The Option Investor Newsletter Sunday 3-26-2000 1 of 4 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 ******************************************************************* WE 3-24 WE 3-17 WE 3-10 WE 3-3 DOW 11112.72 +517.49 10595.23 +666.41 9928.82 -438.38 +505.08 Nasdaq 4963.03 +164.90 4798.13 -250.49 5048.62 +133.83 +324.29 S&P-100 832.65 + 45.91 786.74 + 37.24 749.50 - 16.45 + 46.17 S&P-500 1527.46 + 62.99 1464.47 + 69.40 1395.07 - 14.10 + 75.81 RUT 574.01 - 0.76 574.77 - 29.04 603.81 + 5.93 + 41.14 TRAN 2688.15 + 64.32 2623.83 +258.54 2365.29 - 69.16 + 83.19 VIX 25.81 + 2.14 23.67 - .13 23.80 + 2.51 - 7.79 Put/Ca .42 .42 .39 .40 ******************************************************************* The Convergence Continues Ahh, what an encouraging week we had. And what better way to finish it out then by holding strong even as some took profits. It was a broad-based market rally that saw a variety of astounding events ranging from the post-interest rate hike rally to the inexplicable reaction to MU earnings shortfall. Once again, on profit-taking Friday, both the NASDAQ and the Dow proved to be resilient. The past couple of weeks have been like stages in the Tour de France. After the grueling incline we faced during expiration week, combined with back-to-back CPI and PPI, tired and waning, the market rested up over the weekend and prepared to face the next stage. That next stage had an early challenge to overcome: Greenspan Pass. Monday was a slow start as the NASDAQ began to feel fatigued. And on early Tuesday, it was involved in a scary pile up. But skinned knees and all, it got back up from 4455 and pedaled harder towards the FOMC meeting. When it finally got there, the momentum was strong and the NASDAQ effortlessly hurdled Greenspan Pass. Where was the Dow? Quietly and steadily coasting ahead of the pack, not even flinching at the FOMC's 25 basis point hike. The Dow's recovery of late has been vital to the market's health and brings back memories of last year's April earnings run. Two weeks ago, all we heard about was the amazing and rather frightening divergence between the NASDAQ and the Dow. Had we left those "old economy" stocks for dead, never to look back? Could we possibly continue on without them? Of course not. It was playing out just as it had in 1999: convergence was abound. When we think about this it makes sense. April earnings season typically is that last real source of trading information for the broad market before the summer arrives. Then, volume drops off, profits from the last nine months in the high-fliers are taken, reallocation to more stable stocks occurs, and traders head off to Long Island and Florida for golf and sun. So now we are seeing the NASDAQ and the Dow join forces to make what is adding up to be an excellent earnings run. Now, getting back to this past trading week, the Dow held a steady trend throughout the week, climbing 517 points from 10595 to Friday's close of 11112. That was a 4.9% weekly advance and a gain of over 11% in the past two weeks. Still, the Dow is down 3.3% on the year. This catch-up game with the NASDAQ is the convergence in the making. It's your turn to shine DJIA! Although trading was lighter than normal on Friday, the Dow should be applauded in that it had the strength to hold on to its weekly gains in the face of profit-takers. Closing down only 7.14 points, it was relatively unchanged. This sets a positive tone for the coming week as traders feel comfortable holding long positions over the weekend. Some noteworthy performers in the Dow were IBM(+5.38), HON(+3.38), and MMM(+3.88). MSFT(-0.19) held up on prospects that they may settle their antitrust suit the government. Naturally, the ride for the NASDAQ was a bit more volatile. Can you believe that? After trying in vain during Friday's early going to reach its all-time high of 5132, the NASDAQ topped out at 5078 and began coming off its highs. It fell into the red briefly, only to find short-term support at 4900. This bounce was reassuring as no one really wanted to over do it. From there, it fought through the selling to close up 22.42, another very bullish sign for next week. The NASDAQ netted 164.90 points for the week, up 3.4%. Taking a look at the 10-day chart of the NASDAQ, you can see that the NASDAQ has put in double bottom at 4455, followed by two triple digit gains, and almost a third on Thursday. It certainly looks as if it poised for an April earnings rally. A potential catalyst to a continuation of this broad market rally will be the MSFT outcome. MSFT formally offered an 11-hour settlement package to the government this weekend when the U.S. District judge presiding over the case threatened to deliver a verdict of his own on Tuesday if the two sides couldn't come to terms. Although MSFT's concessions, such as equal pricing practices, providing source codes to its old operating systems(OS), and splitting the browser from the OS, are all key points of contention for the government, the latest reports reveal skepticism among government lawyers that this case will be settled. The implications of a settlement at this time would be a great boost to the markets. MSFT stock has been depressed ever since the government's antitrust cloud began looming over it. It never really could sustain any of the advances that it has mounted in that time. MSFT's recent breakout can be attributed to the HOPE that a settlement is near. Now I emphasize hope. Will this current stock level be sustainable if the government balks at MSFT's recent offer? Probably not. Many see this as a matter of time. Whether the government settles for concessions or breaks the company up, the fact that it is finally over may provide upside to the market as MSFT steps up into its traditional leadership role again. It may be MSFT or micro-MSFTs, either way it will help INTC in leading both the NASDAQ and the Dow. While we are on the topic of government intervention in the markets, let's move to the FOMC. Getting through the FOMC meeting last Tuesday was important for the markets. As most had expected, they raised both the Fed Funds rate and the discount rate by 25 basis points, or 0.25%. Even though this was the expectation, the NASDAQ slid that day to retest that sub-4500 level. We see that even a slight degree of uncertainty can heat up the selling in today's markets. Keep that in mind. So what is the Fed trying to do? Cool down the economy or the stock market? Now this debate can and will go on forever and Greenspan will be hailed and cursed all in the same breath. But, it is important to remember a few things about the great interest rate debate. Aside from higher crude prices, which I will get to in a moment, inflation has indeed remained tame. Some will even say non-existent. Productivity continues to rise and this seemingly higher demand in the economy continues to be met with ample supply. Most importantly, it requires six to nine months for a rate hike to actually begin affecting the economy. Certainly, it affects borrowing and lending today, but the macroeconomic repercussions take a little longer. Taking a glance at the bond market, the 30 year bond has been trading below 6.0%, which is really quite amazing. It has been rallying with the stock market and has taken this recent rate hike with a grain of salt. Yet, on Thursday, the minutes from the February FOMC were released, revealing that some members were urging for a 50 basis point hike a month ago. This did create a ripple in the bond market as traders felt concern over future FOMC action. Bonds closed down Friday at 6.0%. Moderation is the key in this interest rate debate. It would seem that most investors and traders would agree with this mantra. A 50-point basis point move at anytime would prove to be far too unnerving for investors and would only further polarize the pro- and anti-Greenspan camps. With this latest move, it appears that the Fed wants to take this 8 year long skyrocketing flight and land it as softly and gently as possible. Maybe even a landing that we can sleep through, but how often does that happen? Looking forward to the next week, there are a variety of factors that will be prevalent in the market. Being the last trading week of the quarter, fund managers will be participating in "window dressing." This is the practice of investing all or most of the cash that these funds have on the sidelines. Fund managers do this so that they are fully invested on their quarter-end books. Investors typically don't like to see their investments in cash, especially in a bull market. Considering that TrimTabs.com estimated $21.9 bln flowed into all equity funds over the week ending March 22nd, we could see a buying fest. It is these strong fund flows that underpinned the market this week. Momentum plus high liquidity equals rally. On Monday, OPEC members will be meeting to decide the fate of global oil production as current output agreements expire at the end of the month. Can you say collusion? They are looking to increase the supply by 1.5 mln barrels, yet if there is a 2.0 mln barrel increase, the price of crude may come down even more. Either way, it means a cheaper price at the pump. FedEx already announced this week that it will be adding a fuel surcharge to shipping prices. Lower oil prices mean less argument for inflation. Next week will be a continuation of April earnings euphoria. Based on the positive prospects for the likes of GE, INTC, and HWP, this could be the beginning of a formidable rally. Matt Russ Research Analyst *********** JIM'S PLAYS *********** There is no Jim's Plays article this weekend. ************ Stock News ************ Trading Volumes Drive Online Brokers Higher By Cindy Christ Shares in online brokers were on fire Friday, leading the Nasdaq as the best-performing sector. Notice of better-than-expected results from a Web-based investment bank and an upgrade for two well-known Internet brokers helped spark the rally, which sent the online brokerage sector up 7.4 percent intraday. After the close Thursday, Wit Capital Group (WITC), parent of online investment banking group WitSoundView, said it expects results for the first quarter ending March 31 to "significantly" outperform analysts' estimates. The company said that first-quarter revenues would more than double projections, exceeding $85 million, and that it would turn a profit for the first time. Wit Capital said analysts expected revenues in the range of $47.6 to $54 million. Consensus projections by First Call/Thomson Financial projected a 5-cent loss for the quarter, up from a loss of 67 cents a year ago. "The issuing and trading markets for Internet and technology stocks have been very strong in the first quarter, and our results will reflect both market conditions and the accretive benefits of the SoundView Technology Group merger," said Wit SoundView co-CEO Ron Readmond. In January, Wit Capital completed its merger with technology -focused investment bank SoundView to provide its clients with better access to IPOs and research. Wit Captial Group expects to report earnings the week of April 17. In a research alert Friday, U.S. Bancorp Piper Jaffray analyst Stephen Franco raised his revenue and per-share earnings outlook for Ameritrade Holding Corp. (AMTD) and E*Trade Group on (EGRP) the strength of record trading volumes. Trading volume on the New York Stock Exchange and Nasdaq in March is tracking ahead of all previous records, with average weekly volume of 8.6 billion shares, up 36.6 percent from the last quarter, according to Robertson Stephens. Franco rated Ameritrade a "buy" and upped his second-quarter revenue view to a loss of 4 cents a share from a loss of 14 cents. Franco lifted his revenue outlook for Ameritrade to $151 million from $119 million. In addition, Franco boosted his rating on E*Trade to a "strong buy" and raised his second-quarter earnings forecast to a loss of 15 cents a share from a loss of 21 cents. Franco said second-quarter earnings for the No. 2 online broker would total $350.7 million versus the previous estimate of $296 million. Shares in Ameritrade closed higher, up $2.31, or 10.5 percent, at $24.25. E*trade was among the Nasdaq's most active issues with nearly 22 million shares changing hands. EGRP jumped $4.13, or 14.8 percent, to close at $32. In an interview with CNBC financial television, Franco said the whole sector is primed for take-off. "This space has been really hot now for two straight quarters...momentum is starting to come back into the sector," he said. Friday's strong performance follows a similar move in traditional brokerages earlier this week, after a number of the Street's biggest firms reported results that far surpassed Wall Street estimates. The rosy industry outlook lifted shares in online brokers across the board. No. 1 online broker Charles Schwab (SCH), which is up about 22 percent over the last month, jumped $3.69, or 6 percent, to $64.94. TD Waterhouse (TWE) added $1.38, or 6.4 percent, to $22.88. National Discount Broker (NDB) gained $5.88, or 11.6 percent, to $56.69. DLJ Direct (DIR) rose $1.25, or 8.7 percent, to $15.56. ******* Ask OIN ******* There is no Ask the Analyst article this weekend. ************** Market Posture ************** As of Market Close - Friday, March 24, 2000 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,850 11,250 11,113 Neutral 3.16 SPX S&P 500 1,410 1,475 1,527 BULLISH 3.21 OEX S&P 100 780 800 833 BULLISH 3.21 RUT Russell 2000 510 530 574 BULLISH 2.24 NDX NASD 100 4,000 4,150 4,692 BULLISH 2.24 MSH High Tech 975 1,000 1,150 BULLISH 2.24 XCI Hardware 1,480 1,510 1,770 BULLISH 2.24 CWX Software 1,430 1,670 1,610 Neutral 3.21 SOX Semiconductor 1,130 1,360 1,288 Neutral 3.21 NWX Networking 1,000 1,040 1,170 BULLISH 2.24 INX Internet 770 800 917 BULLISH 3.09 BIX Banking 520 600 580 Neutral 3.16 XBD Brokerage 450 480 582 BULLISH 2.31 IUX Insurance 520 600 572 Neutral 3.16 RLX Retail 900 1,000 933 Neutral 3.16 DRG Drug 340 380 341 Neutral 3.16 HCX Healthcare 700 750 686 BEARISH 3.24 ** XAL Airline 110 140 138 Neutral 3.10 OIX Oil & Gas 265 300 276 Neutral 3.16 Posture Alert The market put in some solid gains this past week, but Friday's fade at the end of the day brought some of the major indexes back below key levels. Brokerage stocks continued their stellar pace, as they added another +4.39% gain Friday to their already phenomenal week. Johnson & Johnson's hit on Friday hurt the Healthcare Index, which closed down -2.86%. As such, that sector has been downgraded to Bearish from Neutral. **************** Market Sentiment **************** Sunday, March 26, 2000 Red Hat, Best Buy, and More Expectations! The market turned in a very stellar week, as both blue chips and technology stocks enjoyed solid gains. Many sectors across the board added to already big-gains, and many beaten up sectors found new life. This solid breadth across the board is extremely positive, especially heading into April. The earnings season will be in full effect in just two weeks, but we have already gotten positive news from numerous companies, ranging from bellwether General Electric to internet brokerage firm Wit Capital. This may be a sign of more good things to come! 