The Option Investor Newsletter Tuesday 4-25-2000 Copyright 2000, All rights reserved. Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 4-25-2000 High Low Volume Advance Decline DOW 11124.80 + 218.70 11136.60 10881.00 1,066,935k 2,193 810 Nasdaq 3,711.23 + 228.75 3711.57 3583.92 1,621,448k 2,848 1,316 S&P-100 795.32 - 4.57 795.88 777.77 Totals 5,041 2,126 S&P-500 1477.14 + 27.81 1477.67 1438.42 70.3% 29.7% $RUT 489.03 + 20.49 489.03 468.54 $TRAN 2914.03 + 108.90 2918.07 2803.04 VIX 27.06 - 3.12 29.11 26.94 Put/Call Ratio .41 ************************************************************* A broad based rally? What changed? The market today was a different market than we have seen in some time. The broad-based rally today covered both markets and almost all sectors. The rising tide floated almost all boats. Of the 100+ stocks that I personally follow every day only four were negative and included BVSN, AKAM, ADAP, EXDS. The optimism was bubbling over even from the bears. The "retest" phrase was actually slipping from usage among the many "experts" on the various media outlets. The key may have been Ralph Bloch. Ralph has been on the cutting edge of calling the turning points over the last several weeks and has been very close to perfect in his calls. When the rally appeared to stall around midday Ralph announced that the low on Monday appeared to be a successful retest of the April 17th low of 3227. Monday's low of 3345 may not be an exact technical retest but if Ralph liked it, the market approved. Of course it also helped that Microsoft CEO Steve Ballmer sent an email to employees stating that he was confident that MSFT would not be broken up and they would be vindicated in the end. He repeated his stance later in a telephone interview and was adamant that the company would survive as a single entity. This confidence not only put a bottom under MSFT stock but aided the market as well. MSFT also gave employees 70 mln new stock options with the option price set at the low for Monday. The added incentive appears aimed at keeping key employees as it fights the breakup battle. Earnings are the fuel and the market was on fire today. Some of the majors included Proctor & Gamble who announced in line with their already reduced expectations and after rising all last week, got killed again today with a -6.25 drop. The outlook for PG was bleak with slowing sales and rising costs. Several analysts also downgraded PG again. But even with the -6.25 drop the Dow rallied as the techs gained back ground. Dow tech stocks roared back to life with IBM +6.00, HWP +7.00, INTC +8.88 and even MSFT regained +2.75 after taking a -$12 beating yesterday. Another NYSE stock announcing today really set fire to the Nasdaq. Corning, (GLW) easily beat the street with $.64 vs estimates of $.55 and +78% over last years $.36 number. Corning did not do this with glass baking dishes. Corning is a leading supplier of fiber optic cable and the excellent earnings from blowout fiber sales confirmed the tech trends for the entire sector. Nasdaq companies that benefited were JDSU +12.56, CIEN +15.38, SCMR +6.69 and to a lesser extent LU, ORTL, CSCO. Corning was so positive in their outlook that investors were rewarded with a +$28 gain during regular trading. Other major announcers today included JDSU who beat estimates by a penny and promptly dropped -$7.75 in after hours trading. Got to do better than that guys! AMGN announced in line with estimates and dropped -$3.00. LSI Logic beat estimates by a penny and dropped -$3.88. Compaq announced inline with estimates but there was some confusion about some non-operating earnings and dropped -$1.00 after the close but CPQ was up +$3.00 on the tech rally today. On the winning side was Nortel which beat estimates by +$.05 and added +$6.00 after the close on top of a +13 during regular trading. NT said they expected earnings to grow by +30% to +35% going forward. EBAY announced blowout earnings, doubling estimates, and guided analysts even higher for the next quarter. With auctions exceeding $1 bln for the first time and registered bidders exceeding 12.6 mln or a +230% increase from last year, the auction giant truly controls their own destiny. EBAY also announced a surprise 2:1 split to occur on May-24th. The Nasdaq gain Tuesday of +229 was the second largest gain ever but when combined with Monday's loss of -161 it only gives us a +88 for the week. The Nasdaq has now recorded the ten biggest gains and the ten biggest losses ever and all occurred this year. Even with the days gains the Nasdaq is still -27% down from the March highs. Even with the rally today the Nasdaq is still technically over sold but few analysts are forecasting a rally yet. The rally today puts the Nasdaq closer to breaking out of the down trending channel, which started on March 24th, than it has been since April 10th. We are currently at the proverbial inflection point. On a historical basis it is still very oversold but this is also historically the time the Nasdaq has trouble as the earnings flood dries to a trickle. The Nasdaq closed over its 200 DMA again and this may be the first step in starting a new up trend. Advance/declines were very positive today with the NYSE and the Nasdaq both posting better than 2:1 ratios. Up volume was better the 4:1 over down volume. On the surface it would appear the rally has legs but with 73% of the S&P having already announced the earnings parade is drawing to a close. Normally this would be the call to move to the sidelines but since the majority of major players have been standing on the sidelines for several weeks the urge to buy the rally is going to be strong. Nobody wants to miss the train if the Nasdaq is going to start trending up again. Stocks have not been this cheap since December of last year and nobody expects them to remain at this level for long. Now we are likely to see a test of wills as buyers face each other over a banquet table of juicy steaks. All the funds would like to see prices drop a little more but if someone across the table flinches and starts grabbing for the best steaks the resulting feeding frenzy would make a room full of lumberjacks afraid of losing fingers and hands trying to grab a morsel. It will all boil down to whether the fund managers think the selling is over, or not. If they think this was just another bear trap rally, just like the last two big up days this month, then we will struggle again. If they decide that this is as cheap as stocks are going to get before the June earnings run then the buying will pick up speed and the Nasdaq express will be back on track. In order to confirm the current rally the Nasdaq will need to close over 3800 tomorrow and hold over 3800 the rest of the week. Right now we have a lower high and a higher low formation and only one will eventually prevail. If the market climbs the wall of economic worry we have this week then the rally is for real. Wednesday we have the Durable Goods Orders and Thursday we are expecting the Employment Cost Index and GDP as well as a speech by Greenspan. These reports could set the tone for May. If the reports continue to show inflation creeping up then Greenspan and company will be a larger worry as the FOMC meeting in three weeks edges closer. I think it is a good possibility that we will see some weakness between now and Thursday until the ECI and GDP numbers are known. If those are much higher than expected all eyes will be on the Greenspan speech for a hint of a more aggressive rate policy and that would of course be market negative. Tuesday, Richmond Fed President Alfred Broaddus, a voting member of the Fed's rate policy group, said recent economic data point to a risk of higher inflation and intensifies his concerns about the economy overheating. As I have said before the Fed will telegraph pending rate increases and