The Option Investor Newsletter Sunday 4-23-2000 1 of 5 Copyright 2000, All rights reserved. Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com Entire newsletter best viewed in COURIER 10 font for alignment ****************************************************************** MARKET STATS FOR LAST WEEK AND PRIOR WEEKS ****************************************************************** WE 4-20 WE 4-14 WE 4-7 WE 3-31 DOW 10844.05 +538.28 10305.77 - 805.71 11111.48 +189.56 -190.80 Nasdaq 3643.88 +322.59 3321.29 -1125.16 4446.45 -126.44 -390.04 S&P-100 777.12 + 45.18 731.94 - 89.58 821.52 + 6.46 - 17.59 S&P-500 1434.54 + 77.23 1357.31 - 159.04 1516.35 + 17.77 - 28.88 RUT 481.84 + 28.12 453.72 - 89.27 542.99 + 3.90 - 34.93 TRAN 2833.25 +106.21 2727.04 - 100.68 2827.72 + 64.48 + 75.09 VIX 28.41 - 10.92 39.33 + 12.39 26.94 - .27 + 1.40 Put/Call .75 .94 .37 .48 ****************************************************************** What a difference a week makes! Friday of last week was a lesson in terror for many new traders as market makers stepped aside and ignored sell offers for many Nasdaq stocks causing the biggest point drop in Nasdaq history. The last day of this week was a sleeper. (yawn!) The Dow charged off at the open and got stronger as the day progressed. After dipping to a low of 10635 on both Tuesday and Wednesday the Thursday close of 10840 was confirmation of a renewed rally in the Dow. The drop last Friday back to 10200 seems a distant memory as money continued to flow into the old economy stocks. The tech contingent on the Dow was no help with MSFT flat in front of earnings and Intel wiping out the HWP gain of +3.69 with an identical loss. Volume was a weak 894 mln shares. The Nasdaq finished the week with a whimper but on increasing strength. The Volume was VERY light with only 1.3bln shares trading compared to well over 2 bln on a "normal" day. Still the profit taking on Wednesday was orderly and minimal with the index giving back only -87 points of the almost +500 points gained on Monday and Tuesday. Thursday the Nasdaq started out higher but quickly sold off to 3600 or -109 but then trended higher the rest of the day. Twice it tried to go back to 3600 again but failed each time with a higher low. The high just before the close was only -39 and I was encouraged even though it closed negative. The fuel for the rally continues to be earnings. The results coming in are truly amazing. 75% of the companies reported have beaten estimates. 56% of the S&P-500 companies have reported and earnings are up +21.4% over last year. Not only are earnings beating last year but are also beating estimates for this year by +6.3%. This is over twice the average from last year of only +2.8%. There have been substantially fewer pre-warnings and only a few companies have announced less than expected. This is a cruel good news bad news joke. The much stronger than anticipated earnings only mean that the economy is much stronger and with the Fed waiting in the wings with a May-16th meeting date the worry of a stronger than expected rate increase is growing. Microsoft announced earnings after the bell today and it is probably a good thing we have three days before the markets get to trade on the news. They beat the estimates of $.41 with $.43 per share but the revenue numbers were lower than even the reduced estimates from the Goldman Sachs from last week. Official estimates were $5.9 bln and the GS estimate was $5.75 bln. Actual revenue was only $5.66 bln but net profits were $2.39 bln. With margins running 42% even after increased legal expenses and higher employee costs it is still an incredible profit machine. Microsoft agreed PC demand was slow this quarter but indicated it had been getting stronger in recent weeks. Still, more bad news Microsoft guided analysts to only single digit growth for next quarter. The biotech sector was a strong contributor to the Nasdaq weakness today. With several promising drugs removed from the market this week and a conference call warning from AFFX, investors decided to take profits and move into other sectors. Some of the losers included MLNM -3, PEB -4.13, ENMD -6, HGSI -6.13, PDLI -6.44, DNA -6.88, INCY -9, AFFX -11, ABGX -12.25. Money flow into equity funds amounted to $6 bln for the week ending on Wednesday with 60% going into growth funds as reported by AMG Data. Index funds lost money for the seventh week out of the last nine. CNBC reported that a total of $16 bln flowed into all funds which included bond funds and international funds. The wall of worry is building and should provide a strong hurdle to a market rebound. The unemployment claims for the week announced on Thursday morning showed only 257,000 new claims for benefits. This was the lowest number since Dec-1st, 1973 and down -9,000 from the prior week. This again is not good news for the Fed. This news along with the stronger than expected CPI report last week will be combined with the Employment Cost Report and GDP numbers next week to determine rate policy for May. Worst case we could see a pre-meeting increase next week if either report is overly strong. I think the pre-meeting hike concept is gaining momentum. Greenspan does not want to tank the market with a stronger then expected +.50% hike at the May meeting but he may feel he can get away with a +.25% hike next week and then another +.25% at the May meeting. The market would react less with the two hike scenario than a single aggressive hike. While I was somewhat encouraged by the move off the lows by the Nasdaq on Thursday, it was still a down day only made better by the big Dow gains pulling it up. I struggled with my charting program trying to find a view that would make it look more positive (the optimist in me) but I could not make the outcome different. On the positive side of the ledger is the end of tax selling. Investors who needed to sell to raise tax money should have already sold and settled by now. The margin calls caused by the April tax selling are now over. Most investors are probably licking their wounds and not too anxious to rush back into battle just yet. On the negative side there is a slowing of money into retirement accounts and fund money still on the sidelines is waiting on the next retest before committing funds. The Nasdaq has resistance at 3900-4000 which will take a strong commitment by investors to penetrate. The Dow is entering a broad zone of resistance as well. We have negative economic events in our immediate future and the earnings currently powering the rally are now half over and many investors will be moving to the sidelines until the market stabilizes. This is not a pretty picture. On the other hand the Nasdaq is still terribly oversold and could benefit from traders who left for the holiday moving back into the market the first of next week. Unless somebody of importance goes on CNBC and says BOTTOM real loud we are doomed to suffer the "we have to retest eventually" mantra from every technical analyst that can find a microphone. This may be the equivalent of a self-fulfilling prophecy. This is only going to add to the wall of worry that the markets will have to climb. If John Q. Investor decides to buck the analyst and buy some of the recent high flyers while they are cheap then the Nasdaq could slowly build support and once a new trend is seen the institutional money may be forced to start chasing stocks as well which would create the beginnings of a nice rally. I think the key here is valuations, or more correctly pricing. Look at the prices of the recent high flyers. Many have dropped from +$200 ranges to sub $50 levels. To the retail investor this represents major bargains on high priced stocks. It makes no difference to most that the PE dropped from 400 to only 200 or that most of these stocks have no PE at all. They are $200 stocks on sale for less than $50 and now that taxes are over the urge to shop will begin. For the cigarette smoker it is the equivalent of $2.50 a pack smokes now selling for $.50 simply because fewer people bought last month. After paying $2.50 the $.50 is a bargain. One out of three smokers will still die from them but at least they can get their thrills cheaper temporarily. For non-smokers insert your own analogy here, 60 watt light bulbs, Duracell-D batteries, cans of beer or Charmin bathroom tissue. Would your buy more next week at $.10 per item? I can hear you now, "but these things have real value!" Yes, but how much is a D battery or a roll of toilet paper going to be worth a year from now? The retail investor will convince himself that his undervalued, tech stock bargain will regain its former glory and split several times allowing them to buy truckloads of beer, batteries or light bulbs two or three years from now because they were smart enough to buy the dip. Is that not what it is all about? Perception? If it appears to be a bargain to enough people then they will buy and the price will go up prompting others to buy and the greater fool theory will reign supreme again. Remember, most current investors have never seen a dip that did not bounce. There is no such thing as a bear market and only those who turned their accounts into black holes of debt over the last few weeks are now believers. Those that only lost a couple months profits are clicking on charts every night as they pursue the new national pastime of point and click wealth. Try explaining to the reader who turned a $25 million account into a $2 million account last week with margin calls that he could not meet that there is no bear market. I doubt he will listen long. Still he is shopping again this weekend and that is my point. As long as the "Internet investor" has money he will be addicted to the game and the game will go on. The most immediate challenge will be on Thursday. The Employment Cost Index and the GDP numbers will be announced. Two very big economic factors to watch. More importantly Greenspan will have a major speech on Thursday also. What is key here is Greenspeak. Since everyone expects a +.25% rate hike at the May meeting, if Greenspan intends to hike more aggressively, he will have to tell the market in advance that is his plan. The Fed never raises rates without telegraphing those increases well in advance so the market does not over react. Especially with the market so fragile at this point Greenspan will have to make his plans known to avoid disaster in an election year. Of course he will not say "I am going to raise rates +.50% at the May meeting." That would only accomplish the same disaster three weeks earlier. He will form his words as only Greenspan can, in as vague but precise a context, that it will take several days for you to decide what you heard. By the time all the analysts spread their version of the event, days have passed and the pain is not as noticeable. If the Fed raises rates +.50% and the market heads for 9000 again then they cannot raise rates again at the next meeting. If they over react and tighten too much then the economy can crash just as fast as the market. Since rate increases take 6-9 months to show up in the economy, the impact of the last six increases has yet to be felt. They do not want to be faced with having to cut rates by summer because they over reacted and now they have to fix it quick. I think Greenspan would have to believe he has lost control before raising more than +.25% and the market would react badly to an out of control Fed. In reality the Fed is our safety net and we know that they will keep the economic engine running at maximum safe speed much longer than if we were in control of the throttle. The greed factor in all of us would have us hitting the wall at full speed and the paramedics would be picking up pieces and trying to patch together the economy for years to come. The week ahead could be really rocky but what else is new? The Microsoft revenue shortfall is going to impact both the Nasdaq and the Dow at the open on Monday. MSFT traded down almost -$5 in after hours on Thursday and without any new news over the weekend Monday morning will be the same. Looks like another good week to watch from the sidelines unless you are very skill full at jumping out quickly. Should we get the proverbial retest of the Nasdaq lows of 3200 again, be VERY CAREFUL about buying that dip. I would really want to see a strong bounce to convince me it was not just a head fake. Remember, Ralph Acompora, (Acomporaspan) said we could see 2900 again. Now that would be really painful but a killer buying opportunity for those with money left. A suggestion for the wise....have money! Historically the next real rally is not until June so plan on being a trader not a holder on any bounce. A good way to play the bounce without having to be right about picking specific stocks on the spur of the moment is the QQQ. When these crashes occur they typically have climatic dips and then charge off again. You can't be sure that the stock you chose beforehand is going to be one of the bouncers. By playing the bottom with the QQQ you get the benefit of the entire Nasdaq 100 movement. You can catch the immediate bounce and then decide over the next several days which individual stocks you want to move into. The QQQ has only been under 80 once since December and that was last Friday. If we have another market event and it dips under $80 again, it probably will not go much farther. I would look to buy any bounce under $80 and either buy the stock or the options. If you buy the options I would buy the May calls as deep ITM as you can, $10-$12, to remove as much time premium and maximize the bounce. A bounce would likely be back into the $87 range and you should be able to capture $5 of the $7 move. Normally late April and May are very choppy months and require a much higher skill level for successful investors. Many experienced investors simply sit out until the first of June and save their capital for the next earnings run. There will still be bargains and trading rallies but finding a trend that is tradeable for more than a couple days could be a problem. The wild card is the recent crash and the "normal cycle" could have been impacted by the premature drop. Trade smart, wait for the bounce, don't buy too soon. Jim Brown Editor Disclosure: My current long positions: VIGN, NTAP, BRCM, SCMR, ARBA, TIBX *************************** Ballads from the Newly Poor *************************** YESTERDAY Music and Lyric by THE BEATENS Yesterday ... Alan Greenspan seemed so far away Now the margin calls are here to stay Oh I believe in Yesterday Suddenly ... I've got half the stocks I used to have I lay bloodied in the aftermath Oh I believe in Yesterday Why they took the fall, I don't know, I couldn't say I bought something wrong Now I long for Yesterday Yesterday, All my riches seemed not far away Now I'm glad to have a place to stay Oh I believe in Yesterday ********* The Day the Nasdaq Died (tune of American Pie) A long, long week ago I can still remember how the market used to make me smile What I'd do when I had the chance Is get myself a cash advance And add another tech stock to the pile. But Alan Greenspan made me shiver With every speech that he delivered Bad news on the rate front Still I'd take one more punt I can't remember if I cried When I heard about the CPI I lost my fortune and my pride The day the NASDAQ died So bye-bye to my piece of the pie Now I'm gettin' calls for margin 'Cause my cash account's dry It's just two weeks from a new all-time high And now we're right back where we were in July We're right back where we were in July Did you buy stocks you never heard of? QCOM at 150 or above? 'Cos George Gilder told you so Now do you believe in Home Depot? Can Wal-Mart save your portfolio? And can you teach me what's a P/E ratio? Well, I know that you were leveraged too So you can't just take a long-term view Your broker shut you down No more margin could be found I never worried on the whole way up Buying dot coms from the back of a pickup truck But Friday I ran out of luck It was the day the NAAAASDAQ died From: Andy Serwer at Fortune Magazine *********** JIM'S PLAYS *********** What a week! I did ok and I was only in the market two of the four days. Maybe that is a lesson we can all learn from. I preach it but I do not follow my own advice. When that opening bell rings it is like a siren call and the "market" becomes your only thought. I am sure the productivity in the U.S. would be much higher if 44 million of us did not, in one form or another, follow the market from bell to bell. Two of my plays this week had all the earmarks of the Etrade commercial on TV where the guy is up, down, up, down and he finally jumps out his window. I went from buyers remorse to sellers remorse and then failure to sell remorse several times. VIGN - Covered Call This play could not have worked better, in retrospect. During the play I had some serious doubts as it occured. After buying the stock for $42.13 at the close the previous Friday I saw it plunge to a low of $38 on Monday and was reconsidering having to sell calls for several months to recover the $4 loss on 9000 shares! Fortunately the fundamentals were sound and it rebounded quickly and soared the next day. After pausing briefly around 11:AM on Tuesday I wrote the ATM $53 call (the strike was left over from the recent split) thinking the rebound from $38 to $53 was sure to profit take soon. Instead it continued to rocket to $65 the next day before earnings. Serious sellers remorse set in as I watched it rocket $12 over the strike I sold. $12x9000=lots of money! I contented myself with the $11 profit between what I paid and the strike I sold and the $3.13 premium I received for writing the call. $14.13, not bad for a $40 stock and four days! VIGN announced earnings on Wednesday and beat estimates of $.01 with $.02 on a +505% increase in revenue. CSFB upgraded to a strong buy, $90 target, Dain Rauscher reiterated strong buy, $100, Bank America, Advest, ING Barrings all reiterated a strong buy on Thursday. The stock dropped -$7.81. Do you see what I mean about never holding over earnings????? By a miracle of fate the stock dropped to -$.88 under strike price I sold and the options expired worthless. Darn! I guess I will have to wait a week or two and see if it will hit $60 again and write May calls. Please excuse the sarcasm but I could not believe my luck. I could easily make another $10 on this play before I get called out. NTAP - April $80 naked put & Apr $57 covered call I know this sounds really fishy but it is too incredible to make up. I had previously sold the APR-$80 naked put on the Friday dip. When NTAP dipped again on Monday I bought some stock with the idea of writing a short APR covered call as well. I thought NTAP at $47 was a bargain. When it rebounded on Tuesday and appeared to roll over I sold the $57 call, left over from a split, for $3.25. When the end of day spike occured and the opening spike the next day I was again rethinking my covered call plans. After trading for most of two days around $63 NTAP pulled back Thursday afternoon to just under $57 and my calls expired worthless allowing me to keep the stock. What a deal! With any Nasdaq rally NTAP should rebound again and I will write a higher strike May call. I closed the naked put on Tuesday for a small profit of only about $3 when it appeared to be rolling over. If the Nasdaq rolls over early in the week I will sell the stock and look to get back in cheaper. EBAY - APR-$180 Naked Put I had sold the APR-$180 naked put on the Friday dip for $37.63 expecting a strong rebound after EBAY closed positive on crash Friday. It bounded out of the gate on Monday, sank back again with the Nasdaq and then roared off again. I closed it too soon on Tuesday for a profit of about $15 at $22.50. CMVT - April $100 Naked Put I covered the APR-$100 naked put I had sold on the Friday dip on Tuesday for $17.50. It did not pop as much as I had expected but the concept is the same. PMCS - April $180 Naked Put PMCS held $118 all day during the Friday crash and it is one of the Super Seven Tech stocks from last week. It rebounded right on schedule on Monday and I closed it on Tuesday for $25. QQQ - calls. The lottery ticket play on the QQQ calls was a total loss. I had purchased the APR-$100 for $1.13 and they never even came close again. To make matters worse I tried to open a spread position against my worthless calls at $92 and again at $87 and both times the QQQ changed direction immediately and I closed for another $1.00 each time. In reality my lottery ticket play for $1.13 actually cost me about $3.50 after I attempted to repair it. Again, I should have just closed the play and forgot it when it turned against me. ******* New plays: When the Nasdaq started recovering around midday on Thursday I took a chance and sold naked puts on BRCM, SCMR, ARBA, TIBX. The drop at the close put them all in a small loss position and the MSFT drop at the open on Monday is likely to complicate the problem. I set my stop loss at $5 to $10 above my sell price depending on the premium received. Normally I try to get a $40 premium or larger. Because I was speculating on a Nasdaq bounce at the close today I only sold 10 of each. The bounce did not happen and these will probably all stop out. I am not going to go into detail on each one since the theory is the same. BRCM $152.44 - May-$220 Naked Put @ $72.50 ARBA $69 - May-$120 Naked Put @ $54.00 TIBX $67.88 - May-$120 Naked Put @ $54.88 SCMR $64.56 - May-$120 Naked Put @ $51.50 If I do get stopped out I plan on staying in cash until after the Thursday reports and speech. If the plays are still alive I will close them not later than Wednesday to avoid the possible Thursday drop. I am going to watch VIGN and NTAP and depending on the market conditions either sell the stock to avoid giving back any of the profit already made or if market conditions permit I will write May calls when reasonable. If possible I do want to let them run a little bit before choosing a strike. Good Luck Jim ********** STOCK NEWS ********** Room to Grow By S.P. Brown Though getting long-in-the-tooth, the current economic expansion just keeps going and going. For proof, look no further than the current spat of quarterly earnings. According to the Wall Street Journal, this earnings season will be one of the strongest in years. Of the 16 Dow Jones Industrial Average (INDU) components that have reported, only one has failed to beat expectations, the exception being Philip Morris (MO). More impressively, though, 72 percent of the S&P 500 Index (SPX) companies that have reported earnings have exceeded analysts' expectations, compared with an average of 56 percent over the past six years. In fact, First Call estimates that first-quarter profits will rise nearly 23 percent, exceeding