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*: Best Buy BBY 5.61 +.73 +.75 3/28 Cableton Systems CS 9.77 +.14 +.16 3/29 ImClone Systems IMCL 3.20 +.01 +.02 3/30 RedHat RHAT 0.97 -.02 -.01 3/27 Walgreen WAG 2.36 +.23 +.24 3/27 Now based upon sentiment analysis, Best Buy and Cabletron Systems are both highly optimistic. Not only are their whisper numbers 2 cents above expected, but the Pinnacle Index for both of these securities are great, indicating a potential let down after earnings. RedHat is considered a low expectation stock, and has a good chance of rallying should the company come-in or beat expectations. Now below is a quick list of short interest for these companies that are due to report. It is always helpful to know that if a short squeeze were to happen, how many shares are potentially at threat. Short Interest Current Month* Previous Month % Change Avg Daily Volume Best Buy 3,483,224 1,880,778 +85.2 1,913,365 Cabletron 2,390,139 1,988,514 +20.2 3,511,025 ImClone 2,288,031 2,316,084 -1.2 756,372 Walgreen 12,030,536 10,943,202 +9.9 2,328,450 RedHat 4,332,339 4,133,809 +4.8 1,961,746 *NYSE as of 3/15. NASDAQ as of 2/15. BULLISH Signs: Corporate Earnings: Major corporate earnings continue to come out strong and ahead of analyst expectations. General Electric is the latest bellwether to give positive comments regarding earnings. Short Interest: Short interest continues to climb as quickly as the market. The short interest on the NYSE increased +5.7% to 4,110,510,698 shares on March 15. This bearish level would suggest further upside potential. Interest Rates (5.984): The current yield is in bullish territory. Mixed Signs: Volatility Index (25.81): 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. Currently, it stands in the middle of its trading range. BEARISH Signs: Pre-Release Season: With April just around the corner, we have the beginning of pre-release season. Over the next several 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, followed by MicroStrategy and its 140-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 (3/24) Overhead Resistance (830-860) 7.14 OEX Close 832.65 Underlying Support (800-825) 1.22 Underlying Support (770-795) 0.82 What the Pinnacle Index is telling us: Based on Thursday's sentiment, we would expect some profit taking to occur very shortly, as the sentiment on overhead seems too bullish. Put/Call Ratio Friday Strike/Contracts (3/24) CBOE Total P/C Ratio n/a CBOE Equity P/C Ratio n/a OEX P/C Ratio n/a Peak Open Interest (OEX) Friday Strike/Contracts (3/24) Puts 700 / 9,113 Calls 830 / 4,363 Put/Call Ratio 2.08 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 24, 2000 25.81 ************* COMING EVENTS ************* For the week of March 27th, 2000 Monday Existing Home Sales Feb Forecast: 4.75 M Previous: 4.59 M Tuesday Consumer Confidence Mar Forecast: 140.0 Previous: 141.8 Wednesday New Home Sales Feb Forecast: 875 K Previous: 882 K Thursday GDP - Final Q4 Forecast: 6.9% Previous: 6.9% GDP Chain Deflator Q4 Forecast: 2.0% Previous: 2.0% Initial Claims 03/25 Forecast: 270K Previous: 266K Help Wanted Index Feb Forecast: N/A Previous: 89 Friday Personal Income Feb Forecast: 0.3% Previous: 0.7% PCE Feb Forecast: 0.8% Previous: 0.5% Chicago PMI Mar Forecast: 56.7% Previous: 56.7% Factory Orders Feb Forecast: -1.0% Previous: -1.1% Michigan Sentiment Mar Forecast: 108.0 Previous: 107.7P Week of 04/03 04/03 Auto Sales 04/03 Truck Sales 04/03 NAPM Index 04/03 Construction Spending 04/04 Leading Indicators 04/05 NAPM Services 04/06 Initial Claims 04/06 Wholesale Inventories 04/07 Nonfarm Payrolls 04/07 Unemployment Rate 04/07 Hourly Earnings 04/07 Average Workweek 04/07 Consumer Credit ************* WOMAN'S WORLD ************* Is The Treasury Trying To Counter The Fed? By Mary Redmond Two important events occurred in the last couple of weeks which impacted interest rates. The Federal Reserve raised short term rates by a quarter point and the Treasury enacted a buyback of approximately $1 bln worth of long term bonds. It is possible that the two different departments have a different perspective on the current economic outlook. First, lets take a brief look at the different types of rates. The Federal Funds rate is the rate charged for overnight borrowing by banks. The discount rate is a rate of interest that district banks charge members. The prime rate is the rate that banks charge their prime customers, and is supposed to be the lowest rate at which banks can profit. Then we have money market fund rates, corporate bond rates, and municipal bond rates. All of these are dependent to a certain degree on the rate which is considered risk free, the 30 year Treasury rate. It is risk free because the government can always levy taxes for the money it needs. The prime rate rose this week to 9%, the Fed Funds rate to 5.94%, the discount rate to 5.5%, while the 30 year bond rate dropped below 6%. While we have had inverted yield curves before, it has not been for the same reasons. The current budget projects that the national debt may be eliminated by 2013. These estimates are optimistic and many factors such as the rising price of medicare might impact the actual outcome. However, Treasury Secretary Summers has stated that reducing the debt "reloads the fiscal cannon" so the government can respond better in more difficult times. At the same time, Fed Chairman Greenspan seems to be chronically perturbed that the fast rate of economic growth will somehow lead to inflation, and so he continues to raise short term rates. As a result, the spread between the prime rate and the 30 year bond rate is over 3 points, which probably can not continue forever. The inverted yield curve is not necessarily dangerous, but it will be interesting to watch how this drama continues since it is making economic history. The one problem some market analysts worry about is the possibility that the Fed may feel compelled to raise short term rates by enough to actually cause a recession. This could impact the "old economy" stocks more than the "new economy." The financial stocks seem to be paying more attention to the lowered long term rates than the increasing short term rates. At Home went up five points this week partly due to data published that they were one of the fastest growing internet portals during the month of February. I think this stock may start moving again, after being stagnant for months. My strategy was to buy At Home Jan 02 $30 LEAPS. Some investors utilize the strategy of writing short term, out-of-the-money(OTM) calls against their LEAPS. If this strategy works out, the near term calls will expire worthless which reduces the price of the LEAPS. The only potential disadvantage is a rapid move up in the stock, which could result in the LEAP being called away. The key is that two year LEAPS have a very slow rate of time decay. The implied volatility is much lower for a leap than the implied volatility of the near term OTM calls. Professionals rarely buy near term deep OTM calls. They sell them to amateur speculators. Near-term, deep OTM calls almost always expire worthless. I also wrote April $60 covered calls for $3 against Dell which I purchased at $58. I think this could be an easy way to make 10% return in a month. Dell showed strong support even when the Nasdaq dropped below 4500 briefly on Tuesday. CMGI had a great run up to $129 on Wednesday. I sold my shares then bought back in because I think it may rally in April. The internet stocks did not have the spotlight this week. Perhaps the Barron's article about the internet stocks they think are headed for the e-soup kitchen before the end of the year scared people away from the whole sector. The article failed to mention the readily available supply of venture capital in today's markets and the alternative methods of corporate finance available to developmental stage companies today. The Nextlink skew spread I put on a couple of weeks ago by buying the July 100 calls at 25 and selling the July 110 calls at 19 is working out as expected, as it looks as if the stock will easily be above 110 in July, which should give a profit of over 75% on the spread. The only disadvantage of this type of spread is the fact that you have to put up 30% margin in cash which can tie up a lot of capital. Last week I cited a statistic from a recent study which showed a 99% correlation between cash flows to equity funds and the movement of the market. For the week ended March 22, approximately $13.7 bln went in to mutual funds, the largest amount in over 4 years. Here is the key: For the first time since the first week in January 2000, investors started putting money back into blue chip funds. $2.6 bln was deposited to large cap growth funds, helping to stimulate the Dow. Aggressive growth funds got their share, with $3.2 bln going in, and technology funds had a healthy inflow of over $3 bln. Let's hope this trend continues, as it is paramount to a healthy, well balanced rally. The statistics are provided from AMG Data Services. Contact Support *************** TRADERS CORNER *************** There is no Traders Corner article this weekend. ********** Some Random Thoughts on Trading By Lee Lowell I'd like to begin by addressing some questions and giving my thoughts on various trading activities. Someone e-mailed me about the role of market makers in stock option trading. In my opinion (and I hope I don't offend anyone too badly), the market maker system in stock and stock option trading is unfair and inefficient. There is no outside participation involved with the market maker system. Let me explain. If you're interested in buying ABC stock at $100 and the current market for the stock is $99 bid / $101 offer, you need to wait for the market maker to bring his offer down to $100 before you will even get your order filled. Even though your $100 bid is higher than the market maker's $99 bid, you still will not get filled until the market maker brings his offer down to $100. When I was trading commodities as a market maker in the crude oil options pit, our method of participation was/is totally different than trading stocks. If the current market for a crude oil $30 call is $0.50 bid / $0.55 offer, you can come in with a $0.52 bid and have that reflected as the best market out there. The screens would then look like this: $0.52 bid / $0.55 offer. You would not have to wait for any market maker to bring down his/her offer to $0.52 in order to get your fill. No matter who you are, if you have the best bid or best offer, your market will be reflected on the screens. The market makers don't control the whole process like it's done with stocks and stock options. This ensures equal participation by all types of traders and leads to tighter markets which in turn decreases the slippage and decreases the monopoly advantage by the market makers. It seems that the stock market makers have a good thing going for themselves by controlling the markets. I believe that this won't last for too much longer. With the advent of the new ECN's and electronic matchmaking, pit trading is on its way out over the next few years. Time will tell. My only advice for any frustrated stock and stock option traders is to just grin and bear it for right now. Set your limit orders and don't chase the market. If I have given any misinformation, I do