investors will be listening to the coded words for changing signals. I would not argue with any rally now but the most likely possibility would be a narrow range until after the FOMC meeting and then a big rally into July earnings. Trade anything the market gives us but keep your stops close! Did you buy it? On Sunday I suggested using the QQQ to capitalize on any dip and bounce this week. The QQQ had only been under $80 once this year and that was on the 17th. I felt the $80 level was strong support and I suggested buying the QQQ stock or options on the QQQ if it broke $80 this week. On Monday it hit $79.88 and then rebounded. Great play for investors who wanted to capture the market move without having to be right on a particular tech stock at the same time. Trade smart and sell too soon. Jim Brown Editor Current long positions include: VIGN, NTAP ********** STOCK NEWS ********** IP Offers to Buy Champion By: Matt Paolucci International Paper (IP) on Tuesday offered to purchase all outstanding shares of Champion International (CHA) in a cash and stock transaction worth an estimated $8.5 billion, comprised of $43 in cash and $21 in stock. With its $64 per share offer, IP has effectively started a bidding war for Stamford, Conn.-based Champion. On February 17, Finnish forestry company UPM-Kymmene unveiled its plan to buy Champion for $6.56 billion in stock. Helsinki- based UPM offered $52.74 per share of for Champion, a 30 percent premium to the U.S. firm's closing price Wednesday at the time. But shares of both Champion and UPM have come down since the announcement, as analysts questioned whether UPM was paying too much. The paper industry is in the midst of consolidation. Just five days after UPM's merger accord with Champion was announced in February, Finnish-Swedish forest products company Stora Enso nnounced a deal to acquire Consolidated Papers Inc. (CDP) for bout $4 billion. IP itself completed a $6.6 billion buyout of another paper behemoth, Union Camp, just last year. "Our cash and stock offer is far more attractive to Champion shareholders," said John Dillon. "It not only represents a significant premium over the UPM-Kymmene offer, but also provides Champion shareholders certainty of value and much more liquidity." "A merger with Champion affords us the opportunity to significantly improve profitability by strengthening our core businesses There is no question in my mind that we will be a stronger company," Dillon added. Based on Monday's closing prices, the International Paper offer represents more than a 20 percent premium over the mplied value of the UPM-Kymmene proposal and nearly 25 percent over Champion's closing share price. In addition, IP would assume approximately $2.3 billion of Champion's debt. International Paper's offer is not subject to any financing conditions or to pooling-of-interests accounting treatment and does not require an IP shareholder vote. The merger is expected to result in $425 million in annual cost savings as a result of integrating manufacturing operations, reductions in duplicate overhead costs and improved purchasing efficiencies, principally in North America. In addition, the combined company will be able to reduce capital expenditures below the amount spent as separate entities. International Paper also announced plans to sell more than $3 billion in assets by the end of 2001, as part of the company's increased focus on its core businesses. IP said it is prepared to enter into discussions with Champion's management as soon as the Company's board has authorized those discussions. The transaction is subject to regulatory approvals, which are not expected to delay completion of the deal. ************** MARKET POSTURE ************** As of Market Close - Tuesday, April 25, 2000 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 11,000 11,400 11,125 Neutral 4.25 ** SPX S&P 500 1,500 1,550 1,477 BEARISH 4.14 OEX S&P 100 800 850 795 BEARISH 4.13 RUT Russell 2000 550 600 489 BEARISH 4.14 NDX NASD 100 4,000 4,500 3,621 BEARISH 4.13 MSH High Tech 1,000 1,150 952 BEARISH 4.13 XCI Hardware 1,600 1,700 1,488 BEARISH 4.13 CWX Software 1,500 1,670 1,204 BEARISH 4.04 SOX Semiconductor 1,200 1,300 1,082 BEARISH 4.13 NWX Networking 1,070 1,190 984 BEARISH 4.04 INX Internet 800 940 590 BEARISH 4.04 BIX Banking 530 620 581 Neutral 3.16 XBD Brokerage 500 580 481 BEARISH 4.14 IUX Insurance 540 620 609 Neutral 3.16 RLX Retail 900 1,000 967 Neutral 4.13 DRG Drug 355 380 386 BULLISH 4.25 ** HCX Healthcare 710 760 774 BULLISH 4.25 ** XAL Airline 130 155 147 Neutral 3.10 OIX Oil & Gas 265 300 290 Neutral 3.16 Posture Alert The old & new economy stocks both enjoyed a solid day Tuesday, as numerous equities made up the losses from Monday's Microsoft debacle. Sectors leading the way include Internet (+9.25%), Semiconductors (+8.94%), NASDAQ 100 (+7.99%), and Software (+7.79%). With this most recent action, we have upgraded the Drug and Healthcare sectors to Bullish from Neutral, and have upped the Dow to Neutral from Bearish. **************** MARKET SENTIMENT **************** Tuesday, April 25, 2000 Bears 1,249, Bulls 879! Tuesday's trading ended in stellar fashion, as all indexes participated in the relief rally. This rally came on the heels of Microsoft Monday, in which the software bellwether sank and took all passengers with it. Tuesday's trading was extremely positive, especially since most indexes closed at higher levels than before the pre-Microsoft news. However, the only negative today was volume, as the NYSE traded just over a billion shares while the NASDAQ traded 1.6 billion, which if compared to the chart below, is quite light. Regardless, a win is a win, so we'll enjoy it for the moment! Corporate earnings continue to please, and has given huge support for this market. If it weren't for the strong earnings, this market would be in bad shape. Regardless, as it stands the S&P 500 has done a remarkable job of managing the earnings. Below is a scoreboard of S&P 500 companies and their earnings record for this quarter. S&P 500 Earnings: Beat Expectations: 252 or 72.8% Missed Expectations: 35 or 10.1% Reported In-Line: 59 or 17.0% Total: 346 Pretty impressive results so far, and they continue to come in great. After the bell today, we had bellwethers such as Nortel and Ebay smash expectations. These numbers may help fuel the rally over the next several days; however, as we have stated before, after earnings season, the media will be fascinated with Mr. Greenspan and the ever so fun game of FedWatch. So don't be pulled into any bear traps! Below, we have highlighted the NASDAQ records, and surprise-surprise; many of them have come from the month of April. The top 4 point gainers and losers are all from this month. Now if you were to tally up the top 4 gains and compare them versus the top 4 losses, the score would be 1249.16 (bears) and 879.92 (bulls), or an average of 312.29 to 219.98. This is not the type of score we like to see, and unless the bulls can pull off a last second Hail-Mary, the bears will end the month victorious. Date Point Change Date Point Change 04/18/00 +254.41 04/14/00 -355.49 04/25/00 +228.75 ??? ??? 