The Option Investor Newsletter Thursday 4-6-2000 Copyright 2000, All rights reserved. Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 4-06-2000 High Low Volume Advance Decline DOW 11114.30 + 80.40 11201.10 11029.60 1,008,016k 1,862 1,135 Nasdaq 4,267.56 + 98.34 4324.09 4196.51 1,745,257k 2,787 1,431 S&P-100 814.09 - 5.00 820.88 806.29 Totals 4,649 2,566 S&P-500 1501.34 - 7.36 1511.76 1487.37 64.4% 35.6% $RUT 532.50 + 14.46 535.68 517.99 $TRAN 2847.32 + 23.04 2874.84 2823.38 VIX 29.77 - 0.82 31.08 29.38 Put/Call Ratio .49 ************************************************************* Fear of the Fed causes late afternoon pullback. The non-farm payroll report due out Friday almost stopped the current rally dead in its tracks today. After both major indexes charged off to triple digit gains this morning the air slowly leaked out of the balloon as the day progressed and the Dow fell back into negative territory briefly just after 3:PM. While the Nasdaq did not go negative it dropped -68 points from the intraday high before rebounding at the close. After the release of the weekly jobs report today, which fell 6000 to 260,000, a 26-year low, the focus immediately shifted to the non-farm payrolls tomorrow. The abundance of bearish estimates along with the party line parroted by Greenspan at the New Economy luncheon yesterday put fear of the Fed back into traders. Official estimates are running from +375K to +425K new jobs created in March with the unemployment rate dropping back to 4.0%. Unofficial estimates, the "whisper" numbers, are as high as 600K jobs and 3.9% unemployment. Traders will attempt to justify a blowout number by pointing to a five week period instead of four weeks and warmer weather compared to the storm plagued February numbers. Still with February clocking in at only +43,000 new jobs, a +600K number will send ripples of Fed fear through the markets. Greenspan said on Wednesday that he felt the market would ignore even stronger measures by the Fed to stop the runaway economy. Stronger measures equate to +.50 rate hikes instead of +.25% or hikes between meetings. If the jobs numbers blow out and the PPI/CPI next week are elevated then the Fed could react before the next meeting. If the Fed feels the market will ignore stronger measures then they will be less inclined to use small increases. This caused many traders to take profits from the rebound and go flat before the announcement. Goldman Sachs released a "Super Seven" technology list for stocks that will perform well in periods of extreme volatility like we had this week. The list includes Cisco Systems, Dell computer, EMC Corp, Oracle, PMC-Sierra, Teradyne and First Data Corp. "During this period of extreme volatility we recommend that investors remain focused on those larger cap technology names where we continue to have high conviction in the fundamentals," Goldman said. Today's close for the Super Seven, CSCO -.31, DELL -2.03, EMC +6.50, ORCL +4.59, PMCS +15.69, TER +9.25, FDC +2.63. After Clinton joked that he and Prime Minister Blair tanked the biotech sector recently on a misunderstanding and confirming that they supported patenting new discoveries, the sector has rocketed. Today CRA announced they had finished sequencing the human genome, a breakthrough that opens the door to precise understanding of what causes diseases of all kinds. The sector again rocketed with many stocks adding +20, +30, even +$40 or more. The semiconductor sector just keeps surprising with worldwide sales of +$14.6 billion in February. This was an increase of +33% from year ago levels and only fueled increases in estimates for coming quarters. Some of the stocks that benefited were NSM +6.44, KLAC +7.75 and TER +9.25 after also being named to the Super Seven list. European auctioneer QXL.com, which had dropped from $180 to a close of $70 on Wednesday received an upgrade from SG Cowen with a $1000 price target. They split 3:1 after the close yesterday to around $24 but traded today as high as $117 this morning after the news. The stock closed at $52 ($156 pre-split) and was trading up +$9 in after hours. Alcoa was the first Dow stock to announce earnings this quarter and posted +$.95 vs estimates of +$.91. Alcoa said operating efficiencies and higher prices drove first quarter profits +60% higher than a year ago and giving them the strongest quarter ever. AA finished up +$1.75 today after a big sell off yesterday in front of the news. In the "I am glad I did not hold over earnings" section Yahoo posted record earnings yesterday and then sold off over -$11 today to close at $153.69. If you have been reading this letter long then you know YHOO has a history of a significant gains before earnings and then a drop after earnings. Even though we preach it in the letter and teach it in our seminars, even some of the staff continues to hold over earnings, even when the trend clearly shows otherwise. The refusal to acknowledge facts will eventually lead to serious losses. The crowd continually expects big price explosions after strong earnings because the few companies that actually have strong gains are burned into their subconscious while the majority of stocks that decline after earnings are ignored. Learn from history and profit from it. The Dow, Nasdaq and S&P all closed on the upside for the first time in weeks. The volume was light but we will take anything we can get compared to the alternative. The VIX is still hovering in buy territory around 30 but there is not really any follow through yet. The jobs report and CPI/PPI are providing resistance to the current earnings cycle. We are nearing the end of the rally if this is just a dead cat bounce or bear trap rally. The Nasdaq seems to be running out of steam and even with the +98 close today it was not convincing. With most bear traps lasting 2-3 days Friday will be a key day. We are rapidly approaching a liquidity crisis around April 15th and with overhead resistance the Nasdaq has an uphill battle ahead. The Dow, despite the 700 point swing on Tuesday is locked into a trading range between 10900-11200 and showing no indications of a breakout. Traders should be taking advantages of any earnings runs but be prepared to step aside quickly if the Nasdaq rolls over. Traders should also be ready to step aside as the 15th approaches if the market starts moving downward again. As you have seen this week, when everyone heads for the exits at the same time we can see some serious down drafts. Recognize the warning signs and act quickly. Nasdaq and S&P futures are both up strongly but there is a lot of darkness before the morning jobs report. Trade smart and sell too soon. Jim Brown Editor Current long positions: None *************************Advertisement**************************** Options Traders ! Mr. Stock's new online trading site has been designed for you. Trade spreads, straddles, covered writes, and stocks online. Get real-time market data throughout our site. Advanced options tools include volatility graphs, implied volatilities, and more. http://mojofarm.mediaplex.com/adserver/click_thru_request/565-58-1875-3 ****************************************************************** ********** STOCK NEWS ********** A Retailer With A High-Tech Growth Rate By Matt Paolucci If you thought the only way to capture big returns was to invest in technology stocks, then maybe it's time you take a look at retail, particularly women shoes. Huh? I know, it sounds a little strange. But if you are looking for a little diversification among your holdings in optical networking and genomics testing, perhaps you ought to check out Steven Madden Limited (SHOO). The Long Island, NY-based company designs, sources and sells fashion footwear under the Steve Madden, l.e.i., and David Aaron brands for women and girls ages 8 to 45 years. The Company distributes its products through 28 Steve Madden retail stores, one David Aaron store, three outlet stores and more than three thousand department and specialty store locations in the United States, Australia, Canada, Israel, Mexico and Venezuela. Steven Madden is definitely in expansion mode, and for good reason. Business is booming. Fourth quarter revenues increased increased 86 percent to $49.2 million compared to $26.5 million for the fourth quarter of fiscal 1998. Diluted earnings per share increased 94 percent to 33 cents from 17 cents, even with an 11 percent increase in shares outstanding. Full year revenues were up 90 percent to $163 million compared to $85.7 million for fiscal 1998. Diluted earnings per share increased 84 percent to 92 cents versus 50 cents in the prior year period, on a 13 percent increase in shares outstanding. Net profit margins were 8.6 percent in the fourth quarter, and 7.0 percent, increases of 19.4 percent and 10.7 percent, respectively. Madden is planning 8 new store openings during the year 2000. The two most recent additions, its fifty-sixth and fifty-seventh stores, will be in Chicago, Illinois and Littleton, Colorado. Rhonda J. Brown, President and Chief Operating Officer, commented, "The Park Meadows store (Littleton) marks our second store in the Denver market where we have already been successful. This mall is a highly trafficked three-year old shopping center that features the best specialty retailers for the year 2000..." Steven Madden is also taking advantage of online opportunities, selling its shoes and accessories through Web sites StevenMadden.com and Stevies.com. The Stevies line of products targets girls in the 6-12 year-old age group. The brand, which focuses specifically on the "tween" market, will be available in July. Steven Madden, Chairman, President and CEO, stated, "We are excited by the positive reception Stevies has had since its introduction at the Vegas Shoe Show in February. These licenses represent our next tactical step in strengthening the Stevies name and propelling the brand further through our department store partners..." Wall Street seems to be pretty excited about the prospects for shares of Steven Madden LTD. All seven of the analysts who cover the stock rate it either a Strong or Moderate Buy. The stock, which currently trades for around $18, has a PE (price/earnings) ratio of just 16 times this year's (2000) earnings estimates of $1.07 per share. The Company is forecast to grow at 22.9 percent annually over the next five years, versus 15.5 percent for the overall shoe and apparel sector, that's 47 percent faster than the competition. Laurence Dunn, a Chartered Financial Analyst with John Galt Capital Management, calls Steven Madden Limited is arguably "the best run company in the sector today." ************** Market Posture ************** As of Market Close - Thursday, April 6, 2000 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,850 11,250 11,114 Neutral 3.16 SPX S&P 500 1,410 1,475 1,501 BULLISH 3.21 OEX S&P 100 780 800 814 BULLISH 3.21 RUT Russell 2000 470 580 533 Neutral 4.04 NDX NASD 100 3,800 4,700 4,087 Neutral 4.04 MSH High Tech 900 1,150 1,039 Neutral 4.04 