The Option Investor Newsletter Sunday 3-19-2000 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 3-17 WE 3-10 WE 3-3 WE 2-25 DOW 10595.23 +666.41 9928.82 -438.38 10367.20 +505.08 -357.40 Nasdaq 4798.13 -250.49 5048.62 +133.83 4914.79 +324.29 +178.76 S&P-100 786.74 + 37.24 749.50 - 16.45 765.95 + 46.17 - 8.74 S&P-500 1464.47 + 69.40 1395.07 - 14.10 1409.17 + 75.81 - 12.73 RUT 574.77 - 29.04 603.81 + 5.93 597.88 + 41.14 + 11.06 TRAN 2623.83 +258.54 2365.29 - 69.16 2434.45 + 83.19 - 79.54 VIX 23.67 - .13 23.80 + 2.51 21.29 - 7.79 + 0.63 Put/Call .42 .39 .40 .41 ****************************************************************** Look out above, the bull is back? Simply incredible! What am I talking about, the Dow finished down? In my eyes it was a victory of Superbowl proportions. Thursday the Dow was like Rocky Balboa struggling to his feet and pulling every last ounce of energy to win that final round at the close. After taking the beating of his life and spending more time on the mat than on his feet he found the energy to fight back and win. I have to admit that when the Dow was trying so hard to hit that +500 mark in the last few minutes it almost brought tears to my eyes. The market is my life. I live it, eat it, breathe it. I even dream about it. (My wife says I need counseling) Still as exciting as it was to witness history in the making on Thursday, Friday was the Superbowl and we won. There maybe -35 less points left on the Dow scoreboard but it was a sentiment win of epic proportions. +819 points in two days. The very definition of over bought ran smack up against the definition of profit taking. (Friday, 'frI-de, noun, A. the last trading day of the week. B. profit taking day. C. Pay day.) We survived. The sellers came and the buyers never flinched. We held our positions. We watched our charts but there was never a serious attempt to run it back down. Sure there was some give and take and some individual stocks gave back Thursday's gains but the fortress held. They took their best shot and the market did not even flinch. As the afternoon was drawing to a close I was almost as excited as I was at the close on Thursday. This was bigger. A weekend before a Fed meeting with huge profits on the table and traders held overnight and over the weekend! Lookout above! The bull is back and he is ready to rumble. Before I have you running down to the ATM to transfer money into your brokerage account I should probably qualify my comments on Friday's action. While the Nasdaq was up +80 there was no follow through volume. Only 1.69 bln shares traded. There was no rush to buy and there was no rush to sell. Everyone simply held their breath and hoped it would not crash again. The Dow managed 1.3 bln shares and there was some rotation but calm was the byword for the day. Calm and orderly. Sellers and buyers, buyers and sellers. Everyone kept looking over his or her shoulder expecting to see a wave of selling at any moment but it just did not happen. The Dow moved in a 200 point trading range and had plenty of opportunity to tank but ended the day only 35 points from yesterday's close. This is a major sentiment change and a major victory for the home team. Next you will be expecting floor traders to line up on camera and moon Greenspan. There was a negative chart pattern on the Dow for Friday. The range for the day was almost 200 points and the Dow closed only 30 points from the low of the day. This finish at the bottom of a wide range is normally negative on its own but taken in context I think we should be grateful for small favors. Given the large gains of the previous two days I think the shooting star pattern is a false indicator. Another positive was the non-impact from the rebalancing of the S&P on Friday. Many funds were selling stock at the close to adjust their fund weights to the new S&P weight. This wholesale portfolio adjustment was almost invisible. There were exceptions like NT which had a huge imbalance to the buy side and several million shares were bought at the close which added +$9 to the stock price. Since 1995 there has only been 46 days of heavy volume where the up volume beat the down volume by anything close to the 10:1 ratio we saw on Thursday. Of those 46 days 70% or 32 resulted in significant market gains in the coming week. Where you would expect almost a 100% follow through the actual market statistics only indicated a positive follow through two out of three times. This indecision is what will keep us on our toes next week. No investor wants to jump in at the current price if this was just an oversold bounce and we are going to roll over again next week. With the PE of the major industrial companies in the S&P averaging only 11 there does not appear to be much risk of a further drop. Value investors started showing signs of a pulse again but after being in intensive care for months the recuperation could take some time. These investors will likely ease back into the market one step at a time instead diving blindly into the murky waters. The CPI on Friday was also a non-event although food and energy prices soared. Other sectors dropped and the net impact was a +0.5% gain for February with the core rate up only +0.2%. The next hurdle in the economic calendar is the FOMC meeting on Tuesday. There is no doubt that the Fed will raise rates and it has already been factored into the market. What investors will be watching is the wording on the releases. Are we going to have one more increase or two, or three? With bond yields now at 6% and productivity increasing at record rates the Fed by their own admission is baffled at what to do. The "stay vigilant" and "react aggressively" rhetoric is falling on deaf ears. The question is at what point does Greenspan get mad and decide to up the ante? The market gains of this week now have many analysts wondering if Greenspan will break out of his incremental mode of the past and fire a real shot across the bow of the economy with a +.50% rate in an attempt to get attention. The real quandary is how the markets will react to any action. A +.25% raise is expected and deemed just another nuisance news event and celebrate the non-event by going on another stock buying binge. A +.50% raise could be seen as affirmative action by the Fed to backup their words with strong action to keep the current economic expansion on track for years to come. Investors could celebrate the strong action as evidence the Fed is in control and go on another stock buying binge. A win-win scenario and one that has got to have Greenspan pondering the wisdom of accepting another term in office. The Fed has withdrawn all the extra funds that they injected for the Y2K crisis and nobody has noticed due to the strength in the economy. As one analyst put it, "the Internet is more important than the Fed and the Fed has not caught on yet." Even though the FOMC meeting this week is not likely to have any real impact on the markets it will still be the focus of the news until it is over. The 2:15PM announcement may cause a big market move in one direction or the other but the impact will only be temporary without serious negative language in the release. Since the FOMC meeting is the only major economic incident for the week maybe the markets will start focusing on the real story, April earnings. With YHOO, the first major announcer the first week of April and only a little more than two weeks ahead, any April earnings run should start this week. I am hoping the lack of serious profit taking on Friday will prove to be the result of investors taking positions they do not want to sell until after earnings. If trader sentiment has improved as it appeared on Thursday then we could be back near record highs very soon. If we tank again this close to April earnings then the entire market is in trouble. May and June have not been kind to us recently as you can see by these charts. If the market is going to rally into earnings then trade hard and plan to be out in case we are in for a repeat of history. This is a great time to be an investor and even better to be a trader. The market moves already this year have equaled the moves that used to take years. Just the trading ranges in the Nasdaq from last Fridays high of over 5100 to the low of 4455 this Thursday was the equivalent of the total move for entire years until just recently. The +2500 point move from the Oct low just six months ago equaled the previous 26 year move. Think about it. The total gain of 26 years since the Nasdaq was started in 1971 was doubled in only six months. The previous doubling move took only 12 months from the October 1998 low of 1357 to the Oct 1999 high of 2919. The previous double took three years from 1000 in July-1995 to 2000 in July 1998. 1000-2000 in three years followed by -32% drop in three months. 1357-2919 in twelve months followed by -15% drop in one month. 2630-5132 in six months followed by a -13% drop in four days. As you can see from the examples above we are moving at an incredible rate of speed. The shear volatility from the magnitude of these moves is very troubling and tough to handle for new investors but very profitable for more experienced traders. Yes, there is a high risk that the market is overvalued and can crash farther at any time based on historical valuations. What investors are betting on today is the strong economy and the technical innovations that are literally changing the way we live on almost a daily basis. Yes, stocks could be overvalued based on the economy of the 60s, 70s, 80s and even the 90s but is it overvalued for the 2000s? Just as the markets are not the same markets your father traded they are not the same markets we all traded just 2-3 years ago either. Traders are not faced with buying an option for $3-$4 and waiting a month for it to move to $6-$7. Today the intraday ranges on even the lower volatility options can be $6-$7 a day. Stop losses are almost worthless with the huge intraday swings and entry points have become the most important part of execution. If you make a good entry then you insulate yourself from many of the other problems traders are experiencing. The second most important trading aspect today is exit points. With many Nasdaq stocks trading in ranges of $20, $30, $50, even $75 points during the week it is important to take profits when they are offered. The stock may continue to run or it could drop again in a heartbeat. The sector rotation which previously took weeks and then days is now occurring in hours. Sectors up double digits in the morning can be down double digits in the afternoon. Traders must be quick or they will be broke. What prompted this editorial is the constant stream of email that goes something like this: I bought a $19 call option on SDLI. It went up to $37 and last week and this week it is $4. What should I do? The other repeated email goes something like this: I bought a $19 call option on SDLI and I was stopped out at $17. I bought it back again at $22 and was was stopped out at $20. I bought it back at $25 and did not put in a stop order and it is $4. What should I do? There is no magic answer except you should not trade options above your experience level. This is the greatest market in history but it is also the most dangerous to the inexperienced trader. If you have never traded options before then you should start out by learning how with "inexpensive" positions. What would happen to you if you showed up at the Indy 500 as a spectator and they picked you at random from the audience to drive in the race? How long do you think the average person would last after they strapped you into a 200MPH car and the green flag dropped. Most would not make it a lap before ending up against a fence or at the bottom of a pile of flaming debris. For this same reason you should not jump into a 200MPH option and not expect a financial accident. Until you learn how to trade options you should start with the easy ones. Get the feel of the stock cycles and market cycles. Practice entry and exits. Project reasonable expectations and learn to take profits when you reach 75% of those expectations. Options trading is extremely profitable if done right and will bankrupt your account if done wrong. Just because your brother in law made 1000% last month does not mean you can do that this month. (Did he tell you he lost 90% of his capital the month before?) The best bets this week for low volatility, low risk option plays are DELL, NITE, SEG, INTC, AOL. These are good companies with charts that don't look like the Alps. Learn to walk before you run because it is a long way back from zero. The market open on Monday will be critical. It is then that we could see any profit taking from the huge gains last week. Traders may be having second thoughts about holding profits over the Fed meeting even when logic dictates that the meeting will have no impact on the markets. Plan for the April earnings run but allow for disaster also. Far too many traders only look at the upside until disaster strikes. Don't be caught looking the other way. Trade smart, sell too soon. Jim Brown Editor Disclosure: My current long positions: ADAP, AMCC, BRCD, CIEN, CMRC, INSP, MSTR NTAP, RBAK, SCMR, SDLI, VRSN, YHOO No shorts Editors note: Due to the volume of email I receive it is impossible for me to respond to even a small percentage. If you have questions or comments about OIN please direct them to questions@OptionInvestor.com and someone will respond. Thank you for your cooperation. *************************Advertisement**************************** Options Traders ! Mr. Stock's new online trading site has been designed for you. Trade spreads, straddles, covered writes, and stocks online. Get real-time market data throughout our site. Advanced options tools include volatility graphs, implied volatilities, and more. http://mojofarm.mediaplex.com/adserver/click_thru_request/565-58-1875-3 ****************************************************************** *********** JIM'S PLAYS *********** Biotech crashes, Nasdaq corrections, +500 point days! What a week. I happened to be sitting at my PC trading when the Biotechs crashed. I was talking to some of the other traders at the office at the time and we were all dodging the knife. When the report came on CNBC that the intent of the press conference had been misunderstood I quickly sold all the ITM naked puts I could get the market makers to take on HGSI, AFFX, CRA and IDPH. As they quickly bounced off their lows I was congratulating myself on my trading prowess. Unfortunately my "big head" got in the way as the week progressed. The six figure profits I had on Wednesday morning slowly bled thousands as the biotechs failed to continue their rebound. What's wrong? I don't understand! The news was all over that nothing had changed. Don't investors get it? I used every excuse in the book in trying to hope them back up. Finally on Thursday when the Nasdaq rolled over for the last drop to 4455 I bailed on the puts with only 20% of the gains I had on Wednesday morning. Just another example of how to not let your bias and knowledge get in the way. Just because the facts point to one conclusion and the stock is moving in a different direction, always go with the stock. Never fight the tape. The good news about closing all those biotech naked put positions on Thursday morning was it put me back into all cash. When the Nasdaq bottom came later that morning I was ready to establish my positions for April. I opened the following naked puts. If held to expiration they would produce these returns based on my 25% margin requirement at Preferred. Stock Strike Premium Return ADAP - $170 - 22.88 - 54% AMCC - $230 - 39.38 - 68% AMCC - $260 - 41.44 - 64% BRCD - $160 - 22.75 - 57% CIEN - $140 - 10.25 - 29% CMRC - $200 - 18.50 - 37% INSP - $210 - 30.00 - 57% - possibly in trouble MSTR - $230 - 39.50 - 69% NTAP - $190 - 24.38 - 51% PMCS - $200 - 28.25 - 56% SCMR - $140 - 21.13 - 60% SDLI - $180 - 21.94 - 49% SDLI - $210 - 24.44 - 47% VRSN - $210 - 27.13 - 52% YHOO - $170 - 19.88 - 47% ARBA - closed when it rolled back over Friday As long time readers know I will not hold them to expiration for multiple reasons. Time decay will begin rapidly next week as the options become current month. Time decay occurs most rapidly as options go from ITM to OTM. Since all but one of these are now OTM the drop next week should be swift. Premium drop does not happen in a straight line. The bigger the premium the faster the drop but as the premium decreases the slower the decay. Even if the option becomes $30-$40 OTM the last 25% of the premium will bleed very slowly as holders refuse to believe there is no hope for a rebound. Using the YHOO put as an example, the 19.88 premium may lose 50% of its value next week but the last $10 may bleed away over the next three weeks. Once the premium reaches a plateau where decay has slowed to a minimum there is no reason to continue the risk. If I close the play for $5 two weeks early I capture $14.88 profit and I have no risk of some random event like an Ebay purchase or missed earnings from sending me back to a loss some morning before the options even open. Another reason is the increasing margin requirements. The initial margin requirement when sold was $4000. ($160*25%) As the stock price goes up, say to $220 the margin requirement also goes up since it is 25% of the underlying until closed. At $220 the margin would be $5500 per contract. That may not sound like much $4000 to $5500 but I currently have over 400 contracts of the stocks listed above. Multiply 1500 x 400 and you get $600,000. So without making another trade if all the stocks I sold puts on went up then my margin would go up as well. I get no extra premium for the increased margin just increased liability. Using the YHOO example if the premium drops to $5 and YHOO goes to $220 the maintenance percentage at that point would drop to 9%. This does not mean I lost the initial 47% it just means the risk-reward factor for holding YHOO at that point is 9%. If I can close that position and sell another naked put on something else for the 30%-40% returns above then I would be stupid to maintain a 9% maintenance position. If I close the position early at $5.00 then I lock in my returns for the partial month on YHOO at 37% and then do it again with something else. ($14.88 / ($160*.25)) = 37%. I think you can see that if you write ITM naked puts your returns can be very good. As long as you watch your positions the first day or so until they go OTM and then put on a stop loss your risk is actually less than with straight calls. The difference is decay is working for you with puts and against you with calls. ************ I also bought a few calls on YHOO for the expected earnings run. I had looked at calls on YHOO for a week but the premiums were higher than I could stand but when it dipped to $160 on the Nasdaq drop I could not resist. ************ Since I started posting my disclosure notice at the bottom of the market wrap I have received many emails asking why I don't write about all of my trades. Volume! In the March option cycle alone I made over 500 trades and had over 1300 fills. There is no way I could write about them all. ************ Since I backed up the truck on the Thursday dip I am really hoping for a continued rally next week. Of course we all know what hope is worth. ************ There will be no Jim's plays next Sunday. I will be at the Denver seminar with many of our readers from all over the world. I am going to be trading live each day and many of you will get to see how these plays work out in real time plus I will be adding plays based on what we teach and see during the seminar. Good Luck 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: 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? ************ Stock News ************ C.R. Bard: Not High-Tech, But Mid-Tech, Plus Dividends By Matt Paolucci In these days of extreme market volatility and uncertainty, investors have become very short-term focused, which only leads to more volatility. It's becoming more and more difficult to find companies that one would be comfortable holding for the long-term, especially technology-related companies. Well, medical devices maker C.R. Bard (BCR) would may change your mind. C.R. Bard has been around a while, 95 years to be exact. CEO William Longfield describes Bard as a mid-tech company rather than a high-tech company. They are truly a global company, with almost a third of their business coming from outside of the United States. Bard develops, manufactures and markets health care products, including vascular, urological and oncological diagnosis and intervention products, sold to hospitals, health care professionals, and extended care and alternate site facilities. "One of the key things that differentiates Bard from many of the other companies is that in over 70 percent of our product lines we are the market leader. We're a uniquely positioned company that is the leader in almost every business that it's in," Longfield said. The company seems to be on a run. Last week, one of the company's subsidiaries, Davol Inc., received U.S. Food and Drug Administration (FDA) approval to market its Avitene Ultrafoam(TM) collagen sponge used to stop bleeding during surgical procedures by accelerating blood clot formation. The Ultrafoam product is the only collagen hemostatic sponge approved for use in all surgical applications, including neurosurgery, the surgical specialty using topical hemostats most frequently. According to IMS Health, Inc., a national marketing research firm, more than 5 million hemostatic agents are used annually in the United States. Good news for Bard. And in January, Bard received U.S. FDA 510(k) approval to market its Memotherm FLEXX biliary stent for treating cancerous biliary obstructions. The stent and its associated delivery system enable the device to negotiate difficult anatomy and allows the stent to conform to acute bends in the biliary duct. The biliary duct is a small duct that carries bile (aids in the digestive process), which is secreted by the liver, to the gall bladder. The stent business is highly competitive, which includes such companies as Guidant Corp. (GDT) and industry giant Medtronic (MDT). Bard's financials look very healthy, as the company has been busy buying back shares and divesting non-core businesses. For the year ending December 31, 1999, Bard reported fourth quarter revenues of $270 million versus $269 million in the prior year period. Diluted earnings per share was 64 cents versus 48 cents, excluding one-time charges. Full year revenues were $1.03 billion versus $1.16 billion, with earnings per share of $2.28 versus $1.96, net of one-time gains and charges. Longfield stated, "We are just beginning to demonstrate the financial strength that is a result of our strong market positions. Our sales momentum continues to build, while our gross profit margin increases and our SG&A expense decreases as a percentage of sales. Our operating income rose to record levels and, most importantly, the return on shareholder investment was over 20 percent for the year 1999..." Despite the good news, shares of BCR are down from their 52-week high of $59, currently trading for $40, presenting a compelling buying opportunity. The company is highly profitable, boasting net profit margins of almost 12 percent, four times the industry average. Bard actually pays a quarterly dividend, currently two percent, an complete anomaly when considering most growth stocks pay no dividends. Bard's balance sheet is in great shape, with almost $100 million in cash. Of the thirteen analysts surveyed by Zack's Investment Research that follow shares of BCR, only eight have the stock rated either a Strong Buy or Moderate Buy. With earnings per share of $2.28 for fiscal 1999, the stock trades at less than 18 times earnings, and only 15 times fiscal 2000 estimates. ******* Ask OIN ******* What A Difference A Week Makes By Ryan Nelson We went from indestructible to self-destruction in only 4 trading days. It seems like you only have micro-seconds to make your buying decisions now-a-days before you have missed the boat and an even less amount of time to pull the trigger to get out unless you want to get stuck holding the bag. That is why I love the weekend. A chance to step back to analyze just what is happening on Wall Street. Some are calling this week's action on the Nasdaq just another buying