04/17/00 +217.87 04/03/00 -349.15 04/07/00 +178.89 04/12/00 -286.27 02/23/00 +168.21 04/10/00 -258.25 01/10/00 +167.05 01/04/00 -229.46 03/03/00 +160.28 03/14/00 -200.61 01/07/00 +155.49 03/29/00 -189.22 03/22/00 +153.07 03/20/00 -188.13 03/09/00 +149.60 03/30/00 -186.78 02/03/00 +137.02 04/24/00 -161.40 Date % Change Date % Change 10/21/87 +7.34 10/19/87 -11.35 04/18/00 +7.19 04/14/00 -9.67 04/25/00 +6.57 10/20/87 -9.00 04/17/00 +6.56 10/26/87 -9.00 09/08/98 +6.02 08/31/98 -8.56 10/30/87 +5.29 04/03/00 -7.64 10/29/87 +5.20 04/12/00 -7.06 10/09/98 +5.17 04/10/00 -7.06 09/01/98 +5.06 10/27/97 -7.02 10/15/98 +4.55 03/27/80 -6.15 Top Volume Days (In History) & Lowest Volume Days for 2000 Date Volume Date Volume 04/04/00 2,881,326,200 03/27/00 1,374,793,800 04/14/00 2,553,268,800 04/20/00 1,418,691,600 04/17/00 2,447,524,600 02/01/00 1,419,596,600 03/01/00 2,232,343,100 04/10/00 1,440,720,000 04/18/00 2,147,927,000 01/13/00 1,470,650,500 03/07/00 2,144,429,400 03/28/00 1,482,970,500 03/02/00 2,137,076,800 01/31/00 1,503,964,700 03/03/00 2,136,527,500 01/03/00 1,507,020,200 03/31/00 2,111,442,500 01/04/00 1,509,974,100 02/29/00 2,088,835,400 01/12/00 1,519,226,700 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 (5.934): The current yield is in bullish territory. Volatility Index (27.06): The VIX continues to prove that the low 30's are an excellent buying opportunity, and the low 20's continue to be a great selling opportunity. Short Interest (NYSE): Short interest on the NYSE fell 1.33% to 4,055,931,190 shares on April 14; however, this is still a high level and from a contrarian viewpoint, would be considered bullish. 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 2.25 Overhead Resistance (775-800) 1.70 1.82 OEX Close 777.12 795.32 Underlying Support (745-770) 1.60 1.84 Underlying Support (715-740) 5.53 6.45 What the Pinnacle Index is telling us: Based on the above statistics, overhead and underlying both remain light, indicating we can still go in either direction with relative ease. Resistance will start to be felt at the 800 benchmark. Put/Call Ratio ******************************************************************** Thurs Tues Thurs Strike/Contracts (4/20) (4/25) (4/27) ******************************************************************** CBOE Total P/C Ratio .75 .41 CBOE Equity P/C Ratio .68 .34 OEX P/C Ratio 1.42 1.40 Peak Open Interest (OEX) ******************************************************************** Thurs Tues Thurs Strike/Contracts (4/20) (4/25) (4/27) ******************************************************************** Puts 680 / 4,808 680 / 5,264 Calls 800 / 5,512 800 / 5,376 Put/Call Ratio 0.87 0.98 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 25, 2000 27.06 *********** OPTIONS 101 *********** A Laywer That Represents Himself... By: David Popper As a practicing attorney and owner of a small firm and frequent participant in court proceedings, I often have the ability to watch attorneys and pro se litigants argue before the court. Pro se litigants are those that represent themselves before the court. Often I have found that pro se litigants focus on irrelevant information which may be emotionally satisfying but is in no way relevant to their case. In fact, more times than not, I have seen unrepresented persons argue to the judge in such a manner as to annihilate their own meritorious case and snatch defeat from the jaws of victory. Some of these unrepresented litigants are attorneys. It is often noted that a lawyer who represents himself has a fool for a client. Why? EMOTIONS! Though emotions have a place in final arguments, they have absolutely no place in the cold calculations needed to build a winning case. Likewise, emotions have absolutely no place in the market. Professional traders will tell you that their success is best when the market is approached in an academic manner. I have made every mistake in the book. Most of the mistakes have their roots in emotion. As a long time trader, I have learned all of the trading rules that I need to know. Lack of discipline or emotion though often caused me to violate the very rules that I understand. Is it any wonder that the same trader that successfully paper trades may lose when there is real money on the table. Emotions can and will destroy your account. What makes a trade emotional? The answer may be different for every trader, but for me it is adopting too large a position in any one stock. Before Jim published his article "How to Trade High Risk Internet Stocks without High Risks" I was using that strategy. At first, I adopted strike prices where the calls were well above support points and the puts were placed well below resistance. Often, the difference between the call and put strike prices on the same security were 50 to 60 points apart. At that point, I would trade only 10 call contracts and 10 put contracts. Each contract would generate a premium of approximately $5 and therefore, I had an excellent chance of earning an "easy" $10,000 with reduced risk. Money came easy. But do you know what? If $10,000 is this easy, if I narrowed the spread between the calls and puts, I could make $15 a contract instead of $5. If I doubled the number of contracts and narrowed the spread, I could earn $60,000 per month instead of $10,000 per month. I can live on $60,000 per month. What I did not count on was emotion. Options are priced appropriate to risk. With additional risk, my strike prices were attacked. I was constantly covering. My failure to place my calls and puts above and below natural resistance and support levels left me vulnerable. Every time my strike prices were attacked, I covered too quickly. The positions were closed for a minor loss. You see, greed made me rationalize that the strike prices with high premiums were adequately protected, when they were not. Greed made me take a position which was too large for my account. Fear made me close a put position which I would otherwise keep open. Emotions turned my winning trades into losers. Over the next several issues, I will discuss emotions in the market, their causes and perhaps a cure. Contact Support ************ WOMANS WORLD ************ Moving At The Speed Of Light By: Mary Redmond We all want to know when the Nasdaq is going to go up again, and some of us want to know about the Dow also. The real upward momentum might come back when John and Jane Public start investing aggressively in technology funds and John and Jane Technology Fund Manager start buying technology stocks aggressively again. The issue is when is that going to happen. Whether the Nasdaq goes way up or down it could very likely happen relatively fast. The public's impatience has been a contributing factor to the volatility seen in the markets today. If you take a look at a chart of both the Dow and the Nasdaq for the first quarter of the year you will see an example of this. The Dow hit a high of 11750 in January, then in February we experienced a severe bear market in the "old economy" non technology stocks. The Dow lost 2000 points in two months, and hit a low of 9731. Meanwhile, the Nasdaq moved from 4000 to 5000. People were talking about Nasdaq 7000 and Dow 9000 by the end of the year. Quickly the pattern reversed and the Dow actually went up again to 11500 while the Nasdaq dropped. This is an example of how fast corrections can occur, and how quickly public sentiment can change. We have no one to blame but ourselves for this. The fund managers, brokers and investment advisors have to do what their customers want for the most part. Fund managers used to be able to show an excellent yearly performance record, now they are expected to show excellent quarterly or monthly performance, or risk losing their jobs. The turnover rate of shares traded on the NYSE is higher than it ever has been. This has been blamed on day traders, but there are far too many shares trading hands to be attributed solely to day traders. At the beginning of the 1990s it was estimated that between two and five million Americans owned stocks. Now the estimates are between eighty and one hundred million, and if you add the mutual fund shareholders the number would be even higher. Plus there are millions of investors from other countries who regularly buy US stocks on our exchanges. A couple of years ago, the thought of one billion shares trading hands on the Nasdaq was mind boggling. Now a day with only one billion shares trading is considered slow. There are a couple of facts which indicate that cash may be building up on the sidelines. Approximately