last quarter's growth of 21.4 percent. Strong earnings growth hasn't been confined to the tech sector, either. The Wall Street Journal went on to report that the all 10 major sectors of the Dow Jones US Total Market group have reported stronger earnings. Some of the notable earnings performers include basic- materials, which is up 223 percent this quarter compared to the first quarter of 1999; energy, which is up 51 percent; utilities, which is up 27 percent; and financials, which is up 17 percent. As for technology, its earnings have increased 67 percent. Moreover, earnings growth has actually accelerated over the course of the last four quarters, confounding economists and forcing forecasters to revise their projections upward. It's unusual for earnings to remain so robust so far into an expansion. Typically, earnings get their biggest kick immediately following a recession due to businesses increasing production without adding new capacity or labor. Then, later on in the business cycle, earnings slow as the economy matures. The primary reason this economy has been able to buck the trend for so long is technology, which has caused productivity and profit margins to rise and input costs to fall. Some economists thought productivity gains of the past few years were beginning to taper off. But according to Lehman Brothers (LEH) economist Ethan Harris, productivity should grow 4.1 percent for the first quarter on a year-over-year basis, an increase from 3.6 percent at the end of the fourth quarter. This just goes to show, the current 110-month expansion continues to re-write economic theory. *************** ASK THE ANALYST *************** So, now where to? By: Eric Utley There are two sure things in this world, death and taxes. You might want to add a third item to that list, and that is volatility. Last Wednesday, the NASDAQ lost around 3%, and traders called it a slow day! It's become commonplace for the NASDAQ to be up or down by more than 100 points in a day. While the volatility might not be helping your blood pressure, it certainly provides trading opportunities. The agile trader can navigate through these tumultuous times, and find opportunities everywhere. Like Ryan talked about two weeks ago, on Terrible Tuesday he had one of his best days in the market. The bottom-line, volatility is here to stay, but plenty of profits can be taken by establishing a trading plan, and trading with discipline. People are used to making money in this market, it has been very easy for the last several years to do very well. As a result, investor expectations are extremely high. This only adds to what is becoming an uncertain market. Every day CNBC has their guest pundits make predictions about where the market is going. At the end of the day, the reporters sum all the guesses, and make a hypothesis about what the market will do in the next few days. You may have noticed that in the past two weeks, they have been dead wrong almost every day. The market is unsure about its future direction right now. We could be in a consolidation period right now that might last for six more months. But a few things are interesting to me right now, namely earnings. Of the companies in the S&P 500 that have reported thus far, 70% have beat earnings estimates. That is amazing! Also, supply is beginning to dry up in the market. Only a tiny fraction of IPOs actually came public last week. And secondary offerings have all but dried up. Only time will tell where we go from here, but be on your toes, as volatility remains the name of the game. We have decided to bring the Ask the Analyst column to you twice a week now. So every Wednesday and Sunday, I will analyze a group of stocks that you, the reader, sends in. Ryan and I have been talking about the recent volatility, and decided it would be a good idea to delve into technical analysis and chart patterns for our readers on a more frequent basis. So please fell free to send in any stocks you would like analyzed. Send those requests to asktheanalyst@OptionInvestor.com. Please put the symbol in the subject line of the e-mail. ---------------------------- Alltel - AT Will you please give me your opinion on Xerox and Alltel. Do you see improvement within short time, if not I'll take my losses and try elsewhere! Thanks, Bob We're quite familiar with AT here at OI. In fact, about a month ago we played AT as a put. Problems for the company began to mount late January when investors began to question the viability of the Information Services Division of AT. However, investors love the prospects for the Communications Division of AT, as seen by the gap up on the chart in early March when Morgan Stanley upgraded the stock to a strong buy, calling the stock an inexpensive way to play wireless. The stock has since filled its gap, and has been consolidating as seen on the chart. This is a classic chart pattern where the stock has become "coiled" and is ready to "spring". The wedge, as it is commonly referred to, has developed with decreasing volume, and the most likely move from here, is up, considering AT's short-term trend. ---------------------------- LM Ericsson Telephone - ERICY I know you've played and dropped ERICY twice in the last month but it appears close to forming a "Head and Shoulders" pattern. Along with a 4:1 split it appears ready to rumble. Your thoughts? Thanks, Kevin You're right Kevin, ERICY is an old favorite here. Throughout February and March, ERICY formed a top head-and-shoulders, a bearish formation to say the least. You can see what happened when the stock broke the right shoulder line at $90, it has been downhill ever since. The stock has support at $70, the level where the stock broke out of congestion in late January. But, that support might not hold if ERICY can't break from its recent downward trend. The European telecom stocks are coming back to life, and wireless heavyweight QCOM beat earnings estimates last week so the outlook for ERICY is improving. The company is scheduled to split 4:1 with a payable date of May 5th. A 4:1 split may seem a little odd considering the current level the stock is trading at. But the split is intended to align the ADR shares with the stock traded in Sweden for accounting reasons. Anyway, the split could be the catalyst that breaks the recent downtrend. One thing that concerns me though, is the volume. It appears that more traders are selling on down days, than are buying on up days. ---------------------------- DISCLAIMER: This column is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The Ask the Analyst picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable, but is not guaranteed as to its accuracy. ************** MARKET POSTURE ************** As of Market Close - Thursday, April 20, 2000 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 11,000 11,400 10,844 BEARISH 4.14 SPX S&P 500 1,500 1,550 1,434 BEARISH 4.14 OEX S&P 100 800 850 777 BEARISH 4.13 RUT Russell 2000 550 600 482 BEARISH 4.14 NDX NASD 100 4,000 4,500 3,505 BEARISH 4.13 MSH High Tech 1,000 1,150 921 BEARISH 4.13 XCI Hardware 1,600 1,700 1,460 BEARISH 4.13 CWX Software 1,500 1,670 1,197 BEARISH 4.04 SOX Semiconductor 1,200 1,300 1,024 BEARISH 4.13 NWX Networking 1,070 1,190 949 BEARISH 4.04 INX Internet 800 940 575 BEARISH 4.04 BIX Banking 530 620 555 Neutral 3.16 XBD Brokerage 500 580 458 BEARISH 4.14 IUX Insurance 540 620 575 Neutral 3.16 RLX Retail 900 1,000 939 Neutral 4.13 DRG Drug 355 380 377 Neutral 3.30 HCX Healthcare 710 760 755 Neutral 3.30 XAL Airline 130 155 146 Neutral 3.10 OIX Oil & Gas 265 300 283 Neutral 3.16 Posture Alert The battle between the "old economy" stocks versus the "new economy" continues, with the blue chippers closing out the week with a victory. Volume was light, as most traders took an early start to try and find the Easter Bunny. Sectors making moves Thursday include Insurance (+3.62%), Internet (-3.15%), Software (-2.92%) and the NASDAQ 100 (-2.17%). There are no current changes in posture. **************** MARKET SENTIMENT **************** Sunday, April 23, 2000 Nokia, Amazon, Ebay, JDS Uniphase and More! Once again, this last week felt more like a soap opera on a roller coaster than it did investing, as sentiment swayed from old economy back to new economy and then back again. The NASDAQ broke record point gainers back-to-back to start off the week, but then dissipated later to end things off. Many of the bellwethers reported solid earnings, yet the buy-the-rumor, sell-the-news mentality was in full effect. The selling pressure was apparent, as many mutual funds and money managers were using the earnings excitement to lighten up positions and raise cash. Now whether these moves are in anticipation of mutual fund redemptions in the future, or wanting to be on the sidelines to pick up bargain basement prices in the coming weeks remains to be seen. Regardless, we think this trend may continue. This week ahead will be another busy one for earnings, with many high- tech leaders reporting. And with sentiment being so low, it will be interesting to see if the sell-the-news mentality continues. We stated before in previous letters that once earnings are over, what does this market have to look forward to? The summer slowdown for technology is around the corner, and in two weeks all eyes will be on inflation and the risk of higher interest rates. The media will definitely turn bearish again, which will only help keep traders on the sidelines, which in turn will nullify trading volume, which in turn will keep many investors to wait things out. Combine this with the Microsoft storm cloud (not only a bearish earnings report but also the court case), and the near term prospects look bleak. Regardless, longer term out, these next several weeks will probably look like great entry points in hindsight, but until then, it would be most prudent to ride things out until stabilization occurs. Below is a small list of equities (that should be reporting their earnings this next week) and our Pinnacle Index for those particular stocks. The Pinnacle Index is a proprietary product that determines current market sentiment and expectations for underlying equities and indexes, which is based upon speculation in the option markets. Also included are their expected earnings, the infamous whisper number (if available), their estimated earnings release date, as well as the put/call ratio for that security if available. What we look for are liquid stocks/options that garner a lot of interest from the investment community. Most of the issues are high tech, and are thus more aggressive. We then filter out many of the equities, only to show stocks with excessive optimism or pessimism. From a contrarian standpoint (a high number is a good indication of extreme optimism, and a low number is a good indication of extreme pessimism) you should buy when its low, and sell when its high. Last quarter, we highlighted some stocks with a Pinnacle Index that were stratospheric (as high as the upper 20's). Needless to say, these stocks had so much pent-up enthusiasm, that after their earnings, they tanked. It is the old adage, buy the rumor - sell the news. There were also numerous companies with a Pinnacle Index less than one. However, once these companies came out with their bad quarter, the stocks rallied due to the oversupply of pessimism. If your favorite stock is not listed, the most common reasons are: 1) there are no options traded on the underlying equity 2) lack of interest by option speculators in the security 3) lack of quality information 4) company already pre-released 5) insufficient data. Also, as we get closer to the heart of earnings season, the list will expand dramatically to reflect companies whose earnings are due out shortly. Company* Symbol Pinnacle Expected Whisper#: Put/Call Index(PI): Earnings: Ratio: April 24th Akamai Tech AKAM n/a -.48 -.47 n/a CDW Computer CDWC n/a .63 .64 n/a Corning GLW 2.62 .51 .52 .51 Gadzoox Networks ZOOX 1.02 -.18 -.17 n/a Priceline PCLN 2.31 -.06 -.04 .54 Merck MRK 3.02 .62 .63 .72 April 25th Ebay EBAY 0.67 .03 .05 .55 BMC Software BMCS 1.62 .46 .48 .43 Xerox XRX 2.01 .26 .27 .44 Checkfree CKFR 1.27 -.11 -.10 .60 JDS Uniphase JDSU 0.68 .10 .11 .74 LSI Logic LSI 1.12 .25 .29 .57 LookSmart LOOK n/a -.27 -.22 n/a Minnesota Mining MMM 2.37 1.08 1.10 .45 Nextlink NXLK 1.02 -1.53 -1.51 1.83 Nortel Networks NT 0.82 .19 .22 .57 Peoplesoft PSFT 2.08 .02 .04 .47 April 26th Amazon.com AMZN 0.87 -.35 -.33 .62 Earthlink ELNK 0.95 -.42 -.41 .39 Global Crossing GBLX 1.32 -.40 -.36 .53 Infospace INSP 3.48 -.06 -.02 .49 Nextel Comm. NXTL 1.41 -.84 -.83 1.14 April 27th Electronic Data EDS 1.04 .47 .48 .53 GTE GTE 6.40 .83 .84 .30 Worldcom WCOM 1.75 .43 .43 .59 Network Solutions NSOL 2.50 .15 .18 .82 Nokia NOK 0.92 .15 .16 .82 April 28th Ericsson ERICY 1.11 .17 .19 .82 Now with these recent gyrations in the market, as well as many technology shares getting cut in half, the Pinnacle Index is unusually low across the board. These low sentiment indicators are more of a byproduct from the recent sell-off in the market, than specific negative sentiment towards an individual equity. Because of this, many of the numbers may be skewed more bearish than in previous quarters. Regardless, low sentiment issues that look interesting this week include Ebay, JDS Uniphase, Ericsson, Nortel Networks, Nokia, and Amazon. If these companies can meet/beat the whisper number, and have a positive conference call regarding future quarters, these issues may be in for a rally. And with Microsoft's earnings disappointment, these issues may get even cheaper before they report earnings. Have a good trading week! 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. Interest Rates (5.825): The current yield is in bullish territory. Volatility Index (28.31) 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. Mixed Signs: None BEARISH Signs: Liquidity Crunch: With the fear of inflation, and the most likely scenario of several more rate hikes, liquidity in the marketplace will become a more significant issue and put more pressure on equities. 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. 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 sell-off 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 Thurs Tues Thurs Benchmark (4/20) (4/25) (4/27) ****************************************************************** Overhead Resistance (805-830) 1.65 Overhead Resistance (775-800) 1.70 OEX Close 777.12 Underlying Support (745-770) 1.60 Underlying Support (715-740) 5.53 What the Pinnacle Index is telling us: Based on Thursday, both overhead and underlying levels are light, indicating we can go in either direction with relative ease. In the most likely scenario, we will be in a trading range with the bears winning the short-term battle. Put/Call Ratio ******************************************************************** Thurs Tues Thurs Strike/Contracts (4/20) (4/25) (4/27) ******************************************************************** CBOE Total P/C Ratio .75 CBOE Equity P/C Ratio .68 OEX P/C Ratio 1.42 Peak Open Interest (OEX) ******************************************************************** Thurs Tues Thurs Strike/Contracts (4/20) (4/25) (4/27) ******************************************************************** Puts 680 / 4,808 Calls 800 / 5,512 Put/Call Ratio 0.87 Market Volatility Index (VIX) ******************************************************************** 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 14, 2000 Bottom? 39.33 April 20, 2000 28.31 ************************Advertisement************************* Tired of waiting on trades to execute? 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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. 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The Option Investor Newsletter 4-23-2000 Sunday 2 of 5 ************* COMING EVENTS ************* For the week of April 24, 2000 Monday None Scheduled Tuesday Existing Home Sales Mar Forecast: 4.75M Previous: 4.75M Consumer Confidence Apr Forecast: 135.0 Previous: 136.7 Wednesday Durable Orders Mar Forecast: 2.0% Previous: -2.7% Thursday Employment Cost Index Q1 Forecast: 0.9% Previous: 1.1% GDP Q1 Forecast: 6.0% Previous: 7.3% GDP Chain Deflator Q1 Forecast: 2.3% Previous: 1.9% Initial Claims 04/22 Forecast: 260K Previous: 257K Help Wanted Index Mar Forecast: N/A Previous: 88 Friday None Scheduled Week of May 1st 05/01 Auto Sales 05/01 Truck Sales 05/01 NAPM Index 05/01 Construction Spending 05/02 New Home Sales 05/02 Leading Indicators 05/03 NAPM Services 05/03 Factory Orders 05/03 Fed Beige Book 05/04 Productivity 05/04 Initial Claims ************* WOMAN'S WORLD ************* Liquidity Issues That Impact The Market By: Mary Redmond We all know that institutional buying and selling has a huge impact on the market. When you look at the volume of some of the stocks which have made big gains this week, you can see that there are huge blocks of stock being bought and sold. We are fortunate to have recovered at least in part from the selloff in April, and some of this is possibly due to cash flows to funds and spending by funds which has not yet showed any signs of abating for any more than one or two weeks at a time. Flows to U.S. equity funds have been strong and consistent for over nine years. Here are the flows as reported by trimtabs: % gain in S&P 500 1991: 36,357 billion 24.7 1992: 72,128 billion 4.6 1993: 91,073 billion 7.0 1994: 75,401 billion -1.1 1995: 116,529 billion 34 1996: 173,614 billion 22.9 1997: 189,558 billion 31 1998: 149,507 billion 26.7 1999: 170,717 billion 18.4 In fact, a report of the historic monthly US equity flows during the 1990s has shown that only one month in a nine year period from 1991 to 1999 showed a significant cash outflow from equity funds. This was August of 1998, which probably is the worst market any young traders and investors remember. The Dow hit a low near 7500 and the Nasdaq hit 1000. The equity mutual funds showed a net outflow of approximately 6.4 billion, as the money went into money market funds. The shock therapy may have been exaggerated by the fact that the market had gone up without a serious correction from 1995 to 1998. However, the flows became positive the next month in September of 1998, although the Dow, Nasdaq and S & P were still low. Approximately 8.7 billion in cash went into equity funds in September of 1998, followed by approximately 3 billion in October of 1998. Then the Fed started their program of cuts in the interest rates, the markets started to go up and investors started to contribute aggressively, putting over 13.9 billion into the equity funds in November of 1998. What conclusion can we draw? The fact that so far history has shown us that investors have been loyal to their mutual funds. Despite the fact that online trading has become very popular in the last couple of years, it hasn't so far hampered the fund flows. Also, the pattern seems indicative that most fund investors have a basic understanding of market risk and are in for the long term, and usually do not redeem except under extreme circumstances. In addition, over the last ten years there is a consistent pattern of monthly flows. The first half of the year shows the strongest inflows, and August has historically had the weakest flows. January has on average taken in about 10% of the total for the year. Here is the average percentage that each month has taken in over the last 10 years: Feb 8.4%, March 8.6%, April 11.1%, May 9.5%, June 7.5%, July 8.5%, August 5.5%, September 7.3%, October 6.7%, November 8.9% and December 8.1%. January, April, July and November are consistently the strongest months. The past is not always predictive of what the market will to do in the future, but people's behavior patterns are sometimes remarkably consistent. For example, when the market started to crash last week alot of people assumed that there must be something terrible going on and that is when panic selling can occur. And, fortunately for the market, Americans have consistently made monthly cash contributions to their funds. As long as this money keeps coming in, it may help to buoy the market. The latest statistics from AMG Data for the week ending April 19 stated that equity funds took in 6 billion, with 60% of the total going to growth funds. Technology and internet funds inflows slowed. Large cap index funds started to show redemptions. In the last several months, investors have shown a clear pattern of mass psychology in terms of favoring one sector over another. This can change in a matter of days or weeks, so I wouldn't expect tech funds to show slow inflows the whole year. A couple of other factors besides fund flows influence the liquidity of the market. One of these is the issuance of new stock through initial public offerings. Take a look at the dollars raised through ipos over the last 9 years. 