apologize and I welcome any e-mails to let me know otherwise. I have been flooded by e-mails with great questions, mostly asking about volatility. I would just like to sum up a few words about my thoughts on the volatility effect in option trading. I just finished reading a small paperback by Jay Kaeppel called "The Four Biggest Mistakes in Option Trading". He makes a great point in his first chapter. Most option traders put too much emphasis on trying to get their timing right on which way the underlying contract might move. Getting your timing right is an essential part in option trading success, but if you don't do volatility analysis too, your strategy could backfire. Once a trader has determined that the stock is going to go up, they institute the option strategy of "any old call option will do". That's the mistake right there. Are those call options trading at high or low implied volatility levels? Here's how his example goes: Let's say your bullish on two stocks that just made pullbacks, and you believe they've hit a bottom. You want to buy call options to take advantage of your timing method. What's the implied volatility of each option you're considering? And how does that implied volatility compare to its past levels? If both stocks are trading at $50, and you believe both will go up the same amount, which stock should you pick? That's where your volatility analysis will help. If you want to buy the $60 call on each one with the same expiration, look at the implied volatility of each and then look at the price of each. If one costs $2 and the other costs $4, the choice is easy. The reason why one is cheaper is because its implied volatility is lower. Not only will buying the cheaper one cost you less money to begin with, but you will profit more on your call option if volatility starts to turn higher. If you bought the more expensive one and volatility starts to drop, you could end up losing money even if the underlying stock moves in the direction that you predicted! I want to expand a little more on the subject of "delta". Every option has a corresponding delta that is a by-product of the Black-Scholes trading model. All ATM options have a delta of 0.50, ITM options have a delta higher than .50 and OTM options have a delta lower than 0.50. The first definition of delta tells us the chance of our option finishing in-the-money. When an option is ATM, its strike price is the same as the price of the underlying stock at that moment in time. If IBM is trading at $100, then the $100 call is ATM. Now this $100 call will be either ITM or OTM on expiration day. Therefore, the delta of 0.50 is telling us that there's a 50% chance that it will expire ITM or OTM. The IBM $50 call is ITM to begin with and has a hypothetical delta of 0.85. This tells us that the $50 call has an 85% of expiring ITM. The OTM IBM $125 call has a delta of 0.10, so there's only a 10% chance of it finishing ITM. How can we use delta in our options trading? That depends on your degree of risk, speculation, and how much money you can afford. If you're going to take the super speculative route, then buying far OTM options with low deltas are for you. You will probably lose 19 times out of 20, but if you hit a big one, you could be set for life. If you're looking for an option which will closely mimic the moves of the underlying stock and that has smaller time decay, you should buy an ITM option. This will cost less than buying 100 shares of the stock outright, plus you'll get the almost the same amount of movement that the stock makes. Which brings us to the second definition of delta. The delta of an option will also tell you how much the option price should move up or down in accordance with the underlying's movement. A delta of 0.80 tells us that for every $1 move in the underlying, the option price will move $0.80. If IBM moves from $100 to $101, a call option with an 0.80 delta will see its price move from $2 to approximately $2.75. And if IBM moves from $100 to $98, then this same call option will most likely go from $2 to $0.50. So I'd say that having a good grasp of how to interpret implied volatility and knowing the delta of each option can give you a good advantage when trading options. Not only will you be informed of whether you're buying an expensive or cheap option (based on past implied volatility levels), but you'll also know how much your option will react in conjunction with the moves in the underlying. Good luck. Contact Support LAST WEEKS CHANGE FOR THIS WEEKS PICKS: *************************************** Daily Results Index Last Week Dow 11112.72 517.49 Nasdaq 4963.03 164.90 $OEX 832.65 45.91 $SPX 1527.46 62.99 $RUT 574.01 -0.76 $TRAN 2688.15 64.32 $VIX 25.81 2.14 Calls Week YHOO 194.00 22.88 Entering last leg of the earnings run EXDS 173.31 22.06 Trending with the Internets NOK 221.75 21.88 Two weeks until the 4:1 split SNDK 132.56 15.56 New, needs another split already NT 141.25 12.50 Capitalizing on the new frontier IBM 121.50 11.50 Entering breakout mode on Friday SCH 64.94 9.94 A new $100 price target ALTR 95.88 9.63 New, let the earnings run begin ERICY 102.81 9.25 New, Board Of Directors meet Friday INTC 139.06 9.19 Another solid week for this blue-chip MFNX 98.06 8.19 New, taking advantage of fiberoptics NITE 59.06 7.31 Online brokers are back in the spotlight AOL 71.00 6.63 Takes the award for momentum this week BAC 54.63 4.63 The Financials are back in play HWP 142.38 4.38 Consolidating for the next move RNWK 72.31 4.00 New, bullish short-term triangle play SEG 71.00 2.25 Teetering near breakout, pushed by VRTS XRX 26.81 1.00 Dropped, turned on us mid-week IDPH 119.00 0.06 Dropped, time to take your profits DELL 56.44 0.00 Even-steven, but poised to go higher RATL 86.75 -1.75 More patience is required BMCS 52.81 -2.25 Nearing the bottom of the channel MRVC 127.00 -5.88 Dropped, better opportunities CHKP 218.50 -17.00 Dropped, Friday rollover sealed fate Puts PSIX 37.81 -11.94 New, acquisition angers investors CKFR 61.19 -9.00 Nearing support, but no signs of life ISLD 76.00 -6.63 Weak-handed buyers losing the battle GTW 56.25 -2.69 New, possible earnings shortfall CPQ 28.63 -2.56 Writing is on the wall for earnings RHAT 60.50 -2.38 Little interest ahead of earnings FON 59.25 -0.56 Entry point or exit time?? EK 57.13 -0.31 Dropped, it's too busy piddling around STOCKS ADDED TO THE PICK LIST ***************************** Calls ALTR - Altera Corp SNDK - SanDisk Corp. MFNX - Metromedia Fiber Network ERICY - LM Ericsson Telephone Company RNWK - Real Networks, Inc. Puts PSIX - Psinet Inc. GTW - Gateway Inc. ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to Contact Support with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 DISCLAIMER *********** This newsletter is a publication dedicated to the education of options traders. The newsletter is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The newsletter picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. The newsletter staff makes every effort to provide timely information to its subscribers but cannot guarantee specific delivery times due to factors beyond our control.
The Option Investor Newsletter 3-26-2000 Sunday 2 of 4 *************************** 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 IDPH $119.00 (+0.06) After the $15.66 (13.5%) gain on Wednesday, there was lots of optimism IDPH would again make a charge for overhead resistance at $136.31. But that wasn't to be the case despite the continued surges on the Nasdaq. Instead IDPH couldn't hold the 30-dma level and proceeded to slip lower on Friday. The momentum for this Biotech to recover to its full potential in the near-term seems to have dissipated. IDPH is just too comfortable at the $120 level for us to keep it as a viable call play, but we did enjoy the ride up from $100. CHKP $218.50 (-17.00) Just like we said, CHKP was rolling over late Thursday. On Friday morning the software company dropped near the $210 support level, and bounced once again. CHKP did penetrate $230, but was unable to sustain any further momentum. We are closing the books on this one due to the lack of any follow-through buying. Early Friday afternoon CHKP rolled over and finished the day down -$0.50. It closed just above $215, an intraday support level, and could go either way from here. Not much news this week to help move the stock but the rally in the Nasdaq has left our play waiting at the alter. We did very well in the early going with CHKP, gaining over 43%, however it's now time to move on. MRVC $127.00 (-5.88) Traders seem to have lost interest in MRVC this week. After rebounding nicely from Tuesday's low, the stock has become range bound between 120 and 135. MRVC has lost momentum as volume has dried up and the stock drifts along. Some traders are suggesting that the Semi's may come under pressure next week with the announcement by IBM Friday. IBM is introducing a family of chips that will transfer TV sets into fully interactive appliances with Internet capabilities. We don't want to wait around to see what becomes of the IBM announcement, there are other opportunities that await. XRX $26.81 (+1.00) Every now and then, a play goes immediately in the wrong direction right from the start. After moving up Tuesday and closing near its high on strong volume, we were looking for a breakout over $30. Breakdown is more like it. It proved to be a continued level of resistance instead of a new level of support. Murphy is alive and well even in a bullish trend. There is no news to explain the movement, just continued descent on declining volume since picked. While XRX looks to be turning itself around, investors aren't ready to embrace the issue yet despite their renewed vigor in the inexpensive printer market. PUTS EK $57.13 +0.88 (-0.31) We warned EK that any move upward and that would be it. It was looking promising on Wednesday when EK was able to drop to $55.75. With EK testing support it was the perfect setting for a breakdown and some profits. However our patience has run out. It looks like EK has resorted to the same old story of piddling around the $56-58 range. Until they can make a clean break with some backing, we have no desire to watch and wait for EK anymore. It's time to move on to more exciting plays! STOCK SPLIT CANDIDATES *********************** Current Split Candidates: YHOO - Yahoo! IBM - International Business Machines INTC - Intel Corp NT - Nortel Corporations SNDK - Sandisk HWP - Hewlett Packard Split candidates that are not current plays: EMC - EMC Corp. PHCM - Phone.com FDRY - Foundry Networks EBAY - EBay.com STOCKS WITH UPCOMING SPLITS **************************** We don't list all splits available, only those we feel may have play possibilities. Symbol - Stock Splits/Date 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 RIMG - Rimage Corp 3:2 04-07-00 ex-date 04-10 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 CLAC - ClickAction Inc 2:1 04-20-00 ex-date 04-24 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 HH - Hooper Holmes 2:1 04-26-00 ex-date 04-27 GE - General Elec 3:1 04-26-00 shareholder mtg SFO - Sonic Foundry 2:1 04-28-00 ex-date 05-01 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 CMOS - Credence Systems 2:1 05-17-00 ex-date 05-18 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 CMB - Chase Manhattan 3:2 06-09-00 ex-date 06-12 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: ********************** IBM - Int'l Business Machines $121.50 (+11.50) See details in sector list Chart = /charts/charts.asp?symbol=IBM **** AOL - America Online Inc. $71.00 (+6.63)(+5.63) See details in sector list Chart = /charts/charts.asp?symbol=AOL Put play of the day: ******************** CPQ - Compaq Computer Corp. $28.69 (-1.56) See details in put list Chart = /charts/charts.asp?symbol=CPQ ************* 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 *********** INTC - Intel Corporation $139.06 (+9.19)(+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. Once again, INTC had some profit-taking on Friday, and rightfully so. Traders took some money off the table to fund their weekend fun. Yet, this advance is far from over. INTC really has stepped up to take on a leadership role for both the NASDAQ and the Dow. In the news, INTC agreed to pay $450 mln for Basis Communications, making this the 14th acquisition in the communication industry in approximately a year for INTC. In doing so, INTC has created for itself a major inroad to the digital subscriber line(DSL) market, and this acquisition could provide closer relations with Alcatel, the world's leading supplier of asymmetric-DSL(ADSL) equipment. Basis itself has ties with Alcatel's Microelectronics, the chip division of Alcatel. This most recent move shows INTC's growing interest in the networking realm. And in addition to last week's acquisition of Denmark's GIGA A/S, manufacturer of network components used for optical networking and directing internet traffic, INTC is innovatively expanding its presence into one of the fastest growing technology sectors. We shall see in the coming quarters how nimble this chip giant really has become. As for this recent tear that INTC has been on, we feel that the mild pullbacks of the last two days certainly are good entry