two trillion of market capitalization exited stocks recently, and yet there is less than 300 billion of margin debt outstanding. This may be indicative that liabilities are being reduced. Also, in anticipation of redemptions, some fund managers raised cash by selling stocks only to be surprised by very few redemptions. They are now sitting on excess cash, and generally do not get paid for holding cash. In addition, the Treasury Dept announced this morning that they will buy back another three billion dollars worth of bonds on Thursday. This is additional liquidity which will be added to the system. Remember, when the Dow was 11,750 in January the 10 year T bond was yielding 6.8%. It has since that point declined nearly 100 basis points in yield. Since many ipos which were scheduled to come out in the last two weeks have been cancelled, this leaves excess cash which would have been invested in the ipos. This may direct some of the cash to the perceived safety of the large cap profitable growth stocks. The performance pressure of fund managers is impacting the markets now. For instance, the turnover of mutual fund shares is higher than it ever has been. Fund managers can't afford to show a bad quarter. For this reason, some of them may be hesitant to start buying high flying technology shares now. The Nasdaq may go up again, but it could just as easily go down a little more first. Nobody wants to be caught in the downdraft, so a lot of them sit on cash and wait for someone else to make the first move. If the public starts to contribute to technology funds aggressively, and some fund managers start to buy, the Nasdaq may start to go up again. If this happens, other fund managers and investors may jump in and start buying again too. Then the herd mentality can start in which everyone wants to buy because they don't want to miss the next big move upwards. For the Nasdaq to go up again, we probably need to see this scenario. The psychology can reverse just as easily, but whatever is going to happen, I wouldn't count on it taking too long. Contact Support ***** The Answer is: "No. We Aren't There Yet." By: Renee White It's been an interesting few days of trading and things are starting to feel better. However, I am still skeptical. Here we were, worried about closing below the 200 dma and holding 3500 on Nasdaq and once again we blow right past the fear as though a feather in the wind. In fact, we blew right past 3600 also and we will soon be trying out that 3750 level. Why would anyone question the strength of the bull? I question it. Then again, I'm not that trusting. Once hurt, I want confirmed signs of damage repair. I want the flowers, the presents, smiles, laughter and the fun. I want this market to grovel!! Beg me to buy it with long calls! Force me to believe that it loves me and it won't hurt me again. I want it to convince me to trust it again. I want to be wined, dined and pampered in the land of the greenbacks while all things point north. I want those 100% option profits in one day again. Give me winning trades I can make with my eyes closed! Quit whining and crying...moaning and groaning, crawling on its sides. Just give me greener pastures and a fat bank account once again. Only then will I forgive it for destroying all my plans to spend my rewards this quarter. I'm just not that trusting yet. This market has proved nothing to me yet. Actually, the daily chart is starting to look a little less putrid. You know what that means; the worst part of this flu may be over, but it's not completely well yet. There's always the risk of a relapse and as you know, sometimes it just lingers. The Nasdaq last pierced the lower level of the Bollinger bands on both the Friday and Monday of the major sell-off (April 14 & 17). It has come off the lower band nicely and other indicators are starting to look good, but I still expect it to tap that lower band again. If I am right, that could be a couple hundred point tap which could be painful for short-term traders that have recently bought in. I would feel better about playing a rally after this confirmation of the lows, or at least by coming close to it. Until then, I'll probably limit my trades to mostly short term trading, intra-day or no longer than 30 hours on either the buy or sell side. In my evaluation, we have seen 3 legs of this down market. The first leg was the week of March 27th, 2nd leg being April 3 and 4th, while the 3rd leg was the Friday to Monday April 14 & 17th. Each leg was worse than the previous one. The forth leg is yet to be determined but if it is expected to be the last, it should be less severe than April 17th. Since the April 4th leg of this downtrend, we have had 6 up days and 8 down days. Since Monday's capitulation day on April 17th, we have had 2 up days and 3 down days. In fact, since the week of March 27 when the first leg of this downtrend started (which is when I got killed!), we have had only 5 clear up days and 13 down days. Let's review: +5 added to -13 = -8. Not good. That's more down days than positive days. Easy math. That is why I am still shorting stocks right now. The bias is still negative. It could be improving, or it could be faking me out. I don't trust it. Until there is more confirmation, I will play what I see. There were more advancers than decliners today, which is good. But don't be easily fooled by that neat trick. The volume was ok, nothing exciting. Remember, some great earnings have been coming out and we should all know that if we are told to not hold over earnings, then probably other traders don't either. That means more pressure on the downside after this last batch of heavy hitters is finished reporting. There will be a select few, which may temporarily advance, but the odds of a sustained rally before the FOMC meeting, the CPI and the PPI are slim in my opinion. Those three events alone, coming out in front of the meeting, could be reason enough for triple puking. Nevertheless, as the market changes, so will I. Still though, beginners may want to wait until after the FOMC meeting. My thinking is, I'd rather be a little late to the party, then risk losing even more money in a fake out. This time, the stars must line up! Yesterday, instead of shorting like I thought I would do, I bought a few thousand shares of NetZero for what I thought would be an intra-day play. I bought after a rollover bounce. It then consolidated all day long just staring at me. I was unable to exit by mid day as I had planned. Anxiety hit during the afternoon sell-off which made me cuss for not shorting my own advice. However, just before I was going to take my loss, the whole market took off like a rocket. This is why it is so important to watch not only YOUR stock, but the general market trend also. Those who follow me know I play the hard closing run-ups a lot, for the gap-open profits. Seeing the Nasdaq take off just when I was about to take my loss, caused me to pause. Good thing. Volume picked up and everything turned around. Expecting a hard run into the close, I held and ended the day feeling fine. I exited within the first hour of trading this morning with a really nice profit. Unfortunately, I sold too soon because after consolidating for a while again this morning, NetZero took off due North! When I saw it, I immediately shorted the stock. I was hoping to exit this afternoon, but it continued North as if to know I had just shorted it. Again, I held. I don't expect tomorrow will be another rally in front of the economic numbers on Thursday, especially with Greenspan speaking in the afternoon also. Last Thursday, NetZero closed at 8 3/4. Today it closed at 16. Would anyone be thinking of taking profits in front of a Greenspan speech you think? That's what I expect anyway. I was also able to successfully short EXDS for a nice clean intra-day play, along