1991: 59,786 billion 1992: 57,012 billion 1993: 99,089 billion 1994: 69,985 billion 1995: 86,770 billion 1996: 98,850 billion 1997: 132,592 billion 1998: 108,038 billion 1999: 180,303 billion Why does this impact the market? Most of the buyers of the premier IPOs are institutions. Individual investors rarely have a chance to participate in oversubscribed ipos. If the funds are putting billions of dollars in to ipos, there is less money left over to buy stocks which are already public. Some market analysts have suggested that the huge volume of ipos brought out in 1999 may be affecting the market now, as the lock up periods for insiders to sell their shares are starting to expire. Another factor is the Treasury's buyback program. The US Treasury announced earlier in the year that they plan to buy back up to 30 billion dollars of US bonds along the entirety of the yield curve. That's 30 billion dollars that is going to be injected in to the system. It is not clear yet how this will impact the market, but it is a factor to take into consideration. Contact Support ***** Warning: This is Not The Market Most Beginners Learn In By; Renee White I'm changing my style of trading. Are you? Trading is a little more complicated these days. This is not the time when beginners should be practicing their new found skills if they have a bullish outlook. Learning a strategy is only one tiny part of trading successfully. We have been in a stress-free bull market for some time. It has been a comfortable environment for new traders to learn in. But beware, the market is not that healthy right now. A change in strategy may be in order for a sideways or downside market. I have been surprised how many new traders have asked me about trading lately. They write about their continued losses and how the plays aren't working in spite of the earnings run or split announcement. Still they keep trying and ask my advice on stock picks. (Which I can't give, by the way.) Many seem eager to jump in, in order to win back all that they have recently lost. Don't get me wrong, I love hearing from new traders who have a thirst for knowledge. But I don't like hearing from new traders that DON'T have a thirst for knowledge, that just indiscriminately through money at plays without a reason. Without a willingness to study, read and research, it is just gambling. Vegas would be much more fun with fun people around you. It scares me because many of these traders are playing with money they can't afford to lose. We all know that is Rule #1 when trading options. Why? Because ALL option traders lose money. The ones that survive just win bigger than these that lose. It's the name of the game and the pain of the gain. Please, if you are new to trading and playing the game of options, consider your market timing. This is not the same market it was last November, or the November before that or even early March. Option books, seminars and writers excite many in the rewards of trading. It is rewarding. If you survive. The truth is, playing is not hard. Keeping your profits is! Without good money management, a couple of bad days can wipe out 3 months of profits which had tripled your original account. Money management skills are something all levels of traders fight with on a continuous basis. That's why we have heard of hedge funds going under, people getting $1million margin calls and others getting wiped out. It is a constant battle. Since most all new option traders usually start with a bullish sentiment, they tend start out playing calls. If one is truly new to the investment world, it can takes years to understand market sentiment to the level that it affects your trading. Unfortunately many of these traders continue to trade the same way, even when the market is not on their side. There is a difference in losing money due to poor money management and losing money due to over-trading. Losing money with poor money management is something that tends to happen quickly. Most of the time they knew better, they just got sloppy and everything vaporized. It's like the dog eating the sandwich you just laid down, when you went to answer the phone. You feel stupid and you knew better. Losing money by over-trading though, is a slow, painful process. It happens in little bitty increments. It always comes after a big hit. Desires to win your money back again take over your subconscious. Occasionally, you are rewarded not knowing how dangerous the compliment is. You trade more in order to win again, with larger sums of money. You feel there are buying opportunities everywhere, because everything is so much cheaper now. You diversify your trades. A little here, there and yonder. It disappears again. And again. And again. Then there is another win so you take a deep sigh. You try again, lose or break even. You can't keep track if you are winning more than you are losing. Great news comes out on your favorite company. You load up. And then your bias allows the market to gobble up every red cent. What I am saying is that most new traders are focusing so hard on wanting to play the game, that they fail to realize that the market is against them. They may read caution all night long in newsletters or hear it all week on TV but they don't really hear. They still think in terms of bullish expectations. Personally, I think this is not the market where beginners should be trading. The risk is too high. The market is too unstable. How long will this last? Who knows? Possibly until the May 16th FOMC meeting. Possibly until the June FOMC meeting. Possibly until that first meeting we DON'T get a rate hike or when economic data starts pointing to signs that previous rate hikes are affecting peoples lives.....and the corporations that everyone is trading. When the earnings get softer, the interest rate fears will subside. OUCH! Sounds like another bad earnings run waiting to happen, to me. Gonna trade that one too? So, what can we do? Everyone should be reviewing their own risk tolerance levels right now. Looking at the big picture, with a rally Monday morning or not, the outlook does not look bullish going forward. Over-trading could be painful for those die hard bulls. The charts all point south. All of us want to repair our accounts. There's nothing wrong with that. But just make sure your repair strategy has the wind to your back. It must have the same bias as the overall market to have the percentages in your favor. That alone should force you to rethink your trading style. For some, that may mean sitting out while studying, observing and paper trading. For me, I have decided my gut is telling me to place trades according to the negative bias until at least May 16th. It may be a sideways market, but I don't expect a bull market. In lieu of that, I've just started "shorting" stocks. It felt good to put money in my pocket again. In the past, I usually played puts or just stepped aside and watched. But the puts still had the evaporation effects of time and the implied volatility effects on entry. Shorting the stock does not have that effect and it's easier for me to cut my losses at the end of the day whereas with options, I might just hold losing more with the opening gap down. Besides, I will be one of those who is selling into the rallies, to free up more cash so I might as well play it. In fact, if we do get that capitulation day (again) I may write puts that will be covered with the short stock position. I'll write the puts for the premium, but use shorter term day trading with a negative bias (by shorting the stock) to prevent any disaster. I want to make sure of the depth of the next retest. If it is lower still, I will not write puts because there could still be another leg left to come. I have decided to use this negative market sentiment, to practice playing the market to the downside. I'm practicing reading entry & exit points from a different perspective and interpreting my indicators with a negative bias. For instance, I noticed my Directional Movement Indicator gave me some interesting "Short to Open" signals as the -DI crossed over the +DI . I'm currently set at 13/30. I'm still playing with settings and working on a plan. I'm cross referencing the level of VIX on a 5 min chart, as it hits both the upper & lower Bollinger Bands comparing that to the movement of the DM. I'm also getting a feel for screening out the "noise" from exiting too early from the equity chart, by using the MACD histogram to indicate strength of the trend and stochastics to verify overbought & oversold in conjunction with the information of DM. I have never used the VIX this way so for me, this is an enhancement to my trading style which I would have not put together had I not been looking for ways to trade now that I have a prolonged negative bias. Like I've said before, I'm still a work in progress. It doesn't matter what system you use right now to trade. Just makes sure it works in this environment. The best thing new traders can do right now, is learn to actually hear and filter market sentiment. Adding that to your trading tools will certainly reap rewards for years to come. Ignoring it gets very expensive. Remember, all salmon don't make it when trying to swim upstream. Contact Support *************** TRADERS CORNER *************** Nasdaq 6200, Dow 12,500 By June 1st By: Austin Passamonte What does the future portend? Alan Greenspan holds a special session apologizing for certain Fed members who recently "jawboned" the equity markets. Uncle Al goes on to state (in language we can actually comprehend for once) that after close and careful scrutiny he fears current Fed policy is dampening the markets and announces an immediate 50 basis point cut in interest rates. Abbey Cohen and Mark Mobius hold a joint interview on CNBC and Bloomberg urging everyone to mortgage the house, raid their children's piggy banks and pour the proceeds into tech stocks. Forget entry points, every call option we purchase doubles and triples by markets' close for days & weeks on end. There...now that is the inaugural letter I would love to begin my O/I writing career with! We only get one chance in life for a first impression and I'm thinking it'd be tough for me to top that one. Sadly, that's not exactly the way I see things in my cloudy crystal ball. With a history of trading commodity futures contracts behind me, I lack a personal market bias. Whatever the technical and fundamental evidence points to for a given market is the way I base my trades. I harbor a strong preference to trade index options, so it really doesn't matter to me which way the markets move so long as they move big. If you are a devout raging bull I respectfully suggest you might consider the same market neutral approach in the near term. Seldom have I seen a time where all indicators point in the same overwhelming direction for the markets as they do today. Let's examine the evidence... Technicals: Where do we begin? Pick a tool and it's probably pointing to the downside for either the Dow or Comp. Intraday Stochastics are topped out far above 80% on the Dow and the fast bar is crossing down into the slow on the NASDAQ. The OEX is nearing overbought as well. William's %R is also topped out on the Dow. 18 day M/A are below 40 day M/A. These are all lagging indicators and markets can rally through them considerably, but it takes strong events to create the momentum thrust needed to do so. Where will it come from? We've seen a steady decay in the NASDAQ 100 over the last couple of trading sessions and that doesn't bode well either. If the generals can't lead the charge back up for more than two days, who will? The number of stocks making 52-week lows is several times higher than issues making 52 week highs. Again, where is the underlying strength? Fundamentals: There isn't space enough for all of them, so let's hit the highlights. The media is slaughtering bullish sentiment at every turn. Watching Bloomberg and CNBC from 8:00am to 5:00pm EST every day, I've witnessed the same thing you have. Commentators are grilling every analyst and CEO with the same question: have we seen the bottom? Is the crash imminent and soon? What's next...will Ron Insana break into an Ameritrade ad and yank Stuart's head out of the copy machine to browbeat him about NASDAQ testing sub-3,000? That's about the only financial figure I haven't seen hammered to death so far. A self-fulfilling prophecy seems imminent to me. In case you were wondering, newsprint isn't any better. Heck, the Today Show had Suzy Ormond on Friday morning telling all of the housewives (and husbands) to tread lightly in techs and stay weighted in cash and bonds. Are Oprah & Rosie up next? I'm guessing there are a few traders barely clinging to life with margin debt. Any sleepless nights for them lately? Earnings season is in full bloom and this is the best we can do? Intel and Microsoft pretty much sum up the mood here, the market yawns over good news and reacts swiftly to bad. Markets that shrug off bullish news and drift lower are extremely bearish. As May 16th approaches, might an analyst or two mention the real possibility of a .50 point rate hike by the Fed? What then? Game plan: As traders, what are we to do? Swimming with the tide is infinitely easier than against it. How about a market bias approach in harmony with the trends? Let me share my game plan with you. I currently follow the OEX Skybox closely and will take their trades without question. (Next weekend I'll outline a money-management system for small accounts you can back test yourself with actual Skybox historical data that eliminates the possibility of total loss with theoretical upside potential that will blow you away. I consider Skybox to be the greatest mechanical system I've ever seen, and I've looked at a bunch.) I will examine Pinnacle Advisor's market sentiment for the OEX and when it shows overhead resistance building, it's time to consider buying more OEX OTM puts soon. I'll also check OTM puts for the QQQ and DJX as well and write my target choices down so I can pull the trigger upon first sign of market weakness. Any stocks listed with high sentiment index %s prior to earnings in this section are also put plays on earnings day I'm highly interested in. The only call positions I will take are OEX calls via the Skybox until things shake out. What about you? Is your game plan in place? Did your trading account swell with cash last Friday during the plummet or have you vowed not to miss the express train next time. Next time may come sooner than you think, and I hope you'll be amply prepared. Trade the right directions without bias. Current open positions: May OEX puts, May QQQ puts *********** OPTIONS 101 *********** Safe Investing, How Much is Enough By: Jim Brown After the recent Nasdaq crash we have had many emails asking if there was any safe way to use options to maximize returns. First, there is no safe investment. All stock and option investing involves risk. In the current market environment the urge to trade is the biggest challenge facing most investors. If you trade less the odds are in your favor. Many investors only use a portion of their capital to speculate in options. This is a good idea but the problem is what should you do with the rest of your money. If you are a conservative investor and could be happy with 30% to 50% annual returns then I have a deal for you. The current volatility has created an opportunity to capitalize on the current high premiums yet do it fairly safely. I am talking about long term covered calls using leaps. Now before you hit that delete button, hear me out. Many stocks on good companies are very beaten down right now but their long term prospects are still very good. By buying the stock and writing leaps on it you accomplish several things. First you put that excess capital to work as safely as possible. Second you can lock in substantial returns and third you do not have to worry about your positions on a daily basis. You are freed up from the daily terror of watching your net worth fluctuate with every nasdaq tick. You are also protected from a serious drop in the stock price by the substantial premiums received from the leaps. Most premiums equal 25% to 35% of the stock price. Look at this example: JDSU $85.19 JDSU is currently trading at $85 with strong support at $75. The odds of JDSU closing below $85 by January of 2001 are very close to zero. If you wrote the JAN-2000-$90 leap today you would receive $27 in premium. Without using margin if JDSU closed over $90 the third Friday in January your return would be 37.6% for one trade. Here is the calculation: $27 premium $ 5 gain from $85 to $90 strike $32 profit $32 profit / $85 stock price = 37.6% return if called out. If you use margin the return will be much greater but involve more risk. Very minimal risk but still risk. $32 profit / $42.50 margin required = 75.2% return (margin interest not included in calculation but neither is the interest on the $27 premium received either) Do you think JDSU will close above $85 in January? Is a 37.6% return better than what you are getting on idle money now? Is a 75% return worth the $15 net margin you would have at risk? ($42.50 margin less $27 premium received) If JDSU did not close over $85 would owning JDSU with a basis of $58 be worthwile for a long term investor? You have to be comfortable with the concept and the risk but unless we have a real bear market in the near future the risk of stocks going much lower than they are now is very minimal. Here are some likely candidates for this concept. Most large cap stocks have leaps but even those that don't have options that expire in Nov/Dec and they will produce the same type of returns. Stock Price Strike Premium Return/Margin Return JDSU $ 85 $90 $27 37.6% 75% QCOM $110 $110 $29 26.3% 52% BRCM $152 $150 $48 31.5% 63% YHOO $123 $125 $32 26.0% 52% ARBA $ 69 $ 70 $22 31.8% 64% You can experiment with these and get a larger return by increasing the strike price but you then increase your chances of not being called out in January. That is also not a bad deal. Using these numbers you could write leaps on your stock every year and after three years if you still had the stock your basis would be zero. ZERO ! Of course the odds of you being called out for a 75% to 100% profit during those three years is very high. The key to this strategy is quality stocks, with any growth rate above zero. Even a five percent growth rate will get you called out for a nice profit in the first year. Think about it. How much are you making on your idle money? How much have you made on those marginal stock investments in the last six months? Good Luck Jim Brown ************* DAILY RESULTS ************* Index Last Week Dow 10844.05 538.28 Nasdaq 3643.88 322.59 $OEX 777.12 -5.67 $SPX 1434.54 -13.04 $RUT 481.84 28.13 $TRAN 2833.25 106.21 $VIX 28.31 -11.02 Calls Week BRCM 152.50 30.25 New, earnings are the big story TIBX 67.88 19.56 Provides B2B plumbing to the big boys ABGX 82.50 15.63 Dropped, good play but earnings Tuesday ADBE 112.63 14.81 Shareholder meeting on Wednesday MERQ 72.38 13.63 Wall of worry could dampen sentiment VERT 41.63 13.63 Dropped, sell ahead of earnings SCMR 64.56 13.56 Still risky, but recovering nicely LXK 114.88 12.56 Dropped, earnings on Monday AMD 78.38 12.38 New, annual shareholders meeting Thursday RMBS 167.50 11.25 New, held support from the 200-dma VSTR 100.94 10.94 Leading the charge in the Nasdaq rebound ARBA 69.00 6.75 New, B2B is still the place to be CMVT 80.06 6.13 Connecting Telecom and Internet NXTL 110.00 5.13 Dropped, Wall Street Journal article DHR 52.94 4.88 New, volume is increasing; a good sign ENE 71.00 2.00 Dropped, no downside, but none up either VOD 46.00 1.00 Dropped, quick reversal kills play GMST 41.69 0.56 Two weeks until earnings Puts MCOM 27.63 -5.63 New, earnings report revealed delays DCLK 55.44 -5.13 Government is bearing down on them NTPA 31.50 -3.38 New, typical post-earnings depression EK 58.50 -3.00 Looking for a move down towards $55 WY 53.50 -1.13 Flattened out, buyers are still striking MCLD 61.38 6.75 Dropped, 3:1 split is coming FIBR 40.00 9.56 Still unable to break above the 10-dma DIGX 75.44 27.44 New, does it have what it takes?? STOCKS ADDED TO THE PICK LIST ***************************** Calls BRCM - Broadcom AMD - Advanced Micro Devices RMBS - Rambus ARBA - Ariba DHR - Danaher Company Puts MCOM - Metricom DIGX - Digex Inc NTPA - Netopia Inc *************************** PICKS WE DROPPED THIS WEEK *************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS VERT $41.63 (+13.63) It's a fact, VERT is reporting earnings this Wednesday April 26th, after the close. And for the number buffs, First Call has VerticalNet coming in at an estimate of -0.17 p/s versus -0.10 same quarter last year. As we cautioned initially, this play was likely to be short and sweet. Recall this Internet was just added to our call list on Tuesday evening. As it turned out, the next two days provided excellent entry points off near-term support at $40 followed by upward moves as high as $47.44 intraday; thus giving traders lots of opportunity for profit. We decided however to drop VERT this weekend to give ample time to plan your exit prior to the company's announcement. No need to fret though, if you currently have open positions there's still three trading days to play this earnings' run. Watch for overhead resistance at $48-$50 and sell too soon! NXTL $110.00 (+5.13) Trading like a yo-yo for most of the week has forced us to drop NXTL from our list. After finding a bottom near $100, NXTL began to fly late Monday. The flight lasted until midday on Wednesday when traders clipped our wings as they left for an extended holiday weekend. On the bright side $110 did seem to provide support on Thursday, suggesting there may be more room to the upside. The wireless telecom stocks have taken it on the chin for most of the month, and NXTL is no exception. For the bravehearts, that want to hang on and see if this one can find its footing again, be aware that NXTL is scheduled to report earnings before the open on Wednesday. We will look for a flight that's not quite so bumpy. VOD $46.00 (+1.00) Perhaps we were a bit premature in our selection of VOD, and then again maybe not. Whether we were or not, we are dropping this one from the list. With the strength seen in many of the stocks at the NYSE on Thursday, VOD just couldn't seem to get anything going. Telecom stocks in general had a tough go of it after Tuesday. Although the $45 area did hold up reasonably well on Thursday, VOD closed back under its 200-dma at $48.68. Another fly in the ointment for this play showed most minor intraday bounces met by increases in volume, pushing the price back down. A drop on light volume is one thing, moves lower with bigger numbers is quite another. Could we see VOD get back on track? Sure, but at this point the risk-reward ratio simply isn't on our side. ABGX $82.50 (+15.63) After bottoming again on Monday near the 200-dma (then at $53.25), ABGX gave us a quick, but profitable run. Rising as high as $98.44 on Wednesday before weakening with the rest of the Biotech sector, ABGX looks like it is done with its earnings run. Although there may be more upside in the play on Monday, earnings are scheduled for Tuesday (the company did not specify time of day), and in order to avoid the typical post-earnings drop, we need to be out of the play before the announcement. We will look for ABGX to provide us with another opportunity after the dust settles. LXK $114.88 (+12.56) In typical volatile fashion, LXK gave us a couple of profitable runs last week. The first one began Tuesday morning and ran from below $100 to $117.81 by the close. After such a strong run, the pullback to $107 on Wednesday was to be expected. The consolidation provided another entry for the run which then pushed the printer company up to close at the high of the day on Thursday, just below $115. The play is now over, and all positions should now be closed as LXK reports earnings Monday morning. ENE $71.00 (+2.00) Looks like ENE is out of energy. It simply hasn't been able to muster any strength in the face of market weakness. Unless you were able to buy the dip on Monday to $65 (not part of our plan), this play has been a snoozer. Resistance remains at $72 with intraday support around $67-$68. There is no reason to wait around with crossed fingers hoping for a market meltdown that makes EME look a bit more attractive. Our capital can be better deployed elsewhere. Thus, we're shutting off the light on ENE with the expectation of getting charged up somewhere else. PUTS MCLD $61.38 (+6.75) The rally we saw early last week in MCLD faded into the weekend as the stock fell to broad market weakness. The stock seems to lack direction and conviction, its just drifting along with the rest of the market. The stock found strong support early last week at the $50 level, a support level that was established nearly 5 months ago. Nonetheless, the stock doesn't appear to have much downside left, there is too much risk to continue to hold our put position. The company will be splitting its stocks 3-for-1 next week, Tuesday, April 25th. Even though the split will put the stock in the low 30's range, which could be seen as a negative, we don't want to hand around to see any sort of split run. We'll split, and look for better opportunities elsewhere. ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. 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The Option Investor Newsletter 4-23-2000 Sunday 3 of 5 STOCK SPLIT CANDIDATES *********************** Current Split Candidates AMD - Advanced Micro Devices ADBE - Adobe Inc. Split candidates that are not current plays INKT - Inktomi Inc. EMC - EMC Corporation CHKP - Check Point Software SDLI - SDL Incorporated BRCM - Broadcom STOCKS WITH UPCOMING SPLITS **************************** We don't list all splits available, only those we feel may have play possibilities. Symbol - Stock Splits/Date KSS - Kohls Corp 2:1 04-24-00 ex-date 04-25 MCLD - McLeodUSA 3:1 04-24-00 ex-date 04-25 APH - Amphenol Corp 2:1 04-25-00 ex-date 04-26 HH - Hooper Holmes 2:1 04-26-00 ex-date 04-27 GE - General Elec 3:1 04-26-00 shareholder mtg COGN - Cognos Inc 2:1 04-27-00 ex-date 04-28 SFO - Sonic Foundry 2:1 04-28-00 ex-date 05-01 MU - Micron Tech 2:1 05-01-00 ex-date 05-02 CYSV - Cysive Inc 2:1 05-08-00 ex-date 05-09 ZOMX - Zomax Inc 2:1 05-08-00 ex-date 05-09 BALT - Baltimore Tech 5:1 05-10-00 ex-date 05-11 AXP - American Exprs 3:1 05-10-00 ex-date 05-11 SYK - Stryker Corp 2:1 05-12-00 ex-date 05-15 ALKS - Alkermes 2:1 05-12-00 ex-date 05-15 AMK - Am Tech Ceramics 2:1 05-15-00 ex-date 05-16 SIVB - Silicon Valley 2:1 05-15-00 ex-date 05-16 CMOS - Credence Systems 2:1 05-17-00 ex-date 05-18 ACLNF- A.C.L.N. Ltd 5:4 05-18-00 ex-date 05-19 RI - Ruby Tuesday 2:1 05-19-00 ex-date 05-22 SNE - Sony Corp 2:1 05-19-00 ex-date 05-22 CXR - Cox Radio 3:1 05-19-00 ex-date 05-22 PAYX - Paychex 3:2 05-22-00 ex-date 05-23 MSA - Mine Safety App. 3:1 05-24-00 ex-date 05-25 AEG - AEGON N.V. 2:1 05-30-00 ex-date 05-31 AES - AES Corp 2:1 06-01-00 ex-date 06-02 MOT - Motorola 3:1 06-01-00 ex-date 06-02 KPN - KPN Telecom 2:1 06-02-00 ex-date 06-05 MEDI - Medimmune 3:1 06-02-00 ex-date 06-05 NXTL - Nextel Comm 2:1 06-06-00 ex-date 06-07 LMGA - Liberty Media Grp2:1 06-09-00 ex-date 06-12 CMB - Chase Manhattan 3:2 06-09-00 ex-date 06-12 ANEN - Anaren Micro 3:2 06-09-00 ex-date 06-12 AA - Alcoa 2:1 06-09-00 ex-date 06-12 RMBS - Rambus 4:1 06-14-00 ex-date 06-15 JNPR - Juniper Networks 2:1 06-15-00 ex-date 06-16 NXLK - Nextlink 2:1 06-15-00 ex-date 06-16 EXDS - Exodus Comm 2:1 06-20-00 ex-date 06-21 AAPL - Apple Computer 2:1 06-20-00 ex-date 06-21 XETA - Xeta Corp 2:1 07-17-00 ex-date 07-18 For a complete list of all the coming splits check out the "split calendar" on the side of the online edition newsletter page. ******************** THE PLAYS OF THE DAY ******************** With all the great plays each week we can never decide on just one so take your pick. Call play of the day: ********************** TIBX - Tibco $67.88 (+19.56) See details in sector list Chart = /charts/charts.asp?symbol=TIBX">/charts/charts.asp?symbol=TIBX Put play of the day: ******************** NTPA - Netopia $31.50 (-3.38) See details in sector list Chart = /charts/charts.asp?symbol=NTPA">/charts/charts.asp?symbol=NTPA **** MCOM - Metricom $27.63 (-5.63) See details in sector list Chart = /charts/charts.asp?symbol=MCOM">/charts/charts.asp?symbol=MCOM ************* DEFINITIONS ************* SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. TP/P= True premium or Time premium RRR = Risk/Reward/Ratio ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume MTD = Move to double - amount stock must move to double option price in one week. ONE WEEK MOVE ONLY ! Numbers within ( ) are the amount of change for the week. Numbers within ( ) may be designated with PxW, like P3W, prior 3 weeks The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ********** CALL PLAYS ********** ******** HARDWARE ******** SCMR - Sycamore Networks $64.56 (+13.56)(-64.50) A growing thorn in Cisco's side (but still small by comparison), Sycamore Networks develops and markets intelligent optical networking products that transport voice and data traffic over wavelengths of light. The Company combines significant experience in data networking with expertise in optics to develop intelligent optical networking solutions for network service providers. Sycamore's products are based on a common software foundation, enabling concentration on the delivery of services and end-to-end optical networking. Sycamore's products and product plans include optical transport, access and switching systems and end-to-end optical network management solutions. Recall from last week that we picked SCMR as a rock-bottom turnaround play from $49, where we expected a rebound. SCMR delivered by rising as high as $78.50 on Tuesday. It was and still is a risky play that paid off. That's just the kind of performance you'd expect from an optical networking company that some analysts refer to as "the next Cisco". However, SCMR was unable to escape the market pullbacks on Wednesday and Thursday. Technically though, both pullbacks came on decreasing volume (just 10% over the ADV on Thursday), which says sellers weren't serious and/or buyers were absent. Just as we noted last Sunday, strong support is at $60, and SCMR bounced off $60.50 intraday to close at over $64, a fair amount over its 5-dma of $62.85. It rose while the rest of the market was moving down - a good show of relative strength. Unfortunately, SCMR is having trouble breaking over its 10-dma, currently at $75.00. The next historical level of resistance is $78, a level that provided previous support in January. Though SCMR is in crummy technical shape, it is still on many fund managers' shopping lists because it is a quality company and has the ability to deliver profits on short-term trades. While it is possible that SCMR could retest its lows ($49) should the market decide to test the downside again, we would consider any intraday dip buyable on a normal day. Just be sure to wait for the bounce. If you want to target shoot, $60 is appropriate in our opinion. Otherwise, you may want to wait for a move back over $70, backed up by strong volume. Earnings runs have been an exception rather than a rule this quarter, and with a May 18th report date, it's not likely to materialize for this play. News has been sparse and largely overshadowed by the general market conditions. However, SCMR did announce that Global NAP (a competitive local exchange carrier) will deploy Sycamore equipment to further scale its Internet backbone for higher bandwidth. Global NAP handles Internet dial-up calls for Mindspring/Earthlink, MSN, WebTV, Netcom, Prodigy, and Ziplink. BUY CALL MAY-60 SMZ-EL OI=235 at $13.13 SL= 9.75 BUY CALL MAY-65 SMZ-EM OI= 76 at $10.63 SL= 7.50 BUY CALL MAY-70*SMZ-EN OI=136 at $ 8.75 SL= 6.00 BUY CALL JUN-65 SMZ-FM OI= 48 at $14.50 SL=10.75 BUY CALL JUN-70 SMZ-FN OI= 78 at $12.75 SL= 9.50 SELL PUT MAY-60 SMZ-QL OI= 83 at $ 7.38 SL=10.25 (See risks in the Naked Put section) Picked on Apr 16th at $51.00 P/E = N/A Change since picked +13.56 52-week high=$199.50 Analysts Ratings 5-3-0-0-0 52-week low =$ 48.94 Last earnings 02/00 est= 0.00 actual= 0.01 Next earnings 05-18 est= 0.01 versus= N/A Average Daily Volume = 2.40 mln /charts/charts.asp?symbol=SCMR">/charts/charts.asp?symbol=SCMR ************* SEMICONDUCTOR ************* AMD - Advanced Micro Devices $78.38 (+12.38) Advanced Micro Devices is a leading semiconductor manufacture. They ranked #2 in the microprocessor market, standing only behind Intel (INTC). Their integrated circuits are primarily used for computers, telecommunications equipment, and data and networking devices. The company has operations in the US, Germany, and throughout Asia. We begin our coverage of AMD in expectation of a split announcement at the shareholders' meeting scheduled for this Thursday April 27th. The company is asking shareholders to increase the number of authorized shares to 7.25 mln. With only 152 mln shares outstanding, that'll give the BoD plenty of room for a 2:1 stock split. And it's about time! The last stock dividend was eons ago in 1983! This month we took note of the bullish signs indicating AMD could power higher in the near- term. First AMD broke through its imaginary ceiling at $60 trading on moderate to strong volume. Then the company rocked the Street with blowout earnings on April 12th. Expectations were as high as $0.57 cents, but AMD reported a whopping $1.15 p/s! The reaction the following day was spectacular. Investors bid up the share price 10.9% to $71.50 and volume was at an impressive 15.1 mln, nearly triple the ADV. However the definitive confirmation came in this Wednesday's session. AMD cracked the recent high of $79.18, edging the opposition a fraction higher at $79.25. Importantly it held these higher levels through the week. Near-term support is now clearly established at $75 and $77. Look for respectable volume of at least six to seven mln shares being exchanged or better at 10+ mln shares, which historically substantiated a solid breakout. Assuming all the ducks are in line, $75 should serve as a solid entry point. Take a look at a 10-day chart and it's easy to see the positive bounces off this mark in the last two trading sessions. As a whole this week the chip sector was sizzling with leaders like TXN, LSCC, VTSS, CY, and INTC all reporting better- than-expected earnings. This obviously created an excellent environment for AMD to stretch higher. However we expect the upcoming shareholders' meeting to sustain the momentum and drive AMD into new territory. Recently Deutche Banc Alex Brown upped its rating for AMD to a Buy from a Market Perform and issued a price target price of $125. Prudential and Wit Soundview also came forward with upgrades lifting the stock to a Strong Buy and Buy, respectively. And as a gentle reminder - please remember it's essential you confirm overall market direction before opening new positions, especially considering the topsy-turvy broad markets. BUY CALL MAY-75 AMD-EO OI=2289 at $10.00 SL=7.00 BUY CALL MAY-80*AMD-EP OI=2874 at $ 7.50 SL=5.25 BUY CALL MAY-85 AMD-EQ OI=1319 at $ 5.88 SL=4.00 BUY CALL MAY-90 AMD-ER OI=1896 at $ 4.25 SL=2.50 Picked on April 21st at $78.38 P/E = 55 Change since picked +0.00 52-week high=$79.25 Analysts Ratings 7-10-6-0-0 52-week low =$15.63 Last earnings 03/00 est= 0.46 actual= 1.15 Next earnings 07-14 est= 1.09 versus=-1.10 Average Daily Volume = 5.23 mln /charts/charts.asp?symbol=AMD ***** RMBS - Rambus Inc. $167.50 (+11.25) Rambus Inc. develops and licenses high bandwidth chip connection technologies to enhance the performance of computers, consumer electronics and communications products. Current Rambus-based computers supported by Intel chipsets include Dell, Compaq, Hewlett-Packard, and IBM PCs and workstations. Sony's PlayStation(r) video game system uses Rambus memory. Providers of Rambus-based integrated circuits include the world's leading DRAM, ASIC and PC controller manufacturers. Currently, eight of the world's top-10 semiconductor companies license Rambus technology. Rambus has certainly taken the path of least resistance since the middle of March. In the last six weeks, RMBS has dropped 72%. Many investors and analysts believe there was no reason RMBS should ever have been selling for $471, while others suggest the company's stock is a screaming Buy at current levels. Screaming Buy or not, we do believe one of our latest additions presents a very good opportunity at this time. The company has several issues to tackle. The one thing that really matters is whether or not they can get a substantial amount of their memory(DRAM) business going into personal computers. Drew Peck, an analyst at SG Cowen recently said he wouldn't have a good bearing on that for 6 to 9 months. Peck reiterated his neutral rating on RMBS. The following day, Warburg Dillion Read's Seth Dickson, reiterated his Strong Buy rating on RMBS and set a $350 price target. Another analyst points to the lack of market share as a potential problem for RMBS. According to Billy C. Bowden, an analyst at Amerifirst Securities, the excitement surrounding the company would be justified if it had a bigger share in the market place. Last year it had revenue of $43.4 million in a $18.2 billion industry. Our take on the situation? There's nothing new here. All of this information was in the market place when Rambus soared to from just over $100 in the middle of February to its high on March 14th. Was the buying a bit overzealous? Perhaps, but so was the sell-off. During the carnage a week ago, RMBS hit $133 when investors came to the rescue. This past week the chip developer managed to continue its bounce with the $150 level providing support, even with the Nasdaq drifting lower Wednesday and Thursday. If sentiment is negative next week, a bounce off the $150 area could provide a good entry point. If traders come back prepared to buy stock, any further moves higher could also be considered. A move through $178-$180, accompanied by strong volume and RMBS could be back on track. Earlier this month RMBS did report earnings that were in line with street estimates. The company did receive some negative press and saw pressure on the stock, as the report was not in accordance with generally accepted accounting principles. Investors should also keep in mind, in March, RMBS did announce a 4-for-1 split of the company's stock, set for June 16th. BUY CALL MAY-160 BYQ-EL OI= 84 at $33.63 SL=24.50 BUY CALL MAY-165 BYQ-EM OI= 36 at $30.88 SL=22.50 BUY CALL MAY-170*BYQ-EN OI= 64 at $27.00 SL=19.50 BUY CALL MAY-175 BYQ-EO OI=738 at $26.63 SL=19.25 BUY CALL AUG-175 BYQ-HO OI=137 at $47.13 SL=34.25 SELL PUT MAY-150 BNQ-QJ OI=251 at $17.75 SL=24.50 (See risks of selling puts in play legend) Picked on Apr 23rd at $167.50 PE = N/A Change since picked +0.00 52 week high=$471.00 Analysts Ratings 1-1-2-0-0 52 week low =$ 51.50 Last earnings 04/00 est= 0.14 actual= 0.15 Next earnings 07-12 est= 0.16 versus= 0.08 Average daily volume = 3.04 mln /charts/charts.asp?symbol=RMBS ***** BRCM - Broadcom, Inc. $152.50 (+30.25) Broadcom Corporation is a provider of highly integrated, silicon solutions that enable broadband digital transmission of voice, data and video content to and throughout the home and within the business enterprise. In other words, they make communications chips with integrated software. Broadcom's products enable the high-speed transmission of voice, data and video content over existing communications infrastructures, most of which were not originally intended for digital transmission. Broadcom designs, develops and supplies integrated circuits for some of the most significant broadband communications markets, including the markets for cable set-top boxes, cable modems, high-speed office networks, home networking, digital subscriber line, direct satellite broadcast and terrestrial digital broadcast. The big story here is earnings. Though they beat street estimates of $0.16 by only a penny (a "must" to get an inkling of respect on Wall Street), revenue was up 91% over the same quarter last year while net income was up 167%. That means margins are increasing. Even better is that the company has no debt and sports a return on equity of over 31%. They dominate the cable set-top box chip market and are ramping up in the wireless networking and DSL markets where there could be big incremental growth opportunities. While the volume appears to be descending since the Tuesday earnings announcement, it was still substantially (+18%) over the ADV of 3.8 mln shares on Thursday, and the price has remained fairly stable since with multiple intraday tests of support at $143. The only dip to $141 came at Thursday's close. Thus a post earnings consolidations seems to have taken place without an actual post-earnings depression. So why make the play? Friday's closing volume showed big spikes with an accompanying $6 price increase. There were 30 block trades that day indicating that institutions were hungry for the issue. So long as the market holds and doesn't do a submarine imitation (dive for the bottom), BRCM could see the trend continue. Near-term resistance is at $158-$160. Those figures are from pre-selloff bottoms. Some words of caution though -- this is a volatile issue with HUGE time premiums and still trades under its 10-dma ($160) and 50-dma ($199.95). With volume trending down and a market that could easily move south, BRCM may be getting low on fuel. Please consider waiting for a dip to support (low $140's) before taking a position. If things get really ugly, rock bottom support and the 200-dma is way down at $114, so make sure you see the bounce before getting in, and use stop orders to protect the downside. Helping out the sentiment on Thursday was a PaineWebber upgrade to Buy from Attractive and a new price target of $230. Even better, while W.R. Hambrecht initiated coverage with a Buy rating and a price target of $295 in late March, they upped it to a Strong Buy on Wednesday after earnings. Also, if you are thinking "split candidate", you might be right. While their last one (2:1) in early January was announced at well over $250, the previous 2:1 split announcement on 1/26/1999 occurred at $126. Here we are. Not only that, but there is a shareholder meeting scheduled on April 27th with an agenda item to increase the authorized shares from 400 mln to 800 mln. Put it down as a split candidate. BUY CALL MAY-145*RDW-EI OI= 264 at $25.38 SL=17.75 BUY CALL MAY-150 RDW-EJ OI=2048 at $23.00 SL=16.00 BUY CALL MAY-155 RDU-EK OI= 202 at $20.75 SL=15.00 BUY CALL AUG-150 RDW-HJ OI= 211 at $38.13 SL=27.00 BUY CALL AUG-155 RDU-HK OI= 137 at $35.00 SL=24.50 SELL PUT MAY-115 RDW-QC OI= 226 at $ 5.13 SL=7.25 (See risks of selling puts in play legend) Picked on Apr 18th at $152.50 P/E = 395 Change since picked +0.00 52-week high=$253.00 Analysts Ratings 7-15-1-0-0 52-week low =$ 29.00 Last earnings 04/00 est= 0.16 actual= 0.17 surprise=6% Next earnings 07-18 est= 0.17 versus= 0.09 Average Daily Volume = 3.80 mln /charts/charts.asp?symbol=BRCM ******** INTERNET ******** MERQ - Mercury Interactive Corp. $72.38 (+13.63)(-27.81) Mercury Interactive Corp. is the leading provider of Web performance management solutions that help e-businesses deliver a positive user experience. Mercury Interactive solutions enable its customers to turn Web application performance, scalability and user experience into competitive advantage. The company's performance management products and hosted services are open and integrated to best test and monitor business-critical Web applications. Mercury Interactive is headquartered in Sunnyvale, California and has more than 40 offices worldwide. Looking for a top rebounding candidate? We'd like to nominate MERQ. Mercury fell to $53 early Monday morning and finished the session with gain of about $18. For the balance of the week our play seemed to simply need to catch its breath. Traders taking advantage of the move were well rewarded. So if you chose to sit this one out, have you missed your chance? That would certainly not appear to be the case. This is a stock that lost nearly two-thirds of its market cap in a month, and could be beginning to pick up steam towards its recovery. As we mentioned in Tuesday's update, a pullback to the $71 area would not have been out of line. Thursday's bounce off $69.81 could be setting up to provide us with another entry point for our play. The one bug-a-boo at this point, could be the overall investor sentiment when traders return to work next week. Many analysts and market pundits continue to flood the airwaves concerning a retest of the recent Nasdaq lows. If that's the case, then stand back and wait for opportunity's to buy calls. However with so many folks concerned about another move lower, we may have the perfect "wall of worry" being built before our very eyes. As for MERQ, the company has just completed its best quarter in the history of the company, and received five reiterations and upgrades of a Buy or Strong Buy from analysts. The news is positive as well. On Wednesday, Mercury and Loudcloud Inc, an Internet infrastructure service provider, announced an alliance to deliver Internet business stress testing and performance monitoring services. Not a big deal, but a plus for both companies going forward. Upward momentum through the $75 level could be considered a good entry point. A bounce of $70 could be considered as well. At that level keep your stops close, as there isn't much in the way of support until the $65 area. On Thursday, Deutsche Banc Alex Brown's Chief Global Economist and Investment Strategist Dr. Ed Yardeni said he remains bullish on the markets, based on multi-disciplinary analysis. Yardeni recommends that investors focus on companies with strong fundamentals, visible earnings growth and attractively valued shares. Included in his list of favorites? MERQ. BUY CALL MAY-65 RQB-EM OI=1283 at $15.50 SL=11.25 BUY CALL MAY-70 RQB-EN OI= 68 at $13.00 SL= 9.75 BUY CALL MAY-75*RQB-EO OI= 455 at $10.50 SL= 7.88 BUY CALL MAY-80 RQB-EP OI= 359 at $ 8.50 SL= 6.00 BUY CALL JUL-70 RQB-GN OI= 49 at $17.75 SL=12.75 SELL PUT MAY-65 RQB-QM OI= 51 at $ 6.13 SL= 8.50 (See risks of selling puts in play legend) Picked on Apr 16th at $58.75 PE = 165 Change since picked +13.63 52 week high=$134.50 Analysts Ratings 10-3-1-0-0 52 week low =$ 11.38 Last earnings 04/00 est= 0.11 actual= 0.10 Next earnings 07-13 est= 0.12 versus= 0.09 Average daily volume = 1.53 mln /charts/charts.asp?symbol=MERQ ***** ARBA - Ariba, Inc. $69.00 (+6.75) A leading provider of Intranet and Internet based B2B e-commerce solutions, ARBA enables organizations to automate the procurement cycle through the company's Operating Resource Management System (Ariba ORMS). The recently launched Ariba.com network is a global B2B e-commerce network that enables buyers and suppliers of operating resources to automate transactions on the Internet. Among the company's more notable customers are DuPont, Federal Express, Chevron and Hewlett Packard. Ending the near free-fall that began in early March, ARBA made a quick visit to the underbelly of its 200-dma (now at $66.75) before rebounding last week. After announcing better than expected earnings on April 12th, ARBA dropped to major support near $50, propelled by the twin demons of