XCI Hardware 1,480 1,510 1,611 BULLISH 2.24 CWX Software 1,450 1,670 1,362 BEARISH 4.04 SOX Semiconductor 1,210 1,360 1,157 BEARISH 4.04 NWX Networking 1,050 1,190 1,000 BEARISH 4.04 INX Internet 800 940 747 BEARISH 4.04 BIX Banking 520 615 579 Neutral 3.16 XBD Brokerage 450 580 513 Neutral 4.04 IUX Insurance 520 620 589 Neutral 3.16 RLX Retail 900 1,000 989 Neutral 3.16 DRG Drug 330 380 362 Neutral 3.30 HCX Healthcare 680 760 732 Neutral 3.30 XAL Airline 130 160 152 Neutral 3.10 OIX Oil & Gas 265 300 293 Neutral 3.16 Posture Alert A wild week of trading made Thursday's action feel very lackluster, however; the major indexes all enjoyed a positive day. Volume was decent as the NASDAQ traded 1.7 billion while the NYSE traded just over 1 billion shares. Leader's today include Brokerage (+4.53%), Networking (+4.09%), Software (+3.51%), and Russell 2000 (+2.79). Losers were limited to Drugs and Banking. There are no current changes in posture. **************** Market Sentiment **************** Thursday, April 6, 2000 Reversals Revisited! This has been an extremely dramatic week for all, and no matter what sectors you have played; odds are, you were reaching for the Tums, Advil, Tylenol, or some sort of strong beverage at one point or another. The mother of all reversals occurred this week, and hopefully, everybody took advantage of the entry points that were thrown right in our face. Regardless, the investor psychology in the short term is really important at the moment. Currently, you have millions of investors who bought stocks at higher prices before the big drop. What this creates is potential selling pressure (as investors wait to be break-even), in addition to the bears that are ready to jump back in and short the market. Now, the major issue that can catapult this market through this negative psychology is earnings season. Now the major earnings run is just around the corner, but it is shaping up to be a great season. Last night, Yahoo reported great numbers, stated that the future looks even better, but sold off as they missed the infamous whisper number. This wasn't surprising since they missed their whisper by a penny, and since many momentum-investors were playing the stock hoping for a grand slam! Well, Yahoo hit a triple and scored two runs, but was short of the 4-banger that many were looking for. Well, this week showed the power of catching a reversal, so we thought we would highlight several other reversals that we highlighted recently. On February 27, Pinnacle Capital highlighted several sectors in our Market Sentiment, and the results below are pretty impressive, especially given that the sectors were poor performers, and it only took a month! Catching a reversal is very powerful, and is obviously very rewarding! http://members.OptionInvestor.com/archive/marketsentiment/022700_1.asp Sector As of 2/27/00 As of 4/6/00 Return: Banking (BIX) 471.34 579.48 23% ** Insurance (IUX) 464.53 589.12 27% ** Airlines (XAL) 117.08 152.19 30% ** 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 NYSE: 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. Short Interest NASDAQ: Short interest jumped +3.49% to 2,710,141,156 shares on March 15. This bearish barometer would indicate further upside potential. Interest Rates (5.791): The current yield is in bullish territory. Volatility Index (29.77): 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. Tuesday, the VIX hit 35.44 before retracing, which also happened to be the lows of the day! Mixed Signs: None BEARISH Signs: IPO Dilution: With so many IPO's hitting the market, there seems to be dilution occurring where shares of finally freed up to sell by insiders. $58.6 billion of stock was freed up for trading in March, $67.3 billion this month, and $118.3 billion in May. This is too much stock for the system to handle. 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 and other's such as Tellabs. 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 Tues Thurs Benchmark (3/31) (4/04) (4/06) Overhead Resistance (830-860) 4.20 9.27 11.48 OEX Close 815.06 813.29 814.09 Underlying Support (800-825) 1.01 1.22 1.31 Underlying Support (770-795) 1.52 1.90 1.93 What the Pinnacle Index is telling us: Based on Thursdays figures, overhead continues to increase. It is doubtful that the OEX will significantly break into this level by April expiration. Put/Call Ratio Friday Tues Thurs Strike/Contracts (3/31) (4/04) (4/06) CBOE Total P/C Ratio .48 .55 .46 CBOE Equity P/C Ratio .35 .45 .41 OEX P/C Ratio .79 1.66 .82 Peak Open Interest (OEX) Friday Tues Thurs Strike/Contracts (3/31) (4/04) (4/06) Puts 700 / 7,509 700 / 7,821 800 / 9,229 Calls 830 / 6,037 845 / 18,137 845 / 17,902 Put/Call Ratio 1.24 0.43 0.52 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 April 6, 2000 29.77 ************ WOMANS WORLD ************ Rubber Bands and Boomerangs By Renee White I assume everyone has known exactly how to trade in this clearly defined market. Right? Buy low, sell high? Seems easy. Buy high, sell higher? I'm confused. Or is it buy low, sell lower? No, that can't be right. Buy on strength, sell on weakness. Of course, that's right...as long as the system isn't overloaded on huge volume with everyone and their uncle trying to buy or exit positions at once. Hey, who changed the game? This is earnings season. I'm not supposed to have to watch or worry about things this closely. Uh oh. Ugghh. If the techs are shaky, that means I have to pay more attention to economic data again. Shoot! I just want to trade easy...meaning, I just want things to go up! Would somebody please tell us where to find the revised rules of the game...the ones that last longer than a few hours at a time. A good friend of mine told me last night that one could easily get rich from trading the intra-day swings that are occurring right now. In theory, he was right. That's assuming one can open a can of catfish and eat it while swimming in a pool of sharks. I'm not that good. At the end of the day lately, I've seen a million opportunities I COULD have participated in. Unfortunately, this instability has made me trigger shy, coupled with recent losses over the last 2 1/2 weeks. I have not been a buyer of individual equities since after the first 10% correction in March. If you remember, I had left low open orders sitting and waiting for a mild sell-off before the last FOMC meeting. It was a dirty trick when "mild" became a 10% correction when I wasn't looking. Before that, I was loaded with cash. After that, I was loaded with bad positions down 55-60% before I even booted up to see them. Stop losses don't work if the correction occurs before you've had a chance to enter them. Being right on the timing of the sell-off was little consolation for the hit. I bought QQQ 110 options on that correction. Like many, it seemed reasonable to think that a 10% correction right before April earnings would make a good entry point. So, feeling like a safe trouper, I trekked off to the option seminar with my mighty YHOO compass pointing towards a typical earnings run along with my Qs that I bought on the bottom. Of course, every scuba diver knows that when the ocean gets very dark and still, you realize that the reef beneath you has disappeared. All the while, you were swimming off to investigate something off in the distance. It's a very eerie feeling to look down and see nothing under you but deep black ocean. A million questions pop into your head when you look around you and see the same depth of ocean all around you. There is no bottom and there is no lifeline. That is how I felt when one attendee came up to me at lunch during the conference and asked, "Did you buy more?" Not knowing what he was really talking about, my automatic answer was, "How bad was it?" His answer, "We just dropped 300 points!" I can't repeat my comment which followed in response to both the money I had probably lost on the Q's along with the shock and confusion over another 10% correction so close to the last. For anyone thinking that I never screw up, I assure you that I did these last few weeks. I promptly ran upstairs and again entered more Qs, now the 105s. I thought certainly I was safe because this would be the last correction before April earnings. Deja Vu? Thank goodness that I exited most of my YHOO positions before that drop, but I still held out on a few other which were well in the money. Feeling confident I just lowered my cost basis on more Qs for the mighty April earnings, I trekked on back to the conference with smiles. After a long seminar week, exhausted and totally removed from the market, I returned home with a "cold". Why do I tell you this? Because I am a trader and life just happens. By the time I came home, I was exhausted and had a fever. All I wanted to do was sleep which is exactly what I did all day Monday, never turning on the tube. In fact, except for getting up to take medicine, I slept through Tuesday morning awaking shortly after lunch. Can you imagine my confusion when I turned on CNBC for the first time in almost 10 days? It just didn't register with me right away that I had just slept through the biggest one day stock market correction in history. How does that happen? I'm NEVER sick! My phone started ringing that evening and I didn't know how to tell people that I had slept through the whole event! Do you have any idea how utterly embarrassing that is? What a trader, huh? But, because I am consistent, I pulled myself together before the close and bought some more Qs. Had to buy that dip! This time it was the 100s. Of course, I felt safe because this would be the last correction before April earnings, right? Ugghh! Is that song not getting old yet? Which verse are we on? Again I find myself out in the deep blue sea, not knowing where the bottom really is. It's just too quiet out here this time. Even though the market has been up since Tuesday, my 110s and 105s are still under water. I didn't exit because I naturally thought the worst was over...until I realized it wasn't. Each 10% correction since mid March has occurred when I was away from my computer and not even booted up. Unbelievable! I accidentally exited my 100s today, basically breaking even, but I'm still holding close to 100 contracts that have red glitter on them. Oh, the trials and tribulations of trying to make money in the markets. The great humiliator. After 3 major corrections in so many weeks, I sit here listening to the big heads talk about retesting the lows. Which low might that be? I'd like to see them retest the first low, but I think that would mean we should be going back up. Hmmm, not so funny this time since we all know they are talking about more downside. Darn, just when we all learn that history repeats itself, it quits repeating; YHOO changes its pattern, there is no January rally, no February sell-off, split runs fizzle and April earnings is a hiccup on the chart. Frankly, I'm just not sure which way the rubber band is shaped right now. Is it stretched or relaxed? The action today