opportunity, but I am a skeptic this time around. I think the Nasdaq is ready to take a breather for at least a couple weeks ahead of earnings season, if not longer. The great thing about this healthy bull market though is that money has not moved to the sidelines, just cycled to other sectors. Still no one wants to miss the next big move, no matter where it occurs. That is smart thinking too. Whether it is the Nasdaq, the DJIA, Russell 2000, Japanese markets, Gold, Cyclicals, Europe, Oil, or the Transports. Something is always on the go and it is up to us to figure out where. Before we jump into charts this week, I recommend you take a look at last week's article as we will build on what we talked about. MRVC, for example, will also be a part of this article since it has drastically changed in just 5 days. That is where we will start today. ---------------------------- MRV Communications - MRVC We've played this thing a lot in OI, just not as a straight call play. Probably because Jim and I never found the perfect entry point for that. -last week's article Can you say, Entry Point? There it is. A more than 50 percent retracement, volume picking up near the bottom to catch the fall and a nice candlestick tail. Jim and I liked what we saw and it is now on the call list. I just can't believe it happened so fast! Oh well, instead of sitting around in awe of the move this week, we jumped on the entry point. You know I am somewhat skeptical of the Nasdaq right now, but when you get such a big drop like this one, you are usually good for at least a relief bounce. Especially on a good company in a good sector. Besides some of our other editors and analysts are bullish on the Nasdaq right now as we head to April earnings. Either way, $132 is a lot better than the $184 of last Friday. Here is the chart this week showing some of the technical indicators we like to see in choosing an entry after a pullback. These rules apply to all stocks too, not just MRVC. ---------------------------- Coherent Technologies - COHR Hi, I would greatly appreciate your inputs on COHERENT TECHNOLOGIES (COHR). Regards, Subhashis It's like you are reading my mind. We almost played this as a call play two weeks ago, but just didn't feel real good about it so we passed. We were afraid we might be catching the top. In hindsight, it was a good call as we would have taken a beating on this one. Right now, I have the same view of COHR that I have on almost all Nasdaq stocks...it's cheaper than it was last week. I wanted to show this chart to let you see why we passed on it before and what I think it may do in the short-term. When we initially looked at it, COHR was just under $100 and had a made a run from $20 in early January. That is a healthy move to say the least. We find that $100 is typically a pretty strong psychological resistance level and, after that kind of a run, it takes an incredibly powerful momentum stock to go much higher. Therefore we felt it needed to consolidate. Stocks don't go up in a straight line (unless your RMBS). (I can't believe I am saying that as RMBS used to be a sure thing for short players). Anyway, COHR has pulled back to the 50-dma and bounced in a similar fashion to MRVC with a good candlestick tail, volume, and healthy retracement. It is still stuck under the 10-dma though and I would like to see a close over that level before opening a position. And volume continuing to increase. The main reason I think it may need more to time consolidate, along with the Nasdaq, is the lack of volume we saw in the rebound Friday. Volume is the key to stock price movement in most cases and light volume on the rebound doesn't do it for me. The Nasdaq posted incredibly low volume for a triple- witching Friday. ---------------------------- Clorox - CLX CLX? Arthur Ok, a man of few words, I like that. We will analyze CLX as it comes at a time when scared and wounded Nasdaq investors are beginning to look elsewhere for investment opportunities. Clorox and other of the household stocks perked up this week after a brutal week before when P&G warned of earnings. This hurt the entire sector as fears of higher material costs began to weigh on the group. But where are investors expecting this sector to go? It is already beaten to less than 50% of the 52-week highs, in most cases. Could it be that this was the final capitulation event before a modest recovery? If so, I would like to capitalize on what has to be some incredibly low premiums in this tattered sector. I admit it. I have been dabbling in some LEAPs on some stocks in this group. There is always room for some diversification in your portfolio. I don't own CLX, but when I look at the chart, I love the dead stop CLX had at $30. I think you have a solid amount of buyers at this level. CLX also broke above the 10-dma and out of a 2-month downtrend. Now, we have to be careful here because CLX poked its head above the 10-dma once before in early March at $40, before succumbing to the weakness brought on by PG. This may be a head-fake as well, but I don't think so though. I think CLX was ready to rebound in early March before PG ruined things. That gives us an even better entry point. The problem here, as I see it, is that CLX will never be the big winner like some of the tech stocks we are becoming accustomed too. This isn't necessarily bad, just keep in mind that it is a different kind of play. It is a play based on solid entry points, low premiums, and calculated exit point decisions. What I mean is, buy-low, sell-high and don't get greedy. CLX is not going to bail you out of a bad play with a $15 up-move the day before expiration. We need to see a little more confirmation on the charts with the moving averages starting to round up, and a stair-stepping pattern of higher-lows to build a game plan on, but I wouldn't be surprised to see it happen. Their products aren't going away anytime soon! ---------------------------- Good Luck to all and don't forget to send in the symbols for any stock you want analyzed. Send those requests to Contact Support. Please put the symbol in the subject line of the e-mail. ---------------------------- DISCLAIMER: This column 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 Ask the Analyst 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 its accuracy. ************** Market Posture ************** As of Market Close - Friday, March 17, 2000 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,000 11,500 10,595 Neutral 3.16 * SPX S&P 500 1,400 1,475 1,464 Neutral 3.16 * OEX S&P 100 760 800 787 Neutral 3.16 * RUT Russell 2000 500 520 575 BULLISH 2.24 NDX NASD 100 3,800 4,000 4,440 BULLISH 2.24 MSH High Tech 1,650 2,000 2,191 BULLISH 2.24 XCI Hardware 1,300 1,460 1,624 BULLISH 2.24 CWX Software 1,200 1,470 1,408 BULLISH 2.24 SOX Semiconductor 800 900 1,254 BULLISH 2.24 NWX Networking 940 1,000 1,123 BULLISH 2.24 INX Internet 700 800 819 BULLISH 3.09 BIX Banking 500 600 549 Neutral 3.16 * XBD Brokerage 400 450 527 BULLISH 2.31 IUX Insurance 500 600 515 Neutral 3.16 * RLX Retail 900 1,000 924 Neutral 3.16 * DRG Drug 340 380 345 Neutral 3.16 * HCX Healthcare 700 750 701 Neutral 3.16 * XAL Airline 110 140 133 Neutral 3.10 OIX Oil & Gas 240 300 276 Neutral 3.16 * ***Posture Alert*** The market rallied strong this week off an important support point at the 10,000 level. Bond interest rates fell to their lowest level in six months after news of mild inflation set the stage for only a modest credit tightening by the Federal Reserve next week. Technology stocks regained their leadership role still up 18% on the year. Look for the blue chips to hold their gains next week. We remain bullish in the technology sectors and neutral across most other sectors. **************** Market Sentiment **************** A Preview of Great Expectations! The year 2000 continues on its volatile way, with wild swings that would make you feel like you were at an amusement park. This trend will easily continue, and will probably get worse as more on-line investors try to day trade issues. The month of April starts the beginning of the major earnings run. However, the next two weeks starts the major negative pre-release season; in which companies, who are struggling, will let Wall Street know of their problems. This will be a time when we start seeing equities getting chopped in half, or dropping a large percentage off their current values. However, once we pass this cautionary time, we will be off to the start of another potentially successful earnings run. Below is a small list of equities (that should be reporting their earnings this next week) and our Pinnacle Index for those particular stocks. The Pinnacle Index is a proprietary product that determines current market sentiment and expectations for underlying equities and indexes, which is based upon speculation in the option markets. Also included are their expected earnings, the infamous whisper number (if available), and their estimated earnings release date. What we look for are liquid stocks/options that garner a lot of interest from the investment community. Most of the issues are high tech, and are thus more aggressive. We then filter out many of the equities, only to show stocks with excessive optimism or pessimism. From a contrarian standpoint (a high number is a good indication of extreme optimism, and a low number is a good indication of extreme pessimism) you should buy when its low, and sell when its high. Last quarter, we highlighted some stocks with a Pinnacle Index that were stratospheric (as high as the upper 20's). Needless to say, these stocks had so much pent-up enthusiasm, that after their earnings, they tanked. It is the old adage, buy the rumor - sell the news. There were also numerous companies with a Pinnacle Index less than one. However, once these companies came out with their bad quarter, the stocks rallied due to the oversupply of pessimism. If your favorite stock is not listed, the most common reasons are: 1) there are no options traded on the underlying equity 2) lack of interest by option speculators in the security 3) lack of quality information 4) company already pre-released 5) insufficient data. Also, as we get closer to the heart of earnings season, the list will expand dramatically to reflect companies whose earnings are due out shortly. Company Symbol Pinnacle Expected Whisper#: Estimated Index(PI): Earnings: Date*: 3Com COMS 1.18 +.25 +.26 3/20 Tibex Software TIBX 1.20 +.00 +.01 3/23 Liberate LBRT 1.53 -.17 -.16 3/21 Micron Elect. MUEI 4.80 +.04 +.05 3/20 Micron Tech MU 0.99 +.83 +.92 3/20 So far, the Pinnacle Index for these companies due to report earnings is extremely low, with the exception of Micron Electronics. This is normally unusual, but given the recent sell-off in technology, we expected to see low numbers. The whisper number for Micron Technology is significantly higher than expected, so should they not beat this number, you may see downside pressure. If all of these companies beat their whispers handily, and have positive conference calls, we would expect to see rallies across the board. Have a good trading week. BULLISH Signs: Corporate Earnings: Major corporate earnings continue to come out strong and ahead of analyst expectations, with Oracle being the latest to blow away 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. With the NASDAQ surpassing volume of 2 billion shares again, this money is obviously flowing into technology. Short Interest: Short interest continues to climb as quickly as the market. The short interest on the NASDAQ increased another +8.51%, for a 5th consecutive record. Interest Rates (6.106): The current yield is now safely off of 52-week highs and is temporarily out of the danger zone. Mixed Signs: Volatility Index (25.06): The VIX continues to prove that the low 30's are an excellent buying opportunity, and the low 20's continue to be a great selling opportunity. BEARISH Signs: Pre-Release Season: With April just around the corner, we have the beginning of pre-release season. Over the next 3 to 4 weeks, companies will let Wall Street know that their profit/sales goals are not being met, and their stocks will get brutally punished. The first major corporation to do just this is Proctor & Gamble, with it's 27 point decline. 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. Investor Expectations: More and more investors are now expecting high double-digit growth if not triple-digit expansion in their portfolios. This extreme positive sentiment could help fuel a future selloff in technology shares. 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 (3/17) Overhead Resistance (790-820) 17.94 Overhead Resistance (765-785) 7.16 OEX Close 786.74 Underlying Support (740-760) 0.75 Underlying Support (700-735) 4.27 What the Pinnacle Index is telling us: Based on Friday's readings, underlying support is strong (700-735), and gaining strength. Overhead (overhead resistance is heavy. Put/Call Ratio Friday Strike/Contracts (3/17) CBOE Total P/C Ratio .41 CBOE Equity P/C Ratio .35 OEX P/C Ratio 1.11 Peak Open Interest (OEX) Friday Strike/Contracts (3/17) Puts 720 / 7,621 Calls 750 / 3,820 Put/Call Ratio 1.98 Volatility Index Major Date Turning Point VIX October 97 Bottom 54.60 July 20, 1998 Top 16.88 October 8, 1998 Bottom 60.63 January 11, 1998 Top 26.38 March 4, 1999 Bottom 28.15 May 14, 1999 Top 25.01 July 16, 1999 Top 18.13 August 5, 1999 Bottom 32.12 October 15, 1999 Bottom 32.06 January 28, 2000 Bottom 29.09 March 14, 2000 23.06 ************* COMING EVENTS ************* For the week of March 20th, 2000 Monday Treasury Budget Feb Forecast:-$40.0B Previous: $62.2B Tuesday Trade Balance Jan Forecast:-$26.5B Previous:-$25.5B FOMC Meeting Wednesday None Scheduled Thursday Initial Claims 02/18 Forecast: 270 K Previous: 262 K FOMC Minutes Friday Durable Orders Feb Forecast: Unch. Previous: -1.3% Week of 3/27 03/27 Existing Home Sales 03/28 Consumer Confidence 03/29 New Home Sales 03/30 GDP-Final 03/30 GDP Chain Deflator 03/30 Initial Claims 03/30 Help-Wanted Index 03/31 Personal Income 03/31 PCE 03/31 Chicago PMI 03/31 Factory Orders 03/31 Michigan Sentiment ************************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. 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The Option Investor Newsletter 3-19-2000 Sunday 2 of 5 ************* WOMAN'S WORLD ************* Liquidity Is Key By Mary Redmond We know now that one of the major technical indicators to watch is liquidity. For long term investors, the price of the stock will eventually equal the value of the company, but for day by day or month by month traders, the liquidity of the market is one of the primary driving factors. Liquidity generally refers to money flows to various stocks or sectors of the market. The main one I watch for is cash flows to equity mutual finds. A recent study at the University of Penn. showed a 99% correlation between cash flows to mutual funds and the daily movement of the market. If you look at the flows over the past 6 months you can understand some of the movement we are seeing now. You can see the cash flows to equity and bond funds on the web sites of the investment company institute, ici.org, or several other web sites which track flows. Let's take a look at the last six months and you can see the correlation with movement in the market. In Sept of 1999, new cash flows to equity funds equaled 9.38 billion. Aggressive growth funds took in $2.04 billion. This was only up slightly from August and the Dow dropped about 5% while the NASDAQ stayed in the 2700 range. In Oct of 1999 new cash flows rose to $20.4 billion. Hybrid funds took in $8.6 billion, foreign funds took in $4.42 billion, and aggressive growth took in 5.56 billion. The Dow rose from 10,000 to approximately 10,700 and the NASDAQ started picking up speed and rose to 3000. In November of 1999, new cash flows totaled $19.11 billion, with aggressive growth taking in $8.48 billion. Is it any surprise that the NASDAQ rose from 3000 to 3500? The Dow also participated rising from 10,700 to over 11,000. In December of 1999, the money kept coming as $24.26 billion came into equity funds and aggressive growth funds took in $11.5 billion of the total. The Dow rose from 11,000 to 11,500 and the NASDAQ hit 4000. January of 2000 was the highest month on record with new cash totaling $39.98 billion. Here's the key: aggressive growth, growth, and sector funds took in all the money with a total of $40.48 billion, compared to $26.87 billion the prior month. Practically no money went into blue chip value funds. This was when the Dow started deteriorating, from 11500 to under 10,800. The NASDAQ rallied, rising to 4500. In February the fund flows were strong, but again it was all put into aggressive growth and technology funds. Witness further deterioration of the Dow. Slowly, investors started to redeem their value funds as they lost money. Value funds actually showed a net outflow of cash in February. Meanwhile, tech funds took in close to $10 billion, with the average of $2.5 billion per week. The NASDAQ hit 5000 and the Dow dropped to below 10,000. As far as March is concerned, it appears to be coming in like a lion. For the week ending March 8, $5.4 billion went into funds, and it all went into aggressive growth, small cap, health care and tech. For the week ending March 15, AMG Data Services reported that $5 billion went into US Equity funds, with $2.4 billion going into technology, $2.6 billion going into aggressive growth, and the rest going into small cap. This is indicative that investors still have a strong interest in the NASDAQ and tech stocks. Will the trend of this week continue? I don't think that investors have lost their interest in technology growth funds after just one week of some loses. Since some premier tech stocks have earnings growth in the range of 100% annually, I think the NASDAQ will continue to have higher percentage gains than the Dow. However, it is a very good indicator to have a broadening market. I started the week with only two open options positions, my Nextlink spread and Qwest Jan 55 calls. The Nextlink spread was an example of a smiling skew spread, as the implied volatility for the 110 calls was higher than the implied volatility for the 100 calls. Essentially, this means that more people were buying the 110 calls because they are cheaper. NXLK actually hit $100 Thursday when the NASDAQ was at a low point but it bounced back up again. Nextlink stock has a volatility of over 80% which can also make it a good candidate for covered call writing. I also bought back in to CMGI at $120 because their Alta Vista IPO is scheduled to come out in April which may give CMGI a big boost. It is expected to be a major IPO, raising over $2 billion dollars, and CMGI is a majority shareholder. I had made so much money on the Qwest leaps I had bought previously that I bought back in again last week. Investors seem to be getting bored with this stock since the Deutsche Telecom talks have been suspended, so I decided to write 60 calls against my 55 leaps. The April 60 calls were $1.38, which lowered the purchase price of the 55 leaps. Eventually, if this strategy works out, the 55 leaps will be paid for. I am also considering buying two year leaps on Excite At Home. It is one of the few internet stocks which has decreased significantly in price over the last twelve months, which means the leaps are at bargain basement prices. The market is valuing Excite At Home as if they were going under. The price over book value is only about 1.5, meaning that they are trading right around book value. Short interest is 21%, so if shorts ever have to run for cover we could see a move like the Dow had on Thursday. They have experienced some loss of investor interest this year for a number of reasons. Yet, their revenue growth rate for the nine months ending September '99 was over 700% annually. This might be a good long term play. *************** TRADERS CORNER *************** A Country New: Calendar Spreads By Janar Wasito I have decided to take an extended break from day-to-day, short term trading, and move into calendar spreads. So this will be my last article for a few weeks. In the future, I will cut back to perhaps two articles a month. My reasons are partly personal: finishing up a graduate school program, and getting ready for professional exams. And my reasons are partly due to portfolio management and my estimate of the market. This week has shown us record up days on the DOW and record down days on the NASDAQ. I think that we are probably in for more of the same general volatility. For the last few years, November to April have been very positive periods for the market, but late April through October have been much rougher, to say the least. I started trading options actively a little over a year ago, and I had huge portfolio swings, particularly through the latter period. The Marines have a term for operational execution called "recon pull." The idea is that the reconnaissance effort determines where the main part of the force goes. Sun Tzu had this idea thousands of years ago--an army flows down the hill like water, avoiding the highlands, and clinging to the lowlands. I am applying the same principle in a way. Over the last 2 months, I have tested just about every trading strategy, and I am going with the one that has given me the best results--calendar spreads. I am going in big, with the bulk of what I made in some bullish trades at the end of 1999. Though I risk buying a short term top, I think the LEAPs that I buy will be up, on average, by this time next year. The basic idea is to buy a Long Term option and to write/sell short term (30 day or less) calls against it. The rules of thumb are that you buy a LEAP with half intrinsic and half time premium. This ensures that there is a high delta, thus, the LEAP generally moves in step with the stock. In my version of the strategy, I will be selling front month calls at a strike price about 10% above the current level of the stock when there are about 10 - 12 days left (taking into account factors such as market, sector, and stock oversold/overbought conditions, as I have detailed in previous articles). I want to capture maximum disparity between the time decay of the current month options and the time decay of the long term option. Each month, at expiration, I plan to record the following values: -- total value of the LT Options -- cash flow from selling the ST Options -- increase in value of the LT Options After expiration today, I calculated the first two values and found that the present cash flow from the 10 day short calls I wrote amounted to 9.4% of the value of the LEAPs, and I have 20 more months on those LEAPs. Of course, this was aided by an almost picture perfect scenario in this trading cycle--the stocks tended to peak about 10 days before expiration, making for good entry points into the short calls. In other cycles, the stocks will continue to go up, in which case I will make less from the short calls, but more from the gains in the LEAPs. You do the math: at that rate, I can pay for the LEAP twice over by the time it expires in January, 2002. Think of the LT Options as productive assets--the factory, property, and equipment of your portfolio, consider it a business. They will go up and down in value. The cash flow from the ST Options should be reinvested in PP&E, which in turn throws off more present cash flow. If the stock goes up to the strike price of the option you have sold, buy it back on the day before expiration; the increase in value of the LT Option should offset the loss, if any. The LT Options may go down in value in any given month or two; over time, if you chose your stocks well, they should go up. The secret ingredient of stock selection for this strategy--besides being a gorilla in a rapidly expanding market--is splits. They provide more LEAPs and allow you to sell more ST Options each month. I figure that I can execute this strategy by trading on three days a month: expiration (buying back ST Options, if necessary), the Monday after expiration (buying new LT Options), and the Monday two weeks before expiration (selling ST Options). This strategy will not give me the returns that making the right daily decisions on straight calls or naked puts would, but for the time invested, the average returns should be very good. Depending on where I stand in 6 months, I may go back to some more short term strategies to take advantage of seasonally