post-earnings depression and weakness in the previously high-flying Internets. Even with the decline in the NASDAQ, which took the index below the 3650 support level again on Thursday, ARBA managed to hold its own and began to develop intraday support at $65. Volume has been very strong over the past two weeks, but appears to be dropping back to more normal levels. Providing evidence that the worst may be over for ARBA, declines in price are now coming on reduced volume and the recoveries are seeing stronger volume. Below $65, stronger support is seen at $60 and a bounce near this level would provide a nice entry point. All we need now is convincing strength in the Internet sector and ARBA looks like it is poised for a nice recovery. Target shooting intraday dips is risky, but may provide the best entry. For the more cautious Internet investor (isn't that an oxymoron?), waiting for ARBA to break through resistance near $75 may make the most sense. In a B2B special issue of the Wall Street Journal on Thursday, James Pickrel, Senior Analyst with Chase H&Q stated that ARBA is a Buy-rated stock. He called the company "a great case study in taking a core capability and a strong management team and then building on that to expand the opportunity". Also on Thursday, ARBA and Intelligroup announced a strategic Application Service Provider (ASP) alliance to offer scalable e-commerce applications targeted to the business needs of companies with market capitalization under $1 billion. BUY CALL MAY-65*IUR-EM OI= 344 at $13.38 SL=10.00 BUY CALL MAY-70 IUR-EN OI= 580 at $10.75 SL= 8.00 BUY CALL MAY-75 IUR-EO OI=1613 at $ 8.88 SL= 6.25 BUY CALL MAY-80 IUR-EP OI= 780 at $ 7.38 SL= 5.25 SELL PUT MAY-55 IRU-QK OI= 724 at $ 3.50 SL=5.50 (See risks of selling puts in play legend) Picked on Apr 23rd at $69.00 P/E = N/A Change since picked +0.00 52-week high=$183.34 Analysts Ratings 9-13-1-0-0 52-week low =$ 15.25 Last earnings 04/00 est=-0.08 actual=-0.06 Next earnings 07-12 est=-0.08 versus=-0.12 Average Daily Volume = 5.16 mln /charts/charts.asp?symbol=ARBA ********* SOFTWARE ********* ADBE - Adobe Systems Inc. $112.63 (+14.81)(-27.19) Adobe Systems is a leader in desktop publishing software, the company's Acrobat Reader is popping up all over the Internet as users clamor to display portable document format (PDF) documents on the Web. Three of Adobe's products, Photoshop, Illustrator, and Page Maker generate about 60% of its sales. The company also markets print technology to OEMs and has stakes in a string of technology firms whose products complement its own offerings. Adobe is hoping a restructuring effort and the introduction of its InDesign publishing package will spur sales and accelerate its product growth track record. The strong demand for ADBE's products puts it in a good position. As the Internet grows, so will the demand for the company's products. With customers upgrading to new versions of ADBE products, revenues should continue to expand. In ADBE's most recent quarter, the company reported $282 mln in revenues, and earned 51 cents per share, making it a relative value among Internet stocks. ADBE's strong fundamentals helped to buoy the stock during the recent horror show that left many tech stocks paralyzed. Investors capitalized last week by picking up bargains in the Net stocks. Many of the strong software stocks surged last week including ADBE. There appears to be a dichotomy forming in the tech sector, investors are slowly accumulating the top tier tech names, and avoiding the second tier stocks like they were the plague. We feel that ADBE will continue to benefit from the recent market divergence in tech stocks, as investors move money into those companies with strong fundamentals. ADBE's chart has held up relatively well as the stock continues to roll higher. ADBE has support just below at $110 and resistance above at $115. Watch for the stock to move above resistance on heavy volume for an entry point. If your feeling a little more aggressive, look for the stock to bounce off support and target shoot to your risk level. ADBE will hold its Annual Shareholder Meeting this week, on Wednesday, April 26th. Investors are voting on the proposal to increase the amount of authorized shares to 500 mln from 200 mln. The increased number of shares is a prelude to a stock split. The announcement of a split could push ADBE above its resistance levels, positioning the stock to retest its all-time highs. BUY CALL MAY-110 AXX-EB OI= 286 at $13.13 SL=9.75 BUY CALL MAY-115*AXX-EC OI=2119 at $10.88 SL=8.25 BUY CALL MAY-120 AXX-ED OI= 423 at $ 8.75 SL=6.00 BUY CALL MAY-125 AXX-EE OI= 163 at $ 6.88 SL=5.00 SELL PUT MAY-100 AEQ-QT OI= 131 at $ 5.38 SL=7.50 (See risks of selling puts in play legend) Picked on Apr 11th at $119.50 P/E = 58 Change since picked -6.88 52-week high=$125.00 Analysts Ratings 4-7-3-0-0 52-week low =$ 27.50 Last earnings 02/00 est=0.43 actual=0.47 Next earnings 06-15 est=0.47 versus=0.35 Average Daily Volume = 2.41 mln /charts/charts.asp?symbol=ADBE ***** TIBX - Tibco Software $67.88 (+19.56) Headquartered in Palo Alto, California, TIBCO Software Inc. is a leading provider of real-time infrastructure software for e- business. TIBCO's products and services enable computer applications and platforms to communicate efficiently across networks. The TIB/ActiveEnterprise(TM) product suite facilitates the distribution of information and integration of business processes by connecting applications to a network through its patented technology. (That's code for B2B enabler.) TIB technology was first used to "digitize" Wall Street and has been adopted in diverse industries, including manufacturing, energy, telecommunications, and electronic commerce. TIBCO Software's global client base includes Cisco, Yahoo!, NEC, 3Com, Sun Microsystems, SAP, Philips, AT&T and AOL/Netscape. Reuter's owns 62.5%, while Cisco owns 7.2%. Ever notice that plumbers are some of the highest paid workmen in the world? It's a job nobody else wants to do. Such is the case with TIBX, who provides the B2B software plumbing that operates Ariba's, MySAP.com's, and AltaVista's systems. Recently, Aether Systems, SingleSourceIT (a private group boasting relationships with Ingram Micro, HWP, CPQ, ORCL and IBM), and Delta Airlines announced they would be deploying TIBX software to run their own exchanges too. Technically, volume driven by fund and institutional money remained at roughly double the ADV for most of the week, making for impressive gains off Monday's low. When we last updated TIBX, we noted strong support at $45 with intraday support at $53 and $57. With all the buying activity, the only dip TIBX took was to $56 late on Wednesday. So to those target shooters aiming at $57, congratulations on a good entry -- even more so if you sold at the top ($72.50) on Thursday. Anyway, technically TIBX is looking really strong compared to the overall market. Intraday support now rests at $62 with the 10- dma of $61.06 and a 5-dma of $57.89. Any of these could be retested, but based on Thursday's close of $67 and some after hour trades near $70, it's not likely to get to those moving averages unless the market turns to retest recent lows. If the market has found a low, the next technical Holy Grail to the upside is the 50-dma of $95, but expect some mild resistance at $82. Target shoot to your level of comfort, or wait until TIBX moves over $73 and is backed by volume. That would be just over the Thursday's intraday high. From a company press release reported by PRNewswire, TIBX announced on Wednesday it has partnered with Computer Sciences Corporation (CSC) to provide Saturn Corporation, a wholly owned subsidiary of General Motors (GM), with the real-time, e-business integration infrastructure for its Next Generation Retail System. Another week, another deal; that's all we ask! Just a reminder too that in the prior week, shareholders voted to increase the outstanding shares from 300 mln to 1.2 bln. It becomes a split candidate again once the price gets back over $100. Earnings are not until June and won't affect the play. BUY CALL MAY-65 PAV-EM OI= 57 at $13.13 SL= 9.75 BUY CALL MAY-70*PAV-EN OI=291 at $10.75 SL= 8.00 BUY CALL AUG-70 PAV-HN OI=439 at $20.75 SL=15.00 BUY CALL AUG-80 PAV-HP OI= 84 at $17.88 SL=13.00 expensive SELL PUT MAY-50 PAV-QJ OI=112 at $ 2.75 SL= 4.50 (See risks in Naked Put Section) Picked on Apr 18th at $61.25 P/E = N/A Change since picked +6.63 52-week high=$147.00 Analysts Ratings 3-0-0-0-0 52-week low =$ 6.56 Last earnings 03/00 est= 0.00 actual= 0.01 Next earnings 06-19 est= 0.00 versus= N/A Average Daily Volume = 1.50 mln /charts/charts.asp?symbol=TIBX ******* TELECOM ******* CMVT - Comverse Technology Inc. $80.06 (+6.13)(-15.31) Comverse Technology has become an all-star in voice messaging. The #1 voice mail firm makes enhanced telecommunications systems that let telecom providers offer call answering, voice/fax mail, and other services. The company also makes telecommunications software for information processing applications. CMVT's customers include AT&T, Deutsche Telekom, and Compaq. Interestingly, Israel accounts for more than half of the company's sales. Comverse has been buying complementary companies to expand its product and geographical reach. Recently, CMVT took its telecom network software subsidiary - Ulticom (ULCM) - public. As telephone companies around the world face increased competition through deregulation, there is an increasing emphasis on promoting and providing additional services to customers. Around 300 telecom providers have selected CMVT to enable enhanced services, including more than 150 operators in the red hot digital wireless market. CMVT's systems enable network providers to offer their customers services such as wireless, wireline, and IP telephony, areas that are providing massive revenue growth for the telecom companies. Recently, CMVT has turned its focus to the emerging Wireless Internet sector. The company is involved in the development and deployment of an open Internet based mobile wireless network. It is expected that by 2003, 700 mln people will access the Internet through wireless devices. As the market grows, CMVT is positioning itself to take full advantage of the boom ahead. The stock showed continued strength early last week, as the investors found bargains in the tech sector. CMVT lost ground Friday, as the stock drifted lower into the weekend on very light volume. The stock established strong support last Friday at $80. Watch for a bounce off that level, or wait for the stock to clear resistance at $85 as an entry point. ULCM is a subsidiary of CMVT that provides software for voice, data, and mobile telecom services. The stock began trading a few weeks ago, when CMVT brought the subsidiary public. The two stocks trade in unison, watch the action in UCLM as confirmation. BUY CALL MAY-75 CQV-EO OI= 8 at $14.25 SL=10.50 low OI BUY CALL MAY-80*CQZ-EP OI=293 at $12.00 SL= 9.00 BUY CALL MAY-85 CQZ-EQ OI=127 at $ 9.63 SL= 6.50 BUY CALL MAY-90 CQZ-ER OI=229 at $ 8.00 SL= 5.75 SELL PUT MAY-70 CQV-QO OI= 4 at $ 7.75 SL=10.25 (See risks of selling puts in play legend) Picked on Apr 16th at $73.94 P/E = 69 Change since picked +6.13 52-week high=$123.88 Analysts Ratings 10-3-0-0-0 52-week low =$ 25.75 Last earnings 01/00 est=0.28 actual=0.30 Next earnings 05-08 est=0.34 versus=0.24 Average Daily Volume = 1.47 mln /charts/charts.asp?symbol=CMVT ***** VSTR - VoiceStream Wireless $100.94 (+10.94)(-36.00) Based in Bellevue, Wash., VoiceStream Wireless is a leading provider of wireless communications services in the United States. VoiceStream Wireless with Cook Inlet Region Inc., has licenses to provide service to over 193 million people with operating systems from New York to Hawaii. With licenses in 19 of the top 25 markets VoiceStream is one of the major providers of telecommunications services in the country. VoiceStream is the largest provider of personal communications service using the globally dominant GSM technology in the United States. So far, so good. Our play in VSTR got off to a great start, on Monday and finished the week with a gain of 12%. As we mentioned last week, the current trend in the wireless business is one of consolidation. The news surrounding recent mergers of wireless operations between Bellsouth and SBC, Verizon and Bell Atlantic and GTE and VOD have kept analysts and traders buzzing. This week four analysts pointed to a potential deal between VSTR and Powertel(PTEL). VoiceStream needs to fill out its nationwide mobile telecommunications network to compete in the market place, and a deal between the two companies could do just that. Others suggest VSTR could end up being an acquisition target in the consolidating market place. Until recently, the popularity of the wireless business in the U.S., among consumers and investors have helped keep the industry and stock prices moving higher. The profit taking which turned into all out selling provided us with a very good opportunity last week. As the sentiment softened somewhat on Wednesday and Thursday, VSTR held its own quite well. From its low on Monday to its high Wednesday VSTR moved about 36%. Although the volume was very light, the support found near the $98 level, is a plus, as the Nasdaq and VSTR drifted lower on Thursday. So we sit at somewhat of a crossroads. If broad market sentiment is positive early next week, VSTR should continue to make up some lost ground. If not, bounces of $98 and $93 may provide a suitable entry point as well. Confirm any bounce with volume prior to placing an order. A retest of the Nasdaq's recent lows could make things tricky. Most of the brokerage firms following VSTR have the company rated as a Strong Buy. On Wednesday analyst Michael Rollins at Salomon Smith Barney reiterated his Buy rating of VoiceStream. His 18-month price target came in at $165.00 per share. BUY CALL MAY- 95 UVT-ES OI= 47 at $16.13 SL=11.75 BUY CALL MAY-100*UVT-ET OI=335 at $13.88 SL=10.50 BUY CALL MAY-105 UVT-EA OI=105 at $11.63 SL= 8.25 BUY CALL MAY-110 UVT-EB OI= 56 at $ 9.75 SL= 6.75 BUY CALL AUG-105 UVT-HA OI=155 at $22.38 SL=16.25 SELL PUT MAY- 95 UVT-QS OI=171 at $ 9.13 SL=12.00 (See risks of selling puts in play legend) Picked on Apr 16th at $90.00 P/E = N/A Change since picked +10.94 52-week high=$159.38 Analysts Ratings 14-4-4-0-0 52-week low =$ 16.38 Last earnings 03/00 est=-1.21 actual=-1.58 Next earnings 05-08 est=-1.12 versus=-0.81 Average daily volume = 2.23 mln /charts/charts.asp?symbol=VSTR ********************************* CALLS - CONTINUED IN SECTION FOUR ********************************* ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************************* SEE DISCLAIMER IN SECTION ONE
The Option Investor Newsletter 4-23-2000 Sunday 4 of 5 ***************** CALLS - CONTINUED ***************** **** MISC **** GMST - Gemstar Int'l Group $41.69 (+0.56)(-29.94) Gemstar is the developer of VCR Plus+, an application that lets TV buffs record programs using a simple code. The technology is widespread and essentially all TV and VCR makers are licensed to integrate it into their products. Nearly 41% of the company is owned by CEO and founder Henry Yuen, Director Thomas Lau, and Thomson Multimedia. We're playing GMST on its near-term recovery potential. Last Friday, this gem sparkled in a collapsing market. Remember the Nasdaq was DOWN 355.49 points! While many other techs were still languishing amid the fury of the broad markets, GMST's performance implied it was ready to begin its recovery. Coming off a month-long decline that reduced its share price by 65%, it appeared the stock hit a bottom at $37.56 during intraday trading. Unfortunately on Monday this week, GMST was blind- sided by news that its takeover target, TV Guide's (TVGIA), 1Q earnings fell 93% due to expenses related to the upcoming acquisition. Despite the rallying markets, GMST lost $2.25 by the close. On the bright side, this downdraft to a mere fraction from Friday's bottom provided the more aggressive traders with a prime entry points. As the week progressed, GMST established a pattern of higher-lows and made valiant attempts to crack the strong opposition at $48. This is a great sign, but technically it'd be even better to see it move through $50 on 2X or 3X the ADV. If you're considering an entry into this recovery play, intraday support is firming at $42 and $43, but stronger at $40. First-quarter earnings may help generate some momentum in the near-term. The company is expected to report in a couple weeks around May 12th. In the meantime, pay close attention to the broad markets to foreshadow the stock's ultimate direction. Recently concerns about potential antitrust problems of Gemstar's merger with TV Guide (TVGIA) has been circulating. Last week the companies squelched the rumors with an announcement that their merger was on track and still expected to close by the 2Q. GMST also received a rating boost from analyst Alan Gould at Gerard Klauer Mattison & Co. He reiterated his Buy rating and issued a $110 target price. BUY CALL MAY-35 QLF-EG OI=208 at $10.75 SL=8.00 BUY CALL MAY-40*QLF-EH OI=461 at $ 6.75 SL=4.75 BUY CALL MAY-45 QLF-EI OI=684 at $ 4.50 SL=2.75 Picked on April 16th at $41.13 P/E = 99 Change since picked +0.56 52-week high=$107.44 Analysts Ratings 8-0-0-0-0 52-week low =$ 22.50 Last earnings 12/99 est= 0.10 actual= 0.13 Next earnings 05-12 est= 0.14 versus= 0.12 Average Daily Volume = 2.86 mln /charts/charts.asp?symbol=GMST">/charts/charts.asp?symbol=GMST ***** DHR - Danaher Corp. $52.94 (+4.88) Danaher Corporation operates in two business areas: Process/ Environmental Controls and Tools and Components. The company's Tools and Components segment produces and distributes general purpose mechanics' hand tools and automotive specialty tools. Among the household names they are responsible for are Sears' Craftsman line, Allen wrenches, and NAPA hand tools. The Process Controls division, led by Veeder-Root, makes leak detection systems for underground storage tanks, as well as sensors, switches, measurement devices, and communications and power protection products. One of the many victims of the selloff in NYSE stocks, DHR found solid support near $37 in early March, and has been moving higher since then on the changing sentiment in the broader markets. As the DJIA recovered, DHR managed to get back over its 200-dma (now at $49.25) and after a brief retest a week ago, looks like it will use this average as support going forward. Three out of four days last week, the stock saw strong gains and Thursday's close near the high of the day is encouraging. Light volume permeated the markets on Thursday and DHR was no exception, trading just over 300,000 shares. The intraday volume picture is much rosier though, as volume ramped up and DHR gained over $1 in the final 90 minutes. This late-day move pushed the stock above the $52 resistance level and hopefully buyers will continue to propel shares higher next week. Look for an intraday dip near support at either $52 or $51 to provide for a better entry, but continuing strength is also buyable. DHR tends to follow the trend of the DJIA, so confirm market strength before jumping on board. News has been rather sparse for DHR, so lets focus on the latest earnings. They were released last Wednesday, and although stronger than expected, keep an eye out for the typical post-earnings depression. Investors have been exceptionally fickle during this earnings season, and you don't want to get caught on the wrong side of changing sentiment. BUY CALL MAY-50 DHR-EJ OI= 0 at $3.38 SL=1.50 Wait for OI! BUY CALL MAY-55 DHR-EK OI= 0 at $1.25 SL=0.00 High Risk! BUY CALL JUN-50*DHR-FJ OI=149 at $5.13 SL=3.00 BUY CALL JUN-55 DHR-FK OI=320 at $2.13 SL=1.00 Picked on Apr 23rd at $52.94 P/E = 28 Change since picked +0.00 52-week high=$69.00 Analysts Ratings 6-5-1-0-0 52-week low =$36.44 Last earnings 04/00 est= 0.46 actual= 0.49 Next earnings 07-19 est= 0.52 versus= 0.45 Average Daily Volume = 478 K /charts/charts.asp?symbol=DHR ***** LEAPS ***** By: Mark Phillips Contact Support Have you regained your balance yet? The wild swings of the past weeks have left even the most seasoned investor feeling a bit woozy, but hopefully things are ready to calm down...at least a little. We are past the hump of Tax Day selling, but the specter of more interest rate hikes is keeping investors jumpy. After the past three weeks, investors embraced the pause provided by the Easter weekend and left early to lick their wounds. The VIX has come off the extreme levels seen a week ago and is now resting at "only" 28.41. It seems like a lifetime ago that we were looking at moves this "high" as buying opportunities. Speaking of buying opportunities, did you take advantage of any that were presented over the past week? CSCO at $56, QCOM at $100, NXTL at $100, NT at $89, and EMC at $108, are just some of the bargains we were presented with recently. After our binge last week where we added 4 new LEAP plays, we are taking a brief rest to digest what is on our plate before moving forward. As such, there are no new LEAPS this week, but on the bright side, there are no drops either. It is unlikely that the turbulence we have seen is over yet, so choose your plays and entry points carefully. Remember that the coming months are typically quiet as investors head off for vacation. Take advantage of any strength provided by the current earnings cycle to take profits on your winners so you can be ready with cash when the next attractive entry point appears. Current Plays SYMBOL SINCE LEAPS SYMBOL PICKED CURRENT RETURN EMC 11/07/99 JAN-2001 $ 80 ZOH-AP $15.38 $60.50 293.37% JAN-2002 $ 90 WUE-AR $19.00 $63.88 236.21% GPS 11/07/99 JAN-2001 $ 40 ZGS-AH $ 5.75 $ 7.63 32.70% JAN-2002 $ 45 WGS-AI $ 7.88 $10.38 31.73% IBM 11/07/99 JAN-2001 $100 ZIB-AT $13.63 $19.63 44.02% JAN-2002 $110 WIB-AB $16.50 $25.25 53.03% CSCO 11/14/99 JAN-2001 $ 40 ZCY-AH $ 9.56 $31.00 224.27% JAN-2002 $ 45 WIV-AI $11.00 $33.63 205.73% GE 11/21/99 JAN-2001 $150 ZGR-AU $16.25 $30.13 85.42% JAN-2002 $150 WGE-AU $25.50 $42.38 66.20% NT 11/28/99 JAN-2001 $ 75 ZOO-AO $22.25 $41.38 85.98% JAN-2002 $ 75 WNT-AO $30.25 $54.25 79.33% VOD 12/05/99 JAN-2001 $ 50 ZAT-AJ $10.75 $ 8.63 -19.72% JAN-2002 $ 50 WHV-AJ $15.00 $14.00 - 6.67% TXN 12/12/99 JAN-2001 $110 ZTN-AB $22.25 $51.25 130.34% JAN-2002 $120 WGZ-AD $28.50 $59.25 107.89% NXTL 12/19/99 JAN-2001 $ 90 ZFU-AR $23.50 $43.25 84.04% JAN-2002 $100 WFU-AT $27.25 $44.25 62.39% SUNW 12/19/99 JAN-2001 $ 80 ZJX-AP $17.63 $25.00 41.80% JAN-2002 $ 90 WJX-AR $22.00 $31.38 42.64% CY 01/16/00 JAN-2001 $ 40 ZSY-AH $ 9.13 $20.13 120.48% JAN-2002 $ 40 WSY-AH $12.63 $25.13 98.97% ERICY 01/30/00 JAN-2001 $ 65 ZYD-AM $19.75 $26.13 32.30% JAN-2002 $ 65 WRY-AM $27.00 $36.50 35.19% NSM 02/27/00 JAN-2001 $ 70 ZUN-AN $18.50 $14.00 -24.32% JAN-2002 $ 70 WUN-AN $24.25 $22.13 - 8.72% AOL 03/12/00 JAN-2001 $ 60 ZKS-AL $14.00 $13.25 - 5.36% JAN-2002 $ 65 WAN-AM $18.63 $18.50 - 0.70% AXP 03/12/00 JAN-2001 $130 ZXP-AF $21.75 $29.63 36.23% JAN-2002 $140 WXP-AH $28.00 $36.50 30.36% WM 03/19/00 JAN-2001 $ 25 ZWI-AE $ 5.00 $ 4.75 - 5.00% JAN-2002 $ 30 WWI-AF $ 5.38 $ 6.38 18.59% QCOM 03/26/00 JAN-2001 $150 YQO-AJ $39.25 $17.75 -54.78% JAN-2002 $160 XQO-AL $52.88 $29.00 -45.16% AMD 04/16/00 JAN-2001 $ 70 ZVV-AN $17.50 $25.38 45.03% JAN-2002 $ 70 WVV-AN $26.00 $35.00 34.62% CMGI 04/16/00 JAN-2001 $ 50 ZB -AJ $21.50 $23.38 8.74% JAN-2002 $ 55 WCK-AK $27.75 $30.88 11.28% JDSU 04/16/00 JAN-2001 $ 80 XJU-AP $27.50 $30.75 11.82% JAN-2002 $ 80 YJU-AP $39.63 $44.38 11.99% VSTR 04/16/00 JAN-2001 $ 90 ZTB-AR $23.88 $34.50 44.47% JAN-2002 $ 90 WWP-AR $35.00 $46.13 31.80% To review the play description on any of our current plays, go to the LEAPS section for the date the play was added. Option Selection: Notice that many of our LEAP plays have moved considerably since initially being picked. The listed options may therefore be deep in the money and very expensive. When entering a new position, look to buy LEAPS according to your suitability level, but note that we typically initiate strikes that are slightly out of the money from the stock's current price. Leap of the Week CY - Cypress Semiconductor $48.63 Looking for a less expensive way to play the Semiconductors? CY could be the solution. Even in the midst of the wild selling on the NASDAQ, CY has shown excellent relative strength as it bounces every time it touches the 50-dma (currently at $46.63). Unlike the SOX Semiconductor Index, which is nearly 10% below its own 50-dma, CY is not posting lower lows. With growth in the Semiconductor industry expected to continue to be strong, CY is carving out its own niche by making strategic acquisitions and continuing to introduce cutting-edge products. Just this past week, the company introduced a new memory product that is capable of keeping pace with today's high performance DSPs. The stock is finding good support at the 50-dma and hasn't violated it on a closing basis since the current uptrend began in mid-December. Volume continues to be an excellent indicator of the near-term direction of CY as positive moves are accompanied by increasing volume. The company released strong earnings this past Tuesday and part of the weakness on Wednesday and Thursday can probably be attributed to a slight post-earnings depression. Look for continued sector weakness to pull CY down to the 50-dma, providing an attractive entry point for this winning play. BUY LEAP JAN-2001 $50.00 ZSY-AJ at $15.25 BUY LEAP JAN-2002 $55.00 WSY-AK at $19.50 New Plays None Drops None ********* PUT PLAYS ********* Put plays can be very profitable but have a larger risk than call plays. When a stock is falling the entire investment community (except the shorts) is hoping it will reverse and start back up. The company management is also doing everything they can to shore up their stock price. The company issues press releases, brokers talk it up, analysts try to put a positive spin on everything. Then of course there is the death knell, the "buy recommendation" simply because the price has dropped to some level that analysts feel attractive again. Buyers who like the stock wait until it appears a bottom has been reached and then jump on it in a feeding frenzy. They may already have a large position and are averaging down. Many factors can stop a free falling stock in mid drop. **** DCLK - DoubleClick Inc. $55.44 (-5.13) DoubleClick is an online advertising firm that offers targeted ad delivery using its patented DART technology, a dynamic analysis tool that collects information on audience behavior and uses that data to target ad placement. DART also measures Web traffic and ad effectiveness. DoubleClick delivers ads to more than 1,300 sites in its network, including AltaVista and US News Online. Doubleclick is expanding its business through merger and acquisition. The company recently acquired software firm NetGravity and information provider Abacus Direct. In a poll conducted by Business Week recently, 57% of the respondents agreed that the government should pass laws now for how personal information can be collected and used on the Internet. In fact, the first Federal Internet Privacy law, the Children's Online Privacy Protection Act, took effect last Friday, April 21st. The recent government intervention spells trouble for DCLK. And it could get worse. Kevin Ryan, President of DCLK is scheduled to speak in a session at the US Capitol next week, Wednesday, April 26th. Not only does DCLK have to contend with the debate surround online privacy, the stock has suffered from a widespread weakness in the Internet group. In fact, all of the Internet advertising stocks have suffered greatly over the past month, including 24/7 (TFSM) and Engage (ENGA). While the government intervention is bad for business, its good for a put play. The chart for DCLK is getting worse by the day, the stock is well below its descending 10-dma, at levels not seen since last fall. The stock enjoyed a brief rally early last week, but continued its losing ways as the broader market weakened. The stock will find resistance at its 10-day, look for a bump against that a level as a possible entry point. Additionally, DCLK established support at $54 and again at $52 last week. Watch closely for a breakdown below its various support levels, as the stock could precipitously fall from there. BUY PUT MAY-60 TDU-QL OI=1573 at $10.50 SL=7.25 BUY PUT MAY-55*TDU-QK OI= 243 at $ 7.50 SL=5.25 Average Daily Volume = 4.35 mln /charts/charts.asp?symbol=DCLK ***** WY - Weyerhaeuser Co $53.50 (-1.13) Weyerhaeuser is the third-largest U.S. forestry company with operations and offices worldwide. The company primarily grows and harvests timber on about 5.7 million acres in the southern US and Pacific Northwest with cutting rights on about 33.5 million acres in Canada. They also manufacture and sell other forest products including pulp, paper, newsprint, and various types of boards. Weyerhaeuser has grown through acquisitions and is involved in real estate construction and development. WY is a plain and simple post-earnings decline play. On Tuesday morning, the company reported that 1Q profits more than doubled. The numbers came in at $1.04 p/s versus the lower consensus estimate of $0.92. Weyerhaeuser attributed the significant increase to soaring pulp prices, recent acquisitions, and the strong paper and housing markets. Despite the great news and rallying broad markets that day, WY added another $1.50 loss (2.8%) to its already shrinking share price. All in all, this stock hasn't performed well in the millennium. It's fallen from a peak of $74.50 at the beginning of January to a low of $47.44 in mid-February. More recently, there's been no apparent interest in an environment where the present sentiment is for investors to look at these type of "old economy" stocks as an alternative to the cut-down techs. This makes for a good background, however the basis of the play is primarily focused on the fact that many stocks slide after announcing earnings, no matter how good the news. And to that end, look for WY to stay below $55 and move toward bottom support at $48 and $50. Since we added WY to our put list on Tuesday evening, it's done just that. The stock continued to establish its pattern of lower- highs and edged itself below $53 during intraday trading. WY is now finding opposition at $52.50, so conservatively look for a breakout under this level. Entries? They can still be found intraday on downward bounces off the $55 mark. In the news last week, Weyerhaeuser was named as one of the possible buyers for Fletcher Challenge's forestry division. The New Zealand-based division is being sold off for $2.5 bln in cash plus assumed debt. Both companies have decline comment; yet shares of Fletcher Challenge have been soaring in New Zealand hinting a deal may be close. BUY PUT MAY-55*WY-QK OI=105 at $3.50 SL=1.75 BUY PUT MAY-50 WY-QJ OI= 5 at $1.63 SL=0.75 low OI Average Daily Volume = 1.54 mln /charts/charts.asp?symbol=WY ***** FIBR - Osicom Technologies $40.00 (+9.56)(-39.81)(-42.00) Osicom is a Santa Monica, California-based business which designs, manufactures and markets integrated networking and bandwidth aggregation products for enhancing the performance of data and telecommunications networks. The Company's products are deployed to telephone companies, Internet Service Providers and corporate/campus environments to provide transport within and access to their networks. They also market remote access servers and make embedded networking chips. Their top competition comes from Cisco Systems, Lucent and Nortel Networks. Ok, so we will give FIBR a bounce this $10 bounce this week. Actually from its low on Monday it was more like a bounce of $15.75. Truth is, depending on where you draw your trendline, it could bounce all the way up to between $65 and $75 and really not disturb its current slope south. Was the selling over-done? Probably so. But, little if anything has changed that would suggest an immediate turnaround for Osicom. The company continued to loose money in its most recent quarter. The IPO of its Sorrento Networks Unit, that was announced in December, has apparently been put on hold, and who could blame them. On Wednesday Sorrento did announce major enhancements to its GigaMUX (TM)Metro Dense Wave Division Multiplexing product. The new feature will enable speeds of 10 Gigabits per second across 64 wavelengths, giving metro service providers an ultra-scalable carrier-class terabit optical platform. The press release from Sorrento is a nice plus for the company, but enough to turn things around? For us to drop this one from our list of puts, we are going to need to see more than a $15 bounce in a stock that has fallen $123. The volume did pick up a little for FIBR on its way back up, suggesting a near term bottom may have been put in. Technically, if buyers continue to come to the rescue, the $45 area could prove to be a tough nut to crack, while the $50-$51 mark could be even tougher. With many of the analysts talking about a retest of recent lows in the Nasdaq, we would look for FIBR to join in, should the sentiment in turn sour in the broad markets. BUY PUT MAY-45*QFW-QI OI=24 at $13.25 SL=10.00 BUY PUT MAY-40 QFW-QH OI=27 at $ 9.88 SL= 7.00 BUY PUT MAY-35 QFW-QG OI=50 at $ 7.13 SL= 5.00 Average Daily Volume = 476 K /charts/charts.asp?symbol=FIBR ***** EK - Eastman Kodak $58.50 (-3.00) Holding status in our minds as a household name, EK develops, manufactures and markets a wide range of consumer and commercial imaging products such as film, photographic paper, processing services, cameras and projectors. The company also operates in the Health Imaging market segment, providing medical films, chemicals and processing equipment, which are used to capture, store and process images and information for customers in the healthcare industry. Even the rising tide of strength on the DJIA was insufficient to float EK's little boat. The steady climb on the "old economy" index could only halt the slide of the most recognizable photo company. After a brief earnings run, assisted by a flight from tech stocks to value-oriented companies, EK fell to support near $59 on Tuesday and Wednesday. On Thursday, when the NASDAQ was weak and value companies were in favor, EK fell through this support level and bounced repeatedly at $58, a level which is beginning to look like support. This also happens to be the intersection of the 30-dma and 50-dma. Volume was low on Thursday, but there was an increase in the final hour as EK recovered slightly into the close. Looking at an intraday chart, EK is displaying a pattern of dropping to consolidate at a support level, trying to move up and then breaking down through that support. If the pattern holds, look for EK to move up to resistance near $59 and roll over. This is a good trigger for opening new positions, although we wouldn't rule out a continued decline from Thursday's close. If EK breaks through the moving averages mentioned above they will likely begin to act as resistance, helping to propel the stock towards its next major support level near $54. One final note - the open interest on the May-55 Puts is over 3000 contracts, indicating the strength of this level as support. BUY PUT MAY-65 EK-QM OI= 77 at $6.38 SL=4.25 BUY PUT MAY-60*EK-QL OI= 518 at $3.38 SL=1.75 Average Daily Volume = 1.79 mln /charts/charts.asp?symbol=EK ***** DIGX - Digex Inc. $75.44 (+27.44) Digex hosts Web sites and Web-based applications for more than 550 businesses and institutions. The company also provides consulting and enterprise services, such as firewall management and Web site activity reporting. Digex clients include Forbes, J. Crew, and Nissan. Among the company's technology partners are Cisco Systems, Intel, and Sun Microsystems. Digex operates two data centers that house more than 1,300 company-owned and managed servers. The company is a publicly traded subsidiary of Intermedia Communications (ICIX), which controls 98% of Digex's voting power. There are now two types of tech stocks, those that will make it, and those that won't. Lately, investors are fearing that DIGX will fall into the latter group. Competition in the Web-hosting market is increasing at a rapid pace. DIGX competes with the likes of EXDS, the premier Net infrastructure company, and IBM, who recently joined forces with Qwest to create a nationwide network of Internet data centers. Even though business is booming in the Web-hosting arena, increasing competition means decreasing profit margins. In DIGX's case, it could be greater losses. Investors have been down right cruel to companies that continue to lose money like DIGX. And it looks like the selling could continue. We mentioned in the company description above that ICIX controls 98% of DIGX. That number fell recently, when ICIX sold 10 mln shares of DIGX stock. The ongoing divestiture by ICIX has investors questioning the future of DIGX. Traders are worried that the insiders are selling because business is getting tougher for DIGX. We're going to take the cue from the insiders at ICIX, and look for DIGX to continue its slide. The stock enjoyed a relief rally early last week, but faded into the holiday weekend. DIGX has major overhead resistance at $80 and some support at $70. An aggressive trader might target shoot as DIGX bumps against its 10-dma or resistance at $80. A breakdown below $70 on heavy volume may provide a more conservative entry point. Watch for open interest to increase before entering the play. BUY PUT MAY-75*UOM-QO OI=3 at $14.13 SL=10.50 low OI BUY PUT MAY-70 UOM-QN OI=2 at $10.88 SL= 7.50 low OI Average Daily Volume = 959 K /charts/charts.asp?symbol=DIGX ***** NTPA - Netopia, Inc. $31.50 (-3.38) Netopia provides a veritable cornucopia of internet connectivity solutions for small and mid-sized businesses. From high-speed internet access gear, such as cable, T1, ISDN, and traditional modem connections to creating and hosting e-commerce Web sites and providing real-time collaborations software such as Timbuktu Pro, NTPA has a little bit of everything. Through its StarNet subsidiary, the company develops technology for transmitting voice over DSL lines. After announcing strong earnings on Tuesday after the close, NTPA began to suffer the usual post-earnings depression we are so familiar with. Unable to break through resistance at $43, the decline began at the open on Wednesday; after opening at $42.63, shares of the company slid downhill for the remainder of the week, aided by the lack of interest in the tech-heavy NASDAQ. Adding to the negative sentiment for the stock going forward, Thursday's close at $31.50 is below the low posted on the previous Friday. This puts NTPA right at support and should we see further weakness next week, look for a decline to the next support levels at $26 and then $18.50. With the NASDAQ closing below the important 3650 level on Thursday, and the Internets showing weakness, second-tier stocks like NTPA are likely candidates for continued selling. In the absence of strength in the tech sector, revenue growth and industry alliances appear insufficient to lift NTPA out of its doldrums that began in early March. Although NTPA saw below average volume on Thursday, this was more likely due to the lack of NASDAQ volume than the possibility of a bottom forming. Selling volume picked up throughout the afternoon as the price continued to drop. Resistance is forming near $34.50, and a rebound to this level would provide a nice entry as sellers return and push the price lower. BUY PUT MAY-35*NQD-QG OI=14 at $6.13 SL=4.00 BUY PUT MAY-30 NQD-QF OI= 0 at $4.38 SL=2.50 Wait for OI! Average Daily Volume = 412 K /charts/charts.asp?symbol=NTPA ***** MCOM - Metricom $27.63 (-5.63) Metricom is a leading provider of wide area mobile data communications solutions. It designs, develops and markets wireless network products and services that provide low-cost, high performance, easy-to-use data communications that can be used in a broad range of personal computer and industrial applications. The Company's networks take advantage of Federal Communications Commission ("FCC") regulations that permit license-free, spread spectrum operation in the 902 to 928 MHz frequency band. Metricom's primary service, Ricochet, provides users of portable and desktop computers and hand-held computing devices with fast, reliable, portable, wireless access to the Internet, private intranets, local area networks ("LANs"), e-mail and on-line services for a low, flat monthly subscription fee that permits unlimited usage. Did we mention that Paul Allen's Vulcan Venture made a $600 mln investment along with WCOM for a 48% and 37% ownership, respectively We last played MCOM as a put just two months ago when it traded at $86. We should have shorted it in perpetuity! Yes, their losses were narrower than the Street expected by a country mile (-$1.15 act vs. -$2.03 est). However, in their efforts to roll out the service in 46 cites by the end of 2001, they have announced delays in zoning approvals and utility negotiations in one of their larger markets, namely New York. They have also announced that they face a potential component shortage from vendors, which would help explain why they just inked a new deal with NSM as a chip supplier. While the MCOM's Ricochet service concept (unlimited usage mobile ISP) is a good one in our opinion, the slow rollout will delay revenues and thus profits. The Street didn't tolerate that concept very well as MCOM lost over $6 on Thursday following the announcement. Not only does that part of the story stink, MCOM has been in a technical descending channel since February. Channel support and historical support are both at the $22-$23 level. Resistance is up around $38, but we don't think that very likely right now given the earnings news. It has already violated every average on the trading screen. There is still more room to fall, especially in a market downdraft. Look for the post earnings depression and fallout to help it along. It's not all bad news. Their CFO bought 200,000 shares in March when the price was higher. However, we'll bet that Pacific crest wishes they hadn't issued that Strong Buy rating back on April 4th at $46. Nor can Lehman Bros. be happy about their Buy rating issued on April 11th. With Paul Allen and MCIWorldcom owning over 80% of the operation though, this could be a long-term winner. . .just not right now. Consider your entry if the price falls below $27 or bounces down from $36. Watch out for the low OI. BUY PUT MAY-30*MQM-QF OI= 2 at $5.75 SL=3.75 low OI BUY PUT MAY-25 MQM-QE OI= 0 at $3.88 SL=2.25 Wait for OI! Average Daily Volume = 1.5 mln /charts/charts.asp?symbol=MCOM ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***************************** SEE DISCLAIMER IN SECTION ONE *****************************