felt good, but after being bitten 3 times, I am not that trusting. Also, I hear the stage being set for profit taking to retest the recent lows, if not lower. What a rude awakening for people still trading with money that was meant to be used to pay their 1999 tax bill. I've talked to several friends in the last 2 weeks who have had hefty margin calls $100K, 190K, 250K, even close to 3/4 of a million dollars. All were from writing naked puts. Obviously, everyone has been hit in this market, even traders who know better. I know that I lost a bundle while at the conference, not watching my "safe" entries on the first 10% correction in March. Who would of thought we would get corrections once a month, then once a week, then in a day....all back to back. Well my friends, I hope you are one of those people who has been able to intra-day trade hard enough to make a fortune, as my friend so calmly pointed out last night. I am not. My confidence is on hold until I see a reef beneath me. Trying to cover positions also seems ackward since I don't have a sense of market direction. Right now it just feels like I am swimming in shark infested waters, with an open can of catfish. I know they are there ready to take another bite, but I don't know if I can make it to the reef before they try. The bigger question may soon surface. If it does retest Tuesday's bottom again (count on that happening...the question is when?), do I risk loading again feeling safe with a double bottom? Or do chart patterns not matter anymore either? Will it be another May/June decline or this year a rally after the sell-off during April earnings? The real question becomes, "How many times can you throw a boomerang and it come back to hit you in the head?" Trade carefully. ************** TRADERS CORNER ************** There is no Traders Corner article tonight. ************* Options 101 ************* Getting Back To Basics By: Lee Lowell Let's go over a few issues that seem to be confusing some of our readers. Before you ever dive into the market and buy or sell an option, you must do a little preparation. If there is no analysis involved, you will get eaten alive. First, you must have access to an option calculator. Most likely it will be a calculator based on the Black-Scholes equation. I suggest going to the CBOE website and clicking on their "Trader's Tools" link. Within the Tools, click on the "Option Calculator". This is your first step in getting a handle on how the option is priced in the marketplace. All the inputs that are necessary for the option calculator are readily available, except the volatility component. The volatility component is something that we've discussed extensively, but there still seems to be some confusion. Any option calculator will ask you for your volatility "estimate" of the underlying stock. The volatility estimate is what you think the volatility of the underlying stock will be until your option expires. You need to make an educated guess on this volatility. In order to make a guess, you should look at the stock's "historical" volatility behavior. I've had many questions on where to look for this historical volatility. There are not many free places on the web to find these statistics except for the CBOE website. Within the tools section again, you can click on the "stock's historical volatility" link. At this point you can get a handle on how the stock has moved in the past. I believe the CBOE breaks down the HV into 30 day intervals. Once you've seen the past results, you make your own guess of volatility and plug it into the option calculator. This is called your "forecast" volatility. Whether your forecast is right or wrong is yet to be seen. But at least you've done some analysis. The next step is to check your option's "implied volatility". This is the volatility component of the option itself and it signifies what the market participants predict for the underlying stock in the near future. It's almost like saying the option itself is making a prediction of the stock's movement. Remember, volatility (historical or implied) is a number that gives you an idea of how the underlying has performed in the past and how it hopes to perform in the future. You can also use the option calculator to figure out any option's implied volatility. Just plug in all the variables excluding your volatility guess, but including the option's price as it's trading in the market. Since you've swapped your volatility guess for the option's price, the calculator will now spit out for you a volatility number instead of a theoretical value. This new volatility number is the option's "implied volatility". So you now have your "forecast volatility" which is derived from looking at how the stock has fluctuated in the past. And you have the option's "implied volatility". It's you against them! How do the two compare? Is your FV higher/lower than the IV? If there is a significant difference, then you must dig a little deeper or check your analysis. If the IV is much higher, then there is probably some excitement surrounding the stock because of takeover rumors or earnings announcements approaching. If you are confident with your volatility forecast and it differs significantly from the option's IV, then go ahead and take advantage of the situation by buying or selling options based on the FV/IV relationship. What really helps in getting an idea of how the stock and option's volatility has moved in the past is to look at historical charts of each. I believe that looking at past IV charts is essential when trading options. Unfortunately, this is not easy to find on the web anywhere for free either. The options broker that I use for my own trading has their own in-house volatility charts that comes in pretty handy. That is mrstock.com. Check 'em out. I've also been asked to suggest datafeed vendors that supply IV and delta information. Take a look at esignal.com, dtniq.com, interquote.com, pcquote.com and mt98.com. I believe all of these have IV columns in their options chains, and mt98 & pcquote even have "bid IV" and "ask IV" columns too which is a big plus. MT98 might even have IV charts too. In my opinion, IV is a much more important number to focus on than the HV. The HV just tells me the price band that the stock has moved within over the past. Over time, all stocks will develop an average volatility level that the stock seems to revert to. If it's trading above its mean, it will eventually move back down to it. And if it's trading below the mean volatility, it will eventually trend back up to that level. Fine. But if you want to trade the options, you're gonna be trading them based on IV. You get a quote for a certain option from your broker, and that option has an IV attached to it. You buy or sell that option based on its IV. Not only can the IV be higher or lower than the HV, but the IV can be high or low compared to its own past. Here's an example. We want to analyze a 3-month IBM ATM option. IBM has a 90-day historical volatility of 35%. The ATM option has a 1-day IV of 40%. This is obviously above the HV. But is the IV high/low compared to its own past? For the last 90 days, the IV has ranged from 40% - 80%. So the 1 day IV of 40% is low for its range but still higher than the HV. What's the assessment? It seems that over the past 3 months, there was pumped up excitement in the options for whatever reason. But as rumors were quelled, the option's IV started to come back down in line with the HV. As I've said previously, the HV and the IV usually move in tandem except for those few occasions. We know that the IV for IBM ATM options are close to the HV now but at the low end of its IV range. At this point you can say that IBM options are fairly priced. If the 1 day IV had been 80% instead of 40%, it would be fair to say that IBM options are relatively expensive, so selling strategies could be in your future. This is what volatility analysis can do for you. The datafeed vendors I mentioned can get you started in the right direction. Last week I mentioned that another author stressed in his book that too many traders only focus on their timing techniques when trading options. Once they predict which way the stock will move in the future, they indiscriminately purchase any option they can get their hands on. This is a BIG mistake. They may be right about the direction, but they may be buying grossly overvalued options. Going back to our IBM example above, what if this trader had bought IBM options when the IV was at 80%? He/she would surely lose over the near term as the IV plummets down to 40%. Or if he/she happened to be lucky enough to squeak out a gain on the trade, it's not nearly as much as he/she would've made if the options had been bought at 40% IV. The strategy of this trader should've focused on selling options to take advantage of the IV. If he/she was bullish on IBM, then selling puts, put spreads, or writing covered calls would be the optimum strategy. I believe I have exhausted the subject of volatility over the last few weeks. For any newcomers to OIN, just click on the "Options 101" link in the left-hand margin and read some of the previous articles. There' some good information on volatility in general, along with ways to use it in your own trading. You can use volatility analysis to give yourself an advantage when putting on call and put spreads, ratio spreads, straddles, etc. Don't forget to look at the formula I previously presented to give yourself an idea of the stock's possible range until expiration date. It's just another tool to help you make a more informed trading decision. Good Luck. Please view this in COURIER 10 font for alignment ************************************************* CHANGES THIS WEEK Daily Results Index Last Mon Tue Wed Thu Week Dow 11114.27 300.01 -57.09 -130.92 80.35 192.35 Nasdaq 4267.56 -349.15 -74.79 20.33 98.34 -305.27 $OEX 814.09 5.56 -9.33 -9.33 7.80 -5.30 $SPX 1501.34 7.39 -11.24 -11.24 13.97 -1.12 $RUT 532.50 -23.05 -9.92 11.92 14.46 -6.59 $TRAN 2847.32 -57.14 18.85 99.33 23.04 84.08 $VIX 29.77 -1.55 2.24 2.69 -0.82 2.56 Calls Mon Tue Wed Thu Week MEDX 68.00 1.69 -2.19 4.50 13.75 17.75 New HWP 148.13 0.00 5.56 4.75 6.13 15.25 Stellar AMAT 106.69 -5.00 8.88 6.06 2.50 12.44 Strong CHKP 176.75 -36.19 25.47 -1.84 18.25 5.69 Great day LXK 111.25 0.31 0.19 1.69 3.31 5.50 New WLA 103.00 4.19 3.63 -3.00 0.38 5.19 Light vol IBM 122.75 3.63 -0.81 2.44 -2.25 4.75 Still up CL 59.00 4.12 0.19 -2.25 0.56 2.63 Up small KSS 103.94 1.63 -4.50 1.25 3.06 1.44 Midday hi BAC 53.44 3.06 -1.31 -0.19 -0.56 1.00 Dropped PCAR 50.06 -0.12 2.88 -2.00 -0.69 0.06 Skidding EXDS 139.69 -17.69 14.13 -5.94 8.69 -0.81 Steady SUNW 92.69 -3.88 0.19 -1.25 3.94 -1.00 Running INTC 129.81 -1.31 2.13 -2.88 -0.06 -2.13 Which way QCOM 139.13 -8.56 5.88 -5.38 -2.13 -10.19 Dropped NOK 212.00 -15.63 1.25 -4.75 13.00 -10.50 Dropped DISH 68.44 -4.81 -5.81 -4.69 4.75 -10.56 Recovered NXLK 105.44 -1.56 -12.82 -12.37 8.50 -18.25 New NXTL 126.56 -5.62 -6.82 -9.93 0.69 -21.68 New INKT 