with a short term QQQ trade. I'm avoiding the options on QQQ at this time, playing them directly instead. Most traders know that when Greenspan speaks, the market listens. Since he has a recent history of confusing us with oblivious hints of his next rate hike intentions, I will play the fear by making lemonade while shorting for profit. With the degree of damage done technically on Nasdaq, it is unrealistic to expect an easy ride straight up. A reversal must have more up days than down days and we are not there yet. In fact, I expect more wild volatility until after the FOMC meeting on May 16th. After Thursday we will have roughly 2 weeks to worry and trade the fear of the May 16th meeting. Some rallies may occur, followed by abrupt profit taking. So for now, I will wait for more downside on Nasdaq before I step in to start buying my Leaps and longer term plays. Just remember: if the sector is down and the market is down, your great stock with a future stock split may still not be able to keep its head above water AND you still have evaporating time premiums with the options. Wait till the wind is to your back. I am making my list of candidates and getting the symbols of the strikes with large open interest. If a re-test of recent lows occurs quickly, I will be prepared to pounce, assuming I have not already used up my buying power for that day. OH, that would be a very mean joke!! Contact Support ************** TRADERS CORNER ************** The Psychology of Trading By: Molly Evans The markets giveth and they taketh back. This is the axiom of a seasoned market player. Trading seems like it should be so easy. The commercials on t.v. show people reveling in the ease of clicking and the riches of instant profit. Brokerages give out margin like Halloween candy and analysts just raise the price target of Tech XYZ as it already hit their first number. That's the way it was just a few LONG weeks ago. Shall we examine what's taken place since then? The Nazdaq had an 80% gain in a year and kept charging with only a couple of bumps along the way. The fed started raising interest rates but investors brushed that aside because, "that doesn't affect technology companies." A couple of reports came in raising the question of inflation creeping into the economy and then a prominent bull threw a red flag, warning "the little guy" that perhaps now would be a good time to trim some fat from their portfolios. Carnage ensues. You know the story. What really happened here though? It's elementary psychology Watson. "The Market" itself is just a very big crowd of people. It's every man for himself. There is promise of fantastic monetary reward for outsmarting the next guy yet one risks giving it all away should he not mind the port. There is money in the market because people as well as yourself puts it there. No one goes into the market with the intent of giving you their money. Hence, trading is a very tough way to bring home a fair dollar. Others are trying to rob you while you've got your hand in someone else's back pocket. As Dr. Alexander Elder, author of "Trading for a Living" states, "The trading highway is littered with wrecks. Trading is the most dangerous human endeavor short of war." We've just witnessed many wrecks. How you as an individual performs when there is a pile up on this highway is due in large part to your trading psychology. Amateur traders bring all of their emotional baggage to the table. That is a very expensive suitcase in the market. A good trader's ultimate goal is to trade well. Isn't there a book "Do What You Love, The Money Will Follow"?? That's the nature and psyche of a good trader. Successful trading builds equity. That's the reward. To get there, it takes more than luck and and an 80% run up bull market. A trader must keep emotions in check, trade with a plan and not allow the primitive group psychology influence his good judgment. Market swings are a result of the collective whole swaying from indifference to hope or pessimism and fear to optimism and greed. People enveloped in the crowd, think differently than they would were they in solitude. They become more credulous and impulsive, anxiously search for a leader, and react to emotions instead of using their intellect. It's a proven psychological phenomenon. Elder relates that just as a soldier will follow a trusted leader to his death, so too will a trader wipe out his account in the belief that he is following a trend and has a winner despite the apparent losses that are mounting. "When we join groups, our thinking on issues involving that group regresses to the level of a child. A leaderless group cannot hold itself together and falls apart. This explains buying and selling panics. When traders suddenly feel that the trend they have been following has abandoned them, they dump their positions in panic. Group members may catch a few trends, but they get killed when trends reverse. When you join a group, you act like a child following a parent. Markets do not care about your well-being. Successful traders are independent thinkers." This of course, is not say that you should become a contrarian investor! The crowd is bigger and stronger than you. You should never go against the crowd no matter how smart you are. The key is to plan your trades away from the market. Devise your entry and exit plans and then stick to it. Be patient. Wait for that entry point. If it doesn't come along, you know what? There's another train coming. Find it. The beauty of individual investing and trading is that you don't have to trade. You can afford to be patient for the right opportunity. The weakest part of any trading plan is the trader himself. Traders fail when they don't have or deviate from their plan. Plans are created by reasoning individuals while impulsive trades are made by crowd induced euphoria or fear. The markets rise because of greed among buyers and fear among short sellers. When a rally ensues, it's because the bulls are afraid they're being left behind at the station and they hop aboard at any price. A short seller feels trapped in an escalating rally as they watch their profits melt and turn into losses. Hence, the rush to cover their positions and the rally drives on up. As Elder says, "Fear is a stronger emotion than greed, and rallies driven by short covering are especially sharp." If this is fact, then the opposite is true too. Markets will fall the fastest by panic selling. The message boards are filled with sad testimony about their margin or panic selling and their lament that the market immediately turned around as soon as they were out. Don't be in this situation. This happens because the crowd sellers were gripped by the same fear or margin debt and everyone dumps at the same point. Obviously as soon as the capitulation ensues, the markets head north. The crowd gets greedy and goes on a new shopping spree in the market. As traders going forward, we have to guage the sentiment of the crowd and plan our trades accordingly. The aim of market analysis isn't to correctly guess the future price of a stock. A biased bull looks at chart and says, "Where can I buy?" while a biased bear looks at the same chart ands asks, "Where do I short?" A fair market analyst looks from neither perspective but seeks only the truth. Are the bulls or the bears in control? Is anyone in control right now? Yesterday it was the bears, today it was the bulls. Liken today's market to something tangible. Borrowing from Elder's example, if a man falls down a flight of stairs, he might just get up, brush off and run up them again. Now assume he just fell out of a third story window. He won't just get up and run right then. He may have broken a leg. The question we should all ponder is, did we just fall down the stairs or did we fall out of that third story window? Contact Support