The Option Investor Newsletter 4-23-2000 Sunday 5 of 5 ************* COVERED CALLS ************* Market Terms: After Hours Trading... Trading stocks "after-hours" has become a popular activity for those investors who thrive on volatility. Traders often use the technique to participate in news-driven events that occur after the market is closed for the day. Earnings and merger/takeover announcements are some of the most common corporate activities that transpire outside of the customary trading session and now aggressive investors have a means to speculate on those events before the general public begins to trade. Obviously the profits can be substantial during the volatile periods surrounding major news but the risks are equally extreme and while the concept of trading after hours seems attractive, it includes its own array of problems. Before you engage in this endeavor it is important to understand the mechanics of the system and the methods that skilled traders use to be successful. In simple terms, "after-hours" trading means that investors are able to buy and sell stocks before and after normal trading hours. The New York Stock Exchange is open for trading from 9:30 a.m. to 4:00 p.m. (EST) but investors looking for bargains can now buy or sell stocks on electronic networks as late as 8:00 p.m. (EST) and up to an hour before the market reopens the next day. There have also been discussions about extended trading hours at the NYSE and for Nasdaq issues but no firm plans exist at present. The privilege of after hours trading was previously limited to professionals and institutions but with the recent growth of electronic trading, the public now has the same ability. Even before the systems were in place, brokerages could in principle trade whenever they wanted however, the methods of matching individual orders were very inefficient. The development of electronic trading networks made it possible for institutions to trade stocks without routing the transactions to the floors of the exchanges and it wasn't long before someone decided they could avoid the exchanges completely through the use of these networks. One of the oldest and best-known ECN's is Instinet, a network operated by Reuters that helps buyers and sellers match their orders. Another is Island ECN, a relatively new network that has also applied to the SEC to become a primary stock exchange. Now it is possible to trade virtually at all hours with other people or institutions connected into the same ECN. Most systems are based on computerized trade-matching and the majority of these networks function as "crossing" markets. That is, your order is filled only if it corresponds with another opposing order. The obvious problem with this concept is liquidity. Until the major exchanges begin 24 hour trading, or everyone uses the same ECN, the potential number of trading partners will be limited. For professional traders, the relative absence of a liquid market presents a number of opportunities. With most of the ECNs, there is no common reporting structure thus, prices and volumes on one network might be significantly different from those on another. Since only a limited number of traders have access to multiple ECNs, there is a substantial potential for arbitrage; buying in one place at one price and selling the same issue simultaneously on another network for a profit. The end result of this market manipulation is widened spreads, irregular trading, and a greater probability that the average investor will lose money in an "after-hours" transaction. With the incredible advancements in trading technology, it's only natural that the public would demand equal access to information and techniques used by professionals. Regrettably, we may not be ready to assume the obligations and that come with that ability. In fact, expanded market hours may not be the blessing that some expect, only another hazard in today's stressful life. Good Luck! SUMMARY OF PREVIOUS PICKS ***** NOTE: Using Margin doubles the listed Monthly Return! Stock Price Last Call Strike Price Profit Monthly Symbol Picked Price Month Sold Picked /Loss Return RAMP 21.09 20.19 APR 17.50 6.00 *$ 2.41 13.9% R 24.63 22.19 APR 20.00 5.50 *$ 0.87 9.9% PAIR 19.44 21.69 APR 15.00 4.88 *$ 0.44 6.6% FSI 15.63 16.31 APR 15.00 1.25 *$ 0.62 6.2% PRGS 23.44 20.13 APR 20.00 4.25 *$ 0.81 6.1% INSUA 33.06 33.56 APR 30.00 3.88 *$ 0.82 6.1% CRCL 27.63 26.63 APR 22.50 6.25 *$ 1.12 5.7% ELIX 26.00 20.00 APR 20.00 6.88 $ 0.88 5.0% TRMB 24.75 25.19 APR 20.00 5.63 *$ 0.88 5.0% R 22.69 22.19 APR 17.50 5.75 *$ 0.56 4.8% VANS 16.13 14.88 APR 15.00 1.75 $ 0.50 3.8% PXD 10.50 9.56 APR 10.00 1.13 $ 0.19 2.9% COB 14.13 9.31 APR 10.00 5.00 $ 0.18 1.2% MUEI 14.50 11.00 APR 12.50 2.81 $ -0.69 0.0% POSS 12.56 8.50 APR 10.00 3.25 $ -0.81 0.0% MATK 15.50 16.63 MAY 12.50 4.13 *$ 1.13 7.2% UGLY 7.50 8.00 MAY 7.50 0.50 *$ 0.50 6.2% ANET 10.56 10.44 MAY 7.50 3.63 *$ 0.57 6.0% PSSI 9.13 8.22 MAY 7.50 2.19 *$ 0.56 5.8% APC 35.81 38.34 MAY 35.00 2.88 *$ 2.07 5.5% LPNT 16.38 17.00 MAY 15.00 2.25 *$ 0.87 5.4% CAR 20.81 23.13 MAY 20.00 1.94 *$ 1.13 5.2% PIR 10.50 10.81 MAY 10.00 1.00 *$ 0.50 4.6% NUHC 22.13 17.13 MAY 17.50 6.00 $ 1.00 3.8% MRL 26.88 24.75 MAY 25.00 3.25 $ 1.12 3.4% DGX 44.50 53.63 MAY 40.00 6.00 *$ 1.50 3.4% BSX 21.75 24.31 MAY 20.00 2.50 *$ 0.75 3.4% CNJ 8.13 6.25 MAY 7.50 1.50 $ -0.38 0.0% *$ = Stock price is above the sold striking price. Comments: This week's recovery offered a small reprieve with many of our portfolio issues showing new signs of life. A number of the positions that were previously closed have future potential but the broad market technicals are still fairly bearish and it remains to be seen if the downtrend has ended. For small-cap issues, the outlook is slightly more favorable as the Russell 2000 is nearing support and the hammer candlestick on a weekly chart could mean we are going to move sideways at the very least. Keep your fingers crossed and a close watch on your exit points. Positions Closed: THDO, IARC, ESCM, BYND, RMII, CRAY, MPPP, MAIL, SCUR, CYOE, CYCH, AND (2), EPTO (2), FSII, IGEN, TLXN, BIDS, CBSI, . NEW PICKS ********* Sequenced by Company ***** Stock Last Call Strike Option Last Open Cost Return Return Symbol Price Month Price Symbol Bid Intr Basis Called Unchanged ACF 17.63 MAY 15.00 ACF EC 3.13 170 14.50 3.4% 3.4% BBBY 39.06 MAY 32.50 BHQ EZ 8.25 240 30.81 5.5% 5.5% IM 18.88 MAY 17.50 IM EW 2.25 539 16.63 5.2% 5.2% MATK 16.63 MAY 12.50 KQT EV 4.75 23 11.88 5.2% 5.2% SPGLA 7.81 MAY 7.50 SQE EU 1.19 350 6.62 13.3% 13.3% SPLH 12.06 MAY 10.00 QRX EB 2.69 50 9.37 6.7% 6.7% WWFE 15.63 MAY 12.50 UWF EV 3.88 35 11.75 6.4% 6.4% Sequenced by Return Called (& Not Called) ***** Stock Last Call Strike Option Last Open Cost Return Return Symbol Price Month Price Symbol Bid Intr Basis Called Unchanged SPGLA 7.81 MAY 7.50 SQE EU 1.19 350 6.62 13.3% 13.3% SPLH 12.06 MAY 10.00 QRX EB 2.69 50 9.37 6.7% 6.7% WWFE 15.63 MAY 12.50 UWF EV 3.88 35 11.75 6.4% 6.4% BBBY 39.06 MAY 32.50 BHQ EZ 8.25 240 30.81 5.5% 5.5% IM 18.88 MAY 17.50 IM EW 2.25 539 16.63 5.2% 5.2% MATK 16.63 MAY 12.50 KQT EV 4.75 23 11.88 5.2% 5.2% ACF 17.63 MAY 15.00 ACF EC 3.13 170 14.50 3.4% 3.4% Company Descriptions OI-Open Interest, CB-Cost Basis or break-even point, RC-Return Called, RNC-Return Not Called (Stock unchanged) ***** ACF - AmeriCredit $17.63 *** Trading Range Breakout? *** AmeriCredit is a national consumer finance company specializing in purchasing and servicing automobile loans. Using its branch network and strategic alliances with select auto groups and banks, AmeriCredit purchases loans made by franchised and select independent dealers to consumers who are typically unable to obtain financing from traditional sources. Their history of improving asset quality and strong financial performance in a rapidly growing market can be attributed to its use of technology and sophisticated risk management techniques. Last week, ACF announced a record 66% increase in net income and a 41% increase in EPS, due to record loan origination volume and increases in loan pricing during the quarter. AmeriCredit has traded in a range from $11 to $18 over the last two years. The latest rally off the March low has been supported by heavy volume suggesting a new high is likely - market permitting. We remain conservative and favor an entry point near the 150 dma. MAY 15.00 ACF EC Bid=3.13 OI=170 CB=14.50 RC=3.4% RNC=3.4% Chart = /charts/charts.asp?symbol=ACF">/charts/charts.asp?symbol=ACF ***** BBBY - Bed Bath & Beyond $39.06 *** Breakout! *** Bed Bath & Beyond sells domestics merchandise and home furnishings through 189 stores. Their merchandise includes bed linens and related services, bath items, kitchen textiles, kitchen items, basic housewares, and home furnishings. BBBY's end-of-March rally was due to posting a fourth quarter EPS of $0.34 vs $0.24, beating estimates by $0.04. This performance reflects the addition of new superstores and higher same store sales and led CS First Boston to initiate coverage with a new Buy. The stock broke out above its stage III top, suggesting a new up-trend is likely. We favor a cost basis below technical support. MAY 32.50 BHQ EZ Bid=8.25 OI=240 CB=30.81 RC=5.5% RNC=5.5% Chart = /charts/charts.asp?symbol=BBBY ***** IM - Ingram Micro $18.88 *** Stage II Breakout? *** Ingram Micro is the world's largest wholesale provider of technology products and services. Ingram Micro's key business units deliver fulfillment and distribution, product acquisition and selection, supply-chain automation and programs, as well as eProcurement. Ingram Micro has been ranked No. 41 on the prestigious Fortune 500 list, the highest ranking by a Southern California company for revenue in 1999. On Monday, Ingram announced it was selected as the fulfillment engine for 3Com Corp.'s business-to-consumer e-commerce Web site, Buy Direct. Ingram has now broken above a stage I basing formation on heavy volume with the first test of resistance expected near $23. The first level of technical support starts around $15.50 and earnings are due Wednesday. MAY 17.50 IM EW Bid=2.25 OI=539 CB=16.63 RC=5.2% RNC=5.2% Chart = /charts/charts.asp?symbol=IM ***** MATK - Martek Biosciences $16.63 *** Long-term Play *** Martek develops, manufactures and sells products from microalgae. The company's products include: specialty, nutritional oils for infant formula, nutritional supplements and food ingredients; high value reagents and technologies to visualize molecular interactions for drug discovery and development and; new, powerful fluorescent markers for diagnostics, rapid miniaturized screening, and gene and protein detection. Martek gained attention after a favorable article on its infant formula nutrients in Developmental Medicine & Child Neurology. A new license agreement with Abott Labs (ABT) relating to the use of long-chain polyunsaturated fatty acids in infant formula quickly followed. Recently, a new patent establishes Martek as the one of the first companies with ability to identify and use valuable genes in algae. The technicals remain bullish as the stock continues a stage II climb off of last year's double-bottom formation. MAY 12.50 KQT EV Bid=4.75 OI=23 CB=11.88 RC=5.2% RNC=5.2% Chart = /charts/charts.asp?symbol=MATK ***** SPGLA - Spiegel $7.81 *** Stage I Base *** Spiegel is an international specialty retailer that offers merchandise and credit services through a merchandising segment and a bankcard segment. It's merchandising operations are comprised of it's Eddie Bauer, Spiegel and Newport News subsidiaries, which distribute apparel, home furnishings and other merchandise through catalogs, e-commerce sites and retail stores. Their bankcard business markets various MasterCard and Visa programs nationwide through First Consumers National Bank (FCNB). Spiegel reported a strong fourth quarter with earnings increasing 80%. The company is gaining the attention of analysts with new coverage and Eddie Bauer has opened several new stores. The stock has been in accumulation since the beginning of the year forming a typical stage I base. A reasonable entry point for those with a long-term bullish outlook. MAY 7.50 SQE EU Bid=1.19 OI=350 CB=6.62 RC=13.3% RNC=13.3% Chart = /charts/charts.asp?symbol=SPGLA ***** SPLH - Splash Technology $12.06 *** Speculative *** Splash Technology develops, produces and markets color servers that provide an integrated link between desktop computers and digital color laser copiers and large format printers, enabling such devices to provide high quality, high speed, networked color printing. These hybrid systems support multiple uses including image scanning, image manipulation, printing and photocopying. Last week SPLH reported record 1st quarter earnings, posting an EPS of $0.15 vs. 1999's EPS of $0.13. Sales increased 47% over last year and Splash's CEO announced they are raising their revenue growth target for the year from 25% to 30%. Splash's correction appears to be ending, and the technicals suggest a continued sideways trend is probable. A reasonable entry point for conservative investors with a long-term outlook. MAY 10.00 QRX EB Bid=2.69 OI=50 CB=9.37 RC=6.7% RNC=6.7% Chart = /charts/charts.asp?symbol=SPLH ***** WWFE - World Wrestling $15.63 *** Down, but not Pinned! *** World Wrestling Federation Entertainment is engaged in the development, production and marketing of television programming and live events, and the licensing and sale of branded consumer products featuring the World Wresting Federation brand. The hype, the noise...is it real? Does it matter? No, just show us the money! NBC is ponying up $30 million to help finance WWFE's football league, the XFL. This I just have to see... hmmm, maybe that's the idea? USA cable has jumped off the ropes with a lawsuit in a full body slam to stop Viacom and CBS's attempt to lure WWFE's highly rated programming to the CBS-owned TNN cable channel. On the positive side, the WWF has announced new distribution agreements with the largest "pay" television systems in Germany and France. The stock appears to be forming the right-shoulder of a H-N-S bottom formation, which has bullish implications. We favor a cost basis below the March low and swear it is real! Honest. MAY 12.50 UWF EV Bid=3.88 OI=35 CB=11.75 RC=6.4% RNC=6.4% Chart = /charts/charts.asp?symbol=WWFE ****************** BIG CAP NAKED PUTS ****************** Will return next weekend! *********************** CONSERVATIVE NAKED PUTS *********************** Stock Buying Basics: Fundamental Analysis... Last weeks article on "old economy" stocks prompted a number of readers to question the value of fundamentals-based investing. From today's perspective, the present is much different from the past. Markets are now computerized, block traders dominate the exchanges and individual investors are largely ignored. They have been replaced by huge mutual funds to which they have given their life savings. Most people believe that to be successful, you must make decisions differently these days. They regard the strategies of the past as relics for historians with little or no valuable insight concerning the market's current performance. In reality, not much has really changed and the "Black Friday" sell-off has prompted a number of experts to review the basics of value investing. Warren Buffett of Berkshire Hathaway explains the concept best, "Evaluating securities and businesses for investment purposes has always involved a mixture of qualitative and quantitative factors." At one extreme, the analyst exclusively oriented to qualitative factors would say, "Buy the right company (with the right prospects, inherent industry conditions, management, etc.) and the price will take care of itself." On the other hand, the quantitative spokesman would say, "Buy at the right price, and the company (and stock) will take care of itself." In the world of the stock market, money can be made with either approach and a combination of both may offer the best balance in a portfolio. The first step in examining the fundamental factors in a company (net asset value, working capital, price-to-earnings ration, debt to equity ratio etc.) is to identify the minimum criteria that determines a favorable characteristic in each specific category. A well known expert on fundamental analysis, Benjamin Graham made the following list of attributes of an undervalued stock. In his list, criteria 1 through 5 measure risk; while 6 and 7 establish financial soundness; and 8 through 10 show a history of stable earnings. Any company that meets 7 out of the 10 criteria is considered undervalued and a potential candidate for a long-term portfolio holding. 1. An earnings-to-price yield (reverse of P/E ratio) double the current AAA bond yield. If the AAA bond yield is 6%, the earnings yield should be 12%. 2. A price-to-earnings ratio that is 40% of the highest average P/E ratio achieved by the shares in the most recent 5 years. 3. A dividend yield of 2/3 the AAA bond yield. Stocks that lack either a dividend or current profits are eliminated here. 4. A stock price that is 2/3 the tangible book value per share. 5. A stock price that is 2/3 the net current asset value or the net quick liquidation value. 6. Total debt that is lower than the tangible book value. 7. A current ratio of 2 or more. This is a measure of liquidity, or a company's ability to pay its debts from income. 8. Total debt of no more than the net quick liquidation value. 9. Earnings that have doubled in the most recent 10 years. 10.Earnings that have declined no more than 5% in 2 of the past 10 years. Some of the criteria in Graham's list are more important to certain types of investors than others. Depending on a trader's risk/reward attitude (income, safety, growth), he can select those elements that best achieve future goals and give heavier weighting to those valuation attributes that primarily define his investing style. Good Luck! *** WARNING!!! *** Occasionally a company will experience catastrophic news causing a severe drop in the stock price. This may cause a devastatingly large loss which may wipe out all of your smaller gains. There is one very important rule; Don't sell naked puts on stocks that you don't want to own! It is also important that you consider using trading STOPS on naked option positions to help limit losses when the stock price drops. Many professional traders suggest closing the position when the stock price falls below the sold strike or using a buy-to-close STOP at a price that is no more than twice the original premium from the sold option. SUMMARY OF PREVIOUS PICKS ***** Stock Price Last Put Strike Price Profit Monthly Symbol Picked Price Month Sold Picked /Loss Return PAIR 19.44 21.69 APR 15.00 0.56 *$ 0.56 27.3% UPR 14.50 16.81 APR 12.50 0.56 *$ 0.56 18.6% BELM 16.44 15.50 APR 12.50 0.25 *$ 0.25 15.3% ADLT 18.75 17.25 APR 12.50 0.44 *$ 0.44 15.2% TLCM 30.25 24.31 APR 22.50 0.50 *$ 0.50 11.1% SEM 17.81 17.88 APR 15.00 0.31 *$ 0.31 7.3% NUHC 17.56 17.13 APR 12.50 0.31 *$ 0.31 7.1% TLCM 32.44 24.31 APR 22.50 0.44 *$ 0.44 6.9% CDT 34.31 28.25 APR 25.00 0.56 *$ 0.56 6.6% SVGI 30.06 25.63 APR 22.50 0.38 *$ 0.38 6.5% MLT 30.00 21.19 APR 22.50 0.44 $ -0.87 0.0% ANLY 9.81 11.13 MAY 7.50 0.38 *$ 0.38 14.1% PPDI 15.56 16.56 MAY 12.50 0.56 *$ 0.56 13.1% LPNT 16.38 17.00 MAY 15.00 0.81 *$ 0.81 11.8% KR 19.06 17.69 MAY 17.50 0.75 *$ 0.75 9.6% RDC 26.69 27.63 MAY 22.50 0.63 *$ 0.63 7.7% CQ 19.75 22.06 MAY 15.00 0.38 *$ 0.38 7.6% SUPX 30.06 28.00 MAY 17.50 0.69 *$ 0.69 7.5% CYBX 23.81 20.75 MAY 17.50 0.50 *$ 0.50 6.9% VTS 28.06 22.75 MAY 20.00 0.56 *$ 0.56 6.6% VANS 17.06 14.88 MAY 15.00 0.56 $ 0.44 6.0% AFWY 20.06 18.25 MAY 17.50 0.38 *$ 0.38 5.7% *$ = Stock price is above the sold striking price. Comments: This week the "Bear" rested and although it isn't clear if he is done shredding the market, there are some signs of a new bottom forming. Regrettably, the damage was severe but a number of the previously closed positions recovered under the guise of Murphy's Law. Issues such as Coyote Network (CYOE) rebounded sharply from oversold conditions and many other stocks are beginning to follow that pattern. As we move into the next expiration cycle, keep your fingers crossed and a watchful eye on your exit points. Positions Closed: MADGF, SPNW, INSO, SCUR, PCMS, MCRE, AMTD, EGRP (2), ZONA, ISIP, CYOE (2), CONV, GADZ, RSLC, PMRY, OXGN, CD. NEW PICKS ********* Sequenced by Company ***** Stock Last Put Strike Option Last Open Cost ROI Opt Symbol Price Month Price Symbol Bid Intr Basis Expired ACF 17.63 MAY 15.00 ACF QC 0.75 122 14.25 14.5% BBBY 39.06 MAY 27.50 BHQ QY 0.50 178 27.00 6.0% JAKK 23.75 MAY 20.00 UFF QD 0.88 0 19.12 13.3% LYNX 20.88 MAY 12.50 ULX QV 0.50 5 12.00 10.7% OCR 14.31 MAY 12.50 OCR QV 0.50 105 12.00 11.3% PAIR 21.69 MAY 17.50 PQG QW 0.50 883 17.00 10.0% TOS 32.06 MAY 30.00 TOS QF 0.75 48 29.25 6.5% Sequenced by ROI ****** Stock Last Put Strike Option Last Open Cost ROI Opt Symbol Price Month Price Symbol Bid Intr Basis Expired ACF 17.63 MAY 15.00 ACF QC 0.75 122 14.25 14.5% JAKK 23.75 MAY 20.00 UFF QD 0.88 0 19.12 13.3% OCR 14.31 MAY 12.50 OCR QV 0.50 105 12.00 11.3% LYNX 20.88 MAY 12.50 ULX QV 0.50 5 12.00 10.7% PAIR 21.69 MAY 17.50 PQG QW 0.50 883 17.00 10.0% TOS 32.06 MAY 30.00 TOS QF 0.75 48 29.25 6.5% BBBY 39.06 MAY 27.50 BHQ QY 0.50 178 27.00 6.0% Company Descriptions OI-Open Interest CB-Cost Basis or break-even point ROI-Return On Investment ***** ACF - AmeriCredit $17.63 *** Trading Range Breakout? *** AmeriCredit is a national consumer finance company specializing in purchasing and servicing automobile loans. Using its branch network and strategic alliances with select auto groups and banks, AmeriCredit purchases loans made by franchised and select independent dealers to consumers who are typically unable to obtain financing from traditional sources. Their history of improving asset quality and strong financial performance in a rapidly growing market can be attributed to its use of technology and sophisticated risk management techniques. Last week, ACF announced a record 66% increase in net income and a 41% increase in EPS, due to record loan origination volume and increases in loan pricing during the quarter. AmeriCredit has traded in a range from $11 to $18 over the last two years. The latest rally off the March low has been supported by heavy volume suggesting a new high is likely - market permitting. We remain conservative and favor an entry point near the 150 dma. MAY 15.00 ACF QC Bid=0.75 OI=122 CB=14.25 ROI=14.5% Chart = /charts/charts.asp?symbol=ACF ***** BBBY - Bed Bath & Beyond $39.06 *** Breakout? *** Bed Bath & Beyond sells domestics merchandise and home furnishings through 189 stores. Their merchandise includes bed linens and related services, bath items, kitchen textiles, kitchen items, basic housewares, and home furnishings. BBBY's end of March rally was due to posting a fourth quarter EPS of $0.34 vs $0.24, beating estimates by $0.04. This performance reflects the addition of new superstores and higher same store sales and led CS First Boston to initiate coverage with a new Buy. The stock recently broke above its stage III top, suggesting a new uptrend is likely. We favor a cost basis below technical support. MAY 27.50 BHQ QY Bid=0.50 OI=178 CB=27.00 ROI=6.0% Chart = /charts/charts.asp?symbol=BBBY ***** JAKK - Jakks Pacific $23.75 *** Toys Are Fun! *** Jakks Pacific designs, develops, produces and markets toys and related products. Their principal products are action figures and accessories featuring licensed characters, principally from the World Wrestling Federation; Road Champs die-cast collectible and toy vehicles and Remco toy vehicles and role-play toys and accessories; Child Guidance infant and pre-school electronic toys; and fashion and mini dolls and related accessories. Jakks customers include toy and retail chain stores, department stores, toy specialty stores and wholesalers. The Road Champs products are also sold to smaller hobby shops, specialty retailers and corporate accounts, among others. The company's five largest buyers are Toys 'R Us, Wal-Mart, Kay-Bee Toys, Kmart, and Target. Jakks has a broad niche in the industry and distributes proven product lines. The company also has an immaculate balance sheet. MAY 20.00 UFF QD Bid=0.88 OI=0 CB=19.12 ROI=13.3% Chart = /charts/charts.asp?symbol=JAKK ***** LYNX - Lynx Therapeutics $20.88 *** Bottom Fishing! *** Lynx Therapeutics develops unique, proprietary technologies aimed at handling and/or analyzing, simultaneously, the DNA molecules or fragments in complex biological samples. Their applications include the identification of genes differentially expressed between samples, characterization of gene expression within a sample, and a highly efficient means for genotyping groups of genetic markers or nucleotide polymorphisms (SNPs), simultaneously, against very large numbers of genomes. Lynx's technologies have already started to generate revenue for the company through service agreements with a number of large drug companies. Lynx's shares, as well as those of other biotechs, took a hit in March when President Bill Clinton and British Prime Minister Tony Blair said scientists worldwide should have free access to research on the mapping of human genes. Then the broad market correction took its toll and now most of the issues are back where they began. Fortunately, our cost basis is near a long-term technical base. MAY 12.50 ULX QV Bid=0.50 OI=5 CB=12.00 ROI=10.7% Chart = /charts/charts.asp?symbol=LYNX ***** OCR - Omnicare $14.31 *** Retail Drugs! *** Omnicare is a provider of pharmacy services to