155.88 -27.56 -9.44 2.38 -4.50 -39.13 Waiting Puts LVLT 88.19 -7.25 -3.69 0.19 -6.81 -17.56 New ICGE 73.88 -12.15 -10.28 5.81 0.19 -16.44 Entry IIJI 67.50 -8.63 -5.63 8.88 3.13 -2.25 Slid late KO 45.75 2.37 3.07 -4.75 -1.88 -1.19 New ITXC 55.13 -2.43 -9.56 8.19 11.88 8.06 Dropped PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** BAC $53.44 -0.56 (+1.00) The sound you heard at 4:00pm EST was the closing bell, or it could have been the bell ringing to wake up investors letting them know they could finally go home. We wouldn't blame you if you dosed off watching BAC trade the past two days, we did. We are going to let this one go for now. The short-term trend is still heading up, but BAC and the banking sector seems to have lost its momentum. BAC ran into overhead resistance near its 200-dma on Monday before the sell-off. The holding company has been unable to garner any momentum in the past two sessions drifting lower to support at $53 late today. BAC did see a few buyers step in, the last 15 minutes of the session, with fair volume, which could be the beginning of another run. Frankly with the bounce in the blue chips today, we looked for BAC to participate, but it couldn't get out of its own way. NOK $211.50 +12.50 (-10.50) That's it. Time to say good bye to this 4:1 splitter. After the close tomorrow, NOK will undergo its split and will begin split-adjusted trading on Monday, April 10th. Veteran readers will recall that we do not recommend holding through a split due to the likelihood of a post split depression. While NOK didn't give us the split run we were looking for, it was still a profitable play with many opportunities to profit from the price swings. As a consolation prize, NOK announced today that it had secured a $300 mln equipment contract with British wireless carrier, Orange Plc. That may help slightly. But in reality, with earnings about a month off in early May, there is no event to trade into. Accordingly, we don't expect NOK to be on the move for a bit and will end this phone call tonight. Time to find another play. QCOM $139.13 -2.13 (-10.19) Beep, beep. That's the life-support system sounding off for QCOM. Granted the stock price was charging ahead last week while many of the Internets were drowning, but now QCOM is flat lining around $140 and $145. As you know consolidation is necessary, although we expected some signs of vitality by today. Plus volume levels have dissipated to almost half the ADV and this is a bearish indication. It's possible QCOM will regain its powerful momentum a few days before its earnings' report on April 18th (after the bell), but as it is now, the play is over. Also in the future, look for a rollout of the CDMA mobile phone technology in China. US Commerce Secretary William Daley said he won a pledge from Chinese Premier Zhu Rongji today to get the networks up and running. PUTS: ***** ITXC $55.13 +11.88 (+8.06) ITXC showed strength on Wednesday and moved higher along with the NASDAQ which is exactly what we wanted to see. It traded up but it did so with conviction, which was unexpected. And to put the final spoils on this play, ITXC gapped up today and steadily made way to the $55 level. Given that it didn't roll over in the high $40's and firmly went through $50, our expectations for this play have not materialized. Therefore, we must cut this one loose and move away from ITXC. ******************** PLAY UPDATES - CALLS ******************** AMAT $106.69 +2.50 (+12.44) AMAT is in the right business at the right time, and the stock continues to roll higher. As long as people continue to buy cell phones, cars, and computers AMAT will benefit. Positive news flowed from fellow Semi's Wednesday as Microchip Technologies (MCHP) and Fairchild Semiconductor (FCS) said earnings will top analysts estimates in the coming quarter. AMAT also benefited Wednesday from an upgrade by Adams Harkness. The firm raised AMAT from Market Perform to Accumulate. Wall Street is looking for an incredible quarter from the Semi's as one analyst put it, "Conference calls will be wildly bullish." James Morgan, chairman and CEO of AMAT said Thursday that the backlog of orders for the industry was increasing. Morgan predicted "decades of huge growth" for the semiconductor industry as the use of microchip applications spreads beyond computers. All of the good news has pushed AMAT firmly above $100. After hitting an all-time high of $111.25 Thursday, AMAT pulled back on light profit-taking. The stock continues to use its 5-dma as support in its move higher. Look for the stock to bounce off the 5-day and confirm direction before entering any new positions. AMAT has ran into resistance twice at the $110 level, watch for momentum to carry the stock above that level and provide an entry with less risk. EXDS $139.69 +8.69 (-0.81) With its wide intraday swings, EXDS continues to provide opportunities. Although the stock dipped down to $131 at the open today, it managed to climb back above the critical support level of $136. The earnings report from Yahoo that we have been eagerly awaiting provided a boost to net stocks today, as the company beat estimates by a penny. As earnings season commences, many analysts are looking for great numbers from the high-tech stocks. In the news recently, EXDS announced that it has built on their successful alliance with Compaq (CPQ) to provide e-business services. EXDS also named CPQ as their preferred provider of Windows NT/2000 systems. Also of note, DELL held its analyst meeting Thursday, where the company announced its new extended Internet Strategy. EXDS will provide Web services for DELL's new initiative. We mentioned last Tuesday that EXDS had light resistance at $140. That level has now turned into formidable resistance, as the stock failed to break $140 yesterday and again today. EXDS is finding support at its 5-dma, look for a dip below that level to initiate new positions. Watch EXDS closely to see if the stock can breakout above $140, if the stock can move above resistance there is not much standing in the way of $150. PCAR $50.06 -0.69 (+0.06) Our play in PCAR lost traction over the past two days as traders took profits after the recent run-up. After peaking at $54 on Tuesday the stock gapped down $1 Wednesday on average volume. The stock stumbled again Thursday, as traders sold PCAR down to $49. After hitting $49 for the second time today, PCAR gained back $1 in the last hour of trading as volume picked up into the close. It appears the profit-taking is over, noting the strong close today. Although the stock has come off its recent highs, we're looking for PCAR to regain momentum and continue its climb higher. The stock established solid support today at $49, look for a bounce off that level as an entry point. If the strength from today's close carries through tomorrow, look for PCAR to move higher using its 5-dma as support. We'll encounter resistance at $51 before PCAR can move substantially higher. Watch for a move above $51 with conviction as that would position PCAR to retest its recent highs. INTC $129.75 -0.06 (-2.19) Indecision appears to be dominant throughout the market at this time and also has a hold on INTC as it remained relatively unchanged today. Everyone seems to be a little wary as to where we go next but the good news is that the Semiconductor Index($SOX) was up almost 2%. Going forward to Friday's trading session, we will be watching the general market direction as tomorrow's employment report is released at 8:30 EDT. Due to INTC's last two sessions of indecision, the overall market trend will be its catalyst, one way or the other. We are currently putting INTC on probation to see if we get an upside move for this call play. Technically, INTC has resistance at its 50-dma of $133.13 and it has been finding buyers in the short- term around $125. Watch for trader sentiment after amateur hour and target shoot to your individual risk levels. CHKP $176.75 +18.25 (+5.19) After the abuse that occurred on Tuesday, CHKP has at least recovered its feet. It took some time but buyers have now pushed the price solidly above support at $155-157, and today's close puts the price just above the 10-dma at $174. Although yesterday's volume was still heavy at over 3 million shares, things calmed down today, with just average volume of 1.25 million shares trading hands. After the turmoil in the markets, and specifically the Internets, investors are likely resting up before jumping back in with both feet. Adding support today was word that Sands Brothers upgraded the Internet security firm from Neutral to Strong Buy. Now that CHKP has moved above resistance at $170 and is resting above the 10-dma, look for further strength as earnings on April 12th approach. Should the markets pull back, target shooting may be your entry strategy - look for a bounce near $170. A more conservative approach to playing this volatile issue would be to wait for a convincing break through resistance at $180. DISH $68.44 +4.75 (-10.56) Margin calls from Tuesday's decline served up a nice entry into our DISH play Wednesday morning as the NASDAQ gapped down at the open. This proved to be the low of the day, and buyers cautiously moved back into the issue. Yesterday's late day weakness provided one more dip before the gap up this morning, which set DISH firmly on the path to recovery, allowing the stock to close very near its close on Tuesday. Doubling its average daily volume today, DISH moved right up to resistance at $70 before pulling back a bit at the close. Above $70, DISH will also find resistance at $75 and $80. After the turbulence in the markets this week, it has been reassuring to see some normalcy return, hopefully calming investor fears as we move into the April earnings cycle. Although DISH doesn't report until mid-May, the rising tide of the NASDAQ should help to float the stock higher if the bulk of earnings are strong. Today's introduction of DISHLink, should garner positive attention for the company in the weeks ahead. DISHLink is an affordable and convenient system for delivering broadband content and video channels to the office desktop, and will be demonstrated at the Sands Expo Center in Las Vegas from April 10-13. A dip to support near $66 looks like a good entry strategy, but more conservative traders may want to wait for a break through $70 before helping themselves to DISH. *********************************************** PLAY UPDATES - CALLS - CONTINUED IN SECTION TWO *********************************************** ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. 