Elder, Alexander; Trading For a Living: Psychology, Trading Tactics and Money Management; Wiley and Sons, Inc. New York; 1993. ***** Falling Knives Or $100 Bills? By: Austin Passamonte Depends on which side of the market you are in! Are you a bonafide raging bull? On days like this it sure is easy to be one. However, have you met any traders who only go long calls, sit on their hands or get carved up trying to trade somewhere in between? They might be missing out on profits and fun! While attending the O/I seminar in Denver last month one of many excellent instructors asked the crowd for a show of hands from all of the "bulls" present. A virtual sea of palms stretched into the air across the room. These individuals were easily spotted for the remainder of our stay they were the ones huddled into groups during breaks watching CNBC as the NASDAQ plunged three days straight. One could almost guess how deeply invested in call options each individual was with a quick glance at their slumped body posture, glassy stare and grumbling amongst each other. Haven't we all seen this image gazing back from the mirror ourselves? The crowd was then asked for hands from the "bears" and a few brave souls poked their paws barely (poor puns intended) above their heads. The last request was for traders who considered themselves market neutral to account their presence, and no more than five or six of us dared admit that fact to the crowd. I wondered to myself, "how can this be"? One never likes to see falling stock prices but if the event is out of our control, why not profit from it instead of lamenting the inevitable? It would be very hard indeed to commit oneself to regularly buy puts on CSCO, DELL, QCOM, INTC, SUNW, MSFT, - we could list symbols 'til the cows come home. These tech stalwarts have been so good to everyone in the past (including today), how could we possibly fade them? This mental hang-up is partially based in reality. Buying puts on strong stocks hopefully near a market "top" is much riskier than long calls near a "bottom" in my opinion. We have two choices: sit out the falling markets while grinding our teeth and pacing the floor waiting for bullish entry points or learn to trade both sides of the mountain. Remember, moving markets spend half the time going up and the remainder going down, now don't they? The good news is one can theoretically make twice the money in that same period of time. The best news is there is usually more profit to be made quicker on the downside than on the way up. Which brings us to the point of this piece. You can profit big- time from trading index options in any ranging market condition, especially when the markets fall. There is good money waiting to be made with QQQ, DJX and OEX options. It is my opinion that an astute trader can have far greater returns (and keep more of the profit due to 60% long term 40% short term capital gains tax rate) in most market conditions smartly trading the indexes both directions than solely looking for long call/short put strategies. If you never lie awake at night too excited to sleep because the market is poised to plummet and $100 bills are fixin' to fall from the sky into your trading account then we need to talk! One exercise I practice every night is to pull up the CBOE charts from the left column of tools in this site and plot the daily price movement of the OEX, DJX and QQQ options within a few strikes price range either way of the current market. Keeping this data in my daily trading log allows me to flip back to those large range days and see just how the indexes behaved. You'd be surprised how many times these index options appreciate 20%, 50% and even 100%+ in a single day of epic proportions like we witness about every two weeks lately. When capitulation days are expected as this Thursday could be, or when they appear out of nowhere as today has, it pays to have a game plan that captures large moves. Having a short list of selected choices from puts & calls on the DJX (Dow) and QQQ (NASDAQ 100) a strike or two away from current index levels while the market is live allows you to calmly select the proper play for the situation. At the bottom of most future letters I'll include a couple of index options and the trading range prices for that day. This doesn't mean I bought & sold them (won't I wish), it will simply be an example of what a trader might have experienced had they purchased somewhere in the middle. I think you'll be pleasantly surprised to see how many singles, doubles and occasional grand- slam hits for your profit ledger are on the table during most trading days. I'll try to expand in detail what I attempt to accomplish with index options and share some ideas you might find useful during volatile markets. We'll start with the OEX (S&P 100) by exploring strategies in detail and what it has to offer you. Hey, what do you say we learn a little, turn that knowledge into profits and have some fun along the way together? Trade the right direction. May 25th, 2000 OEX May 780 Call: low 17 1/2, high 30 1/2 - total gain +13 (42%) OEX May 790 Call: low 12 1/8, high 23 1/2 - total gain +11 3/8 (48%) QQQ May 92 Call: low 3 1/8, high 5 1/8 - total gain +2 (39%) DJX May 110 Call: low 2 1/2, high 4 - total gain +1 1/2 (37%) ***** I Wouldn't Call it a Win By Janar Wasito I've often written in this column about having a trading plan and keeping your cool under fire. In the past month, some of these traits may have become liabilities instead of assets. As Molly pointed out, the slow boil will kill the frog who would otherwise jump out of the pot of boiling water. Ribbit. As I write this, my Calendar Spread Strategy is beating the NASDAQ -- it is designed to by systematically capturing the premium each month from short term calls sold. But over the April Options Cycle, the NAS is down 24%, and my portfolio of Calendar Spreads is down 20%. I wouldn't call it a win. Rather than the blow by blow of this strategy, I thought I would hit a couple of general items that are applicable to a wider set of option traders. The first item is something called Regimes of Volatility. In a futures and options class I recently took, we looked at a paper from a major investment bank that outlined 3 major types of markets in seven periods between Fall 97 and Spring 99. Without getting too technical, when there is a major drop -- as we have seen over the last month on the NASDAQ -- the implied volatilities move opposite the major averages. That means that the volatility premium, especially for short term options, goes way up while the averages go way down. The reason is probably apparent to anyone who has been following the markets for the last month. Big, unpredictable drops occur, causing big snap back moves. The VIX and other major indicators move out of comfort zones that have served traders well for 12 months. The market makers who trade for a living need a much wider margin of error, which translates into higher premiums and wider spreads. The net result for the individual trader is that we have to pay much more for options in an environment which is much less likely to yield consistently positive results. Marty Schwartz, a superb trader of both futures and options, looks at how the market reacts to good and bad news. In the last few weeks, the market has reacted negatively to both bad news (CPI) and fair or good news (earnings). It makes the market very hard to trade, and it doesn't help that the options we use are more expensive. The second point is another fairly obvious one: the Internet Bubble has burst. It's not over yet. The best book on this is The Internet Bubble by the Perkins brothers, founding and managing editors of the Red Herring. The basic dynamic described is that insiders (company executives, venture capitalists, investment bankers) are selling stock to the individual investor -- and