points into a bullish run. Friday's close under its short-term support of $140 may result in a slight pullback next week to a firmer support level of $135. So watch to see the market's sentiment next week, which is the final trading week of the quarter, and let's see if INTC re-establishes its $140 support or allows for sweeter entries in the mid-$130's. BUY CALL APR-135*INQ-DG OI=11867 at $12.75 SL=10.00 BUY CALL APR-140 INQ-DH OI= 6273 at $ 9.38 SL= 7.00 BUY CALL APR-145 INQ-DI OI= 4195 at $ 6.88 SL= 4.50 BUY CALL MAY-150 INQ-EJ OI= 2545 at $ 7.88 SL= 5.50 Picked on Mar 19th at $129.88 P/E = 66 Change since picked +9.19 52-week high=$145.38 Analysts Ratings 20-13-6-0-0 52-week low =$ 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 **** HWP - Hewlett Packard $142.38 (+4.38)(-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). At first blush, it wasn't the most stellar week for HWP. As the major indices marched significantly higher, the computer maker struggled to tack on a paltry $4.38. While buyers weren't able to push through resistance at $150, it was encouraging to see support hold at $140. With volume dropping south of 3 million shares over the past 3 days, there just hasn't been enough conviction to get HWP moving higher. After the strong bounce at $124 a little over a week ago, HWP was due to take a break in preparation for earnings season. Anticipation of solid earnings, reinforced by positive comments from the company (see below) is keeping investors from rushing to sell. Although earnings are not scheduled until mid-May, HWP is a split candidate at these levels (above $140), and with nearly 5 million shares authorized and only 1 million outstanding, an announcement could come with earnings or anytime beforehand. With solid support at $140, any return to this level would make for a nice entry, but more conservative investors may want to wait for a convincing break above resistance at $150. Breaking out of this consolidation will require a resurgence in buying volume, so wait for confirmation from this indicator before opening new positions On March 16th, HWP confirmed that it is on track to make its revenue growth goals of 12-15 percent and said that its stock is undervalued due to confusion about how the recent spinoff of Agilent should figure into the valuations. Speaking on Friday, CEO Carly Fiorina reiterated the above statement, attributing the growth to improvements in its Internet operations, and software and computer sales. BUY CALL APR-140*HWP-DH OI=2180 at $11.88 SL= 8.75 BUY CALL APR-145 HWP-DI OI=2255 at $ 8.38 SL= 6.00 BUY CALL APR-150 HWP-DJ OI=1867 at $ 6.75 SL= 4.75 BUY CALL MAY-145 HWP-EI OI= 219 at $13.50 SL=10.00 BUY CALL MAY-150 HWP-EJ OI=1000 at $11.13 SL= 8.25 SELL PUT APR-130 HWP-PF OI=1300 at $ 2.88 SL= 4.50 (See risks of selling puts in play legend) Picked on Mar 16th at $133.00 P/E = 51 Change since picked +9.38 52-week high=$155.50 Analysts Ratings 10-12-7-0-0 52-week low =$ 65.13 Last earnings 02/00 est= 0.77 actual= 0.80 Next earnings 05-17 est= 0.82 versus= 0.88 Average Daily Volume = 3.64 mln /charts/charts.asp?symbol=HWP **** DELL - Dell Computer $56.44 (+0.00)(+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 shines brighter as time marches on. Many analysts are expecting the company to report an upside surprise in early May resulting from higher profit margins and sales derived from new appliance servers. This opinion in itself is sustaining the stock's powerful momentum. Plus the re-calibrated EPS numbers put DELL in a more realistic light. This means "the stock could be perceived as cheap relative to other category leader technology stocks" according analyst Ashok Kumar of Piper Jaffray. Also the company's new Internet Partners Division, a group focused on providing solutions for ISPs, ASPs, and Web hosting firms, is giving analysts and investors confidence this box-maker is evolving with the times and finding ways to offset sluggish PC sales. Accordingly 31 out of 33 analysts following the stock maintain either a Buy or Strong Buy recommendation. And yes, this is the stock that dived to a low of $31.38 in February following a devastating 4Q. This week DELL accomplished a couple of things. On Monday the stock set another 52-week record at $59.06, before edging higher to $59.69 in Wednesday's session. However this current level is proving to be fierce resistance so conservatively, you may want to wait for a move through this mark. Let's not mis-interpret the sentiment. DELL is strong and we're expecting a challenge of $60. Currently it has firmly tethered a near-term support level at $57 and $58. It's just that some of you may not want to ride in a tight consolidation channel waiting for a potential breakout. For those following this momentum play you know there was a slew of analysts' comments at the beginning of March. Well, here's another one to add to the list. Piper Jaffray once again reiterated their Strong Buy rating and $65 price target this week. In company news, Dell announced a price reduction on select units of its Precision Workstation. According to Dave DuPont, senior marketing manager, Dell Precision Workstations, "The inherent advantages of Dell's direct model, combined with our ability to pass along component cost savings, enable us to offer the newest R-DRAM workstations at prices lower than most of our competitors' recent S-DRAM-based workstations". BUY CALL APR-50*DLQ-DJ OI=21757 at $8.88 SL=6.25 BUY CALL APR-55 DLQ-DK OI=15755 at $5.25 SL=3.25 BUY CALL APR-60 DLQ-DL OI=21387 at $2.63 SL=1.25 BUY CALL MAY-60 DLQ-EL OI=14175 at $4.50 SL=2.75 BUY CALL MAY-65 DLQ-EM OI= 5341 at $2.75 SL=1.25 Picked on March 9th at $50.44 P/E = 93 Change since picked +6.00 52-week high=$59.69 Analysts Ratings 14-17-2-0-0 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 = 34.0 mln /charts/charts.asp?symbol=DELL **** IBM - Int'l Business Machines $121.50 (+11.50) IBM is the world's leading provider of computer hardware with products ranging from PCs and notebooks to mainframes and network servers. "Big Blue" also makes computer software and stands only behind the giant, Microsoft (MSFT) in ranking. Currently IBM is expanding its technology focus to include the vast opportunities of Internet business. What we've got here is a news-driven momentum play that perhaps can muster enough endurance to make charge into earnings too! It's generally understood the recovering market has a direct impact on momentum, but the whirlwind of good news' events surrounding IBM is a major influence for this play (see below for details). Right now let's take a look at the play from a technical standpoint. First, the stock's steady pattern of higher-lows this month is a bullish indication that it can run strong in the short-term. Then after IBM held levels above $110, which was a mark of stubborn resistance, we jumped on the bandwagon. As the week progressed we noted the opportunities for entry points at lows near the 50-dma ($112.58). On Friday IBM made a charge and gave us further confirmation it was on the upward track. IBM conquered the technical challenge at the 200- dma and crushed the opposition at $115. Here's where the more conservative made their entrance. Intraday support clearly established itself at $118 and $120 on Friday, but don't open new positions at this level without upward confirmation. Overall our expectation is for IBM to power higher on momentum aided of course by a rallying market and more positive news events. Tentatively IBM is scheduled to report in about three weeks on April 17th. IBM demonstrated to investors this week that it won't be left out of Internet business. The company announced it's forming partnerships with other big players like Cisco, Nokia, and Intel to design and develop product & services to link wireless phones and computers to the Internet. Analysts commented that this strategic move positions IBM to be the "glue" holding the endeavor together. And in the B2B arena, IBM is teaming with CommerceQuest to deliver five e-marketplaces to customers in a broad range of industries with 60 more in the pipeline. There's no doubt either that IBM is a leader in hardware as they continue to forge ahead with new developments. On Tuesday they announced a new memory-chip that can send twice as much data to a microprocessor than currently exists. Plus, they've just joined forces with TDK to develop more solutions for the award- winning ThinkPad family and will soon release a wide collection of servers within their Netfinity line. And on Friday, IBM announced the development of a next-generation system-on-a-chip for television set-top boxes to bring the Internet into the living room. BUY CALL APR-115 IBM-DC OI=11328 at $8.75 SL=6.00 BUY CALL APR-120*IBM-DD OI=23801 at $5.88 SL=4.00 BUY CALL APR-125 IBM-DE OI=13395 at $3.75 SL=2.00 BUY CALL MAY-120 IBM-ED OI= 3495 at $9.00 SL=6.25 BUY CALL MAY-125 IBM-EE OI= 462 at $6.88 SL=5.00 Picked on March 21st at $113.50 P/E = 29 Change since picked +8.00 52-week high=$139.19 Analysts Ratings 14-9-3-0-0 52-week low =$ 81.50 Last earnings 12/99 est= 1.06 actual= 1.12 Next earnings 04-21 est= 0.78 versus= 0.78 Average Daily Volume = 7.15 mln /charts/charts.asp?symbol=IBM **** SEG - Seagate Technology $71.00 (+2.25)(+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. Disk drives are in high demand and so are shares of SEG. The company continues to benefit from a rejuvenated PC sector. SEG has also benefited from the rotation out of the second tier tech stocks. Traders are moving money into the larger tech names that have led the market higher, as end-of-the-month window dressing concludes next week. Earnings are fast approaching and we should see momentum pick up as traders anticipate good numbers from the PC sector. On Friday, SEG managed to edge above resistance at $70, to close at an all- time high of $71. The only resistance keeping SEG from moving higher is at $73, an intraday high reached two weeks ago. The stock now has strong support just below at previous resistance of $70. New entry into the play can be found near the 5-dma, as the stock rolls along. The VRTS position has provided additional lift to shares of Seagate. Last week, Warburg Dillon Read raised the price target on Veritas to $200 a share, from $130. As VRTS shares continue to plow higher, so goes SEG. BUY CALL APR-70*SEG-DN OI=3404 at $7.13 SL=5.00 BUY CALL APR-75 SEG-DO OI=6320 at $4.75 SL=3.00 BUY CALL APR-80 SEG-DP OI=2331 at $3.00 SL=1.50 BUY CALL JUN-75 SEG-FO OI=1231 at $9.13 SL=6.25 Picked on Mar 19th at $68.75 P/E = 17 Change since picked +2.25 52-week high=$73.75 Analysts Ratings 4-6-4-0-0 52-week low =$25.13 Last earnings 10/99 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 ************* SEMICONDUCTOR ************* SNDK - SanDisk Corp. $132.56 (+15.56) Formerly SunDisk, SanDisk was founded in 1988. SNDK is the largest supplier of flash data storage products. They design, develop, and market flash memory data storage products used in a wide variety of electronic systems. Flash memory storage devices are integrated circuits that retain data, when the power is off. Their products are sold worldwide through numerous OEM's (original equipment manufacturers) and distributors. SNDK has sales offices in Europe, Asia and the United States. Exports account for about 55% of their sales. SNDK goes head to head in the marketplace some big names, the likes of which include IBM, Sony and Toshiba. As with many of the tech stocks it's been a volatile two weeks for one of our latest additions to the play list. So what sets this one apart from the rest? SNDK split 2-for-1 about one month ago. Not only was their no post split depression, the flash memory company surged ahead to surpass its pre-split levels over the next two weeks. The point here, is that for a company not to suffer a bit of a depression after the split of its stock, shows that investors were intent on getting in on a hot stock. It took only 11 trading sessions for investors to bid the price of the SNDK back above pre-split levels. Profit-taking set in after SNDK made a new 52-week high. Almost immediately, Merrill Lynch, one of the five brokerage companies that follow the company came to the rescue, upgrading SNDK to a Near-term Buy, with a price target of $200. Their reason? Flash memory demand is outpacing supply. Merrill raised EPS estimates from $0.70 to $0.81 and revenue projections from $465 million to $505 million. All this just in time for the Nasdaq to begin its third mini- correction so far this year. Cautious investor sentiment kept a lid on the price of SNDK stock until last Tuesday, when it bounced off the $105 level. On that day over 3.0 million shares were traded, as SNDK made its way back to close at $130, which to us indicates a near term bottom may be in place. Technically, SNDK has been able to bounce of its 10-dma in each of the last three sessions and closed Friday with a respectable gain of $4.69. We are anticipating further upward momentum for SNDK, but a pullback to support near $125 may provide a good place to target shoot an entry as well. It's perhaps a little early to have a big effect on our play, but Friday, SanDisk filed SEC forms for their annual stockholders meeting to be held May 11th. On the agenda