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 Thursday 4-6-2000 Copyright 2000, All rights reserved. Redistribution in any form strictly prohibited. ******************************** PLAY UPDATES - CALLS - CONTINUED ******************************** INKT $155.88 -4.50 (-39.13) Following the example of the Internet sector as a whole, INKT appears to be gathering its strength. After the drubbing it took on Tuesday, the stock (as well as the sector) have traded in a fairly narrow range over the past 2 days. Yahoo! came out with earnings last night, and although the numbers were solid, they were not exciting. As the sentiment leader for the sector, the fact that Yahoo!'s earnings were not stellar may have negative implications for other Internet stocks. Use appropriate caution going forward and don't let the subdued trading range of the past two days lull you into a false sense of security as we move full speed into April earnings. It does look like most of the weak hands were shaken out near $112 on Tuesday, and hopefully we won't revisit this level anytime soon. The trading today in INKT was mixed as volume picked up on decreasing price between 2-3pm EST. Fortunately, the price bounced right at the $150 support level, allowing INKT to recover modestly into the close on continued strong volume. So, what's next? With earnings scheduled for April 18th, INKT should get moving higher soon. Look for today's support to hold and enter as prices bounce here once again. A more conservative approach would be to wait for a penetration of near-term resistance at $165, or ideally yesterday's high near $175. HWP $148.13 +6.13 (+15.25) Finally, our patience with HWP has been rewarded. As the high-flyers on the NASDAQ were taken out behind the woodshed on Tuesday, HWP held firm at its $130 support level. With the great relative strength demonstrated in the midst of panicked investors, HWP was one of the first to begin moving higher, adding $4.88 yesterday, and a stellar $6.18 today. Voting with their wallets, investors have now pushed HWP firmly through the $140 resistance level and are taking aim at the all-important level of $150. If successful, they will push HWP to a new 52-week high and into blue-sky territory. Now firmly above $140, HWP is back into its historical split range. Look for an announcement anytime between now and earnings, currently scheduled for May 17th. With the public comments from the company that earnings are expected to be strong, and news of the company's dominance in the retail PC sector, this could be the beginning of a strong run. Support should be strong between $140-142, and a bounce near this level would make for a nice entry. For those of you not quite sold on the strength of the recent move, wait for HWP to break out to new highs before jumping on board. KSS $103.94 +3.06 (+1.44) Did you happen to join the rest of folks that bought shares of KSS Wednesday as the retailer bounced off the support area near $95? If so you must be pleased. With investor sentiment still a bit shaky Wednesday morning, KSS fell another $4.50, to $95.13. After lunch investors began to nibble on Kohl's stock, bidding the price another $7 higher in the next two hours. Keep in mind this is not a high flying tech issue, but a 7% move in 2 hours is nothing to sneeze at. Today traders liked what they saw yesterday, and the announcement that Kohl's same-store sales for the month of March rose 6.8%. Total sales for the value priced retailer jumped 34.4% over the five week period ended April 3rd. Oh, did we mention, KSS hit another new high today? Yep, $106 is the new 52-week high, and by the looks of the volume the past two days, there may be more room to go. Over 2.3 million shares have been traded on the latest move. KSS did pull back a little going into the close today, but still finished the day with a respectable gain of 3.0%. If profit- taking continues, buyers could enter at $102 and $100. Don't forget KSS will split 2-for-1 on April 25th, which may also help keep our play in the limelight. For now, look for bounces off support or continued moves higher to enter. WLA $103.00 +0.38 (+5.19) Considering the action in the Drug stocks the past two days, we really aren't disappointed in WLA. The decline Wednesday and the lackluster session today may have provided us with a very good entry point. Lackluster that is until final thirty minutes of trading. WLA did pop up $1.50 in the last half-hour today. Not a big move, but considering for most of the day WLA traded in a $0.75 range, we'll take it as a plus. Most of the weakness seen the past two days came after Paine Webber, downgraded Bristol-Myers Squibb from a Buy to an Attractive. However in the same breath they upped their 12-month price target for BMY from $65 to $73 per share. They said the drug industry should have solid first quarter earnings growth, the probability of a major Medicare drug benefit before the Presidential election is less than 50%, and the Presidential race is too close to call, but could have a major impact on BMY and the industry as a whole, as the year progresses. Analysts at Paine Webber said that while lowering their ratings on BMY they remain positive on the group. Investors took profits on the news, but began to test the waters late today. Volume the past two days amounted to only 4.5 million, which is light compared to what we've seen as WLA advanced. Support is now found between $100 and $101, however with investor sentiment improving WLA may be back on track. SUNW $92.69 +3.94 (-1.00) So, how's our conservative big-cap earnings play today? Very well, thank you. SUNW has exhibited little of the volatility common with other technology issues over the past two days, trading in a $7 range of $87-$94. Support is strong at $87 and could make an excellent target at which to shoot. Intraday support can be found around $91. We'd expect the price to advance further as SUNW trades into earnings, scheduled for April 13 (confirmed, but subject to change). Careful though. Volume has fallen back to the ADV. We'd rather see volume increase running into earnings since it confirms other investors' interest too. Also, with tomorrow a likely day for some traders to take chips off the table prior to a weekend, SUNW could experience some weakness as the day wears on. In the news, Michael Dell made some interesting comments about SUNW today at the DELL analyst meeting in New York. He noted that while SUNW is now DELL's only relevant competitor in the server business, their hype is now greater than their ability to deliver. While a comment like that may have long term implications, it shouldn't affect the play. Just don't bet against Mikey - he has a track record of being generally correct. CL $59.00 +0.56 (+2.63) CL is finding its footing at these higher levels. The consumer stock managed well after taking a late-day dip to the 10-dma at yesterday's close. It recovered nicely with a solid upward move back to $60 before oscillating in a tight one point range. The techs may have rallied somewhat today, but deep wounds can sting for a while. So with that in mind, the short-term for CL is still promising. The overhanging resistance is looming at $60 and $62 while the bigger challenge is the 52-week record at $66.75. Since Tuesday, volume was only moderate so look for the trading levels to return to 2.2 mln (ADV) or better. Upcoming earnings may also lend a helping hand. Colgate-Palmolive is expected to report on April 19th. IBM $122.75 -2.25 (+4.75) Near-term support continues to pattern higher (now at $122) as IBM demonstrates its momentum is intact. The rising technical 5 and 10 DMA indicators still coincide with the stock's support level and are good gauges for entries into this momentum/earnings' play. Today IBM just missed cracking the stubborn resistance ($128.25) set on March 27th as it powered up to $128.13 early in the session. Volume remains respectable too. These are bullish signs that IBM can make a run through $130 and overtake the 52-week record at $139.19 before earnings on April 18th, market permitting of course. In the news, IBM Japan won a 10-year $1 bln computer- outsourcing contract from major life insurer, Mitsui Mutual Life Insurance. The company also snagged a three-year $250 mln equipment contract with ABB's Engineering and Technology Group. ******************* PLAY UPDATES - PUTS ******************* ICGE $73.88 +0.19 (-16.44) ICGE hasn't been moving exactly in the direction we'd expected. A resumption of DB Alex Brown's coverage today with a Strong Buy didn't help. Nonetheless, consider the gain a gift for a better entry. For shortly thereafter, it petered out. ICGE remains technically weak and hasn't meaningfully participated in the rally over the last two days. It just can't get back and hold over resistance of $80, which was prior support until Wednesday's cliff dive. Volume is falling too, telling us that buyers have no conviction. That's not a good sign for the stock when the rest of the market is making decent recovery progress. That said, if you see another move over $80, consider taking a position once it falls back through, even if the overall market is strong, and especially if the overall market is weak. Otherwise, confirm the negative market direction and consider a position if ICGE falls under current intraday support of $71.50. For the chartists, note that it's also under its 5-dma of $76.66, which it couldn't hold today either, making it all the more difficult for a recovery going into a Friday fraught with fear. It's a long way to the next level of support at $60. IIJI $67.50 +3.13 (-2.25) As we warned in Tuesday's update, that sharp 20.4% drop in the first days of the week attracted some bargain hunters. IIJI saw strong gains particularly on Wednesday, although the higher share prices couldn't hold up even with the markets in rally mode. The stock is currently sandwiched between the 5-dma ($63.65) and the 10-dma ($70.18). Recall older support was at $65 so this level isn't reprehensible, but we do need to see downward movement from here. A definitive slide through the 5-dma would provide better confirmation that this technical momentum play can move back into deeper territory. There isn't any company-specific news event to effect trading. ************** NEW CALL PLAYS ************** LXK - Lexmark International $111.25 +3.31 (+5.50 this week) Wrapping its arms around the entire life-cycle of printers, LXK develops and manufactures a broad range of laser, inkjet and dot matrix printers for the office and home markets. The company is also the exclusive source for new print cartridges for the laser and inkjet printers it manufactures. Additionally, LXK provides supplies for IBM printers and offers after-market laser cartridges for the large installed base of a range of laser printers sold by other manufacturers. Beating the rest of the market to the punch, LXK got its pullback out of the way early. Hitting a new 52-week high of $135.88 on March 22nd, LXK had nowhere to go but down as investors calmly took their profits. Having run up 50% since the start of the year there were a lot of profits to take, too. Volume remained below average throughout the decline and began to pick up (along with increasing price) last Friday, posting a close at $105.50. Then came black Tuesday, an event that, although it caused some selling, could only manage to drop prices to $99, (right on the 100-dma). Like a rubber band