long-term care institutions such as skilled nursing facilities, assisted living communities and other institutional health care facilities. The company's Pharmacy Services segment provides distribution of pharmaceuticals, related pharmacy consulting, data management services and medical supplies to long-term care facilities. The CRO Services segment provides comprehensive product development services globally to client companies in the pharmaceutical, biotechnology, medical devices and diagnostics industries. Recent upgrades from CIBC World Markets and CSFB have boosted the gains in the bullish trend. The question is whether the issue can move through the resistance area near $14. In any case, the probabilities favor a continuation of the current up-trend. MAY 12.50 OCR QV Bid=0.50 OI=105 CB=12.00 ROI=11.3% Chart = /charts/charts.asp?symbol=OCR ***** PAIR - PairGain $21.69 *** ADCT Merger Play *** PairGain is the leader in the design, manufacture, marketing and sale of DSL networking systems. Service providers and private network operators worldwide use PairGain's products to deploy DSL-based services such as high-speed Internet access, remote LAN access and enterprise LAN extension. More than 1.7 million PairGain DSL nodes are installed in over 100 countries. PairGain recently introduced its StarGazer4.0 Element Management System, which enables its customers to remotely configure DSL line profiles, monitor equipment performance in real time and easily identify any system failures, all from one integrated system. In February, PairGain agreed to be acquired by ADC Telecom (ADCT) where each common share of PAIR will be converted into 0.43 of a common share of ADCT with a fixed exchange ratio. The merger, subject to approval, is expected to close before August. Active option trading volume and inflated premiums provide a favorable entry point in this speculative takeover play. MAY 17.50 PQG QW Bid=0.50 OI=883 CB=17.00 ROI=10.0% Chart = /charts/charts.asp?symbol=PAIR ***** TOS - Tosco $32.06 *** Oil Sector Hedge *** Tosco Corporation (Tosco) is an independent refiner and marketer of petroleum products. Tosco, through five major facilities consisting of eight refineries, processes crude oil, feedstocks and blendstocks into various petroleum products, chiefly light transportation fuels (gasoline, diesel, and jet fuel) and heating oil. Tosco sells unbranded refined petroleum products to wholesale purchasers. Their wholesale sales of gasoline and distillates are made to large end users, retailers, and independent marketers that serve unbranded markets, including retail, industrial, commercial, agricultural and governmental classes of trade. Tosco also engages in commercial activities related to refining, distribution, and marketing businesses. Tosco also operates convenience stores in its retail system, which includes more than 5,000 retail marketing locations operating under the BP, Exxon, 76 and Circle K names. Simply a conservative issue with a favorable chart in a bullish industry group. MAY 30.00 TOS QF Bid=0.75 OI=48 CB=29.25 ROI=6.5% Chart = /charts/charts.asp?symbol=TOS ************************ SPREADS/STRADDLES/COMBOS ************************ Title: Blue-Chips Save The Day! By: Ray Cummins Wednesday, April 19 Equity markets consolidated today, led by a decline in technology bellwethers. The Nasdaq Composite took a much-needed breather, closing down 87 points at 3706. The Dow Industrials dropped in sympathy, losing 92 points to end at 10,674. The S&P 500 index fell 14 points to 1427. Nasdaq trading volume hit 1.75 billion shares with advances outpacing declines 2-to-1. Volume on the NYSE was relatively light at 1 billion shares with declines ahead of advances 1,479 to 1,472. The 30-year U.S. Treasury bond edged up 28/32, pushing the yield down to 5.85%. The 10-year note rose 14/32, to yield 5.99%. Tuesday's new plays (positions/opening prices/strategy): Johnson & Johnson JNJ LJAN85/MAY85C $7.50 debit LEAPS/CC's Sepracor SEPR LJAN60/MAY90C $28.00 debit LEAPS/CC's Landry's Seafood LNY OCT7C/MAY7C $0.75 debit calendar Our new LEAPS/CC's positions were less than cooperative during the docile morning session. Sepracor dropped slightly before moving to a higher trading range and the target price was unavailable. Johnson & Johnson traded in a relatively small range and the neutral spread did not benefit from the movement. Once again, the opening price was higher than our target entry. Landry's was the most favorable issue of the group with our bullish calendar spread offering an opening debit of $0.75 in the first hour of trading. Portfolio plays: Investors lost interest in equities after two days of gains as worries about the future revenues of America's leading companies overshadowed a number of upbeat earnings reports. Stocks that propelled the market higher during the recent recovery succumbed to profit-taking while those that announced poor revenues were sold in droves. The Dow industrials languished amid declines in Intel (INTC), International Business Machines (IBM) and Hewlett Packard (HWP) and the light trading volume exaggerated both the volatility and the size of the downside moves. The trend also shifted from computer and Internet stocks to drug and biotech issues after favorable profit reports from the industry-leading companies. In the broad market, healthcare, trucking and footwear issues moved higher, while semiconductor, retail and hardware issues slumped. Transportation stocks also rallied after several airlines reported betted-than-expected quarterly results. From a technical standpoint, most analysts had expected stocks to retreat much more significantly and the prevalent belief is the markets will eventually fall back to retest last week's lows before moving higher. In our portfolio we had some exciting news. Apple Computer (APPL) reported a second quarter profit of $0.88 per share, beating First Call estimates by $0.07. Company officials also announced a 2 for 1 stock split and with the morning momentum, the stock hit a high of $130, providing a profitable exit opportunity for those of you in the bullish debit spread. Of course our spread position was closed last week for a small loss but it was nice to see Murphy's Law in action. Boston Communications Group (BCGI) climbed 36% to $9.88 after reporting a first quarter profit of $0.06 per share, which beat the estimates by $0.03. The bullish diagonal spread has offered a number of favorable profit opportunities and today's rally pushed the overall return to a 400% return in three months. Of the plays that remain open, our calendar spreads have provided the best returns and the leaders in that section continue to be Abbott Labs (ABT) and Halliburton (HAL). Both positions traded in profitable ranges during the session and we expect them to return favorable closing premiums through Thursday's option expiration. As you might expect, the Straddles group has also performed above expectations and the newest winner in that section is MasTec (MTZ). The new debit straddle provided a second exit opportunity today with the position credit reaching $15.50. The initial cost of the straddle was 13.00. If you haven't closed the Ubid (UBID) play, consider exiting the straddle before the stock recovers from the recent sell-off. The current credit for the straddle offers a 50% profit for just one month in the position. Thursday, April 20 Classic "old-economy" issues rose to the occasion today, posting impressive gains on strong earnings and bullish forecasts. The Dow Jones Industrial Average rose 169 points to close at 10,844. In the background for most of the session, technology stocks fell driving the Nasdaq Composite 62 points lower to 3643. The S&P 500 Index recovered 7 points to end at 1434. Trading volume was light on the first day of Passover with 1.42 billion shares exchanged on the Nasdaq. Big Board trading was also thin at 894 million shares. Twenty-two of the 30 Dow stocks moved higher and breadth on the New York Stock Exchange was positive, with advances edging declines 4-to-3. Nasdaq declines outpaced advances 2085 to 2032. The bond market closed early with the 30-year Treasury up 9/32, bid at 105 28/32, pushing its yield down to 5.82%. It was the bond market's third straight gain, aided by the government's repurchase of over $2 billion of outstanding bonds. Industrial stocks enjoyed a nice rally today, erasing much of last Friday's devastating loss. A slew of bullish earnings reports lifted blue-chips higher while profit-taking weighed on technology stocks. Thursday's gains in the Dow were boosted by earnings news from McDonald's (MCD), United Technologies (UTX) and Boeing (BA). Revenues and future forecasts continue to be upbeat with most of the companies in the S&P 500 exceeding expectations. The earnings driven recovery has helped temper the bearish near-term outlook in the industrial average and a number of technical indicators are now favorable. For the Nasdaq Composite Index, the story is quite different. After climbing more than 470 points early in the week, the technology industry lost 150 (combined) points on Wednesday and Thursday. The market's most popular issues led the way with Cisco (CSCO), Intel (INTC), and Oracle (ORCL) all moving lower. With today's continued slump, many analysts are again suggesting the Nasdaq will retest its recent lows before beginning any sustained recovery. Today's option expiration marks the end of a very active month in the Spreads Section. While the majority of our positions survived the recent correction to eventually profit, many of those plays were closed early to protect small gains or prevent significant losses. The greatest number or early exits came in the long-term portfolios; diagonal spreads and LEAPS/CC's however, we were also quick to exit any spreads that advanced into profitable territory. While this is generally not our approach for the more conservative positions, it was the most prudent method to use during the first few days of the record-setting slide. It is interesting to note that after all of the volatility, the Credit Spreads section had only one issue that finished outside of the maximum profit range. Of course that portfolio was also a target for early-exits so the profits were very limited. The calendar spreads section finished in top form with each of this month's positions offering positive returns. Even the Legato (LGTO) disparity play provided a target profit of 20%. (Regrettably, that issue also became the biggest loser in the Diagonal Spreads portfolio). Although we failed to accept the bearish trend until its latent stages, the section offered a number of plays that profited from the downward movement. In fact, there were no losing positions in the call-credit portfolio and the incredible volatility produced a 100% success rate in our Straddles section. Unfortunately, the majority of bullish debit positions came under attack at one point or another and very few of these plays were held to expiration. Those that went the distance (AMD and XRX are two examples) were simply too far above the sold strike to have a serious chance of loss. Plays that have been in the portfolio for a longer period of time also fell victim to the hatchet. At some point, without any necessary adjustments, a daily narrative of the underlying issue's performance is simply not a valuable service. For that reason, it was a good time to close many of the those positions. Most of the plays that remain in the portfolio are relatively new and having survived last week's carnage, they have demonstrated an ability to weather the worst of storms. Lets hope that trend continues as the market strives to remain above recent lows in the coming weeks. As always, a complete summary of monthly positions will be posted in Tuesday's edition of the OIN. Questions & comments on spreads/combos to Click here to email Ray Cummins ****************************************************************** - NEW PLAYS - ****************************************************************** MGA - Magna International $46.00 *** Cheap Speculation! *** Magna International and its subsidiaries design, engineer and manufacture a diversified range of automotive parts, components, assemblies, modules and systems. They company engineers and assembles complete vehicles primarily for delivery to North American, European, South American and Asian original equipment manufacturers of car and light trucks. These products include exterior decorative systems, interior products including seats, instrument and door panel systems and sound insulation, stamped and welded metal parts and assemblies. They also make sun-roofs, electro-mechanical devices and assemblies, engine, power-train, fueling and cooling components, a variety of plastic parts, including body panels and fascias and a variety of drive-train components as well as complete vehicle engineering and assembly. Magna started moving higher in late March when Credit Suisse First Boston started coverage on the auto parts company with a "buy" rating and a price target of $52 per share. In the report, Credit Suisse analysts said that among the buy-rated names, Magna International is trading at tangible book value, a key downside support price, and should have several quarters of solid earnings growth. J.P. Morgan recently backed the recommendation with its own "buy" rating. Another popular analyst commented that Magna is Daimler Chrysler's biggest supplier, and he sees the company as critical to the automotive giant as it roles out new models over the next couple of years. That sounds like a favorable recommendation and with the bullish technicals, this position offers an excellent risk versus reward outlook. PLAY (conservative - bullish/calendar spread): BUY CALL AUG-55 MGW-HK OI=0 A=$1.75 SELL CALL MAY-55 MGW-EK OI=30 B=$0.50 INITIAL NET DEBIT TARGET=$1.12 TARGET ROI=50% A less neutral and more bullish type of calendar spread is when the underlying issue is some distance below the strike price of the options. This position is speculative with low initial cost and large potential profits. Two favorable outcomes can occur: the stock rallies in the short-term and the position is closed for a profit as time value erosion in the short option produces a net gain or; the underlying stock consolidates, allowing the sold option to expire and then eventually rallies above the long option strike price. It is generally best to establish this type of spread at least 2 - 3 months before the long option expires, capitalizing on the ability to sell another option against the longer-term position. That is the basic idea in this spread play; selling time value in the options when they are overpriced (high implied volatility) and buying it back (if necessary) when they return to intrinsic value. Ideally, the spreader would like to have the stock finish just below the sold strike when the near-term option expires. If the short options are in-the-money at expiration, he will have to buy them back to preserve the long-term position. Chart = /charts/charts.asp?symbol=MGA ***** RCOT - Recoton $9.44 *** Going Down? *** Recoton is a marketer, developer and manufacturer of consumer electronics products for aftermarket use. Their Video and Computer Game Business consists of STD Holding and its Hong Kong and Chinese subsidiaries, including its manufacturing operations, which produce video and computer game accessories as well as products for other Recoton segments. InterAct Accessories, the company's distributor of computer and video game accessories in the United States, also utilizes those products. Recoton Audio and its United States and European subsidiaries, primarily sell home and mobile audio products. Their Accessories Business consists of Recoton, Christie Design, a research and development subsidiary, Recoton Far East, a Hong Kong distributor, AAMP of Florida, a distributor of car audio installation products, and Recoton Canada, a distributor of all of the company's products. There's not much news on this issue but a review of their recent earnings report shows the company's major weakness. For the fourth quarter of 1999, net sales totaled $250,374,000, up from $245,502,000 in 1998 - almost no gain at all. For the 1999 year, the company reported a loss of $28,030,000, or $2.39 per share, compared to net income of $4,330,000, or $.36 per share, in 1998. That's certainly not the most favorable report and it may be the cause of the recent decline in share value. Regardless of the reason, the chart is technically unhealthy and the probability of the issue reaching our maximum profit price of $12.50 appears to be a highly unlikely outcome. PLAY (aggressive - bearish/credit spread): BUY CALL MAY-15.00 ROQ-EC OI=56 A=$0.62 SELL CALL MAY-12.50 ROQ-EV OI=237 B=$1.12 INITIAL NET CREDIT TARGET=$0.75 ROI(max)=42% Chart = /charts/charts.asp?symbol=RCOT ***** OMC - Omnicom Group $83.56 *** Trading Range! *** Omnicom Group, through its wholly and partially-owned companies, provides corporate communications services to clients worldwide on a global, pan-regional, national and local basis. Omnicom's operations cover the major regions of North America, the United Kingdom, Germany, France, the remainder of Continental Europe, Latin America, the Far East, Australia, the Middle East and Africa. The corporate communications services offered by the company include advertising in various media such as television, radio, newspaper, magazines, outdoor and the internet, as well as public relations, specialty advertising, direct response and promotional marketing, strategic media planning, buying, along with Internet and digital media development. Omnicom has a number of successful subsidiaries and it appears they all have favorable fundamental outlooks. Unfortunately, the upcoming earnings has not generated any rally in the share value and without a major upside surprise, the issue will likely continue lower in the short-term. In any case, the recent area of resistance near $100 should protect our position through the May expiration. PLAY (conservative - bearish/credit spread): BUY CALL MAY-105 OMC-EA OI=10 A=$1.75 SELL CALL MAY-100 OMC-ET OI=25 B=$2.43 INITIAL NET CREDIT TARGET=$0.81 ROI(max)=19% Chart = /charts/charts.asp?symbol=OMC ***** UCL - Unocal $30.18 *** Oil Sector *** Unocal Corporation is an independent oil and gas exploration and production company, with major activities in Asia and the United States Gulf of Mexico. Unocal is also a producer of geothermal energy in Asia, a provider of electrical power and a manufacturer and marketer of nitrogen-based fertilizers, petroleum coke, graphites and specialty minerals. Their other activities include project development, ownership in proprietary and common carrier pipelines, the marketing and trading of hydrocarbon commodities and real estate. The oil sector has performed well in the past few months and the trend is expected to continue through the Summer. Unocal reports earnings next week and the expectations are favorable. Our position is that the oil sector offers a unique hedge against daily swings in the broad-market and we will continue to offer positions in this industry to offset the volatility in blue-chip and technology issues. This play is based primarily on the current price or trading range of the underlying issue and the recent technical history or trend in both the stock and its industry. Current news and market sentiment will have an effect on these issues. Please review the issue thoroughly and make your own decision about the future outcome of the position. PLAY (conservative - bullish/debit spread): BUY CALL MAY-25.00 UCL-EE OI=330 A=$6.00 SELL CALL MAY-27.50 UCL-EY OI=3186 B=$3.88 INITIAL NET DEBIT TARGET=$1.88-$2.00 ROI(max)=25% Chart = /charts/charts.asp?symbol=UCL ****************************************************************** INDEX OPTION SPREADS... ****************************************************************** As a trader, you may be familiar with options on individual stocks where you have the right to buy (call option) or the right to sell (put option) a particular stock at some predetermined price within some predetermined time. The buyer has the rights and the seller the obligations. With index options the basic ideas are the same. Index options allow you to make investment decisions on a specific market industry or on the market as a whole. Spread strategies can be made with index options similar to those made with individual stock options. Many professional traders employ index spreads as a hedge strategy. We favor debit positions on the SPX for momentum and hedge or longer-term plays and OTM credit spreads on the OEX when the risk/reward is favorable. Low ROI disparity spreads will be listed (when available) for the conservative index trader. ******************************************************************* OEX - S&P 100 Index $777.12 *** OTM Credit-Spreads *** The Standard & Poor's 100 Index is a capitalization-weighted index of 100 stocks from a broad range of industries. The component stocks are weighted according to the total market value of their outstanding shares. The impact of a component's price change is proportional to the issue's total market value, which is the share price times the number of shares outstanding. OBSERVATIONS: For OTM credit spread trades, we like to use the actively-traded S&P 100 Index options because they contain much more premium than options on individual stocks and provide an underlying instrument less prone to huge, gapping moves. Review the 'Market Sentiment' section for specific technical information on the S&P 100 Index. Aggressive/Credit-Spread Strangle PLAY (bearish/low ROI): BUY CALL MAY - 835 OEX-EG OI=326 A=$2.88 SELL CALL MAY - 830 OEX-EF OI=2070 B=$3.50 NET CREDIT TARGET=$0.75 ROI=17% PLAY (bullish/low ROI): BUY PUT MAY - 720 OEZ-QD OI=1311 A=$6.00 SELL PUT MAY - 725 OEZ-QE OI=1340 B=$6.62 NET CREDIT TARGET=$0.75 ROI=17% COMBINED NET CREDIT TARGET=$1.50 COMBINED ROI=34% UPSIDE BREAK-EVEN = $831.50 DOWNSIDE BREAK-EVEN = $723.50 By combining two credit spread positions, you can participate in a popular neutral strategy known as the Long Iron Condor. It is often used with range-bound positions and is a limited risk, limited profit strategy that gives you a wide range for success. The play is based solely on the current price and trading range of the underlying issue and the recent technical trend. Current news and market sentiment will have an effect on this position so review the underlying issue and make your own decision about the future outcome of the stock price. Chart = /charts/charts.asp?symbol=OEX ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***************************** SEE DISCLAIMER IN SECTION ONE *****************************
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