is an amendment to increase the authorized shares of the company's stock from 125 million to 400 million. That's right another stock split is in the works, which could garner a bit of attention for our new play. BUY CALL APR-120*SWF-DD OI=627 at $23.38 SL=16.95 BUY CALL APR-130 SWF-DF OI=256 at $19.25 SL=14.00 BUY CALL APR-140 SWF-DH OI=138 at $13.88 SL=10.50 BUY CALL MAY-130 SWF-EF OI= 36 at $26.13 SL=19.00 SELL PUT APR-120 SWF-PD OI=216 at $ 8.75 SL=11.75 (See risks of selling puts in play legend) Picked on Mar 26th at $132.56 PE = 308 Change since picked +0.00 52-week high=$169.63 Analysts Ratings 3-2-0-0-0 52-week low =$ 8.50 Last earnings 01/00 est= 0.22 actual= 0.30 Next earnings 04-19 est= 0.17 versus= 0.08 Average daily volume = 1.23 mln /charts/charts.asp?symbol=SNDK **** ALTR - Altera Corp $95.88 (+9.63) Altera is a leading designer and manufacturer of programmable logic devices (PLDs). These devices are gaining popularity over custom logic chips because they allow for customers to customize the chips via Altera's software program. This saves lots of time and money for the manufacturer. Altera sells about 90% of its product through distributors to a clientele of over 13,000 communications, computer, and industrial equipment manufacturers. Erratic, explosive, and downright unnerving pretty much sums up this month's trading so far, but the earnings' play on ALTR should provide us with some equanimity. Like the rest of the tech stocks, ALTR's share price boomeranged amidst the chaos and sharp volatility of the broad markets. Now it appears to have settled into a steady uptrend. Coming off relative support at $85 and $87, ALTR increased its share price by over 11% this week. We expect ALTR to continue to climb ahead of its earnings scheduled for April 12th, after the bell. The analysts are also bullish on the stock. Many have recently boosted ratings, price targets, and fiscal estimates. We've also got the possibility of a split. ALTR announced its last 2:1 split (May 1999) when the share price was at $78.25. The trigger event was an earnings' report just a week prior. So we have ALTR trading above the historical split-level, earnings just around the bend, and just enough shares to eek out a 2:1 stock split (400 mln authorized and 199 mln issued) so there's a chance. But for now let's focus on an earnings' play. The 5-dma ($90) is a fair gauge for entries so look for upward bounces off this indicator. Although intraday support on Friday was a bit higher at $94 and $95. Therefore it's possible this level may evolve as near-term support over the next few days. Let's also be aware of ALTR's double-whammy resistance level. Breaking through this opposition may be tough. First there's the 52-week record high at $99.25, but also looming above is that ominous force field to contend with at the $100 mark. Despite the pessimistic tone of the latter fundamentals, OIN is optimistic ALTR will make headway over the next two weeks. For those particularly interested in the earnings' numbers, the company is holding its conference call at 5pm EST on April 12th. As we mentioned earlier in the write-up many analysts are bullish on ALTR. This list includes the likes of Chase H&Q who initiated coverage with a Buy rating and addition to its "focus list" late in February. Then on March 3rd, Merrill Lynch upped its rating to a Long-Term Buy from Accumulate and issued a price target of $110. Analyst Eric Rothdeutsch also raised fiscal estimates for 2000 and 2001 citing Merrill Lynch believes "Altera has built sufficient product momentum with its mid-range product offering - primarily the FLEX 10KA & 10KE families - to propel company performance over the next few quarters". SG Cowen raised ALTR's EPS outlook too and reiterated a Buy. Prudential additionally stepped in with a Strong Buy upgrade from an Accumulate. After this slew of assuring remarks, David Wu of ABN Amro reiterated his Buy recommendation and upped ALTR's price target to $155 from $100 just a few days later. More recently, Warburg Dillon Reed upgraded the stock to a Strong Buy and raised its price target to $114 from $90 "on prospects for strong revenue growth propelled by strong product cycle and robust demand". Last but certainly not least, CSFB pumped up its price target up to $95 from $80 citing "better sales than expected in both January and February, and indications are that March will be another strong month". BUY CALL APR- 90 LTQ-DR OI=1116 at $10.50 SL= 7.50 BUY CALL APR- 95*LTQ-DS OI= 306 at $ 8.13 SL= 5.75 BUY CALL APR-100 LTQ-ST OI= 839 at $ 6.00 SL= 4.00 BUY CALL MAY- 90 LTQ-ER OI= 0 at $13.88 SL=10.50 Wait for OI! BUY CALL MAY- 95 LTQ-ES OI= 30 at $11.38 SL= 8.50 Picked on March 26th at $95.88 P/E = 89 Change since picked +0.00 52-week high=$99.25 Analysts Ratings 14-10-3-0-0 52-week low =$28.75 Last earnings 12/99 est= 0.30 actual= 0.31 Next earnings 04-12 est= 0.34 versus= 0.23 Average Daily Volume = 3.56 mln /charts/charts.asp?symbol=ALTR ******** Internet ******** YHOO - Yahoo! Inc $194.00 (+22.88)(-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. Yahoo! Yahoo! Yahoo! the spring is sprung. This is just what we expected to happen. As we've seen before, YHOO typically makes a strong run ahead of it earnings. Time is still in our favor too. We've got seven trading sessions before the announcement, which is confirmed for Wednesday April 5th, after the bell. But be aware that YHOO is known for its deep sell-off following the earnings' report so be out of your call positions before then. There's no need to add risk to an already volatile mover! Early entries are certainly rewarding if you have the financial portfolio and stomach for HIGH-RISK Internet plays. Before Tuesday, YHOO offered a multitude of entries below $180. At one point, a downward spike dropped the stock to $156! YHOO went full-steam ahead after the Nasdaq shook off the last of its "Fed Meeting" jitters. It easily moved through the ominous $200 level and cleared the path of psychological opposition. But what about current entries? Buys at intraday support of $195 are sensible, but it'd be even nicer if we could catch a dip near the rising 5-dma (now at $189.19). If on the other hand YHOO explodes, there's usually enough of a daily spread for the very aggressive to get in on the climb. Besides the earnings' momentum there is also speculation about another split, for a couple of reasons. First of all, YHOO is a split-candidate at the $200 price level. And more importantly, Yahoo! announced this week it will vote to increase the number of authorized shares from 900 mln to 5 bln at the upcoming shareholders' meeting on May 12th. Besides guarantees, what else could we ask for to pump up the share price? As usual Yahoo! is always "wheeling and dealing" to better position itself as an Internet powerhouse. On Wednesday they announced a co-branded marketing blitz with beverage giant, Pepsi-Cola. Through an on-line and offline program called Pepsi Stuff.com, consumers can earn points and discounts online from an under-the-cap logo on Pepsi and Mountain Dew bottles. The five-month promotion is expected to launch in August 2000. Yahoo! also acquired Arthas.com, a Web-based person-to-person electronic commerce payment service company. This addition will enhance Yahoo!'s current commerce offerings to its 120 mln individual users. Terms of the agreement weren't disclosed. There was also a deal with Palm to bundle Yahoo! services on the hand-held computers. BUY CALL APR-190*YUU-DR OI= 7154 at $21.00 SL=16.25 BUY CALL APR-195 YUU-DS OI= 2219 at $18.38 SL=14.25 BUY CALL APR-200 YUU-DT OI=18342 at $16.38 SL=12.75 BUY CALL APR-210 YUU-DB OI= 2974 at $12.88 SL= 9.75 BUY CALL MAY-195 YUU-ES OI= 118 at $24.75 SL=19.25 BUY CALL MAY-210 YHX-EB OI= 333 at $18.88 SL=14.75 Picked on March 12th at $178.06 P/E = 1883 Change since picked +15.94 52-week high=$250.06 Analysts Ratings 14-13-4-0-0 52-week low =$ 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 = 8.45 mln /charts/charts.asp?symbol=YHOO **** RATL - Rational Software Corp. $86.75 (-1.75)(+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. More patience required. RATL started off like house on fire, on Monday, but quickly turned south by late morning. As the Nasdaq went this week, so went RATL. Like many of the tech stocks, you could overlay an intraday chart of the composite index versus your favorite issue, and see very little difference. It really appeared as though RATL was running on all cylinders Thursday, as buying interest picked up late in the day, on good volume. RATL provided us with several good entry points mid-week, and traders that entered late Wednesday or early Thursday found the run-up to $94 provided the opportunity to sell too soon. Friday's decline once again proved the importance of trailing stops, as RATL fell $5.50 in the first 10 minutes of trading. RATL ended Friday's session with a loss of about 7.0%, but did close near intraday support and its 10-dma at $86.67. Now, this is where the patience comes in. As we've said many times before stocks rarely go straight up or down, and with volatility comes opportunity. A bounce from current levels would provide a great entry point for new plays. If we see profit-taking in the Nasdaq early next week, be patient, as RATL very well could continue to follow the trend of the major index. On a decline there are several areas where RATL could find buyers step in including, $83 and $80. Our plan now for our play, is play the cards we are dealt. If RATL begins the week with a solid bounce then great. If we see selling, it won't cost a thing to stand aside, be patient, and wait for a better entry point, as having patience could pay-off handsomely. Last Monday, Rational announced the industry's first Unified Modeling Language(UML)-based data modeling and analysis solutions. Rational Rose Data Modeler, allows business analysts, developers and data modelers to work together in one common methodology and notation to build higher quality e-business software in less time. BUY CALL APR-80 RAQ-DP OI= 71 at $16.00 SL=11.50 BUY CALL APR-85*RAQ-DQ OI= 245 at $13.13 SL= 9.75 BUY CALL APR-90 RAQ-DR OI=1238 at $10.38 SL= 7.00 BUY CALL APR-95 RAQ-DS OI= 65 at $ 8.38 SL= 6.00 BUY CALL MAY-90 RAQ-ER OI= 18 at $15.75 SL=11.25 low OI SELL PUT APR-80 RAQ-PP OI= 820 at $ 4.25 SL= 6.50 (See risks of selling puts in play legend) Picked on Mar 19th at $88.50 PE = 81 Change since picked -1.75 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 = 1.06 mln /charts/charts.asp?symbol=RATL **** AOL - America Online Inc. $71.00 (+6.63)(+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. We'd like to thank our editor, our assistant editor, the research staff and everyone else that made this play possible. Our play in AOL may not have been nominated for an Oscar, but it very well could come in as one of the top plays of the month. The folks that should be receiving the accolades are the nearly 2.0 million new members that have signed up with AOL since December. Late Tuesday AOL reinforced the perception that its momentum remains strong by announcing its membership has exceeded 22.0 million, marking a nearly 10% rise since the December. News of the increase in membership drove the price of AOL $4.50 higher on Wednesday. The move was supported by strong volume at 35.5 million shares. Also in line for a pat on the back, is Merrill Lynch analyst, Henry Blodget. Blodget said in a statement released Wednesday, that he was raising his subscriber estimate for the AOL service to 22.1 million, which is up 300,000 from previous estimates. Blodget has earned the respect of investors on Wall Street, so when he speaks people do pay attention. News that company officials from Walt Disney had been lobbying members of the U.S. House and Senate concerning the upcoming merger between AOL and Time Warner didn't seem to derail buyers. An article on Forbes.com correctly termed the Disney move "petty politics" as they are trying to influence Congress regarding the government's approval of the $350 billion merger. In a nutshell, Disney is worried that the AOL-Time Warner merger could stifle diversity on the Internet, thereby blocking all its competitors from access to its online subscribers and the 12.6 million households with Time-Warner. It's simply not going to happen and investors were smart enough realize it, and continued to buy stock in AOL. Technically AOL has good support back near its 100-dma at $69.17, and near $68. AOL has seen about 21% added to the price of its stock in the past two weeks. Next week, we could see more. If we do see a pullback, have your stops in place, as we believe it would only be temporary and would present a chance to enter new plays for less. On Thursday AOL announced it has agreed with Universal Pictures on a partnership to promote movies and sell tickets online. It's the latest in deals connecting the Internet giant with players outside the virtual world. Last week AOL announced a marketing and product development deal with Sears. They have also joined forces with Wal-Mart, Circuit City and Blockbuster in recent months. BUY CALL APR-60 AOO-DL OI=65348 at $12.88 SL=9.75 BUY CALL APR-65 AOO-DM OI=38894 at $ 8.75 SL=6.25 BUY CALL APR-70*AOO-DN OI=45679 at $ 5.25 SL=3.25 BUY