stretched tight, LXK snapped back as soon as investors figured out the world wasn't going to end. With the air already let out of the stock and earnings just around the corner (April 24th), LXK looks like it could make a run at its recent highs. There are however, a couple obstacles to overcome. The first is the 50-dma ($114.65) which provided overhead resistance in today's trading. This also happens to be a significant level of resistance, confirmed several times in February and early March. The next obstacle will be the 30-dma, currently sitting at $119, and the site of more historical resistance. Look for a bounce near support at $107 to trigger your entry, or for those with a more cautious nature, wait for a close above the 50-dma. Once clear of the obstacles listed above, LXK should be free to run, and we hope the approach of earnings coupled with a broad market recovery will make it a swift race. New has been sparse on LXK, with the most recent item of note being the rating given by Prudential. On March 17th, the firm began coverage with an Accumulate rating. BUY CALL APR-110*LXK-DB OI=570 at $6.63 SL=4.50 BUY CALL APR-115 LXK-DC OI= 96 at $4.25 SL=2.50 BUY CALL APR-120 LXK-DD OI=124 at $2.63 SL=1.25 BUY CALL MAY-115 LXK-EC OI=109 at $7.50 SL=5.25 BUY CALL MAY-120 LXK-ED OI=134 at $6.88 SL=4.75 Picked on Apr 6th at $111.25 P/E = 47 Change since picked +0.00 52-week high=$135.88 Analysts Ratings 6-4-1-0-0 52-week low =$ 49.50 Last earnings 01/00 est= 0.68 actual= 0.73 Next earnings 04-24 est= 0.58 versus= 0.48 Average Daily Volume = 1.13 mln /charts/charts.asp?symbol=LXK **** MEDX - Medarex Inc. $68.00 +13.75 (-17.75 this week) Medarex is a biopharmaceutical company developing monoclonal antibody-based therapeutics (drugs) to fight cancer and other life-threatening and debilitating diseases. The company has developed a broad platform of patented technologies for antibody discovery and development, including the HuMAb-Mouse system for the creation of high affinity human antibodies. Yes, their claim to fame is that they've engineered a mouse with a human immune system! Medarex's HuMAb-Mouse technology is a transgenic mouse system that creates high affinity, fully human antibodies instead of mouse antibodies. Using standard laboratory techniques, scientists can produce these fully human antibodies in a matter of months. Medarex creates and develops human antibodies for itself and others, offering a full range of antibody development capabilities, including pre-clinical and clinical manufacturing services. You say you like a little high risk in this already volatile market? Here's one in the Biotech sector that's got some promise, thanks to an engineered furry critter - a mouse! (see above) But what makes this one different from other Biotech stocks is the technical picture. After reaching a high of $206 in early March, MEDX fell to $33.25, a "mere" 84% drop in value during Wednesday's crater-fest. The turnaround has been equally great as MEDX opened at $41 yesterday and has been on a tear ever since. Clearly, the selloff was overdone as shown by the bottomed-out stochastic. The volume of the recovery both yesterday and today has been at least 50% above the ADV of 1.5 mln shares. With barely in excess of 28 mln shares in float, volume really gooses the price moves and makes this reversal trend look really strong. Though MEDX closed strong (up $4 in the last 10 minutes), intraday support can be found in the $61- $62 range, or if the theory that old resistance becomes new support holds water, $65 may also work for the gunslinger types. If you are one, look closely at a 1-minute chart. You can see the price blast off on a volume spike once it hit $65 - a nice print for the technical trader. Apparently others thought so too. Unless it makes a nice steady move from the open (not a gap up), we suggest waiting for a pullback after amateur hour before getting in. One thing we were not able to confirm is an earnings date, but it should be in mid-May following mid-February results last reported. Typically when a rooster takes credit for the sunrise, you don't believe him. But when President Clinton apologized yesterday for tanking the Biotech market along with Tony Blair two weeks ago, the market was all too happy to respond positively by powering up the sector again. No specific news on the company though other than a recent secondary offering that brought in almost $400 mln of fresh capital - enough to sustain it for years according to one analyst BUY CALL APR-65 MZU-DM OI=239 at $10.13 SL= 7.00 BUY CALL APR-70*MZU-DN OI=259 at $ 7.88 SL= 5.50 BUY CALL APR-75 MZU-DO OI=206 at $ 6.13 SL= 4.00 BUY CALL MAY-70 MZU-EN OI=267 at $14.88 SL=10.75 BUY CALL MAY-75 MZU-EO OI= 41 at $13.00 SL= 9.75 SELL PUT APR-60 MZU-PL OI=142 at $ 3.75 SL= 5.75 (See risks of selling puts in play legend) Picked on Apr 06th at $68.00 P/E = N/A Change since picked +0.00 52-week high=$206.00 Analysts Ratings 1-7-1-0-0 52-week low =$ 2.88 Last earnings 02/00 est= N/A actual= N/A Next earnings 05-15 est= N/A versus= N/A Average Daily Volume = 1.5 mln /charts/charts.asp?symbol=MEDX **** NXTL - Nextel Communications $126.56 +0.69 (-21.69 this week) Nextel communications provides digital and analog wireless communications services throughout the United States. Nextel's 4-in-1 business solution integrates guaranteed all-digital cellular service, text/numeric paging capabilities, digital two- way radio and wireless Internet services. Customers can now use the same phone number no matter where they are, whether it's across town, in another country, or around the world. With headquarters in Reston, Virginia, Nextel serves 96 of the top 100 markets in the United States. "Wireless is hot, and investors want wireless" That's a quote from Christopher Larsen, a wireless analyst at Prudential Securities, earlier this week when talking about the U.S wireless market. Until today, looking at the chart of NXTL, one wouldn't think traders are so hot on wireless. Something positive showed up today for one of our latest additions. Buyers. NXTL hit $119.44 and found an increasing interest in their stock. At its worst level in the first thirty minutes of the session, NXTL was down about -$6.34 when the volume picked up, the price reversed course, and NXTL ended the day with a gain of $0.69. Today marked the first time in nine sessions that NXTL actually had any positive sentiment directed its way. For the week Nextel was showing a loss of about 20%, when investors finally woke up and began to take notice. Keep in mind this is a stock that traded at $165.88 on March 10th. Other than overall market sentiment, very little has changed as far as the company and the position in the market place. In the past two days analysts at WR Hambrect and Davenport & Co. have reiterated their Buy rating on NXTL, which did seem to help prop up the price a bit. This past Monday, NXTL announced "Nextel Worldwide" a service providing customers with one phone, one number, world wide. Nextel Worldwide simplifies the idea of global roaming for international travelers. The real emphasis on this play lies in the fact we believe the selling this week in NXTL was overdone, and the bounce today may be the beginning of a nice run back up the chart. As NXTL hit the low today, about 841K shares were traded in a half-hour period, with the price beginning to reverse. We expect the momentum to continue and would look for chances to jump on board. A pull back to the $122 area would also provide a good entry point. The competition is heating up in the wireless world, as Tuesday SBC Communications and BellSouth unveiled their long awaited plans to merge their wireless operations. Some analysts expect NXTL to eventually merge with a larger European operator that uses similar technology. BUY CALL APR-120 FZC-DD OI=104 at $11.38 SL= 8.25 BUY CALL APR-125*FZC-DE OI=134 at $ 8.63 SL= 6.00 BUY CALL MAY-120 FZC-ED OI=632 at $16.63 SL=12.00 BUY CALL MAY-125 FZC-EE OI=219 at $14.13 SL=10.50 BUY CALL MAY-130 FZC-EF OI=260 at $11.75 SL= 8.75 SELL PUT APR-120 FZC-PD OI=309 at $ 4.13 SL= 6.25 (See risks of selling puts in play legend) Picked on Apr 6th at $126.56 PE = N/A Change since picked +0.00 52-week high=$165.88 Analysts Ratings 12-7-3-1-0 52-week low =$ 33.00 Last earnings 02/00 est=-0.99 actual=-0.85 Next earnings 04-26 est=-0.81 versus=-1.31 Average daily volume = 4.36 mln /charts/charts.asp?symbol=NXTL **** NXLK - Nextlink Communications $105.44 +8.50 (-18.56 this week) Nextlink Communications is a competitive local-exchange carrier (CLEC). The company builds fiber-optic rings in cities to provide local and long-distance phone service, e-mail, and other Internet services primarily to small businesses. NXLK provides services in 38 major US markets, including New York, Los Angeles, and Chicago. NXLK is also adding local multipoint distribution service (LMDS) fixed wireless licenses to its portfolio of communications services. The company has agreed to buy Internet access provider Concentric (CNCX). NXLK was founded by cell phone pioneer Craig McCaw, who owns 35% of the company. The telecom services stocks are showing impressive relative strength. In the face of broad market weakness and wild volatility, US telecom stocks continue to plow higher. Stocks like GTE and BEL are hovering near all-time highs despite the meltdown earlier this week. The sector has benefited from a stream of positive analysts comments. Lehman Brothers upgraded BLS Thursday to Buy from Neutral and raised their price target. The upgrade came after BLS announced a joint venture with SBC. The continued consolidation in the telecom sector is seen as a positive by industry analysts and could help to lift NXLK higher. The merger with CNCX is expected to be completed within the next few months and could provide some relief to shares of NXLK as arbitrageurs have held the stock down. The stock is now trading at a very attractive level after the sharp sell-off Tuesday and continued pressure Wednesday. We're looking for NXLK to rebound from the recent decline as the fundamentals remain intact and the telecom sector begins to rebound. Technically, the chart for NXLK doesn't real pretty after its recent decline. However, there is not much resistance preventing the stock from moving higher. The stock has resistance just above at $110, but after that we should see smooth sailing up to $120. NXLK is currently positioned back above its 5-dma with major support at $103. Watch for the stock to bounce off support for entry or wait for NXLK to move above $110 for a more conservative entry. Confirm direction in the telecom sector before entering into the play; using GTE, BEL, and BLS as references. In the news, Phonecalls.com signed an agreement with NXLK yesterday. Under the terms of the agreement, Phonecalls.com will co-locate with NXLK to provide local and long distance enhanced communications services to commercial and residential customers. Also of note, the Board of Directors announced a 2-for-1 stock on