it is all a huge joke! It's a joke because traditional valuation measures such as inventory turnover, debt-to-equity ratio, and other measures, do not mean a thing anymore. Those insiders all have their MBAs, and they studied the indicators I am talking about. I had classes on those too (though I was trading options on my wireless modem equipped lap top in the back of class). The Perkins brothers list 133 companies, most Internet e-tailers, and they take a close look at the economics. Most of those are destined to fail outright or to be acquired. That will be the business story of the next quarter. Insiders are coming out of lock up in greater numbers in April and May, according to thestreet.com. Even at these prices, they will make a tidy profit. Here's a real life indicator, one of many I should have paid closer attention to. At the beginning of this year, I went out to lunch with a dot.com CEO who had just graduated from business school while I was still working on my degree. I had worked on his company for a period while in school. His company had been backed by top tier venture firms with almost $10 million dollars, and had grown to almost 40 employees. Over lunch, we were comparing notes and he noted his company's revenue figures. As an individual trader, I had actually made more trading than his 1999 revenues. And this is a company that has made it through the minefield of getting funded in a very competitive environment. He was planning on another round of funding leading to an IPO before year end. Great company, great service, but that is what's coming out the IPO pipeline. In retrospect (which is always 20/20), my battle plan for 2000 should have had a dot.com bubble play book. Puts, Bear Call Spreads. Now, I think we are in a grinding bear market with further to fall. But with NASDAQ +86% last year, we should all have read the handwriting on the wall a little more closely. The third point is that option trading is stressful. Well, OK, Janar, tell me something I don't know. Last weekend was not a good one for me. I have watched my financial cushion shrink as I stay in the calendar spread positions I opened 5 weeks ago, against the better advice of advisors, friends, and participants in our local options trading list. This has had a corresponding effect of shrinking my professional/ career options to ones I am less enthused about. (I know, play the biggest violin in the world between your thumb and forefinger for a fresh graduate in the Bay Area, still the country's hottest job market, where we have real negative unemployment.) I had a bull put spread on ICGE constructed of going short Sept 220 Puts and long Sept 120 Puts. It looked like a smart, innovative play when I put it on in late February and ICGE had earnings in front of it and the NAS was still headed to 6000 by tax day, soon to overtake the DOW. It didn't look like such a great play when only one of the four 220 puts I had sold was exercised against me in the depths of the tech sell off last week. $22,000 for $3800 worth of stock. So, I closed the rest of that position on Monday morning. Boy, those 120 Puts sure moved nicely! On a personal basis, the reality is that the markets have overwhelmed me. Last year, I made it a habit to take a week off every month so that I could approach the markets with a fresh eye. This proved invaluable in my best trading period -- November and December. I thought that the calendar spread strategy would be lower stress. Wrong! The stress is that I am in a trade each and every day. I executed as well as I possibly could have, selling deep OTM calls just when my holdings rolled over. I bought them back on the depths of the dips, pocketed the money, and bought more LEAPs. Still, because of the depth of the sell off, I am down, and down big. In this environment, it has been hard to keep up with school and other commitments. It's taken a toll on relationships, some of which were on shaky ground to begin with. How should one deal with this? In light of the continuing lock ups expiring, and the Internet Bubble continuing to burst (not all at once), the best thing would probably be to unwind all my positions and go completely to cash and go chill out. I haven't come to that point yet. A friend from the local option club has suggested some useful steps, though. First of all, think through the worst case scenario and the impact that will have. Because of the way I have set up my finances, none of these trades will impact my "daily operating costs" for at least a year, probably longer. That's a start. One good step is just go ride a bike, relax, do something recreational. Then come back and record lessons learned and make a plan. First, I need to make some career decisions. It really makes no sense to hinge those decisions on my brokerage accounts. I've already closed the ICGE play. I've learned a lesson there -- never open a OTM bull put play again. Never go naked puts, which would be even worse. Never enter a position which threatens the rest of my portfolio. Though these techniques can be useful for the most experienced traders, they don't fit my style, and above all, every trader needs to arrive at a methodology which fits their style. Exercise and going to mass are important to me. Getting organized over the next few weeks is important. Establishing my own criteria for career decisions is important. Getting out and socializing is important. Taking the next big steps in education & career are important. Finally, I scribbled out some specific protective measures. At the tops in the market, sector & stock, sell deep OTM Calls. Hedge half of the position with puts equal to half of the cash flow from the calls sold. Wait until month end to account for the proceeds from calls sold and puts. Then and only then reinvest in LEAPs. Thus, my lines of defense against a downtrend are: cash, calls sold, and puts. On the plus side, I tend to think that the stocks which underlie my LEAPs are at or close to a bottom. Maybe they can drop 10% from here. Maybe Ralph Acampora will be right about NASDAQ 2900. Any time I have seen the Market Sentiment indicators pegged completely to one side -- either bullish or bearish -- it has been about time for them to swing back to the middle. That was true on July 19, 1999. That was true in mid October, 1999. That was true on March 10, 2000. Will it be true now? I think that sometime in the next week or two, it will be true again. Perhaps the NASDAQ's performance in 1994 is an instructive guide for us. It started the year at 775 and ended it at 750 after some rather volatile trading, including a nasty drop in March/ April. Abby Cohen says that the S&P will end the year at 1575, implying a rise of about 10% from our present level. I think we could very well be at our bottom, and that the NASDAQ should head up from here, but not strongly or in a sustained way. My goal, with the Calendar Spread Strategy, is to sell short dated calls equal in value to about 10 - 12% of the long dated calls I hold. I use that cash to buy more LEAPs, thus allowing me to sell more short dated calls. My entry point at NASDAQ 4800 was clearly bad, and would have been much better at NASDAQ 3300. Still, the strategy delivered cash flow in the April Expiration Cycle, just not enough to offset the downside move in the technology sector. If we have indeed put in a bottom, or close to it, then the strategy should work over the next 6 months. Contact Support ************* DAILY RESULTS ************* Index Last Mon Tue Week Dow 11124.82 62.05 218.72 280.77 Nasdaq 3711.23 -161.40 228.75 67.35 $OEX 795.32 5.50 -4.57 0.93 $SPX 1477.14 7.07 27.81 34.88 $RUT 489.03 -13.30 20.49 7.19 $TRAN 2914.03 -28.12 108.90 80.78 $VIX 27.06 1.87 -3.12 -1.25 Calls Mon Tue Week RMBS 186.22 -5.63 24.34 18.72 Heading up with strength TIBX 79.38 -2.88 14.38 11.50 Just like we