strong trading periods. It's been a pleasure joining the OI Team and writing actively as I have done for the last 6 months. I've learned more through the experience than I thought possible; I have greater financial alternatives than I did last year, and I have Jim and the other writers to thank for a very useful newsletter. As long as my calendar spreads throw off enough cash for the occasional ticket to the West Coast of Ireland, and a round of Guinness for the lads, I'll be a happy man in the world. Follow the advice of Rudyard Kipling and treat triumph and disaster just the same. "And so, princes, Kent bids you all adieu. He'll chart his old course in a country new" Contact Support ********** "Skews, Ranges, and Probabilities" By Lee Lowell Let's finish off our subject of volatility "skew". For anyone just recently joining us, you can look at our past discussions on the OI website under the "Options 101" section. To recap, volatility "skew" is a characteristic of options where the implied volatility level is different for each option in the chain. Instead of all options trading at the same volatility (flat skew), each option has its own unique implied volatility which can be either higher or lower than its neighbor option. This is called a volatility "skew" and it can take several different shapes. I want to discuss another strategy that takes advantage of the skew effect. It is the type of skew in which the OTM calls get increasingly cheaper on an implied volatility basis. We'll use the backspread as an example. In a backspread, the trader will sell an ITM call and buy two or more ATM or slightly OTM calls for a credit in the account. The backspread can be used after a stock has a pullback, but the trader is still bullish over the longer term. But if for some reason your prediction is wrong and the stock goes down, you still have the initial credit to soften the blow. Assume the scenario: IBM is trading at $100/share. The June $70 call is trading at $35 with an implied volatility of 45% and the June $100 call is trading at $10 with an implied volatility of 40%. Let's sell 1 June $70 call and buy 2 June $100 calls for an initial credit of $15. This gives us unlimited profit potential if IBM moves above our breakeven point of $115 because we'll be longer 1 extra call option. Now if these call options had a flat skew, our profit picture would look a little different. We'll keep the $70 call as is, but move the $100 call's implied volatility to the same level as the $70 call. Now we have a flat skew where both options are trading at 45%. The $70 call is still worth $35 but now the $100 call is worth $13. If we initiate the same backspread, we'll start out with a credit of only $9 this time and our breakeven has moved up to $121. You can see how volatility skew can change your profit/loss scenarios. Like I've said previously, if you buy an option with lower implied volatility than the option you're selling, you start off with an advantage. Basically, whenever you put on any options strategy, whether it is an outright buy or sell of a single call or put, or any complicated spread, just make sure you have an idea of what the volatility level is or what the skew looks like. Knowing your volatility levels and skews ensures you of starting with an advantage or disadvantage for your option position. Not only can implied volatility give us an idea of whether options are relatively cheap or expensive according to past levels, but it can also act as a predictor of possible future movement of the underlying. When you're trying to figure out the probability of profit of your option position, it is the implied volatility that can help. Let's use IBM again. IBM is at $100/share on March 1. You want to sell credit spreads to bring in some extra income to your account, but you need to have an idea of what range IBM might trade in over the next six months. Is there a way to figure that out? Yes. Remember what implied volatility really represents? It's the market's best guess of the future movement of the underlying stock until expiration day. If IBM has a 35% implied volatility, that means that IBM should be trading in a range of +/- 35% from its stock price today over the next year. Well what if we want to find out what the range of IBM might be over the next 6 months, 6 weeks, 6 days, etc. Here's a formula for figuring that out. The implied volatility of 35% helps us figure out a 1 standard deviation move for IBM. This will give us a range for IBM that is 67% accurate. Here's what the formula looks like: 1 STD move = (IV) x (Underlying Price) x (Square root of DTE/ 365) Let's put in some numbers: IBM = $100 IV (implied volatility) = 35% DTE (days to exp.) = 180 365 = days in a year STD (standard deviation) 1 STD = (35%) x ($100) x (Square root of 180/365) 1 STD = (.35) x ($100) x (.70) 1 STD = 24.5 (approx.) Our result tells us that over the next 6 months, IBM should trade in a range of $75.50 - $124.50 with a 67% success rate. If we wanted to be sure with a 95% accuracy rate, then we just double the range to +/- 49 points. So if you were going to sell put or call credit spreads on IBM, use the 2 STD calculation to give yourself more margin for error. Now you know you should sell the $150 calls or the $50 puts as the short leg of your spread. This way you are 95% sure that IBM won't trade through your short option. Check your options chains to see if these strikes have enough premium to sell because they are quite a bit OTM. I would suggest not selling any spreads for less than $0.75. It's just not worth it for that little amount. There's always an exception though. Just remember there's a 5% chance that IBM will go beyond the ranges we just figured out. And you must be aware of the changing implied volatility of IBM. You should probably re-calculate your ranges once a week to make sure your still comfortable with the spread. Always be prepared for the unpredictable. Now don't just go out and haphazardly sell any credit spreads on any stock. You still need to take into consideration the relative level of volatility. Try to sell credit spreads when the stock's volatility is in its high end of the historical range. And look at the price trend of the stock too. If the stock is in an uptrend, you'll be better off selling put credit spreads. If the stock is in a downtrend, you should look to sell call credit spreads. If the stock is in a trading range, then you could sell put and call credit spreads at the same time on the same stock using the same month's expiration. Let's do one more example with the following data: EBAY = $150 DTE = 35 IV = 75% 1 STD = (.75) x ($150) x (sq. root 35/365) 1 STD = (112.5) x (.31) 1 STD = 35 points EBAY should trade in a range of $115-$185 over the next 35 days with a 67% accuracy or $80-$220 with a 95% accuracy. So set your spreads accordingly. So we've figured out our probabilities if we're selling the options. What about if we buy an option? What's our probability of the option being ITM by expiration? That's where the delta of the option comes into play. The delta of an option can tell us a few different things. One, the probability of our option finishing ITM by expiration day. If you buy a call option with a .75 delta, this is telling you that the option has a 75% chance of being ITM by expiration. A delta of .25 indicates a 25% chance of our option finishing ITM. This doesn't mean that you will make money on your option even though it might be ITM by expiration. If you bought an IBM $130 call at $10 and IBM closes at $132 on expiration day, you will have lost $8 on your trade even though your option finished ITM. You really want your option to finish ITM by more than what your option cost you. In order for your $130 call to be profitable, you need IBM to close above $140 by expiration. The delta also tells us the rate of change in the option price compared to the movement of the underlying. If your call option has a .75 delta, this means that for every $1 move in the underlying (up or down), your option price should increase or decrease by $.75. The last way to use the delta really affects floor traders more than anyone else. The delta number will tell you how many shares of stock to completely hedge against your option position. If you buy 100 call options with a .75 delta, this is equivalent to being long 7500 shares of stock. So you would need to sell 7500 shares of stock to be completely delta neutral. This really applies to floor traders who deal in large quantity of stock and options. They do this sort of hedging activities to lock in price discrepancies of the options. They will buy or sell large quantities of the options and then immediately offset their risk by simultaneously buying or selling the underlying security in the amount indicated by the delta. That pretty much sums up what volatility skew is all about. We've also seen how to figure out the probable range of a stock over a certain amount of time, and the probability of an option position finishing ITM by expiration. As Forrest Gump once said, "That's all I have to say about that". Good luck, Lee Lowell Contact Support ******************* TRADING CLUB UPDATE ******************* Sunday, March 19, 2000 OPTION INVESTOR TRADING CLUBS ARE BROADENING THEIR HORIZONS!!! Visit the trading club message boards and see what others have to say: http://boards.OptionInvestor.com/tradersclubs/ Option Investor Trading Clubs can be found all over the world. If it has been a while since you checked on a club in your area, you need to contact us today. We currently have 102 clubs globally. We have several new clubs starting every month. Join other investors in discussing experiences, strategies and the current market. The Option Investor Trading Club provides you with an outstanding investment tool. If you would be interested in meeting regularly with other investors, drop us a line at Visit@OptionInvestor.com or Contact Support ******* MAILBAG ******* Concerning Spread ROI's: DEAR OIN: How do you calculate the ROI's for basic spread positions? Answer: Return on investment (ROI) is simply the amount returned against the amount invested. In any play, you invest a certain amount and when you close the position (sell out or buy back) or it expires, you have gained or lost a specific dollar amount. That amount divided into what you invested is your return or ROI. In a debit spread, the maximum ROI is simply the maximum credit divided by the initial debit. There is no margin requirement for a debit position (you can not lose more than you invest). In the case of BCMS: PLAY (speculative - bullish/debit spread): BUY CALL APR-35 BCQ-DG OI=6 A=$17.25 SELL CALL APR-45 BCQ-DI OI=845 B=$8.75 INITIAL NET DEBIT TARGET=$8.25 ROI(max)=21% Initial debit = $8.25 (actually we only managed to achieve $8.50) Maximum possible credit = $1.75 $1.75/$8.25 = 21% - nothing more, nothing less...you factor in the commissions based on the number of contracts. With credit spreads the ROI is similar, only the amount invested is the COLLATERAL required. If I spend (or collateralize) $4/contract and I receive $1/contract, I have earned $1 on $4 invested, per contract...thus an ROI of 25%. Credit spread collateral is a simple formula: The difference between the strikes minus the initial credit received, times the number of contracts. It's also the maximum amount of loss (obviously). In the case of the recent CMGI play: PLAY (aggressive - bullish/credit spread): BUY PUT MAR-115 GCD-OC OI=1825 A=$2.31 SELL PUT MAR-120 GCD-OD OI=2531 B=$3.00 INITIAL NET CREDIT TARGET=$0.75-0.81 ROI(max)=17% If you achieve $0.75 initial credit then...$5 - $0.75 = $4.25 Your broker will need $425.00 for every contract opened in this play...that's the absolute maximum loss (at expiration). The ROI is simply $0.75 / $4.25 = 17.6% (again, commissions not included) As far as other combination strategies and ROI calculations: Diagonal spreads are initially like debit spreads but they must be re-calculated as adjustments are made; Calendar spreads and Covered-calls with LEAPS require a more complex approach (far too extensive to explain in this forum) but the information is available in a number of popular books including "McMillan on Options" and "Option Volatility & Pricing; Advanced Trading Strategies and Techniques" by Sheldon Natenberg. Good Luck! ------------- Concerning Naked-Put ROI's: Dear OIN: How do you calculate your monthly return on naked puts? For example: ORCL $83.12 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put MAR 67 ORY OU 1905 0.88 66.12 16.5% Sell Put MAR 70 ORY ON 7139 1.31 68.69 20.7% *** Sell Put MAR 72 ORY OV 1525 1.75 70.25 24.8% Answer: The return on investment (ROI) is based on the equity required to be in your account to start the play and would equal the premium received divided by the equity requirement. The equity requirement would be the greater of the following: (based on E*trade and other common E-brokers) (0.40 * Price Picked + Premium - ( Price Picked - Strike Price)) or (0.20 * Price Picked + Premium) which will take precedence as you go deeper out-of-the-money. Using ORCL as an example: Price Picked $83.12 Strike = 70 Premium received = $1.31 20% equity requiremt.(per shr) = 0.2 * 83.12 + 1.31 = 17.94 40% equity requiremt.(per shr) = 0.4 * 83.12 + 1.31 - (83.12 - 70) = 21.44 The equity requirement = 21.44 ROI = 1.31 / 21.44 = 6.1% after multiplying by 100 I calculate a monthly return by dividing the ROI by the number of days left to expiration to get a daily ROI. I then multiply by 365 and divide by 12. Number of days left to expiration = 9 Monthly Return = 6.1 / 9 * 365 / 12 = 20.6% Good Luck! LAST WEEKS CHANGE FOR THIS WEEKS PICKS: *************************************** Daily Results Index Last Week Dow 10595.23 666.41 Nasdaq 4798.13 -250.49 $OEX 786.74 37.24 $SPX 1464.47 69.40 $RUT 574.77 -29.04 $TRAN 2623.83 258.54 $VIX 23.67 -0.13 Calls Week INTC 129.88 9.69 New, sights set on new highs AOL 64.38 5.63 New, things are looking up DELL 56.44 5.19 Future looks bright w/plenty of upgrades SEG 68.75 4.50 New, on a tear, up 40% in last month SNE 248.06 4.31 Dropped, time to find new toys BMCS 55.06 3.13 New, possible upside pre-announcement RATL 88.50 1.56 New, shows support at $84 BGEN 84.88 0.81 "Unfairly beat up" equals good value CSCO 135.00 -1.38 Only three days left to play this split NITE 51.75 -1.70 Markets posting large aggregate volumes EXDS 151.25 -5.75 New, move past 10-dma confirms uptrend YHOO 171.13 -6.94 A pure and simple earnings play! BWEB 49.25 -8.75 Orderly decline with no panic mentality HWP 138.00 -8.94 Undervalued & looks to be headed higher IDPH 118.94 -10.38 "Shell shock" selling provide good entry NOK 199.88 -18.00 March 22nd vote for 4:1 split TIBX 119.63 -18.56 Only four days until earnings SCMR 144.50 -25.50 New, valuation reflects opportunity FDRY 169.25 -31.94 Dropped, pullback got out of hand NTAP 200.75 -41.00 Dropped, split run play took nasty turn CHKP 235.50 -44.38 "Support and bounced," convinced? MRVC 132.88 -51.63 New, can you say oversold? VERT 220.63 -52.56 Live by momentum, die by it VIGN 236.25 -60.75 Finally found support at $233 Puts TERN 188.56 -77.94 New, heading south fast ISLD 82.63 -25.88 New, downhill slide since early March CIEN 142.63 -20.26 Dropped, no more bungee-trading for us CKFR 70.19 -18.44 New, sickly technicals makes good put BVF 50.63 -2.63 Dropped, "See you in September" or not EK 57.44 3.44 Continues to bounce STOCKS ADDED TO THE PICK LIST ***************************** Calls SCMR - Sycamore Networks RATL - Rational Software Corp. INTC - Intel Corporation BMCS - BMC Software Inc. SEG - Seagate Technology, Inc. EXDS - Exodus Communications, Inc. MRVC - MRV Communications Inc. AOL - America Online Inc. Puts ISLD - Digital Island CKFR - Checkfree Holdings Corporation TERN - Terayon Communication Systems *************************** 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 SNE $248.06 (+4.31) Similar to a child 2 days after getting a new toy, SNE investors seem to have lost interest in the issue, now that all the news is out. Sure, rumors of a recall have been dispensed with, but news on Friday of yet another glitch in the company's new PlayStation2 have left investors a little gun-shy. The stock has been unable to hold support at $250 and doesn't look to have a lot of juice to push it higher. Until all the news is digested, SNE will likely meander around its current level, so we'll put it away and search for other toys to play with. NTAP $200.75 (-36.13) Our split run play in NTAP took a nasty turn this week, as traders sold tech stocks like there was no tomorrow. The networking company lost about 32% in the process, but did manage to gain back about half of its losses. Although intraday charts are pointing higher, NTAP closed against the resistance level at $200 on Friday. NTAP will split its stock 2-for-1 Wednesday after the close, and could have a little more room to go. For those with positions in NTAP, that want to hang on for a last minute surge, we would view the area near $188 as a point to fold. We are dropping NTAP this weekend as time is running out. NTAP did provide us with a good run earlier, but we will look elsewhere as the recent pullback in tech issues is providing us with better opportunities at this time. FDRY $169.25 (-31.94) Whoa! This pullback thing got a little out of hand. Our concerns with the lack of buyers on Thursday's rebound, and to a lesser degree March 25th's lockup expiration, are proving to be well founded. Against the grain of Friday's NASDAQ market, FDRY actually shed over $5 and bounced south of both its 5-dma of $176.10 and 10-dma of $178.80. We don't recommend taking new positions at this level. Perhaps after the consolidation firms and the lockup selling runs its course, we can revisit the issue. But for now, it's time to cast FDRY in the slag heap. PUTS CIEN $142.63 (-20.25) Short and sweet was our play on CIEN. The recovering NASDAQ combined with solid support at $115 was all it took for the stock to reverse directions. The bungee- trading on Thursday looks to have created a near-term bottom for the stock and the move higher has been confirmed by healthy volume. The increase in the number of authorized shares was approved at Thursday's shareholder meeting, so a split announcement could be waiting in the wings. Friday's good move, puts CIEN solidly above its 30-dma ($129.65), and support at $134. CIEN looks like it may have further upside in store, and with the ground level rising, we'll take our bungee cords and go home before we get hurt. BVF $50.63 (+0.38) Bye-bye, so-long, farewell is how the lyrics begin the song "See you in September". Well, we don't know if it will be September or not, but we are saying farewell to BVF. BVF did give us quick drop early in the week, but it wasn't much and you would have had to be quick to pull the trigger as well. Actually after bouncing off the $46-47 area for most of the week BVF seems to be putting in a bottom. Fundamentally things haven't changed much in the last few days, but investors have been willing to step in at these levels and began to slowly bid the price back up. Is this the bottom? We don't know, but BVF has had every chance to continue lower, only to find buyers waiting in the wings. The volume did pick up Friday, so we believe its time to say so-long to this one. STOCK SPLIT CANDIDATES *********************** Current Split Candidates TIBX - Tibco Software INTC - Intel Corp CHKP - CheckPoint Software Split candidates that are not current plays EMC - EMC Corp PHCM - Phone.com FDRY - Foundry Networks EBAY - EBay Inc. STOCKS WITH UPCOMING SPLITS **************************** We don't list all splits available, only those we feel may have play possibilities. Symbol - Stock Splits/Date TLGD - Tollgrade Comm 2:1 03-20-00 ex-date 03-21 IMNX - Immunex Corp 3:1 03-20-00 ex-date 03-21 EVRC - Evercel Inc 2:1 03-21-00 ex-date 03-22 TTPA - Trintech Group 2:1 03-22-00 ex-date 03-23 DISH - EchoStar Comm 3:1 03-22-00 ex-date 03-23 PUMA - Puma Tech Inc 2:1 03-22-00 ex-date 03-23 SANM - Sanmina 2:1 03-22-00 ex-date 03-23 CSCO - Cisco 2:1 03-22-00 ex-date 03-23 WON - Westwood One 2:1 03-22-00 ex-date 03-23 NTAP - Network Appliance2:1 03-22-00 ex-date 03-23 AMCC - Applied Micro 2:1 03-23-00 ex-date 03-24 BWAY - Breakaway 2:1 03-23-00 ex-date 03-24 NSOL - Network Solution 2:1 03-23-00 ex-date 03-24 LDP - London Pacific 4:1 03-24-00 ex-date 03-27 ARTG - Art Technology 2:1 03-24-00 ex-date 03-27 TEVA - Teva Pharma 2:1 03-24-00 ex-date 03-27 PCLE - Pinnacle Systems 2:1 03-24-00 ex-date 03-27 HAUP - Hauppauge Digitl 2:1 03-24-00 ex-date 03-27 JWG - JWGenesis 3:2 03-24-00 ex-date 03-27 KCP - Kenneth Cole 3:2 03-27-00 ex-date 03-28 LLTC - Linear Tech 2:1 03-27-00 ex-date 03-28 IQIQ - ViaLink 2:1 03-27-00 ex-date 03-28 SMTL - Semitool Inc 2:1 03-28-00 ex-date 03-29 USIX - USinterworking 3:2 03-28-00 ex-date 03-29 SRNA - SERENA Software 3:2 03-29-00 ex-date 03-30 JBL - Jabil Circuit 2:1 03-30-00 ex-date 03-31 CRGN - CuraGen Corp 2:1 03-30-00 ex-date 03-31 COVD - Covad Comm 3:2 03-31-00 ex-date 04-03 QSFT - Quest Software 2:1 03-31-00 ex-date 04-03 ARBA - Ariba 2:1 03-31-00 ex-date 04-03 VERT - VerticalNet 2:1 03-31-00 ex-date 04-03 RADS - Radiant Systems 3:2 03-31-00 ex-date 04-03 RMD - ResMed Inc 2:1 03-31-00 ex-date 04-03 CMVT - Comverse Tech 2:1 04-03-00 ex-date 04-04 ENGA - Engage Tech 2:1 04-03-00 ex-date 04-04 ASGN - On Assignment 2:1 04-03-00 ex-date 04-04 RDBK - Redback Networks 2:1 04-03-00 ex-date 04-04 ADRX - AndrxCorp 2:1 04-03-00 ex-date 04-04 GRDN - Guardian Tech 2:1 04-03-00 ex-date 04-04 NYFX - NYFIX Inc 3:2 04-04-00 ex-date 04-05 CTCI - CT Comm 2:1 04-05-00 ex-date 04-06 VITR - Vitria Tech 2:1 04-05-00 ex-date 04-06 NAVI - NaviSite 2:1 04-05-00 ex-date 04-06 UTCI - Uniroyal Tech 2:1 04-05-00 ex-date 04-06 SBL - Symbol Tech 3:2 04-05-00 ex-date 04-06 ABGX - Abgenix 2:1 04-06-00 ex-date 04-07 PWR - Quanta Services 3:2 04-07-00 ex-date 04-10 LINK - Interlink Elec 3:2 04-07-00 ex-date 04-10 WDR - Waddell & Reed 3:2 04-07-00 ex-date 04-10 HDI - Harley Davidson 2:1 04-07-00 ex-date 04-10 DLK - Datalink.net 2:1 04-10-00 ex-date 04-11 CELG - Celgene Corp 3:1 04-11-00 ex-date 04-12 MKTY - Mechanical Tech 3:1 04-12-00 ex-date 04-13 FNSR - Finisar Corp 3:1 04-12-00 ex-date 04-13 VIGN - Vignette Corp 3:1 04-13-00 ex-date 04-14 MFNX - Metromedia Fiber 2:1 04-17-00 ex-date 04-18 MLNM - Millenium Pharm 2:1 04-18-00 ex-date 04-19 CMRC - Commerce One 2:1 04-19-00 ex-date 04-20 AHAA - Alpha Industries 2:1 04-19-00 ex=date 04-20 ELNT - Elantec Semi 2:1 04-21-00 ex-date 04-24 KSS - Kohls Corp 2:1 04-24-00 ex-date 04-25 MCLD - McLeodUSA 3:1 04-24-00 ex-date 04-25 APH - Amphenol Corp 2:1 04-25-00 ex-date 04-26 GE - General Elec 3:1 04-26-00 shareholder mtg CYSV - Cysive Inc 2:1 05-08-00 ex-date 05-09 AXP - American Exprs 3:1 05-10-00 ex-date 05-11 ALKS - Alkermes 2:1 05-12-00 ex-date 05-15 SIVB - Silicon Valley 2:1 05-15-00 ex-date 05-16 SNE - Sony Corp 2:1 05-19-00 ex-date 05-22 CXR - Cox Radio 3:1 05-19-00 ex-date 05-22 AEG - AEGON N.V. 2:1 05-30-00 ex-date 05-31 MOT - Motorola 3:1 06-01-00 ex-date 06-02 MEDI - Medimmune 3:1 06-02-00 ex-date 06-05 NXTL - Nextel Comm 2:1 06-06-00 ex-date 06-07 ANEN - Anaren Micro 3:2 06-09-00 ex-date 06-12 AA - Alcoa 2:1 06-09-00 ex-date 06-12 RMBS - Rambus 4:1 06-14-00 ex-date 06-15 NXLK - Nextlink 2:1 06-15-00 ex-date 06-16 EXDS - Exodus Comm 2:1 06-20-00 ex-date 06-21 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: ********************** TIBX - Tibco Software $119.63 (-18.56)(+16.19) See details in sector list Chart = /charts.asp?symbol=TIBX **** BMCS - BMC Software Inc. $55.06 (+3.13) See details in sector list Chart = /charts.asp?symbol=BMCS Put play of the day: ******************** CKFR - Checkfree Holdings Corporation $70.19 (-18.44) See details in put list Chart = /charts.asp?symbol=CKFR ************* 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 *********** SEG - Seagate Technology, Inc. $68.75 (+4.50) Seagate is a leading provider of technologies and products that enable people to store, access, and manage information. Seagate is the world's largest manufacturer of disk drives. The company sells its products mainly to manufacturers such as Compaq. Seagate continues to drive new solutions for the enterprise and Internet markets, where the demand for storage is ever increasing. The company continues to expand through investment and acquisition. Seagate owns about 128 mln shares of the data storage