February 16th, with a payable date of June 15th. BUY CALL APR-100 QNF-DT OI=673 at $10.38 SL=7.50 BUY CALL APR-105 QNF-DA OI= 92 at $ 7.75 SL=5.25 BUY CALL APR-110*QNF-DB OI=382 at $ 5.25 SL=3.25 BUY CALL MAY-105 QNF-EA OI=134 at $13.50 SL=9.75 SELL PUT APR-100 QNF-PT OI=721 at $ 4.13 SL=6.00 (See risks of selling puts in play legend) Picked on Apr 6th at $105.44 P/E = n/a Change since picked +0.00 52-week high=$132.50 Analysts Ratings 14-2-3-0-0 52-week low =$ 26.00 Last earnings 12/99 est=-1.49 actual=-1.34 Next earnings 05-01 est=-1.56 versus=-1.09 Average Daily Volume = 1.49 mln /charts/charts.asp?symbol=NXLK ************* NEW PUT PLAYS ************* LVLT - Level3 Communications Inc $88.19 -6.81 (-17.56 this week) Level3 Communications is a global telecommunications and information services company that is building an international fiber-optic network based on internet protocol (IP). Their focus is primarily on the business market. Services include local, long distance, and data transmission as well as other enhanced services. Currently they serve 20 cities in the US and Europe. LVLT also has its hands in the coal mining business. This telecom stock is taking a whipping out behind the barn. The widespread market decline has pummeled the share price by 16.6% in a mere four days. Are you thinking, so what? Yes, many telecom and high-flying Internets suffered sharp pullbacks recently, but they're doing what LVLT is not - recovering! It appears as if LVLT doesn't have the dynamism to lift it back up above its previously steadfast support of $100. Take today for example. Banc of America Securities reiterated a Strong Buy recommendation. Instead of a sign of positive recognition, LVLT shed another $6.81 on strong volume. This is especially bearish considering the Nasdaq was in rally mode. Entries into this technical momentum play? Downward bounces off $90 are reasonable while more conservative will wait a definitive move through $85. The next level of historical support is just above the 200-dma ($78.66) at $80 and $83 so watch for opposition at those marks. Pitfalls? Earnings are approaching on April 18th, after the bell. Be careful of investor exuberance as this event approaches. An FYI, even though nothing's transpired in the past, LVLT is a split-candidate above $80. It's always a good idea to do your homework and know as much as you can about the stock you're playing. BUY PUT APR-100 QHN-PT OI= 633 at $15.13 SL=11.00 BUY PUT APR- 95*QHN-PS OI=2058 at $11.75 SL= 8.75 Average Daily Volume = 2.89 mln /charts/charts.asp?symbol=LVLT **** KO - The Coca-Cola Company $45.75 -1.88 (-1.25 this week) The Coca-Cola Company is the largest manufacturer, distributor and marketer of soft drink concentrates and syrups in the world. The company's products include all of the Coca-Cola brand drinks, Minute Maid, Sprite, Barq's root beer, and Powerade among others. It sells more than 160 brands of beverages in some 200 nations. About two-thirds of its sales come from outside the US. The company commands 51% of the global soft-drink market. Coca-cola claims that its products account for a mere 2% of global daily fluid intake -- for now. KO is running out of fizz as the company recently lowered growth estimates. Facing a struggling stock price and questions about its new strategy, late Tuesday Coca-Cola set its long-term target for earnings per share growth at 15%, narrowing its goal from a previous range of 15 to 20%. The long-term growth rates had been in place for the last 10 years as KO enjoyed a time of strong growth. The narrowing of EPS growth came on the heels of a restructuring of the company's operations that will cost KO $800 mln in 2000. Many traders feel that the lowered growth target of 15% is still too high. Pointing out that KO is setting itself up to continue to miss quarterly estimates in the coming year. As a result, the stock will continue to decline due to disappointing earnings. The problems continue to mount for KO in the past year after the contamination scare in Belgium and France, the filing of a racial discrimination lawsuit, and the company's problems with regulators in Europe. As the story gets worse for KO, we can capitalize as the stock continues to decline. After the lowered growth estimates were announced Tuesday night, traders began to sell. And the selling hasn't stopped. The stock found some support today at $45 but continues to look weak. Watch for support at $45 to fail as an indication traders have resumed selling. A move below $45 could see the stock move below its 52- week low of $42.88. If the stock does bounce higher, look for KO to have resistance in the $46 - 47 area, where you might look for an entry. BUY PUT APR-50*KO-PJ OI=3279 at $4.88 SL=3.00 BUY PUT APR-45 KO-PI OI=5479 at $1.44 SL=0.75 Average Daily Volume = 5.13 mln /charts/charts.asp?symbol=KO ********************** PLAY OF THE DAY - CALL ********************** AMAT - Applied Materials $106.69 +2.50 (+10.63) Applied Materials is the world's #1 maker of complex manufacturing equipment used in semiconductor factories. Its machines have a big share in most industry segments, including deposition (layering film on wafers), etching (removing excess material during patterning), and ion implantation (altering electrical characteristics of certain areas of wafer coating). Applied Materials also makes metrology systems and inspection equipment. Their customers include Advanced Micro Devices, Intel, Lucent, and Motorola. Most Recent Write-Up AMAT is in the right business at the right time, and the stock continues to roll higher. As long as people continue to buy cell phones, cars, and computers, AMAT will benefit. Positive news flowed from fellow Semi's Wednesday as Microchip Technologies (MCHP) and Fairchild Semiconductor(FCS) said earnings will top analysts estimates in the coming quarter. AMAT also benefited Wednesday from an upgrade by Adams Harkness. The firm raised AMAT from Market Perform to Accumulate. Wall Street is looking for an incredible quarter from the Semi's as one analyst put it, "Conference calls will be wildly bullish." James Morgan, chairman and CEO of AMAT said Thursday that the backlog of orders for the industry was increasing. Morgan predicted "decades of huge growth" for the semiconductor industry as the use of microchip applications spreads beyond computers. All of the good news has pushed AMAT firmly above $100. After hitting an all-time high of $111.25 Thursday, AMAT pulled back on light profit-taking. The stock continues to use its 5-dma as support in its move higher. Look for the stock to bounce off the 5-day and confirm direction before entering any new positions. AMAT has run into resistance twice at the $110 level, watch for momentum to carry the stock above that level and provide an entry with less risk. Comments With great demand for chips in today's world of cell phones, handhelds, and other personal electronics, AMAT is benefiting. Trading in a $7 range today, AMAT certainly will be moving tomorrow. With strength in the semiconductor sector, momentum is on AMAT's side. A benign employment report tomorrow will give the market reason to go higher so watch for market direction and profit-taking. Target shoot to personal risk levels. BUY CALL APR-100 ANC-DT OI=2931 at $11.13 SL=8.75 BUY CALL APR-105*ANC-DA OI=5468 at $ 8.25 SL=6.00 BUY CALL APR-110 ANC-DB OI=4080 at $ 5.88 SL=4.00 BUY CALL MAY-110 ANC-EB OI= 781 at $11.88 SL=9.25 SELL PUT APR- 90 ANC-PR OI=5554 at $ 1.38 SL=2.50 (See risks of selling puts in play legend) Picked on Apr 4th at $98.13 P/E = 70 Change since picked +8.56 52-week high=$111.25 Analysts Ratings 14-15-2-0-0 52-week low =$ 24.19 Last earnings 01/00 est=0.38 actual=0.40 Next earnings 05-10 est=0.54 versus=0.18 Average Daily Volume = 8.13 mln /charts/charts.asp?symbol=AMAT ************************ COMBOS/SPREADS/STRADDLES ************************ A Day For Reflection.. Wednesday, April 5 Equity markets were mixed today as the Nasdaq posted slim gains while the broader market slid lower. The technology index rose 20 points to 4169 but the Dow industrials lost 130 points to end at 11,033. The S&P 500 index fell 7 points to 1487. Volume on the Nasdaq was 1.8 billion shares with declines leading advances 3-to-1. On the big board, 1.12 billion shares changed hands and losing issues dominated the exchange. In the bond market, the 30-year Treasury fell 6/32, bid at 106 17/32, where it yielded 5.78%. Tuesday's new plays (positions/opening prices/strategy): Proctor & Gamble PG MAY50C/MAY60C $8.50 debit bull-call Kellogg Company K MAY22C/MAY25C $0.00 debit bull-call H.J. Heinz HNZ JUN40C/APR40C $0.00 debit calendar Our new positions were a difficult group during Wednesday's session. Proctor & Gamble was the only issue that provided an easy entry into the suggested spread. The debit for the Kellogg position was slightly higher than our target and we decided to wait for another entry opportunity. We will continue to track the issue for a pullback in the next few days. The disparity in the H.J. Heinz options was gone at the open and there was no favorable position available. Portfolio plays: After another volatile session, the technology group registered modest gains on strength in Semiconductor and Internet issues. Chip stocks were the big winners after a number of analysts made positive comments on the industry. The Biotech sector was also strong with a number of large drug companies enjoying significant rallies. In the broad market, healthcare, defense and railroads were among the strongest industries, and Transport stocks were standout performers as crude oil prices hit a 3-month low early in the session. Some traders insisted that Tuesday's intra-day reversal was evidence the Nasdaq correction is over and bargain hunting investors continued to scour the market for cheap stocks. Some analysts have a more pessimistic view and expect a trading range to develop in the near future. Goldman Sachs strategist Abby Cohen offered some new opinions, saying she continues to be enthusiastic about the outlook for US equities. Fed Chair Alan Greenspan also made comments on the recent activity saying the FOMC must be careful to keep inflation contained and that it should focus on the broader economy as opposed to asset prices. He suggested that monetary policy should not target stock prices and that history will judge if technology earnings forecasts are appropriate. With the recent volatility, no one is really sure what prices should be for any technology issue and some interesting comments came from the chief economist at John Hancock Funds. "The Nasdaq has to be largely a story about emotions and psychology. It's not real stuff. The market is overvalued. But at the same time, we're dealing with a population of investors who are either professionals who can't afford to get out of the market or novices who have never seen it go down. Either way, it lends itself to every downturn being a buying opportunity." In my opinion, that is an absolutely correct analysis