CALL APR-75 AOO-DO OI=55233 at $ 3.00 SL=1.50 BUY CALL JUL-75 AOO-GO OI=22861 at $ 8.38 SL=6.00 SELL PUT APR-65 AOO-PM OI=31887 at $ 1.19 SL=2.50 (See risks of selling puts in play legend) Picked on Mar 19th at $64.38 PE = 173 Change since picked +6.63 52 week high=$95.81 Analysts Ratings 25-13-3-0-0 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 = 27.2 mln /charts/charts.asp?symbol=AOL ******************************************* CALLS - INTERNET 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 3-26-2000 Sunday 4 of 4 ************* COVERED CALLS ************* Technical Analysis: Consolidation to Climax... This week we continue the saga of technical patterns and the methods used to forecast future prices of stocks and other market instruments. Today's narrative begins a brief overview of trends and the manner in which they can be used to help identify play candidates (such as Covered-Call and Naked-Put positions). We will also include some hints for timing your entry and exit transactions. The most basic component used in the examination of a trend is a trend-line. These lines are drawn on charts to help reflect the direction of a market and identify support and resistance levels. They are also used to establish the simplest form of buy and sell signals. If a trend-line is penetrated by a sustained movement, a significant change of character will often follow. When a second set of lines can be drawn above or below and parallel to the primary track, the resulting area between the lines is called a channel. If a chart reflects a pattern of successively higher highs (and higher lows) then a classic bullish trend is occurring. However, a significant move through either boundary generally signals a change in character or a new trend. History suggests that most stocks spend more time in congestion and reversal patterns rather than in well-defined trends. When an issue is not trending, it is sometimes described as "range-bound" or "bracketed." If a bullish issue becomes mired in a range for a lengthy period, volume will dwindle as investors become less optimistic about its future prospects. Technicians draw lines to illustrate these areas, marking the upper and lower boundaries of a bracket. The idea is to identify potential changes in character and the entry points from which to initiate new positions. When a boundary is broken in a sustained movement, the best approach is to simply follow the trend. Experienced traders will often place buy orders at levels where they will be filled as the issue moves outside the current range. After the stock breaks out of a range, identifying the new trend is relatively easy and it is important for an investor to recognize these historical chart patterns that precede major turning points or reversals. After the primary trend has been reestablished, there is often a rapid acceleration in the upward price movement. The activity is usually related to the covering of short positions and late-comers that attempt to join the rally. This surge in buying will often cause a vertical climax that suddenly reverses with equal vigor. The pattern becomes obvious as investors scramble to exit the falling issue and it often resembles the silhouette of a tall building or a shape similar to a craggy narrow mountain. Climax formations can be very dangerous to inexperienced traders and the event generally results in losses for all but the initial participants in the movement. Those who open new positions in an untimely manner usually forfeit their brief profits and occasionally incur substantial losses. Here is one example of a classic trading range break-out followed by a climax and further consolidation. Without looking at a current chart, where do you think the stock is now? Next time; A simple method for success with trends. 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 RAMP 21.09 22.94 APR 17.50 6.00 *$ 2.41 13.9% BYND 5.75 5.19 APR 5.00 1.38 *$ 0.63 12.5% IARC 27.63 22.06 APR 22.50 7.75 $ 2.18 7.9% RMII 10.13 10.00 APR 7.50 3.25 *$ 0.62 7.8% FSII 22.88 22.50 APR 20.00 4.75 *$ 1.87 7.5% BIDS 7.13 7.06 APR 5.00 2.63 *$ 0.50 6.9% SCUR 22.88 20.69 APR 17.50 6.50 *$ 1.12 5.9% COB 14.13 12.56 APR 10.00 5.00 *$ 0.87 5.9% AND 12.75 11.56 APR 10.00 3.38 *$ 0.63 5.8% TLXN 25.75 20.81 APR 20.00 7.13 *$ 1.38 5.4% POSS 12.56 13.00 APR 10.00 3.25 *$ 0.69 5.4% EPTO 14.00 13.00 APR 10.00 4.75 *$ 0.75 5.0% EPTO 16.94 13.00 APR 12.50 5.25 *$ 0.81 5.0% IGEN 28.25 29.50 APR 22.50 6.88 *$ 1.13 4.6% MPPP 29.25 24.69 APR 20.00 10.25 *$ 1.00 4.6% MUEI 14.50 16.00 APR 12.50 2.81 *$ 0.81 4.3% AND 16.13 11.56 APR 12.50 4.75 $ 0.18 1.0% ESCM 17.50 13.00 APR 15.00 4.38 $ -0.12 0.0% TERA 8.81 6.25 APR 7.50 2.00 $ -0.56 0.0% THDO 15.75 9.75 APR 12.50 4.25 $ -1.75 0.0% *$ = Stock price is above the sold striking price. Comments: Even though 3do Company (THDO) had a great quarter in January and has been announcing new products, it gets hammered when its competitors Acclaim (AKLM) and Interplay (IPLY) warn about the next quarter? The stock has fallen all the way to its 150 dma and a support area near $9.00 on heavy volume. Not a good sign. The April $12.50 call can be bought back for about $0.50 which would allow one to exit on any rally or roll down. Keep an eye on Telxon (TLXN). It warned that next quarter's revenues could fall short (up to 10%) of expectations. It closed Friday at its 50 dma but looks to go lower towards stronger support near $17.00. Esc Medical's (ESCM) correction is nearing its 50 dma with the next support level around $10.00. Tera Computer is still suffering from the Cray acquisition announcement but has been holding near its 150 dma. Information Architects (IARC) and Andrea (AND) appear to be ending their correction cycles. NEW PICKS Sequenced by Company Stock Last Call Strike Option Last Open Cost Return Return Symbol Price Month Price Symbol Bid Intr Basis Called Unchanged CBSI 25.75 APR 22.50 CQQ DX 4.38 245 21.37 5.3% 5.3% CRCL 27.63 APR 22.50 HQA DX 6.25 0 21.38 5.2% 5.2% CYCH 14.38 APR 12.50 KBQ DV 2.69 757 11.69 6.9% 6.9% CYOE 12.06 APR 10.00 QTO DB 2.69 1883 9.37 6.7% 6.7% ELIX 26.00 APR 20.00 XQQ DD 6.88 40 19.12 4.6% 4.6% TRMB 24.75 APR 20.00 TRQ DD 5.63 24 19.12 4.6% 4.6% VANS 16.13 APR 15.00 VQG DC 1.75 13 14.38 4.3% 4.3% 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 CYCH 14.38 APR 12.50 KBQ DV 2.69 757 11.69 6.9% 6.9% CYOE 12.06 APR 10.00 QTO DB 2.69 1883 9.37 6.7% 6.7% CBSI 25.75 APR 22.50 CQQ DX 4.38 245 21.37 5.3% 5.3% CRCL 27.63 APR 22.50 HQA DX 6.25 0 21.38 5.2% 5.2% ELIX 26.00 APR 20.00 XQQ DD 6.88 40 19.12 4.6% 4.6% TRMB 24.75 APR 20.00 TRQ DD 5.63 24 19.12 4.6% 4.6% VANS 16.13 APR 15.00 VQG DC 1.75 13 14.38 4.3% 4.3% Company Descriptions OI-Open Interest, CB-Cost Basis or break-even point, RC-Return Called, RNC-Return Not Called (Stock unchanged) **** CBSI - Complete Bus. Solutions $25.75 *** $35 Price Target *** Complete Business Solutions provides Information Technology (IT) services to large and mid-size organizations. These services include data warehousing solutions, electronic commerce solutions and network services to support enterprise wide applications. CBSI plans to increase its e-business transformation capabilities, the expansion of its offshore development centers in India, the development of new customer solutions and consulting offerings, employee recruitment and training programs, and acquisitions. With increasing revenues, new contracts, an infusion of growth capital, and several upgrades, CBSI has already made a new 52 week intraday high. With a new price target of $35 and firming technicals, blue sky territory is on the horizon. APR 22.50 CQQ DX Bid=4.38 OI=245 CB=21.37 RC=5.3% RNC=5.3% Chart = /charts/charts.asp?symbol=CBSI **** CRCL - Circle International $27.63 *** Breakout! *** Circle International is a global transportation, supply chain management and information services company. Circle provides complete logistics solutions for clients worldwide, including air and ocean freight forwarding, customs brokerage, materials management, warehousing, trade facilitation and procurement, and integrated supply chain management services. In January, Circle reported net income increased 22% for the 4th quarter, showing progress with its strategic growth initiatives. New contracts with GM and Delphi, and a partnership with French/ European transportation and logistics company MORY S.A., bode well for the future. Circle has been range bound for about a year until Friday when it gapped above resistance with news it will be added to the S&P SmallCap 600 index. The question is, will the rally continue? APR 22.50 HQA DX Bid=6.25 OI=0 CB=21.38 RC=5.2% RNC=5.2% Chart = /charts/charts.asp?symbol=CRCL **** CYCH - CyberCash $14.38 *** Electronic Payments Surge *** CyberCash is a leading provider of Internet payment services and electronic payment technologies, for both e-commerce and brick- and-mortar markets. CyberCash offers the broadest reach in the payment industry with a comprehensive distribution network that includes direct and indirect sales as well as several marketing partnerships. CyberCash recently reported a huge surge in electronic payments for February, which showed a tripling of transactions in a month that is usually slower than others and demonstrates the phenomenal growth of Internet payment processing. A partnership with First Data Corp. should make it easier than ever for Internet businesses to obtain merchant accounts and payment processing services. CyberCash has broken out of its recent base on heavy volume suggesting further upside potential. We favor the technical support provided by the November high. APR 12.50 KBQ DV Bid=2.69 OI=757 CB=11.69 RC=6.9% RNC=6.9% Chart = /charts/charts.asp?symbol=CYCH **** CYOE - Coyote Network Systems $12.06 *** Breakout! *** Coyote Network Systems provides telecommunications products, international long distance services and network services. Their products include the DSS Switch and the Carrier IP Gateway. 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. On Thursday, Coyote announced it has entered into an exclusive agreement with e-tel corporation to deliver standards-based Voice over Internet Protocol (VoIP) technology directly to smart-card enabled screen phones. In the near future, Coyote could be called Quentra Networks as it seeks a name change. The future looks bright and investors appear to agree as they have pushed Coyote's stock to a new 52 week high. APR 10.00 QTO DB Bid=2.69 OI=1883 CB=9.37 RC=6.7% RNC=6.7% Chart = /charts/charts.asp?symbol=CYOE **** ELIX - Electric Lightwave $26.00 *** On The Move! *** Electric Lightwave is a leading integrated communications provider of enhanced data services, frame relay, ATM and Internet access to bandwidth intensive businesses and the growing e-commerce market. The company provides long-distance and data services nationwide. In its full-service markets, the company offers businesses local and long-distance telephone service and high-speed broadband via its fiber optic networks. Electric recently settled its dispute with US West and completed two more segments of its $131 million long haul route. The post earnings dip during the first part of March was short indeed. Reporting strong growth (revenues up 85% for the year), Electric Lightwave's goal of a profitable year 2000 looks within reach. The stock has made a new all-time high and shows no sign of stopping. The last few runs have climbed about $7 before consolidating. We prefer to remain conservative with a cost basis below support. APR 20.00 XQQ DD Bid=6.88 OI=40 CB=19.12 RC=4.6% RNC=4.6% Chart = /charts/charts.asp?symbol=ELIX **** TRMB - Trimble Navigation $24.75 *** Forget the Compass! *** Trimble designs and develops innovative products enabled by GPS technology, which determine precise geographic location. These products are for unique applications including surveying, mapping, mobile positioning, commercial avionics, military systems, etc. Trimble's products utilize substantial amounts of proprietary software and firmware and Trimble now holds more than 250 U.S. patents on GPS and related technology, with over 200 additional patents pending. Trimble returned to profitability this year and beat expectations though sales were hindered because of shortages of component parts, which the company is aggressively trying to rectify. The recent 'Strong Buy' recommendations, new contracts, and leading-edge products suggest a bright future. APR 20.00 TRQ DD Bid=5.63 OI=24 CB=19.12 RC=4.6% RNC=4.6% Chart = /charts/charts.asp?symbol=TRMB **** VANS - VANS Inc. $16.13 *** An Earnings Double! *** Vans is a branded lifestyle company for the youth market. Vans reaches its 10 to 24 year-old target consumers through the sponsorship of Core Sports (skateboarding, snowboarding, etc.), and through major entertainment events and venues. They operate 128 stores worldwide and design, market and distribute active lifestyle footwear, clothing and accessories. VANS has been climbing for over a year and shows no sign of stopping. This week's earnings report shows why: a 49% increase in net sales, with earnings more than doubling, beating the street estimates by two cents. We favor the support of the recent lateral consolidation area in the event of post earnings blues. APR 15.00 