giant Veritas, adding roughly $100 per share to the stock. Looking for some value in the tech sector? SEG is on a tear, up 40% in the last month. The stock has climbed higher on the heels of a resurgent PC sector and an increased demand for data storage. The investment in VRTS doesn't hurt either. Many traders are buying SEG as a cheaper way to play VRTS. Last week the stock was hit by some brutal profit-taking and overall sector weakness. On Thursday, SEG muscled through the 5-dma, back above support. Look for the stock to continue to bounce above support on strong volume. The wide intraday swings are providing great entry points. A dip below the 5-day would be a good place to look for entry into this play. Or on a breakout over resistance at the $72-$73 level. SEG is slated to report earnings on April 13th. The company has blown away analyst estimates two quarters in a row. An earnings run should begin sometime this week as traders anticipate more good news from SEG. BUY CALL APR-65 SEG-DM OI=2229 at $ 9.88 SL=6.75 BUY CALL APR-70*SEG-DN OI=1955 at $ 7.88 SL=5.50 BUY CALL APR-75 SEG-DO OI= 677 at $ 5.88 SL=3.50 BUY CALL JUN-70 SEG-FN OI= 402 at $11.50 SL=8.50 BUY CALL JUN-75 SEG-FO OI=1449 at $ 9.75 SL=6.75 Picked on Mar 19th at $68.75 P/E = 17 Change since picked +0.00 52-week high=$73.75 Analysts Ratings 4-6-4-0-0 52-week low =$25.13 Last earnings 01/00 est=0.09 actual=0.14 Next earnings 04-13 est=0.13 versus=0.49 Average Daily Volume = 2.68 mln /charts/charts.asp?symbol=SEG **** INTC - Intel Corporation $129.88 (+9.69) Intel Corporation designs, develops, manufactures and markets computer components and related products at various levels of integration. Intel's principal components consist of silicon- based semiconductors etched with complex patterns of transistors. The Company's major products include microprocessors, chipsets, embedded processors and micro-controllers, flash memory products, graphics products, network and communications products, systems management software, conferencing products and digital imaging products. Intel sells its products to original equipment manufacturers (OEMs) of computer systems and peripherals; PC users (including individuals, large and small businesses and Internet service providers) who buy Intel's PC enhancements, business communications products and networking products. Take a look at a 3-month chart of INTC. On January 31st, INTC had an intraday low of $92.88. And that's the last INTC saw of those levels. From there, it's been a steady and strong climb to it's current level of $129.88, which is a new 52-week high. Notice that it traded off its 10-dma for most of this uptrend, and when it violated the 10-dma, it was for a brief moment. In one case, the 30-dma provided a bounce. It has been an impressive run and it appears to be getting better. Throughout this volatile trading week, INTC volume remained strong and it held smartly as the NASDAQ withered and revived. During the major NASDAQ sell-off on Wednesday, INTC did not break. And on Thursday, INTC found good support at $120. With a little luck from the Irish on Friday, INTC established intraday support around the $127.75-$128 level. INTC got a little help from its friends as well. In the news, CS First Boston reiterated a Strong Buy for INTC and repeated its 12-month price target of $150. Robbie Stephens came out and upgraded INTC from a Buy to a Strong Buy. Also, INTC acquired Denmark's GIGA A/S, a manufacturer of network components, such as high speed communication chips used in optical networking and in directing internet traffic. According to a company press release, there is "explosive internet growth behind the GIGA buy." So the technicals are strong and the news is good. Next week should be an interesting one as we watch INTC closely. Support is at $128-$127.75 and below that, $125. Resistance will be psychological as INTC attempts new highs. Keep these levels in mind when looking for entry points. Word on the Street is that INTC is having a stellar quarter and may pre-announce that it will exceed earnings estimates. Maybe that's why these brokers have been talking this past week. We'll have to see. BUY CALL APR-130*INQ-DF OI=11867 at $8.00 SL=6.00 BUY CALL APR-135 INQ-DG OI= 6273 at $5.75 SL=4.00 BUY CALL APR-140 INQ-DH OI= 4195 at $4.00 SL=2.50 BUY CALL JUL-150 INQ-GJ OI= 2545 at $7.75 SL=5.75 Picked on Mar 19th at $129.88 P/E = 62 Change since picked +0.00 52-week high=$129.88 Analysts Ratings 20-12-6-0-0 52-week low =$ 50.13 Last earnings 01/00 est= 0.63 actual= 0.69 Next earnings 04-12 est= 0.68 versus= 0.57 Average Daily Volume = 26.03 mln /charts/charts.asp?symbol=INTC **** DELL - Dell Computer $56.44 (+5.19)(+5.00) Dell Computer is the world's #1 direct-sale computer vendor and one of the world's top PC makers. Therefore it's understandable that the company designs, develops, manufactures, markets, services, and supports a variety of computer systems including desktops, notebooks, workstations, network servers, and storage products. Dell's clients include the government, corporations, the medical and education industries, as well as the individual consumer. Founder Michael Dell is still the CEO and maintains a 14% stake in the company. DELL's future looks bright with the previous week's upgrades and upward revisions of price targets driving the stock price. The strengthening sector, signs that corporate customers are interested in purchasing more PCs, and recent news that Dell will introduce a new line of servers to offset any slowing in overall PC sales were the pertinent factors that initiated DELL's recent revival (see last Sunday's write-up for further details). The continuous slew of stimulants such as the above- mentioned is what drives a stock higher. By Tuesday the growing momentum launched DELL to a new all-time high of $57.94! Indeed the market volatility was hellish, but this stock survived practically unscathed. On Friday it was again pushing towards its opposition. Even though near-term support is established at $55, in-line with the rising 5-dma ($55.18), look for DELL to hold this level before opening any new positions. Play on the side of caution and confirm another breakout. The myriad of analysts' comments this week were dazzling. The details were reported in Tuesday's lengthy update. On Friday there was more specific news surrounding Dell's expansion into the server appliance market. It's rumored that the company will unveil its new lineup, perhaps called PowerApp, before its financial analyst meeting next month. Importantly, this move to enter one of the hottest hardware growth areas will offset any decline in PC prices. BUY CALL APR-50 DLQ-DJ OI=22841 at $8.00 SL=6.00 BUY CALL APR-55 DLQ-DK OI=11586 at $4.75 SL=2.75 BUY CALL APR-60 DLQ-DL OI=13975 at $2.69 SL=1.25 BUY CALL MAY-55 DLQ-EK OI=20031 at $6.38 SL=4.75 BUY CALL MAY-60*DLQ-EL OI=12473 at $4.13 SL=2.50 BUY CALL MAY-65 DLQ-EM OI= 4234 at $2.56 SL=1.25 Picked on March 9th at $50.44 P/E = 93 Change since picked +6.00 52-week high=$57.94 Analysts Ratings 17-13-4-0-0 52-week low =$31.38 Last earnings 12/99 est= 0.15 actual= 0.16 Next earnings 05-18 est= 0.16 versus= 0.16 Average daily volume = 34.9 mln /charts/charts.asp?symbol=DELL **** HWP - Hewlett Packard $138.00 (-8.94) As the #2 computer company worldwide, HWP provides computers, imaging and printing peripherals, software, and computer-related services. Taking full advantage of the tremendous international growth, more than half of the company's sales come from outside the U.S. HWP is in the process of restructuring itself as an Internet specialist, providing Web hardware, software, and support to corporate customers. In pursuit of that goal, the company recently spun off its test and measurement and medical electronics businesses as Agilent Technologies (A). Investors seemed to agree with the view that HWP is undervalued, as the issue tacked on $5 on Friday. This followed comments from the company (see news below) on Thursday that the computer company was undervalued in relation to its peers. As HWP continues to launch new products and grow revenue at a 20% clip, investors are taking notice again. Additionally, above $140 the company becomes a split candidate, and has more than enough shares to pull it off. With a classic bounce right at the 50-dma ($123.25) on Thursday, HWP has already gained $14 from the lows of the week. The recovery is encouraging, as it has come on very strong volume, approaching twice the ADV on Thursday. The long tail on the candlestick from Thursday is a good indicator of investor convictions that HWP is a bargain in the mid 120's. The recovery ran into some resistance near the 10-dma ($142) on Friday and pulled back into the close. With the continued positive press, HWP looks to be headed higher from here. With the FED expected to raise interest rates next week, we might get lucky and see an entry as HWP retests support near the 30-dma (currently at $132.50). A more conservative approach would be to wait for a convincing break through of resistance near $141. On Thursday, HWP confirmed that it is on track to make its revenue growth goals of 12-15 percent and said that its stock is undervalued. After the recent spinoff of Agilent, HWPs treasurer, Larry Tomlinson, places the PE ratio of the company near 25 and says it should be closer to 35, based on the valuations of its peers. Continuing to innovate, HWP announced on Thursday that its HP 9000 N-Class e-commerce servers are now the fastest on the market. BUY CALL APR-135 HWP-DG OI= 552 at $12.00 SL= 9.50 BUY CALL APR-140 HWP-DH OI=1181 at $ 9.75 SL= 7.25 BUY CALL APR-145*HWP-DI OI=1349 at $ 7.38 SL= 5.50 BUY CALL MAY-140 HWP-EH OI=1508 at $12.75 SL=10.25 BUY CALL MAY-145 HWP-EI OI= 167 at $10.63 SL= 8.25 SELL PUT APR-120 HWP-PD OI= 833 at $ 2.88 SL= 4.50 (See risks of selling puts in play legend) Picked on Mar 16th at $133.00 P/E = 46 Change since picked +5.00 52-week high=$155.50 Analysts Ratings 10-12-6-0-0 52-week low =$ 65.13 Last earnings 02/00 est= 0.77 actual= 0.80 Next earnings 05-17 est= 0.81 versus= 0.88 Average Daily Volume = 3.61 mln /charts/charts.asp?symbol=HWP ******************************** CALLS CONTINUED IN SECTION THREE ******************************** ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** **************************** SEE DISCLAIMER IN SECTION ONE
The Option Investor Newsletter 3-19-2000 Sunday 3 of 5 *************** CALLS CONTINUED *************** Internet ******** EXDS - Exodus Communications, Inc. $151.25 (-5.75) Exodus provides Internet system and network management solutions for companies with mission-critical Internet operations. The company offers sophisticated systems along with technology professional services to provide optimal performance for customers' Web sites. Exodus has a long list of customers, including: EBAY, YHOO, SUNW, and AMAT. The company continues to expand its business through acquisitions and expansion overseas. EXDS operates global data centers in Tokyo, London, and Frankfurt. EXDS is making the Web a bigger, better, and faster place. The company is a pick and shovel provider in the proverbial Internet gold rush. EXDS lost some ground last week, and many traders are pointing to the expiration of the recent lockup period as the reason for the decline. Essentially, the lockup period is the time after new stock has been issued when insiders cannot sell. Once this period expires, insiders can sell their stock. This selling tends to push the price of the stock down. On Tuesday of last week, EXDS began selling off on heavy volume. Once the insiders are done selling, there tends to be built-up demand for the stock. It appears that the insiders are done selling, noting the $11 gain on Friday. With the added liquidity provided by the recent selling, large institutions may step in and begin accumulating shares at these lower levels. Minor resistance is at the 10-dma (currently $155 and major resistance is at the $165 level. EXDS did manage to close above $150 which was acting as resistance all day Friday. Last week Exodus received positive comments from several analysts. Credit Suisse First Boston analyst Tim Newington said that Exodus is positioned well to be the dominant player in the web hosting market. Also, AG Edwards initiated coverage on EXDS with an Accumulate. BUY CALL APR-155*QED-DK OI= 308 at $17.63 SL=12.50 BUY CALL APR-160 QED-DL OI=2322 at $15.63 SL=11.25 BUY CALL APR-165 OED-DM OI= 276 at $13.88 SL=10.00 BUY CALL JUN-165 OED-FM OI= 162 at $22.25 SL=16.00 Picked on Mar 19th at $151.25 P/E = N/A Change since picked +0.00 52-week high=$175.00 Analysts Ratings 18-11-0-0-0 52-week low =$ 12.13 Last earnings 10/99 est=-0.21 actual=-0.25 Next earnings 04-21 est=-0.24 versus=-0.14 Average Daily Volume = 5.23 mln /charts/charts.asp?symbol=EXDS **** MRVC - MRV Communications Inc. $132.88 (-51.63) MRV Communications is focusing on fiber-optics. Around 80% of the company's sales come from its networking products, which direct and move data around corporate LANs and WANs. The other 20% of sales come from MRV's fiber-optic voice, data, and video transmission components. MRVC is another company that is making the Internet a better place to be. MRVC is developing technology for the next generation of Internet infrastructure, as the Web evolves into a global communications network. Can you say oversold? Some tech stocks took it on the chin last week, with MRVC among them. The stock was in free fall, losing nearly 75 points before rebounding on Thursday. It appears the carnage is over after finding support at the current levels. The story here is that nothing fundamentally changed with the company last week. The stock has doubled in less than a month and some profit-taking was in order. However, the combination of profit-taking and fear drove MRVC down to levels that now present a good opportunity for traders who can tolerate more risk. When placing a trade, look for the stock to get above light resistance at $135. A move above $135 shouldn't encounter much resistance all the way to the 10-dma at $164. Wait for the stock to regain momentum after traders refocus on earnings scheduled for April 26th, and the recent 2-for-1 stock split announcement set for the end of May. This is high risk play so look for intraday weakness to find entry points. Confirm the direction of the stock after entering any new plays and set tight stops. The quicker the play, the better, to limit your risk. Also see both this week's and last week's Ask the Analyst columns for more info on MRVC. BUY CALL APR-135*RVY-DG OI=127 at $21.63 SL=15.50 BUY CALL APR-140 RVY-DH OI=325 at $19.63 SL=14.50 BUY CALL APR-145 RVY-DI OI= 76 at $18.00 SL=13.00 Picked on Mar 19th at $132.88 P/E = N/A Change since picked +0.00 52-week high=$194.88 Analysts Ratings 1-0-1-0-0 52-week low =$ 5.88 Last earnings 01/00 est=0.02 actual= 0.02 Next earnings 04-26 est=0.03 versus=-0.03 Average Daily Volume = 1.28 mln /charts/charts.asp?symbol=MRVC **** AOL - America Online Inc. $64.38 (+5.63) Founded in 1985 America Online says they are the world's leader in interactive services, Web brands, Internet technologies and e-commerce services. They operate two world-wide Internet services AOL, with more than 21 million members and CompuServe with more than 2.5 million members. Through its strategic alliance with Sun Microsystems, the company develops and offers business operating in the Net Economy easy to deploy, end-to-end e-commerce and enterprise solutions under the alliance iPlanet brand. Their other leading Internet brands include ICQ, AOL Instant Messenger, Digital City and the Netscape Netcenter. One of the recent whipping boys in the Internet sector is back on our play list. Since its high in mid-December shares of AOL have been getting kicked around and shown no respect. The merger announcement early this year with Time Warner did little to prop up the price of the company's stock as investors were no longer sure who or what they were dealing with, a hot Internet company, or an old world media company. The major Internet indexes moved sideways to higher ever since, leaving this old Internet favorite in the dust. Whether its because investors have begun to get more comfortable with the idea of the merger, or that AOL traded below the $50 level, investors finally decided that AOL was worth another look. Since the merger announcement most of the analysts that follow the company have continued to pound the table on AOL reiterating Strong Buy and Buy ratings, with several making it a "top pick". This week the "old world" stocks were re-awakened at least for the time being. We aren't going to decide here if AOL fits in the "old world" or "new world" category, but what we did see is a quality stock gain almost 10% this week on pretty decent volume. AOL is at crossroads in more ways than one. On Monday AOL moved back over its 200-dma and was able to maintain its distance. The next area of resistance over head for AOL is at $66, which is just under the 100-dma of $68.19. Cautious investors may want to wait for a breakout over these levels, otherwise target-shoot to your risk level. Friday AOL and Bertelsmann AG announced a new strategic global alliance to expand the distribution of Bertelsmann's leading media content and e-commerce properties over AOL's interactive brands world wide. It's a four year alliance valued at $250 million. BUY CALL APR-55 AOO-DK OI=22848 at $11.63 SL=8.00 BUY CALL APR-60*AOO-DL OI=95228 at $ 7.50 SL=4.75 BUY CALL APR-65 AOO-DM OI=36978 at $ 4.75 SL=2.50 BUY CALL APR-70 AOO-DN OI=35803 at $ 2.75 SL=1.25 BUY CALL JUL-70 AOO-GN OI=16004 at $ 7.50 SL=5.00 SELL PUT APR-60 AOO-PL OI=53548 at $ 2.38 SL=4.00 (See risks of selling puts in play legend) Picked on Mar 19th at $64.38 PE = 157 Change since picked +0.00 52-week high=$95.81 Analysts Ratings 25-14-3-0-0 52-week low =$38.47 Last earnings 01/00 est= 0.08 actual= 0.09 Next earnings 04-18 est= 0.09 versus=-0.05 Average daily volume = 26.9 mln /charts/charts.asp?symbol=AOL **** SCMR - Sycamore Networks $144.50 (-25.50) Sycamore Networks was founded in 1998 and is headquartered in Chelmsford, Massachusetts. The company combines significant experience in data networking with expertise in optics to develop intelligent optical networking solutions for carriers and service providers. Sycamore's products are based on a common software foundation, enabling concentration on the delivery of services and end-to-end optical networking. Sycamore's products and product plans include optical transport and switching systems and end-to-end optical network management solutions. Sycamore Networks is pushing hard to expand its global presence and emerge as a key strategic player. According to the Chairman and co-founder of Sycamore Networks, Gururaj Deshpande, they are "not satisfied with hyper-growth in the US" and are positioning themselves for growth in "Europe and soon in Asia". Moving forward on that approach, SCMR announced on Friday a $40 mln deal with its newest customer, Storm Telecommunications. This UK-based company will use Sycamore products exclusively as the Storm Network is built out across Europe. Storm Telecommunications is a new-generation fiber network company that is geared to be the first international company to offer optically switched services to customers in Europe, Scandinavia, and the US. This deal certainly plays right into Sycamore's expansion plans. Just last month SCMR also signed on Utfors, a Sweden-based service provider, and LD COM, a Paris-based French metropolitan network operator as global customers. In response to the initiatory $40 mln deal with Storm, confident investors bid up the share price 5.5%, or $7.56 in Friday's session. CSFB cheered for the network equipment firm with a Buy rating and issued a new $175 price target. Analyst James Parmelee also raised fiscal 2000 and 2001 EPS citing "aggressive valuation reflects enormous market opportunity and SCMR's potential to emerge as a key strategic supplier". Yes, this is a pure momentum play - SCMR isn't expected to report earnings until May 18th. Our expectation is that momentum will snowball and provide option traders with some upside profits in the near- term. Taking a look at a chart, you can see SCMR is coming off recent lows with bottom support in the proximity of the 30-dma ($133.94). The first stage of resistance is over 15 points away at $160, but still be aware. For an entry point, watch for positive moves above the 5-dma (currently at $141.98). In last week's volatile markets, the $140 level has demonstrated relative strength for support. In the news on Wednesday, SCMR announced the pricing of its public offering of 10.2 mln shares of common stock at $150.25 per share. The settlement date was March 17th. Earlier this month FS Van Kasper upgraded SCMR to a Strong Buy from a Buy and in February, Salomon Smith Barney raised its recommendation to a Buy from Outperform. BUY CALL APR-140*QSM-DH OI=250 at $21.13 SL=16.50 BUY CALL APR-145 QSM-DI OI= 98 at $18.88 SL=14.75 BUY CALL APR-150 QSM-DJ OI=337 at $16.75 SL=13.00 BUY CALL APR-155 QSM-DK OI=416 at $15.13 SL=11.75 Picked on March 19th at $144.50 P/E = N/A Change since picked +0.00 52-week high=$199.50 Analysts Ratings 4-3-1-0-0 52-week low =$ 56.67 Last earnings 12/99 est= 0.00 actual= 0.01 Next earnings 05-18 est= 0.00 versus= N/A Average Daily Volume = 1.33 mln /charts/charts.asp?symbol=SCMR **** VIGN - Vignette Corporation $236.25 (-60.75) VIGN provides Internet Relationship Management (IRM) software products and services, a category of enterprise solutions designed to enable businesses to build sustainable online customer relationships, increase returns on internet-related investments and capitalize on internet business opportunities. VIGN's clients come from diverse sectors and include financial services, health, education and government, media, retail, technology and telecommunications. Helped by the recovery on the NASDAQ and an upgrade from ABN Amro, VIGN finally halted its four-day losing streak. Plunging in typical sell-the-news fashion after announcing a 3-for-1 split on Wednesday, VIGN finally found support at $233. Volume has dropped off the past 2 days, and any move higher will have to be powered by increasing volume. VIGN should begin to garner more positive attention as the date of the split (4/14) approaches, with the encore of earnings on 4/19. With the FED raising interest rates next week, the volatility could likely provide us with an attractive entry point before the recovery begins in earnest. Testing support several times on Thursday and Friday, and now sitting just above the 30-dma ($235), VIGN appears to be gathering its strength for a profitable run. Strong growth and aggressive expansion plans (see news below) will add fuel to the fire, and buying interest should propel the stock back towards its highs from a week ago. Look to enter this play on either a bounce from support or a break through resistance in the vicinity of $245. At the risk of repeating ourselves, remember that VIGN is a volatile Internet and $30 daily price swings are not uncommon. On Friday, ABN AMRO began coverage of VIGN with an Outperform rating and a price target of $300. Citing strong growth, expectations are for VIGN to garner a 30% market share by 2002. Not content to sit on its laurels, VIGN is targeting growth in India, calling that country the "top Asian market". The company expects India's mushrooming Internet firms to account for the largest share of its Asian sales this year. Allan Bagley, the firm's Asia-Pacific region director, says VIGN will soon set up a sales and support office in India to capitalize on the explosion of Internet-based businesses. Bagley went on to say that alliances in east and south-east Asia last year have allowed VIGN's customer base in the region to grow to 35-40 customers, a figure he hopes to double in 2000. BUY CALL APR-230 GGV-DF OI=258 at $45.00 SL=35.00 BUY CALL APR-240*GGV-DH OI=262 at $40.75 SL=31.75 BUY CALL APR-250 GGV-DJ OI=533 at $37.38 SL=29.00 BUY CALL APR-260 GGV-DL OI=293 at $33.50 SL=26.25 SELL PUT APR-200 GGV-PT OI=168 at $21.13 SL=27.00 (See risks of selling puts in play legend) Picked on Mar 14th at $272.75 P/E = N/A Change since picked -36.50 52-week high=$302.00 Analysts Ratings 3-2-0-0-0 52-week low =$ 21.00 Last earnings 01/00 est=-0.08 actual=-0.05 Next earnings 04-25 est=-0.06 versus=-0.18 Average Daily Volume = 1.23 mln /charts/charts.asp?symbol=VIGN **** YHOO - Yahoo! Inc $171.13 (-6.94)(+20.06) Yahoo! Inc is a global Internet media company that offers an online guide to web navigation, a branded network of comprehensive information, communication services, and shopping access to millions of users daily. Over 32 mln users visit the Web site each month. Yahoo! operates in the black with the bulk of its revenues derived from advertisements commissioned by its list of about 3800 clients. If the Nasdaq jitters would just dissipate we could all yell "Yahoo!" and rattle our pockets with profits. YHOO is heading into its earnings which is scheduled for April 4th, after the bell. Now all of you GUTSY Internets players know YHOO typically runs strong right up to the announcement then does an about face and dives deep on profit-taking! Simple as it may sound that's our play. Ride the wave up, then if circumstances permit, play the downtrend. The current market conditions have held YHOO in check as of yet, but the gift is entry points. The entry range was wide this week from a low at $156 (wow!) to openings near the 5-dma ($168.88) and 10-dma ($172.56). The intraday dips like Friday's are still the best bet to jump aboard; although the more cautious types should be on the sidelines patiently waiting for a move through resistance at $183. A variety of news swirled around Yahoo! this week. On Monday, Yahoo! unveiled the newest member of its global network. Yahoo! Argentina, an Internet guide, is the 22nd World property in one of Latin America's most competitive markets. Yahoo! also plans to announce a partnership with ConsumerReview.com to offer its users more product reviews. The British ISP, 365 Corp, announced it signed a pact with Yahoo! to supply sport content. BUY CALL APR-165*YUU-DM OI=3889 at $21.88 SL=17.00 BUY CALL APR-170 YUU-DN OI=5934 at $19.25 SL=15.00 BUY CALL APR-175 YUU-DO OI=6272 at $17.13 SL=13.25 BUY CALL APR-180 YUU-DP OI=7438 at $15.13 SL=11.75 BUY CALL APR-185 YUU-DQ OI=4025 at $13.25 SL=10.75 Picked on March 12th at $178.06 P/E = 1661 Change since picked -6.93 52-week high=$250.06 Analysts Ratings 15-14-4-0-0 52-week low =$ 55.00 Last earnings 12/99 est= 0.15 actual= 0.19 Next earnings 04-05 est= 0.09 versus= 0.03 Average Daily Volume = 8.28 mln /charts/charts.asp?symbol=YHOO **** CSCO - Cisco Systems Inc $135.00 (-1.38)(+1.06)(+4.69) Cisco is a worldwide leader in networking for the Internet. They provide networking solutions to businesses that allow for seamless communication without regard to differences in time, place, or type of computer equipment. Cisco directs 2/3 of the network traffic out there and is also a major maker of LAN switches. The strategic alliances they have formed with such big names as Microsoft, Alcatel, and US West further enhance their influence and presence in the networking industry. The ruthless market put quite a damper on our split play, yet you couldn't beat the scope of entry points made available. By Thursday CSCO recouped most of its recent losses. Friday showed even more promise. The stock lifted itself back to a higher support level at $135. It looks like CSCO may still be able to make a run for the all-time high at $141.88 before it goes ex-div next Thursday. The market's optimism is renewing, but you have to be careful at this point in the play. Time is short! There's only three trading days left to play this splitter. Although recent news was not necessarily market moving, CSCO is buying two privately-held companies for $501 mln in an attempt to increase its business in the corporate telecom and digital home markets. The two companies it has agreed to buy are JetCell, a wireless technology maker, in a stock deal worth $200 million, and InfoGear Technology, a maker of software used to manage information appliances, in a stock deal worth $301 million. The acquisitions are worth mentioning as it demonstrates CSCO's continued efforts to grow its business into new areas. Earlier in the week, IBM announced that CSCO along with the likes of Motorola (MOT), Intel (INTC), and Nokia (NOK) will team to design and develop products & services to link wireless phones and computers to the Internet. BUY CALL APR-130*CWY-DF OI=12281 at $13.75 SL=11.00 BUY CALL APR-135 CWY-DG OI=14706 at $10.75 SL= 8.75 BUY CALL APR-140 CWY-DH OI=13522 at $ 8.50 SL= 6.50 BUY CALL APR-145 CWY-DI OI=12671 at $ 6.63 SL= 5.00 Picked on March 5th at $137.44 PE = 188 Change since picked -2.44 52-week high=$141.88 Analysts Ratings 23-14-0-0-0 52-week low =$ 47.00 Last earnings 12/99 est= 0.23 actual= 0.25 Next earnings 05-09 est= 0.26 versus= 0.19 Average daily volume = 24.6 mln /charts/charts.asp?symbol=CSCO ********* SOFTWARE ********* BMCS - BMC Software Inc. $55.06 (+3.13) BMC Software is the leading provider of management solutions that enhance the availability, performance and recovery of companies' business-critical applications. This application service assurance(TM) strategy combines superior products with BMC Software Professional Services and outstanding customer support to assure that the e-business applications that companies rely on most, stay up and running around the clock. BMC Software is among the world's largest independent software vendors, is a Forbes 500 company and is a member of the S&P 500. Last week was quite a ride for NASDAQ investors, scaring some and thrilling others. And just when the bears thought they were delivering a debilitating blow, the bulls poised their horns and charged onward. With the NASDAQ swinging violently at times this week, BMCS remained rather headstrong. On Tuesday when the NASDAQ chalked up a 300 point downfall, BMCS found support at $48.25. Wednesday's session of increasing fear had BMCS consolidating at $48.75, as if the NASDAQ decline was a non-event. But it was Thursday that BMCS moved higher on strong volume, propelled by the NASDAQ's bounce from 4455. Thus, the trend was set. And it continued on Friday, closing just off the high of the day with a late session volume surge. So what's the good news? Well, it's been heard on the Street that BMCS is having a stellar quarter, closing some major contracts in the beginning of the 1st quarter that couldn't get done in December on top of already strong business. What kind of business you ask? "Data optimization" with their MQ Series capabilities. This architecture reduces memory consumption, I/O rates, and decreases network bandwidth requirements while improving their customers' end-to-end transmission time. In short, BMCS software provides shorter overall processing time which means that customers get more from their current systems without having to make costly hardware upgrades. Technically, BMCS looks good. With support at $54, BMCS will have to battle resistance of $56, a level not seen since the first trading week of the millennium. Breaking through this level just might be possible as there are rumors floating about on the Street about a possible pre-announcement from BMCS that they will beat earnings estimates of $0.47, due out on 04/27. BUY CALL APR-55 BCQ-DK OI=321 at $3.13 SL=1.50 BUY CALL APR-60*BCQ-DL OI=237 at $1.88 SL=0.75 BUY CALL APR-65 BCQ-DM OI= 68 at $1.00 SL=0.00 High Risk! BUY CALL MAY-60 BCQ-EL OI=990 at $4.75 SL=3.25 Picked on Mar 19th at $55.06 P/E = 56 Change since picked +0.00 52-week high=$86.63 Analysts Ratings 5-13-9-0-0 52-week low =$30.00 Last earnings 01/00 est= 0.42 actual= 0.41 Next earnings 04-27 est= 0.47 versus= 0.47 Average Daily Volume = 6.38 mln /charts/charts.asp?symbol=BMCS **** RATL - Rational Software Corp. $88.50 (+1.56) Rational Software is an e-development company. Rational's e-development solution helps organizations overcome the e-software paradox by accelerating time to market while improving quality. Their integrated solution simplifies the process of acquiring, deploying and supporting a comprehensive software development platform. Rational generates almost 40% of it's revenues from process consulting, training, and related services. 47 of Fortune e-50 companies use Rational's e-development solutions. Rational Software joins our list after exhibiting an irrational round of profit-taking this past week. RATL was just one of the many stocks in the Nasdaq that saw the bears ramble through the trading floors, knocking the legs out from underneath some very impressive rallies. RATL started the week out, trading lower on the economic news out of Asia. Buyers quickly stepped in bidding the price of the software company to a new high at $105 before profit-taking set in. Unfortunately the sentiment in the tech stocks changed overnight and the bears remained in control until late Wednesday. One of our latest plays comes with quite a recommendation as well. Earlier this month RATL announced it was recently ranked as the number one company in a survey of "Companies Wall Street Analysts Liked Best." That's right, RATL was #1 in a survey of 147 companies that received the strongest recommendations from Wall Street analysts across all industry segments, according to data compiled by I/B/E/S International Inc. Volume this week was heavy, as traders pulled money off the table from earlier gains. We are hanging our hat on the bounce off the support level at $75 on Wednesday. With the selling continuing early Thursday in the Nasdaq, RATL was actually finding buyers enter the market, which indicates the bears were getting tired and a bottom may have been found. One word of caution however, RATL did add $5.69 on Friday, but the volume was just below the norm at 940k. If the sentiment stays strong next week, we would look for RATL to continue to move higher as well. The technical picture shows support at $84 and the previously mentioned $75 area. A press release Friday, announced that Rational Corporation has teamed up with Advanced Programming Institute, as partners in technology and education. The Rational Unified Partner Program supports over 300 participating partners with tools, joint marketing opportunities, qualifications and training. BUY CALL APR-80 RAQ-DP OI= 70 at $15.63 SL=12.25 BUY CALL APR-85 RAQ-DQ OI= 115 at $13.00 SL=10.25 BUY CALL APR-90*RAQ-DR OI=1093 at $10.63 SL= 8.25 BUY CALL APR-95 RAQ-DS OI= 38 at $ 8.50 SL= 6.50 BUY CALL JUL-90 RAQ-GR OI= 106 at $14.50 SL=11.25 SELL PUT APR-75 RAQ-PO OI= 60 at $ 4.00 SL= 5.75 (See risks of selling puts in play legend) Picked on Mar 19th at $88.50 PE = 104 Change since picked +0.00 52-week high=$105.00 Analysts Ratings 8-1-1-0-0 52-week low =$ 21.88 Last earnings 01/00 est= 0.25 actual= 0.27 Next earnings 04-19 est= 0.31 versus= 0.23 Average daily volume = 1.04 mln /charts/charts.asp?symbol=RATL **** TIBX - Tibco Software $119.63 (-18.56)(+16.19) Headquartered in Palo Alto, California, TIBCO Software Inc. is a leading provider of real-time infrastructure software for e-business. TIBCO's products and services enable computer applications and platforms to communicate efficiently across networks. The TIB/ActiveEnterprise(TM) product suite facilitates the distribution of information and integration of business processes by connecting applications to a network through its patented technology. (That's code for B2B enabler.) TIB technology was first used to "digitize" Wall Street and has been adopted in diverse industries, including manufacturing, energy, telecommunications, and electronic commerce. TIBCO Software's global client base includes Cisco, Yahoo!, NEC, 3Com, Sun Microsystems, SAP, Philips, AT&T and AOL/Netscape. Every time TIBX starts its engine, it seems as though it needs to head back to pit row for awhile. Last week provided an opportunity though for nearly every fast mover to take a pit stop. Just like in real car racing, good track conditions are necessary to start a good race - perpetual oil slicks are trouble. The same metaphor applies to stocks. If market conditions are not good, individual issues usually participate to an 85% degree. So it was with TIBX. Too bad since TIBX announced to analysts on Mar 9th that they expect revenues to more than double to $41 mln over a year ago. The same report also noted that license revenue grew more than 190% over the previous Q1. Those two items alone would have caused the market to salivate under normal market conditions. Now that the market has reversed itself, we look for TIBX to run hard into earnings scheduled for Mar 23rd, when we also expect another split announcement. Why the expectation of another split? The last one was announced at $125 (we're almost there again) and TIBX has an agenda item at the shareholder's meeting scheduled for Apr 12th to increase the authorized shares from 300 mln to 1.2 bln. The sequence is to announce the split with earnings on 3/23, then seek shareholder approval on 4/12, with the split execution date to follow shortly thereafter. Good support can be found at $115 and $105. Volume is picking up again too, which signals the run may have begun on Friday. Only four days to play until earnings, so make it count! Other than an announcement of a software implementation for RSL Telecom, news was fairly quiet. Remember, this play isn't based on news, but rather on earnings and a possible split. BUY CALL APR-110*PIW-DB OI=130 at $23.50 SL=18.25 BUY CALL APR-120 PIW-DD OI=398 at $19.00 SL=14.75 BUY CALL APR-130 PIW-DF OI=375 at $15.13 SL=11.75 BUY CALL MAY-130 PIW-EF OI=114 at $20.50 SL=16.00 BUY CALL MAY-140 PIW-EH OI= 92 at $17.50 SL=13.75 SELL PUT APR-100 PIW-PT OI=156 at $10.88 SL=13.50 (See risks of selling puts in play legend) Picked on Mar 12th at $138.19 P/E = N/A Change since picked -18.56 52-week high=$147.00 Analysts Ratings 3-0-0-0-0 52-week low =$ 6.56 Last earnings 12/99 est=-0.03 actual= 0.01 surprise=133% Next earnings 04-23 est= 0.00 versus= N/A Average Daily Volume = 802 K /charts/charts.asp?symbol=TIBX **** CHKP - Check Point Software $235.50 (-44.38)(+50.13)(P2W+31.56) Check Point Software has laid claim on being the best in the business at securing the Internet. Their Secure Virtual Network (SVN) architecture provides the infrastructure that enables secure and reliable Internet communications. It's FireWall-1 verifies remote users, controls access and blocks viruses and other unwanted Web content, while VPN-1 will allow companies to set up virtual private networks for secure internal and remote communications. CheckPoint markets its products through manufacturers and resellers including Sun Microsystems. CHKP is located in Rmat Gan, Israel, but nearly 60% of its sales come from the U.S. The laws of gravity prevailed this week in the Nasdaq and CHKP. CHKP had strong momentum from its move in late February to its high a week ago Friday. It took 10 trading sessions for CHKP to travel from the $189 area to its high at $295 on March 10th. A 56% move in 10 sessions is impressive by any standards. The move to new highs was very tradable, as the only real requirement for those that bought CHKP was to move their stops up and enjoy the ride. The reason for moving stops up became apparent on Monday as it took only four days to erase profits from the accounts of those that didn't have their stops in place or couldn't pull the trigger. We mentioned Tuesday that CHKP was near the bottom of its channel, and could bounce from levels seen near $242. Negative investor sentiment for the tech stocks continued to keep pressure on CHKP until hitting $189 early Thursday morning. You've seen the term "don't try to catch a falling knife" many times in our newsletter and now you know why. Bounces off support are normally very buyable, but when overall market sentiment has changed, you will get cut. So why do we think CHKP may have hit a near term bottom? First CHKP hit old support near $190 and bounced. Support and bounced, not convinced? We can't blame you. A look at the volume as CHKP was approaching the low Thursday morning, shows over 1.6 mln shares traded in just two hours. Nearly twice its ADV traded in 120 minutes. This kind of action is typical an exhaustion top or bottom. CHKP continued to move higher on Friday as traders nibbled on more of their recent tech favorites. Support is now found near $220. A move back through the $242 will also provide a good entry point for a new play, but confirmation of overall market sentiment may be prudent prior to placing your order. On Wednesday Check Point and Nokia announced a new solution designed for telcom and service providers to address the high- growth market for delivering managed Internet security and VPN services to small and medium businesses. This new product package further leverages the Check Point/Nokia appliance experience to enable service providers to truly scale their security service offerings, with a cost-effective framework to secure small and medium sized businesses. BUY CALL APR-230 YKE-DV OI=291 at $41.25 SL=32.25 BUY CALL APR-240*KGE-DH OI=184 at $35.75 SL=27.88 BUY CALL APR-250 KGE-DJ OI=189 at $31.75 SL=24.75 BUY CALL APR-260 KGE-DL OI=215 at $28.00 SL=21.75 SELL PUT APR-180 YKE-PP OI= 94 at $10.13 SL=13.00 (See risks of selling puts in play legend) Picked on Feb 27th at $205.63 P/E = 203 Change since picked +29.88 52-week high=$295.00 Analysts Ratings 9-5-2-0-0 52-week low =$ 11.50 Last earnings 01/00 est=0.32 actual=0.35 Next earnings 04-18 est=0.35 versus=0.25 Average Daily Volume = 907 K /charts/charts.asp?symbol=CHKP **** BWEB - BackWeb Technologies $49.25 (-8.75)(+13.50) BackWeb Technologies provides Push software for e-business solutions that solve the problem of timely, accurate information delivery across corporate networks and the Internet. They provide an automated and reliable way to communicate any data type over any network connection. Their customizable software, helps manage sales, software distribution, e-commerce and other tasks, and can set up broadcast channels that download preferred data directly to users with out delays or interruptions. They do business with some of the biggest names in the Tech world, in Cisco Systems, Compaq, SAP and AT&T. Founded in 1995, BWEB had its IPO in June of 1999. Investors added BWEB back into their portfolios Thursday morning as the Nasdaq began to bounce back. The decline this week in BWEB was really very orderly for the most part, showing no signs of the "get me out an any price" mentality. Volume was light with the majority of the damage done the first two days of the week. In percentage terms BWEB, corrected about 24% this week before finding buyers willing to jump in at the $45 area. As we said last weekend we were expecting a pullback, but the move appeared to be exaggerated by the negative sentiment in the Nasdaq. A study of the volume since the first of the month will illustrate the strength behind recent moves. BWEB began the month of March at $38. It moved to $59.13 over the next 7 days, with over 12.5 million shares being traded. The retracement this week had just 2.5 million shares changing hands. Our intent is not to belabor the volume issue, rather show the conviction or strong belief of those that bought shares of BWEB as it continued into uncharted waters, and why we believe this is a temporary setback, and a potential buying opportunity for our play. There have been no company press releases this week, and no comments from the few brokers that follow the e-business solutions company. BWEB may still be riding on the coattails of an earlier release that Cable & Wireless(CWP) will offer its popular push software to its top global accounts, and an alliance with SAP AG, a provider of inter-enterprise solutions. As BWEB began to move higher late on Friday, the volume did pick up a bit, but overall it was light for the session at 303K. Whatever the reason for the popularity, BWEB will probably take its cue from the Nasdaq next week. BWEB ran into resistance Friday near its 10-dma at $50.19 and has intraday support at $48 and strong support at $45. BUY CALL APR-40*UBW-DH OI=100 at $12.88 SL=10.00 BUY CALL APR-45 UBW-DI OI=204 at $10.00 SL= 7.50 BUY CALL APR-50 UBW-DJ OI=280 at $ 7.38 SL= 5.75 BUY CALL APR-55 UBW-DK OI=476 at $ 5.63 SL= 3.75 BUY CALL JUN-50 UBW-FJ OI=359 at $11.13 SL= 8.75 SELL PUT APR-45 UBW-PI OI= 18 at $ 5.13 SL= 7.00 (See risks of selling puts in play legend) Picked on Mar 12th at $58.00 P/E = N/A Change since picked -8.75 52-week high=$59.13 Analysts Ratings 1-3-0-0-0 52-week low =$15.00 Last earnings 01/00 est=-0.08 actual=-0.04 Next earnings 04-26 est=-0.06 versus= N/A Average Daily Volume = 955 K /charts/charts.asp?symbol=BWEB **** VERT - VerticalNet, Inc. $220.63 (-52.56)(+21.47)(+25.97)(+27.00) VerticalNet 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. They are grouped into the following industry sectors: ADVANCED TECHNOLOGIES, COMMUNICATIONS, ENVIRONMENTAL, FOOD AND PACKAGING, FOODSERVICE AND HOSPITALITY, HEALTHCARE/SCIENCE, MANUFACTURING AND METALS, PROCESS, PUBLIC SECTOR, SERVICE, TEXTILES AND APPAREL. 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. Live by momentum, die by momentum...and discover the beauty of stop losses. That was hammered home on Thursday as VERT plunged to $195 intraday (previous historical support from February). Traders holding $270 strikes were wondering where they might find the highest building from which to jump. Alas, recovery was at hand and made for quite an entry for those willing to pull the trigger. Still, with VERT down $52 for the week, you might be asking yourself why it's still on the list? The big picture is that VERT is one of the new "Big Three" (along with ARBA and CMRC) in the B2B Internet sector, having received a large capital infusion from Kingmaker, Microsoft. It isn't in danger of falling off the face of the Earth the way that smaller players might be. The focus of the play now is on the 2:1 split that will occur after the close on Mar 31st. Split adjusted trading will begin on Apr 3rd. We're still a bit nervous about support given Friday's negative move on low volume. VERT could easily test the $200 level again, though $215 may provide some support if the market and sector remain strong. With the 5-dma ($230.46) and 10-dma ($243.94) so decimated, VERT's current price well under these two won't mean much going into the split. However, with a 25% pullback from its high and the split less than two weeks away, VERT still has the makings of a good split run. As we noted last week, don't play this one if your intestinal fortitude isn't strong. In the news, Eastman Chemical inked a deal with VERT to sell paints and coatings on the Net, and is called (surprise!) paintandcoatings.com. It's actually a spin-off of VERT bought by Eastman for "multi seven-figure $$$" in which VERT is a JV partner. More importantly for sentiment, Merrill Lynch's Henry Blodgett started coverage with a Long Term Buy and a 12-18 month price target of $350. He also noted that he expects the shares to remain volatile and would not be surprised to see shares consolidate over the near-term. Furthermore, he views any weakness in the stock as a buying opportunity. Us too. BUY CALL APR-210 ERW-DB OI=305 at $37.00 SL=29.00 BUY CALL APR-220*ERW-DD OI=550 at $32.63 SL=25.50 BUY CALL APR-230 ERW-DF OI=605 at $29.25 SL=22.00 SELL PUT APR-195 ERW-PS OI= 79 at $15.50 SL=19.50 (See risks of selling puts in play legend) Picked on Feb 24th at $221.00 P/E = N/A Change since picked -0.44 52-week high=$296.75 Analysts Ratings 4-6-3-0-0 52-week low =$ 25.44 Last earnings 02/00 est=-0.36 actual=-0.28 Next earnings 05-02 est=-0.45 versus=-0.19 Average Daily Volume = 1.4 mln /charts/charts.asp?symbol=VERT ******* Telecom ******* NOK - Nokia $199.88 (-15.13)(-5.00) Finnish Phone Firm, Nokia is the world's number one maker of wireless cellular phones, ahead of Motorola, Ericsson and Kyocera. In addition they make wireless networking equipment, PC monitors and workstations, digital satellite and cable network systems, and set-top boxes. However mobile phones make up 80% of their $19.8 bln in annual sales. This is the second week in row that saw a swipe taken at NOK's share price. For a company with growing revenues, garnering bigger profit and gaining market share, you'd think NOK's share price should be on fire. Sometimes the market comes with its own fire hose to dowse even the hottest ember. So why keep it? Easy...a shareholder's meeting this Wednesday, Mar 22nd to vote their approval of the 4:1 stock split announced Feb 1st. If approved (any dissenters?), the execution date would likely be during the first week of April. Anyway, now that the correction has reversed itself, we would expect a split run to ensue on news of the shareholders' approval. Technically, there is some support at the $196 level than again at $190. To the upside, if volume should pick up again, look for a move over $205 to confirm the direction. Don't look for technicals though to carry the flag on this play. NOK is still below its 5, 10, and 30-dma thanks to the markets' discombobulating last week. Anyway, it should be about two weeks before the actual split, typically the time at which the real move into the split begins, good technicals or not. Enter at your level of risk tolerance and consider selling naked puts if your account allows it. Support is rock solid at $180 unless NOK forgets how to make phones first thing Monday morning. In the news, we reported Thursday night that the Finnish companies that make the face covers for Nokia handsets may continue their strike until next week, causing delays in NOK's shipments. This may or may not be a big deal. However keep your eyes and ears open for related news. Anything negatively affecting revenues or profits could derail any split run. BUY CALL APR-190 NZY-DR OI=1519 at $21.50 SL=16.75 BUY CALL APR-200*NZY-DT OI=4180 at $16.25 SL=12.75 BUY CALL APR-210 NZY-DB OI=3358 at $11.75 SL= 9.25 BUY CALL JUL-210 NZY-GB OI= 653 at $25.75 SL=19.25 SELL PUT APR-180 NZY-PP OI=1207 at $ 6.00 SL= 8.00 (See risks of selling puts in play legend) Picked on Mar 09 at $214.63 P/E = 96 Change since picked -14.75 52-week high=$227.06 Analysts Ratings 16-9-1-0-0 52-week low =$ 67.69 Last earnings 02/00 est= 0.67 actual= 0.72 Next earnings 05-02 est=-0.61 versus= 0.48 Average Daily Volume = 3.41 mln /charts/charts.asp?symbol=NOK ***************************************** CALLS - TELECOM CONTINUED IN SECTION FOUR ***************************************** ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************************* CALLS CONTINUED IN SECTION FOUR ******************************* SEE DISCLAIMER IN SECTION ONE