of the current market mentality. As long as the economy is performing well, there will be plenty of fund inflows to support the equity markets. Of course there will be technical corrections (hopefully not as significant as we experienced this week), but the overall trend is intact and the outlook should remain bullish for quite some time. The recovery in the leading technology sectors boosted many of our positions in the Spreads Portfolio to profitable territory and we expect the short-term rebound to continue. While there were a number of plays closed early to protect gains or limit losses, a few stocks weathered the storm quite well. Almost all of our credit spread issues remained above their respective short positions (ESIO was the only deserter) and today the majority of stocks in the group moved higher. Nvidia (NVDA) was the session leader with a $16 rally to end at $91 on strength in the chip sector. Sunday's "New Plays" offered two short-term winners in California Amplifier (CAMP) and International Rectifier (IRF), both of which were closed during Tuesday's sell-off for excellent gains. The Debit Spread Section required timely management with E*trade (EGRP) but stocks such as Advanced Micro Devices (AMD), BMC Software (BMCS), Helix (HELX) and Xerox (XRX) withstood the brief correction with ease. Most of the diagonal spreads have been closed for profits or adjusted forward and except for Legato (LGTO), the bullish portfolio has performed as well as could be expected. Each of our calendar spreads have offered favorable returns and Kroger (KR), Philip Morris (MO) and Navistar (NAV) are some of the recent winners. The LEAPS/CC's section is one of the most successful strategies in our portfolio with profitable plays in Bank One (ONE), Computer Associates (CA), Medtronics (MDT), Network Associates (NETA) and Vodaphone (VOD). American Online (AOL) is the only "question mark" in that group and we believe AOL will soon continue its recent rally. The straddles group has been rather docile with regard to the market volatility but each play has attained a positive credit at least once and the newest play, Ubid (UBID) became a winner this week as the stock fell to lows near $18 during Tuesday's wild session. While there is no perfect strategy for the option trader, most investors learn to hedge their risk in as many different ways as possible, thereby minimizing the effects of volatile and adverse markets. Spread trading can also help a trader take advantage of mis-priced options, while at the same time reducing the effects of short-term movements in the underlying issue so that he can safely hold a position to maturity. Looking back over the last few days, that description held true in most of the plays in our portfolio. Lets hope it doesn't happen again in the near future! Thursday, April 6 Stocks rallied today with the technology sector leading the way in a calm and orderly session; a condition that has become the exception rather than the rule. The Dow Industrials gained 80 to end at 11,114. The Nasdaq Composite rose 99 points to 4,269 on strength in biotechnology and networking issues. The S&P 500 Index and the Russell 2000 Index of small-capitalization stocks also advanced. Trading volume was 1 billion shares on the NYSE and 1.73 billion shares on the Nasdaq. Market breadth was very positive with advancers outnumbering decliners 19 to 11 on the Big Board and 28 to 14 on the Nasdaq. In the bond market, most prices slid lower as stability in stocks removed the safe-haven bid from Treasuries. Portfolio plays: Today the Market enjoyed a brief reprieve from the recent bearish outlook as all of the major equity averages moved higher. Our portfolio participated in the bullish activity and most of the plays benefited from the rally. The market leaders rallied in almost every industry and the Spreads Section was dominated by a small group of well-known issues including Advanced Micro Devices (AMD), American Online (AOL), Nvidia (NVDA), Sun Microsystems (SUNW), and Vodaphone (VOD). In the broad market, biotech shares moved higher in a second consecutive day of buying and brokerage, oil service and retail shares gained ground while drug and bank stocks fell lower. In the technology group; networking, Internet and computer software companies enjoyed favorable rallies. The semiconductor sector was somewhat subdued after recent gains even as a report announced that February's worldwide chip sales were up 33% from year-ago levels. The report also indicated a bullish outlook for growth in the industry and that bodes well for many of our long-term positions associated with that group. Even though the Nasdaq has recovered significantly from recent losses, analysts still expect volatile price action over the next few weeks as the index attempts to define a technical bottom. In the intermediate term, the broad market is expected to establish a rectangular trading pattern as opposed to a trending market and those conditions will offer a number of profitable opportunities for option traders. For those of you who favor bullish strategies, the difficulty will be in finding the issues that have greater potential to trend higher rather than remain mired in a range. With persistence, we may even be able to uncover some positions that profit regardless of the market's character. Questions & comments on spreads/combos to Click here to email Ray Cummins ****************************************************************** - NEW PLAYS - ****************************************************************** TLAB - Tellabs $57.94 *** Earnings Warning! *** Tellabs designs, manufactures, markets and services voice, data, video transport and network access systems. Their products are used by public telephone companies, long-distance carriers, alternate service providers, wireless service providers, cable operators, government agencies, utilities and business end users. Tellabs also provides fiber optic systems, digital cross-connect systems, managed digital networks, and network access products. Digital cross-connect systems include the TITAN series and their managed digital networks include the MartisDXX integrated access and transport, statistical multiplexers, packet switches, T1 multiplexers and network management systems. Network access products include digital signal processing products such as echo cancellers and T-coders, special service products such as voice frequency products, and local access products such as the CABLESPAN system. Today shares of Tellabs mover lower after the telecommunications equipment company warned that first-quarter profits would fall below expectations. Tellabs cited lower gross profit margins, largely stemming from higher-than-expected component costs and increased customer service installations, which has a much lower margin than products. The company said it expected to report profits of $0.25-$0.27, almost 20% lower than the consensus estimate. Robert Wilkes, telecommunications analyst with Brown Brothers Harriman, expressed some concern with the lower margin. He noted that Tellabs has enjoyed relatively high gross margins in the past and there was concern that investors would see TLAB's margins fall closer to those of its rivals. ABN AMRO's telecom specialist also lowered his rating on the stock, based on lower future earnings. We simply favor the recent technical resistance near the sold strike at $65. We will try to use any bullish recovery rally to increase the position credit. PLAY (conservative - bearish/credit spread): BUY CALL APR-70 TEQ-DN OI=2180 A=$0.43 SELL CALL APR-65 TEQ-DM OI=5252 B=$0.88 INITIAL NET CREDIT TARGET=$0.50-$0.56 ROI(max)=12% Chart = /charts/charts.asp?symbol=TLAB **** TER - Teradyne $95.50 *** New All-Time High! *** Teradyne manufactures automatic test equipment and software including systems to test semiconductors, circuit boards, telephone lines and networks and software. They also build backplanes and associated connectors used in electronic systems. Teradyne's semiconductor test systems are used by electronic component manufacturers in the design and testing of products that include logic, memory and mixed signal circuits. Their circuit-board test systems are used by electronic equipment manufacturers for the design and testing of circuit boards and other assemblies. Telecommunications test systems are used by telephone operating companies to test and maintain subscriber telephone lines and related equipment. Software test systems are used by a number of industries to test communications networks, computerized telecom systems and server applications. Backplane connection systems are used for the computer, communications and military/aerospace industries. Today Goldman Sachs listed its "super seven" high-technology companies, highlighting issues it prefers in a volatile market. The magic seven included electronic systems maker Teradyne and the stock rallied almost $9 on the news. The bullish issue is now trading at a new record high and the trend is supported by heavy volume. With the favorable outlook in that sector and the move to a new trading range, the issue has very little chance of returning to the $75 range. Once again, we will try to use the daily movement of this volatile stock to increase the credit in the position. PLAY (conservative - bullish/credit spread): BUY PUT APR-70 TER-PN OI=560 A=$0.68 SELL PUT APR-75 TER-PO OI=2071 B=$1.06 INITIAL NET CREDIT TARGET=$0.50-$0.56 ROI(max)=12% Chart = /charts/charts.asp?symbol=TER **** ABT - Abbott Labs $37.82 *** Cheap Speculation! *** Abbott Laboratories is engaged in the discovery, development, manufacture and sale of healthcare products and services. Its products are generally sold directly to retailers, wholesalers, hospitals, healthcare facilities, laboratories, physicians' offices and government agencies throughout the world. Abbott has five reporting revenue segments: Pharmaceutical Products, Diagnostic Products, Hospital Products, Ross Products and International. Abbott also has a 50% owned joint venture, TAP Holdings Incorporated. The drug sector has performed favorably through the recent Market volatility and options in Abbott Labs have been active ahead of their upcoming earnings announcement. The company is expected to report first quarter earnings on April 11 and the consensus is a revised $0.44 per share. Apparently there are some investors who think the earnings may be favorable as the issue has moved up significantly in the last week. We noticed a premium disparity in the front-month options and this position offers low-risk speculation for those who agree with a short-term bullish outlook for the issue. PLAY (speculative - bullish/calendar spread): BUY CALL MAY-40 ABT-EH OI=6382 A=$1.56 SELL CALL APR-40 ABT-DH OI=618 B=$0.43 INITIAL NET DEBIT TARGET=$0.93 TARGET ROI=20% Chart = /charts/charts.asp?symbol=ABT ************************Advertisement************************* Tired of waiting on trades to execute? 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