VQG DC Bid=1.75 OI=13 CB=14.38 RC=4.3% RNC=4.3% Chart = /charts/charts.asp?symbol=VANS ********************* BIG CAP COVERED CALLS ********************* Naked Put Percentage List 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 120.00 120 A-PD 12.25 3000 41% 115 AFCI 82.88 80 AQF-PP 7.25 2072 35% 80 AFCI 82.88 75 AQF-PO 5.38 2072 26% 80 AMCC 150.00 140 AZV-PH 10.88 3750 29% 140 AMCC 150.00 130 AZV-PF 7.13 3750 19% 140 ASDV 90.00 85 QCI-PQ 8.25 2250 37% 85 BEAS 105.75 100 BUC-PT 6.25 2644 24% 100 BLDP 105.00 100 DFQ-PT 6.25 2625 24% 100 BRCD 164.50 160 UBZ-PL 14.00 4113 34% 160 BRCM 233.00 230 RDU-PF 17.75 5825 30% 230 CIEN 162.38 150 UEE-PJ 9.25 4060 23% 155 DITC 109.00 105 PUI-PA 12.00 2725 44% 100 EXDS 173.38 170 QED-PN 15.25 4335 35% 170 EXDS 173.38 165 QED-PM 12.88 4335 30% 170 IMNX 67.00 65 QUV-PM 6.13 1675 37% 65 JNPR 269.00 260 JUY-PL 20.13 6725 30% 260 JNPR 269.00 250 JUY-PJ 16.25 6725 24% 260 KLAC 89.31 80 CKV-PP 4.63 2233 21% 86 MSTR 129.00 110 EUU-PB 10.75 3225 33% 120 NTAP 101.00 97.5 ULM-PU 5.25 2525 21% 90 NVDA 93.19 90 UVA-PR 9.50 2330 41% 90 PCLN 90.00 85 PUZ-PQ 5.63 2250 25% 90 PEB 100.00 100 BE-PT 8.50 2500 34% 100 PHCM 154.50 150 UMN-PJ 15.38 3863 40% 140 PHCM 154.50 140 UMN-PH 11.00 3863 28% 140 PMCS 231.31 230 SAR-PF 23.88 5783 41% 225 PMCS 231.31 220 SZI-PD 18.75 5783 32% 225 PUMA 71.50 72.5 YCQ-PV 8.50 1788 48% 70 RIMM 147.75 130 RUP-DF 12.88 3694 35% 130 SCMR 149.69 140 QSM-PH 9.63 3742 26% 140 SDLI 218.94 200 QZL-PT 14.18 5474 26% 200 SEBL 144.50 140 SGW-PH 10.88 3613 30% 140 SNDK 132.56 130 SWF-PF 16.25 3314 49% 126 SONE 100.50 100 QFB-PT 9.88 2513 39% 100 VIGN 224.94 200 GGV-PT 12.00 5624 21% 200 VRTS 162.56 160 VUQ-PL 13.75 4064 34% 158 You can download a spreadsheet version of this information by clicking here: http://www.OptionInvestor.com/downloads/hpmar-26.xls AFCI AGGRESSIVE SELL PUT APR-80 AQF-PP at $7.25 = 35% MODERATE SELL PUT APR-75 AQF-PO at $5.38 = 26% CONSERVATIVE SELL PUT APR-70 AQF-PN at $3.75 = 18% JNPR AGGRESSIVE SELL PUT APR-260 JUY-PL at $20.13 = 30% MODERATE SELL PUT APR-250 JUY-PJ at $16.25 = 24% CONSERVATIVE SELL PUT APR-240 JUY-PH at $12.25 = 18% VIGN AGGRESSIVE SELL PUT APR-220 GGV-PD at $20.88 = 37% MODERATE SELL PUT APR-210 GGV-PB at $16.00 = 28% CONSERVATIVE SELL PUT APR-200 GGV-PT at $12.00 = 21% *********************** CONSERVATIVE NAKED PUTS *********************** Option Trading Strategies: The Correct Approach... Each week we receive a number of E-mails concerning our approach to profitable option trading. The majority of questions relate to the methods that are used to determine a specific strategy and how a particular candidate is selected for a position. In most cases, we include a brief description of the play and its merits but this summary rarely reveals the in-depth analysis behind the recommendation. Before you can begin to understand the procedure that an option strategist must go through in order to arrive at a position, you must be familiar with the most common approaches to successful derivatives trading. This narrative examines the two basic methods for participating in the options market; Hedging and Speculating. As you begin to trade options on a regular basis, the first task that must be completed is identifying your risk/reward attitude and trading style. Should you be a Speculator or is it better for you to utilize hedged positions? Regrettably, there is no simple answer to that question. A trader's comfort level and portfolio outlook; the intended character and consistency of returns, will determine the type of strategies that are most appropriate for a specific individual. The amount of experience and trading capital are also factors that one would use in making the determination as to whether to be a hedger or a speculator. Traders who speculate generally make money when they are correct about the outlook for a particular instrument and the period in which the expected movement occurs. The most common techniques for speculators include buying and selling individual options and occasionally, directional (vertical - price) spreads. The goal in these strategies is to achieve large returns however, with the potential for significant gains there is also higher risk. The success of the speculator hinges on the fact that his losses will be relatively small and the infrequent large profits will be able to overcome these losses. In contrast, a Hedger will attempt to initiate positions that have a higher degree of success but with lower returns and reduced risk. Typical hedging strategies include straddles, strangles, calendar and diagonal spreads, and delta-neutral positions. Conservative traders would also consider Covered-Calls and other stock/option combinations as hedge techniques. The primary characteristic of hedged positions is they provide a more consistent rate of return with smaller potential losses. Most of the common techniques require far less management and are therefore more attractive to novice traders. The stress level is also greatly reduced but as with any limited-risk position, the likelihood of a substantial profit is virtually eliminated. Regardless of the type of trading you choose to participate in, the most important concern is suitability and comfort. If, after analyzing the markets and available option strategies, you don't feel the strategy is appropriate for you or the current market conditions, then don't make the trade. Trading beyond your means; too large a position or potential risk can also lead to emotional discomfort and bad decisions. In addition, always make sure you completely understand the technique being used and the general characteristics of the strategy. If you are trading speculative positions, realize that large percentage draw-downs are inherent to that approach and to be successful, you must have the necessary capital to offset intermediate losses. One final suggestion; be flexible! Adjust your trading plan to current market conditions. The major benefit of option trading is that you can modify your strategies to fit the existing character and future outlook of the market, including volatility levels and historical patterns. Only in that manner can you expect to succeed consistently, on a long-term basis. *** 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 CYOE 10.75 12.06 APR 7.50 0.44 *$ 0.44 14.8% SPNW 20.75 15.50 APR 15.00 0.75 *$ 0.75 13.3% CONV 12.81 11.50 APR 10.00 0.56 *$ 0.56 13.0% RSLC 23.88 22.69 APR 17.50 0.69 *$ 0.69 11.0% MADGF 14.25 11.00 APR 10.00 0.50 *$ 0.50 10.8% PCMS 23.19 20.00 APR 15.00 0.81 *$ 0.81 10.8% ZONA 10.88 8.00 APR 7.50 0.38 *$ 0.38 10.7% MCRE 25.06 27.81 APR 15.00 0.69 *$ 0.69 10.5% INSO 16.06 15.00 APR 10.00 0.44 *$ 0.44 10.5% ISIP 24.00 17.31 APR 15.00 0.75 *$ 0.75 9.8% SCUR 26.50 20.69 APR 17.50 0.75 *$ 0.75 9.0% NUHC 17.56 22.88 APR 12.50 0.31 *$ 0.31 7.1% OXGN 23.50 22.31 APR 17.50 0.50 *$ 0.50 7.0% CDT 34.31 32.06 APR 25.00 0.56 *$ 0.56 6.6% *$ = Stock price is above the sold striking price. The Barron's article on "cash burn" rates has knocked down a few stocks including Secure Computing (SCUR) and Shopnow.Com (SPNW). Keep an eye on those issues as they test support. Isis Pharma (ISIP) and Zonagen (ZONA) continue to consolidate but they may move lower if the Bio-tech sector falters again. NEW PICKS ********* Sequenced by Company ***** Stock Last Put Strike Option Last Open Cost ROI Opt Symbol Price Month Price Symbol Bid Intr Basis Expired AMTD 24.25 APR 20.00 TQA PD 0.75 1243 19.25 12.1% EGRP 32.00 APR 25.00 QGR PE 0.50 4503 24.50 7.2% MLT 30.00 APR 22.50 MLT PX 0.44 220 22.06 6.8% PMRY 19.50 APR 17.50 PBQ PW 0.63 5 16.87 9.8% SEM 17.81 APR 15.00 SEM PC 0.31 0 14.69 6.7% SVGI 30.06 APR 22.50 VQQ PX 0.38 54 22.12 5.9% TLCM 32.44 APR 22.50 TMU PX 0.44 111 22.06 6.4% Sequenced by ROI ****** Stock Last Put Strike Option Last Open Cost ROI Opt Symbol Price Month Price Symbol Bid Intr Basis Expired AMTD 24.25 APR 20.00 TQA PD 0.75 1243 19.25 12.1% PMRY 19.50 APR 17.50 PBQ PW 0.63 5 16.87 9.8% EGRP 32.00 APR 25.00 QGR PE 0.50 4503 24.50 7.2% MLT 30.00 APR 22.50 MLT PX 0.44 220 22.06 6.8% SEM 17.81 APR 15.00 SEM PC 0.31 0 14.69 6.7% TLCM 32.44 APR 22.50 TMU PX 0.44 111 22.06 6.4% SVGI 30.06 APR 22.50 VQQ PX 0.38 54 22.12 5.9% Company Descriptions OI-Open Interest CB-Cost Basis or break-even point ROI-Return On Investment **** AMTD - Ameritrade $24.25 *** Hot Sector! *** Ameritrade is a provider of online discount brokerage services. They provide technology-based brokerage services to investors through a variety of mediums including the Internet. Their main services appeal to a broad market of self-directed investors who are value conscious. The company uses its low-cost platform to offer brokerage services at prices that are significantly below those offered by its major competitors. The brokerage group is on the move with quarterly revenues expected to exceed estimates. U.S. Bancorp Piper Jaffray analyst Stephen Franco upgraded both Ameritrade and E*Trade Group based on strength from unprecedented trading volumes. Friday's technical breakout above the recent resistance near $21 suggests a new trend is beginning. APR 20.00 TQA PD Bid=0.75 OI=1243 CB=19.25 ROI=12.1% Chart = /charts/charts.asp?symbol=AMTD **** EGRP - E*trade Group $32.00 *** Big Rally! *** E*TRADE Group is a provider of online investing services and has established a popular destination for self-directed 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, touch-tone telephone, online service providers and direct modem access. E*trade's proprietary transaction-enabling technology supports automated, easy-to-use and cost-effective services that empower its customers to control their investment decisions and financial transactions. Same story, different stock, and the Friday rally signals a new trading range for this bullish issue. APR 25.00 QGR PE Bid=0.50 OI=4503 CB=24.50 ROI=7.2% Chart = /charts/charts.asp?symbol=EGRP **** MLT - Mitel $30.00 *** Spin-off Speculation! *** Mitel Corporation is a global designer, manufacturer and marketer of networked systems and specialty chips for the communications industry. Their communications products are primarily customer premises-based communications systems that are used in networks that enable businesses to communicate between branch offices, mobile workers and teleworkers. Mitel Semiconductor manufactures products for communications, ASICs, home gateway, wireless access, WAN Internetworking, and the optical and medical industry. Mitel also provides foundry services to third parties on a contract basis. Mitel has surged recently on strength in the semiconductor group and rumors suggest the company will sell its communications business to acquisition-hungry Alcatel or Cisco. The new interest should help the issue remain above our cost basis. APR 22.50 MLT PX Bid=0.44 OI=220 CB=22.06 ROI=6.8% Chart = /charts/charts.asp?symbol=MLT **** PMRY - Pomeroy Computer $19.50 *** New Trading Range? *** Pomeroy Computer Resources sells and leases desktop computer equipment including hardware, software and related products, and provides information technology (IT) services that support such computer products. Pomeroy's products segment is primarily engaged in the sale, distribution and leasing of computers, hardware, software and related products. The company offers products from an array of manufacturers including Compaq, Hewlett-Packard, IBM, Microsoft, Nortel Networks, Novell and 3Com. Pomeroy's services segment offers life cycle services, internetworking services and customer support services. The company provides the products and services primarily to large and medium-sized corporate, healthcare, governmental, financial and educational customers. Not much news but the breakout is obvious and the technical support at the cost basis provides a margin of downside protection. APR 17.50 PBQ PW Bid=0.63 OI=5 CB=16.87 ROI=9.8% Chart = /charts/charts.asp?symbol=PMRY **** SEM - General Semiconductor $17.81 *** Own This One! *** General Semiconductor operates primarily in the discrete segment of the semiconductor industry. General designs and manufactures discrete semiconductors, including power rectifiers, transient voltage suppressers, small signal transistors and small signal diodes. The company makes these products in a variety of packages including axial, bridge, power and surface mount systems. Their products condition current and voltage, protect electrical surges from power surges, amplify and switch small electrical signals, and regulate voltage levels in circuits. General's products are essential components of most electronic devices and systems, and are used throughout a wide range of industries, including the computer, automotive, telecommunications and consumer electronics industries. A solid company in a favorable group with excellent future potential. APR 15.00 SEM PC Bid=0.31 OI=0 CB=14.69 ROI=6.7% Chart = /charts/charts.asp?symbol=SEM **** SVGI - Silicon Valley Group $30.06 *** On The Move! *** Silicon Valley Group is a multi-product manufacturer of automated wafer processing equipment for the semiconductor industry. The company designs, manufactures and markets sophisticated equipment used in the primary stages of semiconductor manufacturing. SVG's products include photoresist processing