The Option Investor Newsletter 3-19-2000 Sunday 4 of 5 ************* Miscellaneous ************* NITE - Knight/Trimark Group $51.75 (+2.19)(+3.13) Knight/Trimark, headquartered in Jersey City, NJ, is the parent company of Knight Securities, Trimark Securities and Knight Financial Products (formerly Arbitrade, LLC). Knight is the largest wholesale market maker in U.S. equity securities, and advertise with the tagline "where the trade gets done". The four-year old Knight/Trimark Group, as the largest destination for on-line trade executions, is the unseen "processing power" behind the explosive growth in on-line securities trading. BankBoston Robertson Stevens reiterated its Buy rating and raised his EPS from $0.70 to $0.90 citing that "According to Autex/OTC, Knight/Trimark average March quarter weekly volumes are up 100 percent over December quarter volumes". While BBRS may have penned the above, plenty of other analysts were having the same thoughts regarding the whole sector. Mar 17th was the second Friday in a row where all the online brokers posted trading volume in excess of their ADV's. Buying interest has really swelled for SCH, AMTD, EGRP and DLJ too. As long as the markets continue to post large aggregate volume, expect the trend to continue along with it. Earnings are anticipated on Apr 19th. While we think it's a bit too early for a typical earnings run to begin, based on revenue projections and upgrades, it may have already started. If you squint real hard, you can find intraday support in $1 increments beginning at $44. $45 and $46 are pretty strong historically. $50 and $51 worked on Friday. Resistance is at $55. A break over that level (as long as volume remains) would set up for a challenge of $60. The news is contained above, but know too that Merrill Lynch upgraded NITE from Accumulate to Neutral and raised their FY00 estimate from $1.90 to $2.35 and FY01 from $2.25 to $2.95. Their long-term growth rate projection is raised from 23% to 25% (briefing.com). DB Alex Brown joined the chorus too by raising their rating from Buy to Strong Buy earlier in the week citing speculation that Goldman's purchase of Schwab (rumor only) would be good for NITE's order flow business. BUY CALL APR-45 QTN-DI OI=4903 at $10.00 SL=7.50 BUY CALL APR-50 QTN-DJ OI=6399 at $ 7.00 SL=5.25 BUY CALL APR-55*QTN-DK OI=5587 at $ 3.63 SL=1.50 BUY CALL JUL-50 QTN-GJ OI=1829 at $11.88 SL=9.50 BUY CALL JUL-55 QTN-GK OI=1212 at $ 9.88 SL=7.50 SELL PUT APR-40 QTN-PH OI=2232 at $ 1.38 SL=2.50 (See risks of selling puts in play legend) Picked on Mar 12th at $49.56 P/E = 32 Change since picked +2.19 52-week high=$81.62 Analysts Ratings 4-4-0-1-0 52-week low =$21.19 Last earnings 01/00 est= 0.34 actual= 0.54 surprise=59% Next earnings 04-19 est= 0.60 versus= 0.34 Average Daily Volume = 4.2 mln /charts/charts.asp?symbol=NITE **** IDPH - IDEC Pharmaceuticals $188.94 (+10.38) IDPH researches and develops therapies for the treatment of cancer and autoimmune and inflammatory diseases. IDEC was the first-ever to received FDA approval of a monoclonal antibody, called Rituxan, that is now the most widely used treatment of non-Hodgkin's lymphomas in the U.S. The company has two other anti-cancer drugs in the approval process and five more are in the pipeline. There's no doubt the genomics sector reached sky-high valuations and made many investors rich. But the gene stocks took a severe pounding this week. The catalyst was President Clinton and British Prime Minister Blair's discussion over the inevitable moral question (or shall we be a bit more direct and also say perhaps, money too?)...should the human genome research date belong to the public scientists as well as the private enterprises? This controversy knocked the whole Biotech sector off its pristine pedestal. On Tuesday, the Amex Biotech Index (BTK.X) plunged a record 13.2% on the comments. Take note - this is a good index to watch for additional signs of direction. Certainly it may be a bumpy road ahead for this play especially in these explosive markets, but here's our take from Tuesday. The panic sell was blatant "shell shock". Investors feared future revenues could be ultimately forfeited to government entities. Our initial play for the coming days was that investors would realize IDPH is much more than the genomics project. Remember, this company has real products making money right now. And sure enough, the negative feeling started to ease. IDPH moved off its bottoming pattern of $100 and closed just under $120. A nice reward! Now we're faced with resistance. Therefore we need a move through this mark backed by volume for confirmation. Positive market sentiment and good news should also lend a helping hand. On Wednesday, IDEC announced the results of a phase 1 trial for a new drug, Idec-114 (antibody in Psoriasis). Preliminary findings were favorable according to the company. More news like this is what investors need to hear. BUY CALL APR-110 IDK-DB OI=127 at $21.88 SL=17.00 BUY CALL APR-115 IDK-DC OI= 69 at $19.00 SL=14.75 BUY CALL APR-120*IDK-DD OI=203 at $16.63 SL=13.00 BUY CALL APR-125 IDK-DE OI= 63 at $14.75 SL=11.75 BUY CALL APR-130 IDK-DF OI= 79 at $12.88 SL=10.50 Picked on March 14th at $105.00 P/E = 139 Change since picked +13.94 52-week high=$173.00 Analysts Ratings 6-5-1-0-0 52-week low =$ 21.25 Last earnings 12/99 est= 0.15 actual= 0.15 Next earnings 04-20 est= 0.12 versus= 0.10 Average Daily Volume = 1.28 mln /charts/charts.asp?symbol=IDPH **** BGEN - Biogen Inc. $84.88 (+0.81) Biogen researches, develops, and markets biopharmaceuticals to treat a variety of illnesses. AVONEX, is the company's claim to fame, used in the treatment of multiple sclerosis. Other drugs made by BGEN include Amevive, for psoriasis; Antova for autoimmune diseases; and Adentri, for congestive heart failure. BGEN also receives revenues from licensing drugs it has developed to other companies. BGEN has research agreements with Schering-Plough, SmithKline Beecham, Merck and Abbott Laborites. Beauty is in the eye of the beholder. This recent addition to our play list could end up being a real beauty. By now we're sure everyone has heard about the remarks made earlier in the week, by President Clinton, that sent the Biotech stocks in the tank. Clinton's remarks proved to be the catalyst to profit- taking on issues that had enjoyed a run for the past few months. The correction at the Nasdaq pushed the BGEN and sector favorites to levels not seen since the first of the year. From its high in February, BGEN has corrected,(for lack of a better term), over 40%. We don't really like the term "corrected" as that implies BGEN was over-valued in the first place. We believe that BGEN at the current levels provides an outstanding opportunity to buy calls in a stock that should trade at higher levels. Paul Abel, co-portfolio manager of The Medical Fund(MEDRX) has been shopping for bargains the past couple of days. His fund is up 24% for the year and 70% since its inception in late September. What did he buy this week? BGEN and AMGN topped the list, as he said they had been "unfairly beat-up". Abel went on to say, "They are good companies with solid earnings and competitive product pipelines." We couldn't agree more, and that's why BGEN made its way back on our list of favorites. Technically the $76-$79 area provided good support this week and showed stronger volume indicating BGEN could have made a bottom. BGEN did move up to $90 Friday, before sellers entered, although it appeared to be position squaring or options expiration activity, going into the weekend, rather than anything else. The 10-dma is found at $90.13 and a push back through that level accompanied by good volume may provide confidence for more conservative investors. All of the companies in The Medical Fund referenced above focus on oncology. Abel said "it is their feeling the way research is going, there will be a great improvement in cancer therapy and in treatments, if not cures." Concerning BGEN and others, he continued with "not only do they do ground-breaking research, they delivered sales and earnings. That wasn't true before." BUY CALL APR-80*BGQ-DP OI=1633 at $12.75 SL=10.00 BUY CALL APR-85 BGQ-DQ OI=1254 at $10.50 SL= 8.25 BUY CALL APR-90 BGV-DR OI=3664 at $ 8.25 SL= 6.25 BUY CALL JUL-90 BGV-GR OI= 709 at $15.50 SL=12.00 SELL PUT APR-75 BGQ-PO OI=1933 at $ 4.13 SL= 6.25 (See risks of selling puts in play legend) Picked on Mar 16th at $86.81 PE = 61 Change since picked -1.94 52-week high=$129.00 Analysts Ratings 9-7-11-0-0 52-week low =$ 45.13 Last earnings 01/00 est= 0.42 actual= 0.44 Next earnings 04-10 est= 0.43 versus= 0.29 Average daily volume = 4.41 mln /charts/charts.asp?symbol=BGEN ********************** LEAPS by Mark Phillips ********************** What's the world coming to? Two weeks in a row now, we have added a LEAP play on a Financial stock. In case you missed it, the old economy stocks staged a comeback this week and Banking stocks weren't about to be left behind. If you need proof, just look at the $17+ gain on last week's new play, AXP. Continuing to telegraph great entries on our LEAPs plays, the VIX moved as high as 29.14 on Wednesday, before falling for the rest of the week. This corresponded perfectly to great entry points, near major support levels for several of our plays, among them EMC, TXN, NXTL, and SUNW. The VIX is now below 24 again (23.67), and we would advise caution in opening new positions until it can move back towards the upper end of its range. Recall that a VIX reading in the low 20's represents the danger (market top) zone and the low 30's frequently signals a buying opportunity. With the volatility in this market, great entry points seem to be popping up left and right. Watch your favorite LEAPs for an entry point and, when the VIX moves into the buy zone, be prepared to jump on board. Current Plays SYMBOL SINCE LEAPS SYMBOL PICKED CURRENT RETURN EMC 11/07/99 JAN-2001 $ 80 ZOH-AP $15.38 $57.63 274.80% JAN-2002 $ 90 WUE-AR $19.00 $60.75 219.74% GPS 11/07/99 JAN-2001 $ 40 ZGS-AH $ 5.75 $13.13 128.26% JAN-2002 $ 45 WGS-AI $ 7.88 $15.38 95.24% IBM 11/07/99 JAN-2001 $100 ZIB-AT $13.63 $24.38 78.90% JAN-2002 $110 WIB-AB $16.50 $28.88 75.00% LU 11/14/99 JAN-2001 $ 80 ZEU-AP $12.88 $10.25 -20.39% JAN-2002 $ 90 WEU-AR $16.13 $15.13 - 6.20% CSCO 11/14/99 JAN-2001 $ 80 ZCY-AP $19.13 $64.00 234.64% JAN-2002 $ 90 WIV-AR $22.00 $66.00 200.00% GE 11/21/99 JAN-2001 $150 ZGR-AU $16.25 $19.13 17.69% JAN-2002 $150 WGE-AU $25.50 $29.63 16.18% NT 11/28/99 JAN-2001 $ 75 ZOO-AO $22.25 $63.63 185.96% JAN-2002 $ 75 WNT-AO $30.25 $72.50 139.67% VOD 12/05/99 JAN-2001 $ 50 ZAT-AJ $10.75 $17.50 62.79% JAN-2002 $ 50 WHV-AJ $15.00 $23.63 57.50% TXN 12/12/99 JAN-2001 $110 ZTN-AB $22.25 $71.88 223.03% JAN-2002 $120 WGZ-AD $28.50 $76.88 169.74% NXTL 12/19/99 JAN-2001 $ 90 ZFU-AR $23.50 $69.63 196.28% JAN-2002 $100 WFU-AT $27.25 $74.88 174.77% SUNW 12/19/99 JAN-2001 $ 80 ZJX-AP $17.63 $30.38 72.34% JAN-2002 $ 90 WJX-AR $22.00 $35.13 59.66% LU 01/09/00 JAN-2001 $ 50 ZEU-AJ $13.63 $26.00 90.83% MOT 01/09/00 JAN-2001 $125 ZMA-AE $31.13 $49.00 57.43% JAN-2002 $125 WMA-AE $41.50 $61.25 47.59% CY 01/16/00 JAN-2001 $ 40 ZSY-AH $ 9.13 $15.63 71.23% JAN-2002 $ 40 WSY-AH $12.63 $20.88 65.35% ERICY 01/30/00 JAN-2001 $ 65 ZYD-AM $19.75 $37.25 88.61% JAN-2002 $ 65 WRY-AM $27.00 $45.00 66.67% MSFT 01/30/00 JAN-2001 $100 ZMF-AT $17.63 $18.50 4.96% JAN-2002 $110 WMF-AB $21.63 $23.25 7.51% CS 02/13/00 JAN-2001 $ 30 ZCJ-AF $14.25 $20.50 43.86% JAN-2002 $ 30 WLJ-AK $18.25 $24.75 35.62% ICOS 02/20/00 JAN-2001 $ 40 ZIL-AH $10.25 $10.75 4.88% JAN-2002 $ 45 WJI-AI $12.13 $14.13 16.49% NSM 02/27/00 JAN-2001 $ 70 ZUN-AN $18.50 $17.88 - 3.38% JAN-2002 $ 70 WUN-AN $24.25 $25.13 3.61% AOL 03/12/00 JAN-2001 $ 60 ZKS-AL $14.00 $17.25 23.21% JAN-2002 $ 65 WAN-AM $18.63 $22.50 20.81% AXP 03/12/00 JAN-2001 $130 ZXP-AF $21.75 $32.88 51.15% JAN-2002 $140 WXP-AH $28.00 $39.00 39.29% To review the play description on any of our current plays, go to the LEAPS section for the date the play was added. Option Selection: Notice that many of our LEAP plays have moved considerably since initially being picked. The listed options may therefore be deep in the money and very expensive. When entering a new position, look to buy LEAPS according to your suitability level, but note that we typically initiate strikes that are slightly out of the money from the stock's current price. Leap of the Week MOT - Motorola $149.50 Since beginning its latest uptrend in late October, MOT has provided attractive entry points each time it touches the 50-dma (currently at $151.50). With the turmoil in the markets last week, this looks like a tough entry to pass up. The Semiconductor industry is still showing tremendous growth, and with earnings just around the corner, we don't expect MOT to hang around down here for long. The real long-term issue though, is the pending split, scheduled for early June. Shareholder approval is still necessary to raise the number of authorized shares and should be forthcoming at the annual meeting on May 1st. Perhaps attempting to reassure investors earlier this week, an analyst with Warburg Dillon Read repeated his Buy rating on the company. Resistance appears at $154 and then $160. Conservative investors may want to wait for buying interest to return and break through these levels before opening new positions. With solid support at $146, a bounce here would make for an ideal entry, especially if the VIX (below 24 again) can move up into the high 20's. BUY LEAP JAN-2001 $150.00 ZJC-AJ at $37.75 BUY LEAP JAN-2002 $160.00 WMA-AL at $47.50 /charts.asp?symbol=MOT New Plays WM - Washington Mutual $25.38 Unless you've been living in a cave, you know that banking stocks have taken a beating over the past several months, primarily on fears of rising interest rates. Although the FED is expected to raise rates again next week, the prospects for more increases is diminishing, as inflation still refuses to raise its ugly head. A broad recovery in the Banking sector this week seems to indicate the trend is about to reverse. WM was not immune from this effect, gaining as much as $6, before consolidating its gains on Friday. The action this week pushed WM above both its 5-dma ($24.50) and 10-dma ($23.50) and confirmed resistance at $26. For all of you out there who are looking for a cheap way to play LEAPS, this is your ticket - volatility has been almost non-existent and expectations have not risen enough to inflate the premiums. More consolidation is possible ahead of the FED meeting, so look for entries as WM bounces at support near $24. BUY LEAP JAN-2001 $25.00 ZWI-AE at $5.00 BUY LEAP JAN-2002 $30.00 WWI-AF at $5.38 /charts.asp?symbol=WM Drops No dropped LEAPS this week. ********************* Rolling Over to LEAPs By: Mark Phillips ********************* So, you've been looking at your Mutual Fund statements on your rollover IRAs and are congratulating yourself on the 80% gain in the Tech fund and big gains in the index fund over the past year. Now, are you ready to step up to the big leagues? If so, it's time you looked to options. Sure, you know that options give you great leverage over straight stock purchases, but you're afraid to put your retirement at risk in this volatile market, right? If you're looking for a way to turbo-charge your long-term investment returns without exposing yourself to undue risk, then you aren't alone. In 1990, the CBOE responded to this desire by introducing LEAPS (Long-term Equity Appreciation Securities). It sounds complicated, but simply put, LEAPS are long-term options with expiration dates as much as 3 years in the future. This instrument appeals to both options and stock traders, by providing the strengths of each while minimizing the weaknesses. Investing in stocks (or groups of stocks through Mutual Funds) provides the ability to capitalize on long-term growth, but the downside is that you must buy the stock outright, tying up a significant amount of capital. Options provide greater returns, but the disadvantage is that your timing must be precise. Buy at the wrong time and the option value can decay while you wait for the stock to appreciate. Most investors overlook the fact that LEAPS can provide great returns without the rapid time decay of short-term options. An option's price is made up of intrinsic value and time value. Intrinsic value represents the equity of the option and can be thought of as a down payment on the stock. Time value represents the potential of the stock to appreciate over time. In option pricing, At The Money (ATM) options have the highest time value. Time passes at a constant rate and as it does, the time value of an option decreases. This is referred to as time decay. Time decay increases as an option approaches expiration with fully half of the time value in an ATM option vaporizing in the last 30 days. Using actual pricing data for CSCO, the chart below shows how the value of an ATM option decays over time. Making it onto our LEAPs playlist on November 14th, CSCO provides a good example of the benefits of LEAPs over outright stock purchases. When added to the list, CSCO was trading at $83.44. The recommended January 2001 $80 LEAP (closest to ATM) was trading at $19.13. The cost of purchasing 100 shares of stock was $8344, while the LEAP cost was $1913. Four months later, the stock has appreciated to $135, for a gain of $5156 or 62%. The LEAP is now trading at $63.38, showing a gain of $4425 or 231%. For roughly the same cost ($7652 vs. $8344) as 100 shares of stock, you could have purchased 4 of the LEAPS and netted a gain of $17,700. As you can see, longer-term options (LEAPs) allow investors to use a buy-and-hold approach in conjunction with the leverage provided by options. The normal penalty (watching the time value of the option melt away on a day-by-day basis) while waiting for the underlying security to appreciate, becomes a secondary effect. What about the downside? What happens if one of the stocks in which you bought LEAPs takes a dive? Since the time value doesn't rapidly disappear, there is time to wait for the stock to recover. Taking an example from our LEAPs portfolio, let's look at Lucent (LU). Added to the playlist on November 14th, when LU was trading at $72.50, the recommended January 2001 $80 LEAP was going for $12.88. Everything was looking great until LU shocked investors with an earnings warning in early January. The punishment was severe as the stock quickly dropped to approximately $50 per share and the $80 LEAP dropped to approximately $4. Although the stock went nowhere for the next 2 months, investors finally started coming back, LU is once again trading above $70 and the LEAP has moved back to $10. Now LU will likely have to move above $75 before our LEAP will be trading at the price where we initially recommended it, but it is clear that the time value did not evaporate. We can afford to hold the LEAP and wait for the stock to come back, provided that the stock is fundamentally sound. These transitory events can be used as great opportunities to purchase LEAPs in anticipation of the eventual recovery in the stock. Due to the long timeframe on LEAPs, we can afford to be patient, waiting for that ideal entry point. Our favorite indicator in this regard is the CBOE Market Volatility Index (VIX), because it is very reliable at identifying market tops and bottoms. The VIX moves in the opposite direction of the markets, so when it is high (low 30's) the market is approaching a near-term bottom. When the VIX moves into the low 20's, this is the danger zone for a market top, and good entry points are more difficult to come by. Low readings on the VIX can even be used as a trigger to lock in profits on successful positions. So what kind of performance can you get from a LEAPS portfolio? Just taking a sample from our LEAPs portfolio will give some idea. Those stocks on which we recommended LEAPs before the first of the year (EMC, GPS, IBM, LU, CSCO, GE, NT, VOD, TXN, NXTL, and SUNW) provide a good cross-section of the overall market. With returns ranging from a loss of 23%(LU) to a gain of 271% (EMC), a portfolio made up of one of the recommended January 2001 LEAPs on each of the stocks listed above would have provided a 126% rate of return in only four months. With returns like that, supplementing your long-term investments with LEAPs on strong stocks is a hard alternative to ignore. So why don't you build your own mutual fund, based on LEAPs on some of the fast moving stocks in this market. They're more affordable than 100 shares of your favorite tech stock and can appreciate faster due to the leverage. ***************** 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. **** EK - Eastman Kodak $57.44 (+3.44)(-5.63) Since essentially inventing consumer photography in 1880 with the introduction of the first roll film camera, Eastman Kodak Company has focused its energies on making picture-taking easy and accessible to everyone, amateur and professional alike. With a full line of consumer films and cameras, single-use cameras, consumer digital cameras, inkjet media, and supporting products and services, Kodak maintains that focus -- making it easy for everyone to get his or her pictures -- through all its offerings, regardless of technology. Are you sick yet from all the bouncing around? EK's breakout over resistance on Thursday was short lived. Friday they couldn't even break over Thursdays close. So, like we had assumed, that jump was mostly due to the Dow's momentum. EK is at a vulnerable point right now. Trading down to their 52-week low of $53.31 is likely if circumstances are unfavorable. They may be forced down even lower if EK makes another earnings warning like they have done before. Therefore, this play requires patience for the right entry point. A bounce off resistance is your best bet. Earnings are due out Apr 16th, not giving EK a lot more time to send a warning. So we will have to sit back and watch carefully what happens. If EK trades above $60 we would probably drop this play so place your stops accordingly. The 10-dma ($55.88) is support and will be the next support level. However if that earnings warning does come, all levels of support are gone. In the news, EK announced their continual sponsorship of the Olympics through 2008. Hardly worth mentioning as it won't affect our play. BUY PUT APR-55*EK-PK OI=1764 at $1.44 SL=0.75 BUY PUT APR-50 EK-PJ OI=2047 at $0.50 SL=0.00 High Risk! Average Daily Volume = 1.86 mln /charts/charts.asp?symbol=EK **** ISLD - Digital Island $82.63 (-25.88) Digital Island provides a global private network and