculative issues; Healtheon/WebMD (HLTH), S1 (SONE), USA.NET, Webforia, and Derivion. Premiere recently used some of the proceeds from its investment in Healtheon to pay off a $150 million short-term credit facility. The company has also reorganized its corporate infrastructure and along with repaying the debt, expects to eliminate $30 million in corporate overhead in fiscal 2000. Premiere is slated to report earnings on February 29 and the company announced in January that it should substantially exceed expectations for EBITDA, and will be comfortably in-line with revenue expectations. The technicals continue to improve as Premiere recently made a new 6-month high on increasing volume. Signs of accumulation have been evident though there is some technical resistance near $10. The outlook is bullish as the stock moves out of a rounded bottom formation towards the July high. Obviously this position also has value as a pure stock play with the low rate of margin interest, but we favor the advantages of options (LEAPS pricing - time value characteristics) and the ability to exercise at any time is simply a bonus. PLAY (conservative - bullish/LEAPS/CC's): BUY CALL JAN01-5.00 ZTJ-AA OI=924 A=$5.25 SELL CALL MAR00-10.00 TQO-CB OI=979 B=$1.00 INITIAL NET DEBIT TARGET=$4.12 TARGET ROI=100% Chart = /charts/charts.asp?symbol=PTEK **** EPIC - Epicor $9.56 *** Is This B2B? *** Epicor is an enterprise software supplier focused exclusively on the real-world requirements of mid-market companies. The company delivers business performance solutions including Front Office, Back Office and eBusiness capabilities, that enable companies to automate on their own terms and outperform their competition by capitalizing on customer relationships. There have been a number of favorable announcements on this issue in the past few weeks and investors appear pleased with Epicor's aggressive reorganization and cost-cutting measures. The recent spike in price occurred when a fund manager mentioned the stock publicly and Hambrecht & Quist's bullish, post-earnings outlook simply fed the fire. The technical pattern is improving and there are a number of favorable indicators suggesting further upside bias. We noticed the small disparity in Epicor's options while searching for covered-call candidates and for those who like to actively trade calendar spreads, it offers a favorable, low risk position. PLAY (conservative - bullish/calendar spread): BUY CALL JUL-12.50 PQS-GV OI=58 A=$1.93 SELL CALL MAR-12.50 PQS-CV OI=42 B=$0.68 INITIAL NET DEBIT TARGET=$1.12 TARGET ROI=50% Chart = /charts/charts.asp?symbol=EPIC **** NSOL - Network Solutions $302.88 *** Technicals Only *** Network Solutions is a world-wide-web domain name registration service provider. They act as the exclusive registrar for and maintainer of second level domain names within the .com, .org, .net, and .edu top-level domains. Network Solutions provides domain name registration services, Internet-based products and services and Internet technology services. Their well-known InterNIC registration service is an e-mail based registration template application process for the registration of domains. The RegistrationPlus registration process allows customers to reserve a domain name and activate it at a later date. Their Internet-based products and services include Dot Com Mail, a portable e-mail service designed for small businesses, Dot Com Toolkit, a small business resource center for setting up a web site and conducting business on the Internet, and Dot Com Promotions, where a domain name registrant can subscribe to various services provided by LinkExchange. Network Solutions is a popular issue that graces the electronic pages of the OIN on a regular basis. With last week's move above a recent resistance area near $275, there is little chance for a return trip. The indicators all point skyward and the buying may have just begun. Those of you that favor ultra-conservative, credit-spread positions should relish this one. PLAY (conservative - bullish/credit spread): BUY PUT MAR-210 JNU-OB OI=11 A=$3.12 SELL PUT MAR-220 JNU-OD OI=53 B=$4.12 INITIAL NET CREDIT TARGET=$1.12 ROI(max)=12% Chart = /charts/charts.asp?symbol=NSOL ************************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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