equipment, oxidation, diffusion, atmospheric and low-pressure chemical vapor deposition processing systems, photolithography exposure tools and precision optical components and systems. Recently named by Goldman Sacks to a select group of chip companies based on new opportunities in Korea and Taiwan. Also a target of growth-hunting institutions and based on Friday's volume, they may have picked a winner. APR 22.50 VQQ PX Bid=0.38 OI=54 CB=22.12 ROI=5.9% Chart = /charts/charts.asp?symbol=SVGI **** TLCM - TelCom Semiconductor $32.44 *** More Chips Please! *** TelCom Semiconductor designs, develops, manufactures and markets a diversified portfolio of high-performance analog integrated circuits for a wide variety of applications in the industrial, wireless communications, computing, networking and medical markets. Their products comprise four principal product families: Power management such as MOSFET drivers, low dropout regulators, DC to DC converters, and CMOS voltage detectors; data converter systems which include data acquisition and analog to digital converters; thermal management and control information; and linear products such as amplifiers, voltage references and comparators that act as linear building blocks in a wide range of electronic systems. Once again, a solid company with excellent growth potential and a technically bullish chart pattern. APR 22.50 TMU PX Bid=0.44 OI=111 CB=22.06 ROI=6.4% Chart = /charts/charts.asp?symbol=TLCM ************************ SPREADS/STRADDLES/COMBOS ************************ Is It Time For A Breather? Friday, March 24 Technology stocks rallied Friday, driving the broad market to a new all-time high. The Nasdaq continued to move higher, rising 22 points to 4963. The S&P 500 index set its fourth straight record high at 1527. Profit-taking plagued the Dow after early morning gains and the average finished down 7 points at 11,112. Breadth on the NYSE was positive with advances beating declines 1,504 to 1,440 on volume of 1.03 billion shares. The 30-year Treasury fell 1 7/32, bid at 103 15/32, where it yielded 5.99%. Friday's new plays (positions/opening prices/strategy): Northern Trust NTRS APR55P/APR60P $0.81 credit bull-put Summit Bancorp SUB JUL20C/APR27C $6.25 debit diagonal Bank One ONE JAN20C/APR27C $7.88 debit LEAPS/CC's ONE opened higher but eventually fell with the banking group. Our target debit was unavailable (on a simultaneous order basis). SUB also moved up during the early part of the session but succumbed to profit-taking in the closing hour. NTRS was hardest hit with a big drop at mid-session. The position traded as high as $1.00 and our target credit was easily achieved. Portfolio plays: The market continued its record run Friday as investors poured new money into the mega-cap leaders. According to AMG Data, first quarter inflows to equity funds exceeded $100 billion, a a new record. New highs on the S&P 500 and the recent bullish activity in both the Dow and Nasdaq suggest the upward trend will continue through the month of April. Our portfolio enjoyed a number of big winners in various sectors and the majority of issues closed positive. MetroMedia Fiber Networks again led the technology group with a $5 gain to end near $98. Our new diagonal position is at maximum profit above $80. Brokerages also enjoyed significant rallies and E*trade was our top issue in the sector, up $4 to a recent high near $32. The biggest surprise of the day was Silicon Valley Group (SVGI) which rose $2.50 to close near $30. Our bullish spread position is worth $6.25, up from an initial investment of $3.88. Navistar (NAV) has performed very well since inception into the spreads portfolio earlier this month. Our calendar spread has returned $0.88 on $2.00 invested and the bullish diagonal spread is profitable. Kroger (KR) is another new time-spread issue that has rallied favorably in the last week. Our speculation position traded at a small profit on Friday and the potential for future gains is excellent. Our plan is to monitor the volatile issue for a sustained move through the current resistance level near $18 and if it occurs, we will make the appropriate upside adjustment. The short-term rebound in Marketing Services Group (MSGI) has provided a favorable exit opportunity in our bullish diagonal position. Based on the technical outlook, it may be best to forego potential future returns in exchange for the current (guaranteed) profit. Upcoming earnings have been a major influence on the current outlook and the reports coming out for the quarter include robust projections from all forecasting sources. Unfortunately that hasn't been the case in all sectors and two of our recent bullish issues fell victim to revised (downward) estimates. Telxon (TLNX) announced Thursday evening that it now has lower revenue expectations for the fiscal 2000 fourth quarter. Telxon expects that its fiscal fourth quarter revenues, previously anticipated to be in the range of $100 million, could fall short of its earlier estimate by up to 10%. The news resulted in a moderate sell-off during Friday's session and those of you who were interested in downside protection may have rolled to the May-$20 call for a small ($1.12) credit. There were no series below the $20 strike; the alternative was to close the position. Take-Two Interactive Software (TTWO) fell in sympathy to other issues in their industry group as competitors Acclaim (AKLM) and Interplay (IPLY) warned about the upcoming quarter? The issue has been on our hit list since reversing direction to a recent support area (near $14) and Thursday's failure to rally with technology stocks was a potentially bearish signal. The loss from a closing transaction was unattractive so we rolled both positions down to the MAY-$12.50 series for a break-even exit. Of course the issue must remain at or above the current support level (near $11) to produce that result. Questions & comments on spreads/combos to Click here to email Ray Cummins ****************************************************************** - New Plays - The number of requests for credit spreads continues to amaze me. Fortunately, there are always some excellent candidates for the strategy. The following plays are based on well-known companies in favorable technology industries. Each position is evaluated for probability of profit using the current price and trading range of the stock and the recent technical history or trend. Current news and market sentiment will have an effect on these issues. Please review each play individually and make your own decision about the future outcome of the position. **** JBL - Jabil Circuit $82.31 *** Post-Earnings Split Run? *** Jabil Circuit is an electronic manufacturing services provider for international electronics companies in the communications, personal computer, peripheral, consumer and automotive markets. Jabil offers circuit and board design from schematic, mechanical and production design, prototype assembly, volume board assembly and system assembly services. Last week the electronics manufacturer announced record revenue for the quarter and was promptly rewarded with a slew of upgrades. Jabil posted a profit of $0.37 per share during the period, up from the year-ago return of $0.27 per share. Revenue during the quarter rose 50% percent to $837.6 million. Analysts at Lehman Brothers immediately repeated their "buy" recommendation based on positive growth prospects for the fiscal year 2001. Other firms also increased their future price targets and earnings estimates. Credit Suisse First Boston raised its price target to $95 and SG Cowen raised its 12 to 18 month price target to $122 from $115. Of course, the upcoming stock split may also have an effect on Jabil's performance in the short-term. The date of record for the stock split was March 23 and the distribution date will be March 30. The recent technical support near the cost basis should provide ample downside margin for this moderately aggressive position. PLAY (aggressive - bullish/credit spread): BUY PUT APR-65 JBL-PM OI=304 A=$1.38 SELL PUT APR-70 JBL-PN OI=242 B=$2.06 INITIAL NET CREDIT TARGET=$0.75-0.81 ROI(max)=19% Chart = /charts/charts.asp?symbol=JBL **** NVDA - Nvidia $93.19 *** Consolidation Pattern? *** The computing industry recognizes Nvidia as the global leader in advanced graphics processing technology for mainstream platforms, awarding the company the most awards in the history of the PC industry. The unmatched breadth of the Nvidia product family enables gripping multimedia experiences for the entire desktop computer market from workstations to internet-enabled appliances. In use by large corporations, small and medium-sized businesses, and home-based consumers, Nvidia products are the solutions of choice for the top PC OEMs, add-in card designers, and system builders worldwide. Their graphics processors deliver superior performance and crisp visual quality for PC based applications such as manufacturing, science, e-business, entertainment, and education. Nvidia has been in the news recently with a number of positive announcements. Early in March, the company was selected by Standard & Poor's to replace MidAmerican Energy Holdings in the S&P MidCap 400. As the change took place, Nvidia skyrocketed! The stock continued to rise after the company announced that it will design and manufacture 3D graphics and a multimedia system for Microsoft's highly anticipated "X-Box" game console. Now the issue has begun to consolidate but additional deals with Microsoft and a new pact with Hewlett Packard should eventually revive the trend. The big question is how far the stock price will fall before investors move in for the long-term. Lets hope it's not much further. PLAY (conservative - bullish/credit spread): BUY PUT APR-55 UVA-PK OI=27 A=$0.93 SELL PUT APR-65 UVA-PM OI=54 B=$2.06 INITIAL NET CREDIT TARGET=$1.25 ROI(max)=14% Chart = /charts/charts.asp?symbol=NVDA **** TTN - Titan Corporation $53.25 *** Up, Up, And Away! *** Titan is an incubator of technology-based commercial businesses, offering innovative technical solutions. Three of Titan's four core businesses develop and deploy communications and information technology solutions and services. In addition, Titan markets the leading technology for the electronic pasteurization of food products and is continually identifying promising technologies suitable for commercialization. Titan is a very complex organization with a number of potential subsidiaries that could experience significant growth. Most analysts consider Titan a value play, whereby the sum of the pieces, tracked separately, and valued independently, are worth many times more then when consolidated as part of a mini holding company. If that sounds confusing, you are not alone. In this case we will simply base the position on TTN's its recent bullish performance, the favorable technical outlook and the solid support near the cost basis. PLAY (conservative - bullish/credit spread): BUY PUT APR-35 TTN-PG OI=346 A=$0.62 SELL PUT APR-40 TTN-PH OI=356 B=$1.12 INITIAL NET CREDIT TARGET=$0.56-$0.62 ROI(max)=14% Chart = /charts/charts.asp?symbol=TTN ****************************************************************** - STRADDLES - Profitable debit straddles are relatively simple to uncover and there are three rules to identifying favorable conditions for a straddle purchase. First, the trader should select options that are undervalued (cheap). Next, the underlying security must have the potential to move (high or low) enough to make the straddle profitable. Finally, the underlying stock should have a history of multiple movements through a sufficient range in the required amount of time to justify the overall risk/reward of the position. **** UBID - Ubid Incorporated $31.44 *** Waiting For Direction *** uBid operates an online auction for excess merchandise, offering closeout and refurbished products to consumers and businesses. The company's Internet auctions feature a rotating selection of brand name computer, consumer electronics and housewares, and recreation products which typically sell at significant discounts to prices found at traditional retailers. uBid currently runs auctions every day, offering on the average over 1,000 total items in each of its auctions. The company obtains merchandise directly from manufacturers and indirectly through other vendors, such as retailers, distributors and Fortune 1000 companies. Currently, the merchandise is sourced from over 150 vendors. Based on analysis of the historical option pricing and technical background, this position meets the fundamental criteria for favorable straddles. As with any recommendation, the play should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. PLAY (conservative - neutral/debit straddle): BUY CALL JUL-30 UBD-GF OI=182 A=$6.38 BUY PUT JUL-30 UBD-SF OI=194 A=$4.62 INITIAL NET DEBIT TARGET=$10.50-$10.75 INITIAL ROI TARGET=25% A longer time frame (October) is also available at an attractive price. You will have to decide whether the additional potential is worth the cost. Chart = /charts/charts.asp?symbol=UBID ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***************************** SEE DISCLAIMER IN SECTION ONE *****************************
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