related services for enterprises needing to implement business-critical applications worldwide. ISLD enables customers to effectively deploy and manage global applications by combining the reliability, performance and broad range of functions available in private Intranets with the global access of the public Internet. ISLD has five regional data centers in Asia, Europe, and the US connected to ISPs in more than 20 countries, and maintains over 1200 online content distributors including America Online, The Wall Street Journal, and CNBC.com. ISLD has been slowly sinking into the ocean since early December of last year, when a slew of upgrades propelled shares north of $155. Falling back to consolidate between $75-90, ISLD slowly began moving higher in February. Peaking at $129.50 at the beginning of March, it has been a downhill slide ever since. The quick correction on the NASDAQ sapped any upward momentum that may have been building and the issue continued to deteriorate, even as the NASDAQ began to recover. Increasing volume is confirming the slide, hitting almost 2 million shares on Friday. ISLD is now sitting just above the $80 support level established in January and has broken through the 50-dma (currently at $97.75). In addition to the 50-dma, ISLD will likely see resistance near $92. In the interest of attractive entry points, we would like to see a move up to resistance before resuming the downtrend. Given the strength of the decline though, we may not get that lucky. If the issue keeps sinking and the volume doesn't dry up, look to initiate new positions as the price breaks below $80. ***Editor's Note: Lower strikes for April have not been created yet*** BUY PUT APR-95 SUH-PS OI=294 at $19.38 SL=15.00 BUY PUT APR-90*SUH-PR OI= 67 at $16.00 SL=12.50 Average Daily Volume = 1.32 mln /charts/charts.asp?symbol=ISLD **** CKFR - Checkfree Holdings Corporation $70.19 (-18.44) CheckFree Corporation is the leading provider of financial e-commerce services and products. Founded as an electronic payments processor in 1981, CheckFree launched the first fully integrated electronic billing and payment solution, CheckFree E-Bill, in March of 1997. Today, CheckFree services enable three million consumers to receive and pay bills over the Internet or electronically. CheckFree's Investment Services division provides a range of investment management services to help more than 255 institutions provide portfolio management and reporting services to their clients. CheckFree clients manage over 820,000 portfolios totaling more than $400 billion in assets. Software and services provided by CheckFree's Compliance and Financial Service division are used to process more than two-thirds of the nation's six billion Automated Clearing House (ACH) payments. In addition, nearly 400 banks and businesses use reconciliation products and services the division provides. The trading patterns in CKFR have been very negative ever since the NASDAQ hit 5K on March 10th. The previous three sessions had already put CKFR into a downtrending trading pattern, coming off its March 7th intraday high of $103.13. With that said, a NASDAQ correction was the last thing that CKFR wanted to see. This past week's 12% correction wiped out any shareholder hopes that CKFR would reverse its trend. It was Thursday's session that was particularly eye-catching. As the NASDAQ bounced off of 4455 and began its recovery, CKFR blatantly violated its 50-dma of $80.88, closing down at $74.94. And to top off the week, CKFR made a convincing decline to close below its 100-dma of $75.31. So we ponder...where to now? Well, if it continues to hold this downtrend and trades off technicals, we very well may see CKFR fall into the low $60's and test support around $62. And below that, we could see $40's. That would get ugly. But this is a put play and it's okay to be a little bearish, isn't it? Even as news pours in off the wire about new partnerships and mergers for CKFR, it just doesn't seem to be significant to the prevailing trading patterns. Thus, what we really have here is a put play based on poor technicals. Next week shall be an interesting one as we watch closely to see how the markets move after having such a volatile expiration week. Any downward pressure on the NASDAQ certainly wouldn't help CKFR re-establish a new support but it would benefit those put players in the crowd. So see how the market begins the new trading week to determine which way it may go and choose your entry points based on individual risk levels. ***Editor's Note: Lower strikes for April have not been created yet*** BUY PUT APR-80*FCQ-PP OI=136 at $13.75 SL=11.25 BUY PUT MAY-65 FCQ-QM OI=175 at $ 8.63 SL= 6.50 Average Daily Volume = 1.42 mln /charts/charts.asp?symbol=CKFR **** TERN - Terayon Communication Systems $188.56 (-66.44) Terayon manufactures and sells cable modem systems that allow cable operators to deploy two-way broadband access to home users. The modem allows users to access Pay-Per-View movies, Video-On-Demand and the Internet through a set top box. The company's systems are based upon S-CDMA (Synchronous Code Division Multiple Access) technology. Terayon competitor's include: Broadcom, 3Com, Motorola, and Nortel. Questionable technology, shaky comments, and heavy selling. Hmmm...smells of a put play. Terayon is betting their S-CDMA technology will become the broadband standard. Many analysts are beginning to question Terayon's wager on their proprietary technology. The argument is whether S-CDMA is a superior technology to TDMA. TDMA (Time Division Multiple Access) is the current industry standard for modems, in which BRCM is the largest supplier. An organization known as CableLabs sets specifications for modem suppliers, and they believe TDMA will be the future technology for broadband access. Also, CableLabs is questioning recent comments made by Terayon officials. Citing executives from TERN have made inaccurate claims about their technology. What's more, TERN's venture capitalists have sold almost all of their shares. The recent action in TERN's stock reflects the concerns of traders. The stock plummeted through it's 10-dma last week and hasn't looked back. Volume has been increasing with the recent downtrend as traders continue to sell TERN. The only support for the stock is down around $155. Entry points can be found after any brief rallies. Look for volume to pick up as the stock drifts lower. BUY PUT APR-180*YGT-PP OI=539 at $25.88 SL=18.00 BUY PUT APR-175 YGT-PO OI= 86 at $23.13 SL=15.75 BUY PUT APR-170 YGT-PN OI= 82 at $20.88 SL=14.50 Average Daily Volume = 1.17 mln /charts/charts.asp?symbol=TERN ************************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 3-19-2000 Sunday 5 of 5 ************* COVERED CALLS ************* Technical Analysis: Consolidation Patterns... There are a number of different historical patterns that can help you make profitable trading decisions. In most cases, the overall trend of the issue is the fundamental component of any formation. The evolution of a sustained directional movement usually begins with an event or noticeable change in character and as the trend develops, surges in volume accompany the new peaks, followed by periods of consolidation. Some setbacks may be very brief while others, especially after a series of small advances, last for weeks or several months. One of the most difficult tasks in technical analysis is to determine whether or not the major trend is intact. Fortunately, there are a number of ways to establish when an important change in trend has occurred. The study of any trend generally begins with a trend-line and when this boundary is significantly violated, a change in character is likely underway. However, there are many cases where the trend is briefly terminated but eventually regains its momentum. One common type of consolidation occurs when the stock transitions into a narrow horizontal range, moving back and forth within obvious limits. The pattern generally forms during the period of a few days and can often carry on for weeks. As the formation develops, trading volume tends to shrink. When the initial trend is bullish, the peaks of the intermediate rallies may coincide with increased volume. Of course the issue will eventually emerge from the pattern and if the breakout is to the upside, it will usually occur in conjunction with an exponential increase in trading volume. When this type of activity occurs, it is likely that the major trend has resumed and further advances will follow. After the upward movement is reestablished, there is always the possibility that the recent resistance area will be tested for support. In most cases, a new influx of buying interest will occur as the issue recedes to the previous consolidation area (the top of the rectangle). In fact, when a breakout from this type of pattern occurs, it is common for the initial rally to continue for a few days and then retrace to the highs of the the preceding pattern before resuming the primary trend. This reaction is initiated by short term profit-taking that occurs immediately after a significant upward movement. Traders that missed the original break-out often use the brief pullback as a second-chance buying opportunity, thus creating new support at the previous resistance level. This kind of activity is common near both the tops and bottoms of rectangular patterns, depending on the nature (bullish or bearish) of the overall trend. Trading range (rectangle) patterns are among the most common formations that appear in charts. They can reflect areas of consolidation (before an eventual continuation) or they may signal an important change in character (Reversal pattern). The secret to success is learning to identify when the chart indicates a resumption of the primary trend as opposed to a potential reversal. The character of the overall movement is often determined by the dimensions of the pattern and in most instances, the range-bound trading allows the issue to gain new strength before continuing higher. For that reason, the majority of these patterns (that occur during a bullish trend), result in upside break-outs. Two different examples of the formation and its unique characteristics can be seen in the recent charts of ELON or CDT... 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 BIDS 5.34 6.81 MAR 5.00 1.06 *$ 0.72 19.0% ASPX 12.56 14.75 MAR 10.00 3.25 *$ 0.69 10.7% HEB 11.94 13.75 MAR 10.00 2.69 *$ 0.75 9.1% ANIC 6.94 7.88 MAR 5.00 2.31 *$ 0.37 9.0% PTEK 8.94 8.13 MAR 7.50 2.13 *$ 0.69 8.8% TSEM 21.00 35.50 MAR 17.50 4.63 *$ 1.13 7.8% FSII 17.81 19.75 MAR 15.00 4.25 *$ 1.44 7.7% IMNR 15.75 11.88 MAR 10.00 6.38 *$ 0.63 7.6% GZTC 29.13 29.00 MAR 22.50 8.38 *$ 1.75 7.3% AND 8.88 12.75 MAR 7.50 1.94 *$ 0.56 7.0% SCTC 22.31 23.50 MAR 20.00 3.75 *$ 1.44 6.7% TLXN 20.78 22.63 MAR 17.50 4.00 *$ 0.72 6.2% SMSC 14.25 14.06 MAR 12.50 2.25 *$ 0.50 6.0% REMC 26.38 43.75 MAR 22.50 5.00 *$ 1.12 5.9% PCMS 23.06 20.59 MAR 17.50 6.38 *$ 0.82 5.5% MCRE 15.50 25.06 MAR 12.50 3.88 *$ 0.88 5.5% SIII 15.00 20.75 MAR 12.50 3.38 *$ 0.88 5.5% EPIC 9.56 8.75 MAR 7.50 2.50 *$ 0.44 5.4% WRLS 28.00 19.94 MAR 17.50 11.13 *$ 0.63 5.4% ELIX 21.75 25.00 MAR 17.50 4.88 *$ 0.63 5.4% RNBO 30.88 42.00 MAR 25.00 7.00 *$ 1.12 4.1% ITIG 43.44 40.75 MAR 30.00 14.25 *$ 0.81 4.0% GELX 17.81 18.25 MAR 15.00 3.75 *$ 0.94 3.6% UBET 6.25 4.81 MAR 5.00 1.63 $ 0.19 3.0% MSGI 24.88 18.94 MAR 20.00 6.00 $ 0.06 0.3% KOSP 20.31 17.06 MAR 17.50 3.25 $ 0.00 0.0% DRMD 12.75 8.94 MAR 10.00 3.38 $ -0.43 0.0% XICO 26.13 19.38 MAR 22.50 4.75 $ -2.00 0.0% BIDS 7.13 6.81 APR 5.00 2.63 *$ 0.50 6.9% FSII 22.88 19.75 APR 20.00 4.75 $ 1.62 6.5% AND 16.13 12.75 APR 12.50 4.75 *$ 1.12 6.1% ESCM 17.50 14.38 APR 15.00 4.38 $ 1.26 6.0% COB 14.13 16.63 APR 10.00 5.00 *$ 0.87 5.9% THDO 15.75 14.06 APR 12.50 4.25 *$ 1.00 5.4% TLXN 25.75 22.63 APR 20.00 7.13 *$ 1.38 5.4% POSS 12.56 14.00 APR 10.00 3.25 *$ 0.69 5.4% EPTO 14.00 14.06 APR 10.00 4.75 *$ 0.75 5.0% EPTO 16.94 14.06 APR 12.50 5.25 *$ 0.81 5.0% IARC 27.63 21.16 APR 22.50 7.75 $ 1.28 4.7% MUEI 14.50 17.75 APR 12.50 2.81 *$ 0.81 4.3% TERA 8.81 7.13 APR 7.50 2.00 $ 0.32 3.4% *$ = Stock price is above the sold striking price. Comments: Those investors with a bullish, long-term outlook on Youbet.Com (UBET), will have another chance to reduce their cost basis by selling April calls. Marketing Services (MSGI) rallied strongly on Friday's news, forming a bullish technical reversal. Exiting on any follow-through rally may be prudent though rolling down to an April $17.50 or $15 call is an option. Kos Pharma (KOSP) has corrected with the Drug sector and is testing its first line of support (the February consolidation area and 30 dma). A 50% retracement could take the stock price down to around $13.50. Maybe a good time to exit at break-even? Duramed (DRMD) received good news on Monday and appears to be holding around the January high, though the April options remain fairly weak. Evaluate your long term outlook - a 2 year weekly chart shows an interesting perspective. Xicor (XICO) appears to have confirmed Thursday's "hammer-bottom" raising the probability for a short term rally. Those with a long term bullish outlook could roll down with April calls as Xicor's first line of resistance is near $20.50, and the overall correction may not be finished. Several of the April candidates have corrected but remain bullish overall. The weakest is Information Architects (IARC) which may be signaling a change of character. NEW PICKS - 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 RAMP 21.09 APR 17.50 MUB DW 6.00 246 15.09 16.0% 16.0% BYND 5.75 APR 5.00 QYD DA 1.38 354 4.38 14.3% 14.3% RMII 10.13 APR 7.50 RMU DU 3.25 0 6.88 9.0% 9.0% SCUR 22.88 APR 17.50 UQU DW 6.50 149 16.38 6.8% 6.8% AND 12.75 APR 10.00 AND DB 3.38 282 9.38 6.7% 6.7% IGEN 28.25 APR 22.50 GQ DX 6.88 0 21.37 5.3% 5.3% MPPP 29.25 APR 20.00 PUM DD 10.25 70 19.00 5.3% 5.3% Company Descriptions OI-Open Interest, CB-Cost Basis or break-even point, RC-Return Called, RNC-Return Not Called (Stock unchanged) **** AND - Andrea $12.75 *** New Entry Point? *** Andrea designs, develops and manufactures audio technologies and equipment for enhancing applications that require high performance and high quality voice input. The company has several patented and patent-pending audio products that enhance a wide range of audio products to reduce background noise and ensure the optimum performance of voice applications. Though revenues were lower for the fourth quarter, Andrea is expanding its technology portfolio and strategic alliances, which should boost future revenues. AND has broken above a stage I base on heavy volume and recently reached a new 52 week high. Some consolidation was expected and Andrea has now reached a 50% retracement. We favor a cost basis near the long-term 150 dma and the year-old support areas at the sold strike. APR 10.00 AND DB Bid=3.38 OI=282 CB=9.38 RC=6.7% RNC=6.7% Chart = /charts/charts.asp?symbol=AND **** BYND - Beyond.com $5.75 *** The Base Begins? *** Beyond.com is an e-commerce services provider that builds and manages websites for businesses and sells software and computer related products to the government, corporate and consumer markets. Their eStore division allows software publishers, hardware manufacturers and systems OEMs to put up a dot com store on the Internet in a few weeks. Beyond.com's movement into B2B appears successful with several recent contracts. The recent jump in price occurred after the IRS renewed its $15 million contract. Beyond offers favorable speculation for traders with a long-term perspective. Several technical indicators are forming a positive divergence and the issue is under heavy accumulation. APR 5.00 QYD DA Bid=1.38 OI=354 CB=4.38 RC=14.3% RNC=14.3% Chart = /charts/charts.asp?symbol=BYND **** IGEN - IGEN International $28.25 *** Ready to Break-out? *** IGEN International develops, manufactures, and markets diagnostic systems utilizing IGEN's patented ORIGEN technology, which is based on electrochemiluminescence, a universal diagnostic platform, which addresses many segments of the diagnostics industry. IGEN and its associates design ORIGEN-based diagnostic systems for multiple segments of worldwide diagnostic market, from hospital and clinical reference laboratories to patient point-of-care, life science research, and industrial uses. The quick rise in IGEN's price in January resulted after a favorable "preliminary" injunction was issued against Roche Diagnostics regarding a breached license agreement. IGEN recently announced that it has introduced an Infectious Disease Assay Panel that will enable technology and pharmaceutical companies to use genomic drug targets to discover treatments for bacterial and viral diseases, including AIDS. We favor the cost basis below the year-long trading range. Due diligence is mandatory! APR 22.50 GQ DX Bid=6.88 OI=0 CB=21.37 RC=5.3% RNC=5.3% Chart = /charts/charts.asp?symbol=IGEN **** MPPP - MP3.com $29.25 *** Records to Cassettes to Cds to MP3? *** MP3.com is developing an innovative approach to the promotion and distribution of music. The MP3.com Web site offers a variety of attractive benefits to artists and consumers. They use the Internet and file formats that make music files smaller to enable artists to distribute and promote their music and to enable consumers to conveniently access this music. Lots of news on MP3 which is embroiled in litigation with the Recording Industry regarding copy right laws. MP3 recently formed MSP Group in response to the growing B2B demand for more ubiquitous access to music content and services. With the failed merger of CDNow and Columbia House, MP3 may have an opportunity for a partner. We favor the improving technicals as investor speculation appears to be driving the price higher. APR 20.00 PUM DD Bid=10.25 OI=70 CB=19.00 RC=5.3% RNC=5.3% Chart = /charts/charts.asp?symbol=MPPP **** RAMP - Ramp Networks $21.09 *** New High Soon? *** Ramp Networks is a provider of shared Internet access solutions for the small office market. The WebRamp product family allows multiple users in a small office to share the same Internet connection simultaneously while optimizing each user's access speed. Favorable earnings in February sparked the latest rise in price that was unaffected by the following downgrade to a "buy." The technicals suggest a new all-time high may not be far behind. We favor a conservative position near the 150 dma and the February high. APR 17.50 MUB DW Bid=6.00 OI=246 CB=15.09 RC=16.0% RNC=16.0% Chart = /charts/charts.asp?symbol=RAMP **** RMII - RMI.Net $10.13 *** Signs of a Breakout? *** RMI.Net is a provider of E-Business and communication services to small- and medium-sized business enterprises, as well as dial-up residential customers. Through their nationwide network of owned and leased dial-up access sites, subscribers are able to access the Internet in 90 of the largest 100 metropolitan areas in the U.S. RMI.Net's acquisitions appear to be working with record growth in sales of its DSL service and an earnings "warning" on expected record revenues for the year. We favor the move above the 150 dma and nearby technical support. Earnings are expected on March 30. APR 7.50 RMU DU Bid=3.25 OI=0 CB=6.88 RC=9.0% RNC=9.0% Chart = /charts/charts.asp?symbol=RMII **** SCUR - Secure Computing $22.88 *** Web Security *** Secure Computing designs, develops, and markets inter-operable, standards-based products for end-to-end network solutions, including fire-walls, Web filters, authentication, Extranet access control and security related professional services. Secure's customers include Fortune 500 companies, small branch offices and government agencies, all of whom rely on software solutions to maximize productivity on the Internet without compromising their information security. Their security products are designed to provide integrated enterprise security solutions for corporate networks. SCUR now offers fire-wall software that dynamically downloads policy management for an initial protocol allowing both high-security and high-performance for all web-based businesses. We simply favor the bullish technicals and the price support near the cost basis. APR 17.50 UQU DW Bid=6.50 OI=149 CB=16.38 RC=6.8% RNC=6.8% Chart = /charts/charts.asp?symbol=SCUR ****************** Big Cap Naked Puts ****************** DISCLAIMER: Before entering any of the positions listed below, you need to understand your risk tolerance. Selling puts can be a High-Risk endeavor depending on the strike you choose to sell. For a greater return, you run a higher risk of being exercised. Therefore, please consider other strikes than the ones listed below if you aren't comfortable with the one we choose. We are gearing these towards higher-risk players. In any case, you can always select a lower strike with a lower return if it better meets your suitability. Stock Stock Strike Option Option Margin Percent Support Symbol Price Price Symbol Price At 25% Return Level A 121.00 115 A-PC 10.13 3025 33% 120 ABGX 312.00 280 AXY-PP 40.13 7800 51% 280 ABGX 312.00 290 AXY-PR 46.25 7800 59% 280 ABGX 312.00 300 AXY-PT 52.50 7800 67% 280 AFCI 72.06 70 AQF-PN 11.50 1802 64% 70 AFCI 72.06 65 AQF-PM 8.88 1802 49% 70 AMCC 266.00 260 AZV-PL 38.50 6650 58% 260 AMCC 266.00 250 AZV-PJ 33.13 6650 50% 260 ARBA 266.19 260 RBU-PL 21.75 6655 33% 260 ASDV 86.31 80 QCI-PP 8.75 2158 41% 80 BEAS 106.00 100 BUC-PT 10.50 2650 40% 105 BLDP 98.75 95 DFQ-PS 11.50 2469 47% 96 BOBJ 128.00 120 BBJ-PD 12.63 3200 39% 125 BRCD 159.06 150 UBZ-PJ 14.13 3977 36% 140 BRCM 217.56 210 RDU-PB 19.38 5439 36% 215 CIEN 142.63 140 UEE-PH 15.63 3566 44% 140 CLRN 126.13 120 KGQ-PD 14.13 3153 45% 125 CMTN 92.38 90 KUA-PR 9.63 2310 42% 92 DITC 96.50 90 PUI-PR 12.50 2413 52% 95 ENTU 110.00 100 QYE-PT 12.00 2750 44% 108 ENZ 79.31 75 ENZ-PO 9.88 1983 50% 78 EXDS 151.25 145 QED-PH 14.38 3781 38% 146 EXDS 151.25 150 QED-PJ 16.88 3781 45% 146 FFIV 95.25 90 FQL-PR 10.88 2381 46% 94 HLIT 116.88 110 LQL-PB 11.25 2922 39% 115 IMNX 174.00 170 QUV-PN 27.75 4350 64% 174 IMNX 174.00 165 QVU-PM 24.88 4350 57% 174 JNPR 249.94 240 JUY-PH 25.63 6249 41% 240 KLAC 80.00 75 CKV-PO 6.00 2000 30% 77 MSTR 226.75 220 MKZ-PD 31.50 5669 56% 220 MSTR 226.75 210 MKZ-PB 26.25 5669 46% 220 NTAP 200.75 190 ULM-PR 21.00 5019 42% 195 NVDA 99.81 90 UVA-PR 10.75 2495 43% 96 NVDA 99.81 95 UVA-PS 16.00 2495 64% 96 PCLN 90.00 85 PUZ-PQ 7.63 2250 34% 90 PEB 100.94 100 BE-PT 12.38 2524 49% 100 PHCM 159.25 155 UMN-PK 18.13 3981 46% 155 PMCS 210.25 190 SZI-PR 18.00 5256 34% 200 PMCS 210.25 200 SZI-PT 22.25 5256 42% 200 PUMA 171.50 160 YCQ-PL 16.38 4288 38% 160 QLGC 155.50 140 QOV-PH 14.75 3888 38% 150 QLGC 155.50 150 QOV-PJ 19.88 3888 51% 150 RIMM 132.88 130 RUP-DF 15.38 3322 46% 128 SCMR 144.50 140 QSM-PH 15.38 3613 43% 140 SDLI 217.00 200 QZL-PT 19.00 5425 35% 200 SDLI 217.00 205 QZL-PA 20.75 5425 38% 200 SDLI 217.00 210 QZL-PB 23.63 5425 44% 200 SEBL 139.94 130 SGW-PF 10.38 3499 30% 134 SNDK 116.94 105 SWF-PA 13.75 2924 47% 113 SNDK 116.94 110 SWF-PB 16.38 2924 56% 113 SONE 101.75 100 QFB-PT 11.00 2544 43% 100 TIBX 119.63 115 PIW-PC 16.13 2991 54% 118 VIGN 236.00 230 GGV-PF 35.50 5900 60% 233 VRTS 164.81 150 VUQ-PJ 12.75 4120 31% 155 VRTS 164.81 155 VUQ-PK 14.75 4120 36% 155 VRTS 164.81 160 VUQ-PL 17.38 4120 42% 155 For an Excel Spreadsheet of this information, click here to download: http://www.OptionInvestor.com/downloads/hpmar-19.xls VRTS AGGRESSIVE SELL PUT APR-160 VUQ-PL at $17.38 = 42% MODERATE SELL PUT APR-155 VUQ-PK at $14.75 = 36% CONSERVATIVE SELL PUT APR-150 VUQ-PJ at $12.75 = 31% SDLI AGGRESSIVE SELL PUT APR-210 QZL-PB at $23.63 = 44% MODERATE SELL PUT APR-205 QZL-PA at $20.75 = 38% CONSERVATIVE SELL PUT APR-200 QZL-PT at $19.00 = 35% EXDS AGGRESSIVE SELL PUT APR-150 QED-PJ at $16.88 = 45% MODERATE SELL PUT APR-145 QED-PI at $14.38 = 38% CONSERVATIVE SELL PUT APR-140 QED-PH at $11.88 = 31% *********************** CONSERVATIVE NAKED PUTS *********************** Option Trading Basics: Open Interest And Volume... In the options market there are a number of terms and concepts that are essential to successful trading. The inherent complexity of derivatives often inhibits a complete understanding of their fundamental traits and with the large number of available options for each stock, how can a new investor identify which positions are best for a particular outlook or strategy? Experienced option traders generally follow a few simple guidelines when evaluating potential candidates. Most traders incorporate Open Interest data along with Trading Volume analysis to distinguish favorable positions. Open Interest is the net number of open option contracts in a specific series and Volume is simply the number of contracts traded on a given day. The open interest figure increases (it might be more accurate to say that an open interest is created) when a trader opens a new position by purchasing an option from another trader who did not previously hold a position in that option. When the position is closed (by selling the option), the open interest will either remain the same or go down. As an example; if the option was sold to a trader who did not have a position before, or was already long, the open interest does not change. If the option was sold to someone who had a short position, the open interest decreases by one. Simple right? In most cases, low open interest reflects a market lacking in liquidity and indicates those instruments which may be relatively more sensitive to small trading volumes. When there are high levels of open interest, option prices will be more fairly valued but favorable fluctuations are likely to be quickly consumed by the market due to the fact there are a number of participants eager to open new positions or sell for profits. As with stocks, low trading volume generally reflects uncertainty regarding the direction of the market whereas high volume suggests a significant level of confidence in the indicated trend. When volume is high during a bullish move and remains low during corrections, the inference is the market is in a well-established, bullish trend. In contrast, when volume is high during a market correction and light during recoveries, the indication is bearish. Of course with option volume and open interest, the levels of activity are always relative and more importantly, they need to be adjusted for timely analysis as exchanges tend to issue open interest data a day in arrears of volume figures. Volume and Open Interest alone are not useful determinants of market direction, but when evaluated in conjunction with other indicators, some traders believe they can help determine whether a trend is likely to reverse or continue. In the case of call options; when both open interest and the price of the underlying are increasing, the indication may be that buyers are moving into the issue as the bullish trend develops. If on the other hand, open interest is increasing while prices decline, new sellers are outpacing buyers in what is probably a technically weak market. They may be hedging portfolio stock or speculating on the maximum price of the issue (selling premium). A decline in open interest while the underlying is falling in value may simply indicate a liquidation of long positions and likely a technically strong market overall. The reasoning behind this assumption is declining open interest suggests no new selling; no indications of hedging and the bearish traders are unwilling to speculate on the magnitude of the rally. When open interest declines while the price of the underlying increases, the implication is most likely a weak market; as new buyers that normally accompany a bullish move are lacking. Understanding the basic characteristics of options will help you recognize how each component comes into play, and ultimately prove to be important in assisting with educated and profitable trading decisions. *** 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 EXLN 22.13 17.81 MAR 17.50 0.56 *$ 0.56 24.4% ESPI 12.75 12.44 MAR 10.00 0.50 *$ 0.50 23.7% ELIX 21.00 25.00 MAR 17.50 0.50 *$ 0.50 20.1% SCTC 24.38 23.50 MAR 17.50 0.63 *$ 0.63 16.6% PLNR 15.88 13.25 MAR 12.50 0.25 *$ 0.25 15.8% SCTC 25.00 23.50 MAR 20.00 0.38 *$ 0.38 15.3% WSTL 25.88 38.19 MAR 17.50 0.69 *$ 0.69 13.2% ANET 12.69 11.94 MAR 10.00 0.25 *$ 0.25 13.0% TSEM 27.25 35.50 MAR 22.50 0.38 *$ 0.38 12.6% ZONA 7.69 9.25 MAR 5.00 0.31 *$ 0.31 12.1% BCRX 32.75 29.94 MAR 25.00 0.38 *$ 0.38 11.9% WSTL 31.50 38.19 MAR 22.50 0.56 *$ 0.56 11.8% NTRX 31.13 23.25 MAR 20.00 0.69 *$ 0.69 11.2% CLPA 44.81 31.75 MAR 20.00 0.75 *$ 0.75 11.2% MSGI 23.75 18.94 MAR 17.50 0.38 *$ 0.38 10.7% TSEM 20.13 35.50 MAR 15.00 0.56 *$ 0.56 10.6% CRUS 20.31 19.88 MAR 15.00 0.38 *$ 0.38 9.6% PTEC 20.63 22.00 MAR 15.00 0.63 *$ 0.63 9.6% RWAV 10.56 10.06 MAR 7.50 0.31 *$ 0.31 9.3% PGEX 23.13 20.00 MAR 17.50 0.50 *$ 0.50 8.5% IDTC 31.50 32.81 MAR 20.00 0.50 *$ 0.50 8.3% SKYC 28.63 27.97 MAR 20.00 0.44 *$ 0.44 8.0% PILT 33.94 49.88 MAR 22.50 0.63 *$ 0.63 7.4% EXLN 23.00 17.81 MAR 15.00 0.31 *$ 0.31 7.1% MSGI 24.88 18.94 MAR 17.50 0.44 *$ 0.44 7.1% PTEC 23.06 22.00 MAR 17.50 0.38 *$ 0.38 6.6% AXTI 31.94 30.06 MAR 17.50 0.50 *$ 0.50 6.3% RNBO 30.88 42.00 MAR 22.50 0.38 *$ 0.38 5.0% WPZ 15.31 9.75 MAR 10.00 0.38 $ 0.13 4.3% XICO 26.13 19.38 MAR 20.00 0.44 $ -0.18 0.0% CONV 12.81 12.13 APR 10.00 0.56 *$ 0.56 13.0% MADGF 14.25 11.50 APR 10.00 0.50 *$ 0.50 10.8% PCMS 23.19 20.59 APR 15.00 0.81 *$ 0.81 10.8% ZONA 10.88 9.25 APR 7.50 0.38 *$ 0.38 10.7% ISIP 24.00 16.63 APR 15.00 0.75 *$ 0.75 9.8% SCUR 26.50 22.88 APR 17.50 0.75 *$ 0.75 9.0% OXGN 23.50 20.88 APR 17.50 0.50 *$ 0.50 7.0% *$ = Stock price is above the sold striking price. Comments: Xicor (XICO) may have confirmed Thursday's "hammer-bottom" which should allow for a favorable exit next week. Selling the April $20 call or rolling down to the April $17.50 call remain viable options, depending on your risk tolerance. Xicor's first line of resistance is near $20.50. Worldpages.Com (WPZ) is still working off an oversold condition and is looking fairly weak, though rolling down to an April $7.50 call is possible. Several of the April candidates have corrected but remain bullish overall. Closed: Duane Reade (DRD) offered a favorable exit on the oversold rally last week for a small profit of $0.25. The more aggressive traders who held to expiration realized a maximum profit. NEW PICKS - Sequenced by ROI ****** Stock Last Put Strike Option Last Open Cost ROI Opt Symbol Price Month Price Symbol Bid Intr Basis Expired CYOE 10.75 APR 7.50 QTO PU 0.44 566 7.06 17.0% SPNW 20.75 APR 15.00 NUH PC 0.75 149 14.25 15.3% RSLC 23.88 APR 17.50 QRL PW 0.69 621 16.81 12.6% MCRE 25.06 APR 15.00 MQZ PC 0.69 20 14.31 12.1% INSO 16.06 APR 10.00 IJQ PB 0.44 10 9.56 12.0% NUHC 17.56 APR 12.50 NTQ PV 0.31 25 12.19 8.1% CDT 34.31 APR 25.00 CDT PE 0.56 7 24.44 7.5% Company Descriptions OI-Open Interest CB-Cost Basis or break-even point ROI-Return On Investment **** CDT - Cable Design Technology $34.31 *** Up, Up And Away! *** Cable Design Technologies designs and manufactures specialty electronic data transmission cables and network structured wiring systems. CDT products include high performance copper, fiber optic and composite cable constructions, connectors and component assemblies that are used in network communication, interconnect, wireless, commercial aviation, automotive, automation & process control and other applications. Network Communication products encompass the cable and components to complete the end-to-end wiring system structure of local and wide area networks, as well as outside communication, switchboard and equipment cable. Their other products include climate control, video distribution and security and signal systems, electronic cards and surveillance. Shares in CDT soared recently after the company said it received a multi-million dollar order for fiber-optic cable. Demand for fiber-optic cable is expected to increase by 25% annually over the next few years and CDT has committed intensify their focus on the development and acquisition of fiber optic products utilized in communications, wireless, networking, video, CATV and Internet applications. APR 25.00 CDT PE Bid=0.56 OI=7 CB=24.44 ROI=7.5% Chart = /charts/charts.asp?symbol=CDT **** CYOE - Coyote Network Systems $10.75 *** New Range? *** Coyote Network Systems provides telecommunications products, international long distance services and network services, primarily to entrepreneurial carriers such as domestic and international long distance providers, competitive local exchange carriers and Internet service providers. Their products include the DSS Switch, which provides cost-effective and versatile access to the public switched telephone network and the Carrier IP Gateway, a scaleable Internet Protocol solution. They also provide network integration and customer support services. Coyote's new plan is to deliver applications to the desktop using a simple telephony-based Internet appliance over their own branded network. They expect to aggressively grow a carrier customer base through applications that include e-mail, unified messaging and other transaction-based services. The bullish technical outlook is the basis for this position. APR 7.50 QTO PU Bid=0.44 OI=566 CB=7.06 ROI=17.0% Chart = /charts/charts.asp?symbol=CYOE **** INSO - Inso Corporation $16.05 *** Bottom Fishing! *** Inso supplies software solutions to store, manage, share, and publish electronic information. They provide software solutions to manage and distribute all forms of electronic information, from simple memos to complex technical manuals, in environments ranging from desktop computers to the Internet. With enterprise license agreements, integration in popular software products, and bundling agreements, Inso technology is installed on more than 70 million desktops worldwide. Their products are currently focused on Electronic Publishing Solutions, Document Exchange, and Product Data Management. Inso shares plummeted in February after the company warned of lower-than-expected revenue for the fourth quarter and said it's considering the potential sale of the company. Now the worst appears to be over and the success of their subsidiary, eBusiness Technologies is generating new interest. A cost basis near $10 offers favorable risk/reward potential. APR 10.00 IJQ PB Bid=0.44 OI=10 CB=9.56 ROI=12.0% Chart = /charts/charts.asp?symbol=INSO **** MCRE - MetaCreations $25.06 *** On The Move! *** MetaCreations is focused on e-commerce visualization solutions for the World Wide Web. MetaCreations' strategy is centered on the company's MetaStream technology and software tools designed to make the interactive use of photo-realistic 3D on the Web practical and pervasive. MCRE's current operations are focused exclusively on its subsidiary, MetaStream.com, a leading provider of complete solutions for creating and deploying virtual products for e-commerce. MCRE's fourth quarter revenues were lower than prior quarter's as a result of the decision to no longer focus on one-time MetaStream technology licenses, in favor of implementing a recurring broadcast licensing model. The new bullish trend is intact and our cost-basis is near recent technical support. APR 15.00 MQZ PC Bid=0.69 OI=20 CB=14.31 ROI=12.1% Chart = /charts/charts.asp?symbol=MCRE **** NUHC - New Horizons Electronics $17.55 *** Own This One! *** Nu Horizons Electronics is engaged in the distribution of high technology active and passive electronic components. They are also an export distributor of electronic equipment and a contract assembler of circuit boards and related electromechanical devices for various original equipment manufacturers. Active and passive components distributed by Nu Horizons include memory chips, microprocessors, digital and linear circuits, microwave, RF and fiber optic components, transistors and diodes, capacitors, resistors and related networks. These products are utilized by electronics manufacturers including industrial instrumentation, computers and peripheral equipment, consumer electronics, telecom equipment, and a wide variety of other manufacturers. Simply a good company with solid fundamentals and a bullish technical outlook. APR 12.50 NTQ PV Bid=0.31 OI=25 CB=12.19 ROI=8.1% Chart = /charts/charts.asp?symbol=NUHC **** RSLC - RSL Communications $23.88 *** Expanding Telecom *** RSL Communications is a rapidly growing multinational telecom company that provides a broad array of services, with a focus on international long distance voice services to businesses in key markets. RSLC also provides domestic long distance along with fixed and wireless, calling card, data, Internet, private line and other value-added telecommunications services. RSLC has expanded through acquisitions, strategic investments, joint ventures and alliances. The recent agreement to acquire REDNET, one of the UK's leading B2B Internet Service Providers is seen as a favorable move and it follows their announcement of record fourth quarter consolidated and European results and plans to emphasize the growth of its European businesses. APR 17.50 QRL PW Bid=0.69 OI=621 CB=16.81 ROI=12.6% Chart = /charts/charts.asp?symbol=RSLC **** SPNW - Shopnow.com $20.75 *** Internet Retail *** SPNW provides an end-to-end solution that enables businesses to engage in e-commerce with other businesses, merchants and shoppers. SPNW operates an e-commerce network (the ShopNow Network) comprised of online marketplaces and web sites of clients. Their website provides access to thousands of merchants and the products available cover a broad array of consumer goods and services. These include floral, electronic, automotive, and apparel, and services include travel, legal, and health, as well as other categories. SPNW announced this month that their b2bnow.com network, the company's global business-to-business portal, added 40,000 new business customers and the growth has spurred investor interest. We favor recent bullish reversal and the potential for significant upside movement. APR 15.00 NUH PC BID=0.75 OI=149 CB=14.25 ROI=15.3% Chart = /charts/charts.asp?symbol=SPNW ************************ SPREADS/STRADDLES/COMBOS ************************ Dow Rests While Nasdaq Rallies.. Friday, March 17 Stocks ended mixed Friday with consolidation in blue-chips and continued recovery in technology issues. The Dow Industrials closed down 35 points at 10,595 while the Nasdaq rose 80 points to 4798. The S&P 500 index ended 6 points higher at 1464. The volume on the NYSE was heavy at 1.3 billion shares with declines beating advances 1,582 to 1,411. In the bond market, the 30-year Treasury rose 18/32, bid at 103 10/32, where it yielded 6.00%. Thursday's new plays (positions/opening prices/strategy): Kroger KR JUL17C/APR17C $0.93 debit calendar Andrew ANDW JUL15C/APR25C $8.50 debit diagonal MetroMedia MFNX MAY60C/APR80C $17.00 debit diagonal Another session of volatile trading help reduce the opening prices in our new spread positions. ANDW dropped $1.50 in the first few minutes of trading, offering an excellent entry debit. MFNX also fell at the open, providing a second favorable opportunity. The surprise of the day was KR, which initially traded in a small range but rallied to a midday high of $17.50 and finished up $1.12 at $16.68. Our calendar spread enjoyed the benefits of favorable opening disparities and passed through a brief profitable period in early trading. Now the issue will be monitored for continued upward movement and the first resistance level near $17.50 to $18 should provide a decisive test of the current rally. Portfolio plays: The technology sector continued to recover in today's session as Networking and Hardware issues enjoyed impressive rallies while Industrial stocks receded from recent gains. Trading was choppy as a result of the simultaneous expiration of options on stocks, indexes and futures. The excessive volatility over the past month has produced some incredible gaps in market breadth and the large upside movements may be finally be giving way to more sustainable trends. After a brief reprieve, the leading technology issues are expected to continue higher, even in the face of rising interest rates and only a significant change in the FOMC's future economic outlook will alter the current course of the high-tech revolution. Our portfolio finished the month in excellent fashion with the overwhelming majority of plays profitable. The Credit-Spreads section was one short of a perfect performance and even the losing position; Level 3 (LVLT) offered a number of profitable exit opportunities. Most of the April Debit Spreads closed at maximum profit and the few negative plays were far outpaced by winning positions. Our time selling techniques in the long-term portfolios; Covered-Calls with LEAPS and Calendar Spreads have performed very well and the Straddles section produced the best play of the period with a 400% return on LHS Group (LHSG). The strategy of the month; Diagonal Spreads also produced a number of short-term winners with excellent returns. Of course the market's movement dictates our success and now the difficulty will be in identifying the issues that will continue to move higher in the coming weeks. With any luck, the bullish trends in Networking, Internet Commerce, Computer Hardware and Wireless Telecom will remain intact and our simple approach to conservative position trading will provide additional opportunities for profit. The summary of monthly plays will be published in Tuesday's edition of the OIN. Questions & comments on spreads/combos to Click here to email Ray Cummins ********* NEW PLAYS ********* With the FOMC meeting next week and the market in a state of incredible volatility, we decided to search for conservative plays on issues that have demonstrated recent technical strength. These spreads are based on the current price or trading range of the underlying issue and the recent technical history or trend. Current news and market sentiment will have an effect on these positions so review each play individually and make your own decision about the future outcome of the stock price. **** XRX - Xerox $25.81 *** On The Rebound? *** Xerox provides a number of document solutions that enhance and improve business productivity. Their processing activities encompass developing, manufacturing, marketing, servicing and financing a complete range of document processing products and solutions. Black and white light-lens copiers represent almost half of the company's revenues but many of Xerox' new digital products replace or compete with their current equipment. Their new products include the DocuTech family of digital production publishers, the DocuPrint family of black and white printers, the DocuColor family of color copiers and printers and the Document Center family of black and white digital copiers. Xerox is on the move and the recent news of an alliance with with Sharp and Fuji Xerox to deliver faster, cheaper inkjet printing has put the company back in the limelight. Together the three will invest more than $2 billion in inkjet research, development, manufacturing and marketing and Xerox will offer a full line of low-cost inkjet products. The combination is designed to create an unprecedented force to challenge copier giant Hewlett-Packard. Xerox estimates that inkjet products and supplies represent a $57 billion market opportunity with a double-digit annual growth rate. Within the next few months, Xerox said it will begin launching personal inkjet printers, copiers and multifunction machines in North America, Europe and developing markets. The reason for the change in character is obvious and with the extreme volume and volatility in options, there are a number of favorable disparities for spreads. This position offers the simplest approach. PLAY (conservative - bullish/debit spread): BUY CALL APR-20.00 XRX-DD OI=6533 A=$6.25 SELL CALL APR-22.50 XRX-DX OI=12142 B=$4.12 INITIAL NET DEBIT TARGET=$1.88-$2.00 ROI(max)=25% Chart = /charts/charts.asp?symbol=XRX **** AOL - American Online $64.75 *** LEAPS/CC's *** America Online is the world's leader in interactive services, Web brands, Internet technologies, and e-commerce services. The company operates two worldwide Internet services: America Online, with more than 20 million members, and CompuServe, with more than 2.2 million members; several leading Internet brands including ICQ, AOL Instant Messenger and Digital City, Inc.; the Netscape Netcenter and AOL.COM portals; Netscape Navigator & Communicator browsers; AOL MovieFone, the nation's # 1 movie listing guide and ticketing service; and Spinner Networks and NullSoft, leaders in Internet music. Through its alliance with Sun Microsystems, the company develops and offers easy-to-deploy, end-to-end e-commerce and enterprise solutions for companies operating in the E-conomy. AOL's product groups are AOL Interactive Services, CompuServe Interactive Services/AOL Studios, and AOL International. American Online is probably one of the most well-known issues of all the Internet-related companies and the stock receives a fair share of coverage in the OIN. There are numerous facets to the company, the most important of which may be the pending merger with Time Warner (TWX) but our position is simply based on the improving technical outlook. The correction appears to be over and the trend is now firmly established with a bullish bias. The "in-the-money" LEAPS are costly but the play begins with no upside risk. Remember, if the short options are "in-the-money" at expiration, you must buy them back to preserve the long-term position. PLAY (conservative - bullish/diagonal spread): BUY CALL JAN01-40 ZKF-AH OI=12103 A=$29.50 SELL CALL APR00-65 AOO-DM OI=36978 B=$4.62 INITIAL NET DEBIT TARGET=$24.75-$25.00 TARGET ROI=50% Chart = /charts/charts.asp?symbol=AOL **** EGRP - E*trade Group $29.25 *** Break-out! *** E*Trade Group is a provider of online investing services and has established a popular, branded destination Web site for investors. The company offers automated order placement and execution, along with a suite of products and services that can be personalized, including portfolio tracking, charting and quote applications, real-time market commentary and analysis, and other information services. E*Trade provides these services 24 hours a day, seven days a week by means of the Internet, telephone (interactive voice recognition), online service providers and direct modem access. Their proprietary transaction-enabling technology supports highly automated, easy-to-use and cost-effective services that empower its customers to take control of their investment decisions and financial transactions. The financial sector is HOT and E*Trade has been waiting in the wings for a reason to rally. Robertson Stephens Senior Analyst Scott Appleby provided the necessary impetus with some positive comments on the eBrokerage industry and an upgrade for EGRP. The report identifies the sequential transaction growth estimates for the March quarter and offers bullish estimates for the eBrokerage leaders. E*Trade is certainly a leader and the $3 move on Friday may be just the boost needed to carry the issue to a new trading range. Our conservative position will require a small retreat in Monday's option prices to allow a favorable entry. PLAY (conservative - bullish/debit spread): BUY CALL APR-15 QGR-DC OI=245 A=$14.38 SELL CALL APR-25 QGR-DE OI=11128 B=$5.38 INITIAL NET DEBIT TARGET=$8.75 ROI(max)=14% Chart = /charts/charts.asp?symbol=EGRP *************** Readers Request *************** TLXN - Telxon $22.63 *** Favorable Consolidation! *** Telxon designs, manufactures, integrates, markets and supports transaction-based mobile information systems. Their mobile computing devices and wireless local area network products are integrated with its customers' host enterprise computer systems and third party wide area networks, enabling mobile workers to process information on a real-time basis at the point of transaction. Telxon's products are sold worldwide for use in key vertical markets, including retail, transportation/logistics, warehouse/distribution, route sales and manufacturing. They also serve several segments of the emerging mobile services market, such as field service, insurance claims processing and work force automation. TLXN is one of our recent covered-call favorites and this week a subscriber requested a bullish spread position in the issue. The stock has made significant gains in the past few months and the pattern of consolidation appears to be coming to an end. With support near the cost basis, this position offers a favorable alternative to stock ownership. PLAY (conservative - bullish/diagonal spread): BUY CALL JUN-12.50 TNQ-FV OI=73 A=$11.38 SELL CALL APR-20.00 TNQ-DD OI=323 B=$5.25 INITIAL NET DEBIT TARGET=$6.00 INITIAL ROI TARGET=25% Chart = /charts/charts.asp?symbol=TLXN ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. 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