wanted... AMD 88.00 1.88 7.00 8.88 Possible split coming?? BRCM 160.88 -10.63 19.00 8.38 Strong gap up today... GE 166.00 3.81 3.94 7.75 New, now at all-time high ADBE 120.00 -7.88 15.25 7.38 More shares, maybe split? TER 103.38 -3.81 10.88 7.06 New, broke its channel NOC 72.56 3.44 2.13 5.56 New, runnin' and gunnin' SCMR 69.50 -1.75 6.69 4.94 Steel stomach needed... MERQ 75.44 -6.63 9.69 3.06 Top rebounding candidate CVS 46.75 0.19 2.75 2.94 New, found its lows DHR 54.94 0.50 1.50 2.00 Gotta love this chart GMST 42.13 -1.00 1.44 0.44 Dropped, bargain hunters CMVT 79.69 -4.81 4.44 -0.38 Made Barron's best cut ARBA 66.94 -7.00 4.94 -2.06 Look for renewed bounce VSTR 93.00 -14.06 6.13 -7.94 Trick could mean treats Puts DIGX 52.44 -24.06 1.06 -23.00 Thank you Exodus! AKAM 73.06 -11.06 -2.81 -13.88 New, lock-up over soon PG 64.25 1.56 -6.25 -4.69 New, problems continue EK 59.25 -0.75 1.50 0.75 Dropped, not movin' WY 55.44 1.00 0.25 1.25 Dropped, found bottom MCOM 30.38 -2.25 5.00 2.75 Channel still descending NTPA 34.38 -0.50 3.38 2.88 Ready to roll over?? FIBR 45.25 -1.94 7.19 5.25 Dropped, taking profits DCLK 67.63 1.81 10.38 12.19 Dropped, time to go PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** GMST $42.13 +1.44 (+0.44) Along with the rest of the tech sector, GMST got up on the wrong side of the bed Monday morning. The promising future for a recovery ahead of its earnings looks bleak. The stock saw a sweep to a new all-time low of $34.63 by late afternoon Monday as the pressure of Microsoft's (MSFT) woes bore down its weight. It was ultimately rescued from utter demise by an onslaught of bargain hunters who came off the sidelines driving up the trading volume and share price. In the last hour of the session, they bid up GMST before GMST settled for a strong close near the 5-dma at $40.69. Yet while support is relatively firm at $40, GMST appears to be range bound. We expected the stock to give a better performance by now. Since time is money and earnings are more than two weeks away we're exiting tonight to make room for more lucrative plays. Gemstar is expected to report earnings around May 12th. PUTS: ***** WY $55.44 +0.25 (+1.25) The post-earnings decline appears to have come to an unwelcome end. Last week WY continued to develop a pattern of lower highs and challenged the $53 mark with a dive to $52.50 on Thursday. However, this week WY signaled it hit bottom. After a quick dip to $53.50 on Monday, the stock edged higher and is currently sandwiched between the 5-dma ($54.58) and the 10-dma ($57.09). It's possible the 10- dma could serve as strong opposition, but we're betting WY won't slide much further. Therefore we're dropping it as a put play this evening. If you're a nature lover, then you'll be interested to know the National Audubon Society recently recognized Weyerhaeuser's "Cool Springs" Environmental Education Forest as an Important Bird Area (IBA) in North Carolina. DCLK $67.63 +10.38 (+12.19) The debate surrounding privacy on the Net took a back seat this week when DCLK announced several strategic alliances. With the majority of Net stocks taking a bath Monday, DCLK held up relatively well. The stock sold off early Monday morning, finding support at $52. After hitting its low for the day DCLK quickly rebounded and rallied into the close. The end-of-day tech buying Monday culminated with a gap higher by $2.50 Tuesday morning. DCLK got an additional boost by announcing they have joined forces with Broadband Digital Group to deliver advertisements to more than 900,000 registered users. DCLK also said they have teamed with Uniscape, a Global Applications Service Provider, in an attempt to expand their global presence. It appears that traders have forgotten about the controversy currently surrounding DCLK. In light of the strong showing Tuesday, its time to step aside and look for opportunities elsewhere. EK $59.25 +1.50 (+0.75) Although it doesn't look particularly strong, EK also doesn't look ready to continue to the downside. The downtrend, which had remained intact up through yesterday (creating a nice pattern of lower highs and lower lows) was broken today as EK closed above yesterday's high. There may be further downside to the issue, but support at $58 looks solid. We'll let it go for now and look for other plays with more excitement to offer. FIBR $45.25 (+5.25) Well, it looks like the NASDAQ may have put in its bottom yesterday...for the short term. Today's broad market recovery lifted many battered NASDAQ stocks, FIBR being one of them. Technically, FIBR traded in a narrow range and bottomed around the $35 level during yesterday's NASDAQ sell-off. Additional downside looks unlikely. Today's 18% climb confirmed that most of the sellers have already come to the table. The previous week's low was about $26 and since then FIBR has begun to round out. Remember, FIBR's March high was $150 so we have seen quite a bit of selling the past month. We entered this put play at $70.25 and don't mind taking our profits from this recent downdraft. *************************************** PLAY UPDATES - CONTINUED IN SECTION TWO *************************************** ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 DISCLAIMER ********** This newsletter is a publication dedicated to the education of options traders. The newsletter is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The newsletter picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. 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The Option Investor Newsletter Tuesday 4-25-2000 Copyright 2000, All rights reserved. Redistribution in any form strictly prohibited. ******************** PLAY UPDATES - CALLS ******************** AMD $87.00 +6.00 (+8.63) The shareholders' meeting is just two days away and we're eager for a split announcement to create even more excitement and momentum. The company is asking shareholders to increase the number of authorized shares to 7.25 mln, which would give the BoD plenty of room for a stock split. The investors' anticipation was evident today by the rising volume levels (over 5+ mln) and bullish $6 climb. Take a look at a chart and you can see firm support is much lower at $75 near the 10-dma. However in today's session, intraday support established itself much higher at $82-$83. This is quite a spread. If there's no earth-shattering event and the markets hold up, then its unlikely AMD will experience much of a pullback in the next couple of days, but there's never a guarantee. If this turns out to be the case and you decide to add new positions, then you'll have to jump in on an intraday dip. This is a more aggressive trading style and not for everyone, so be careful. Yesterday AMD demonstrated a prototype processor platform, the Athlon, featuring support for double data rate (DDR) memory. This new performance technology operates with the highest-bandwidth and lowest-latency PC memory technology currently available; thus providing advanced levels of performance. The technology should be available in the 2nd half of 2000. ADBE $120.00 +15.25 (+7.38) The MSFT meltdown brought pressure to ADBE along with the rest of the software sector Monday. Despite the sharp selloff in Net stocks, ADBE didn't retest its lows from last week. ADBE continues to show relative strength as it remains in its ascending channel, tracing higher highs and higher lows. Recently, analysts suggest that ADBE is positioned to take advantage of the boom in digital cameras. Businesses are purchasing digital cameras at an increasing rate, and using ADBE's software for editing purposes. The boom in camera sales is expected to add to ADBE's already increasing sales. The day we have long awaited is here. Wednesday, ADBE investors are voting on a proposal to increase the number of authorized shares needed for a split. In anticipation of the meeting ADBE soared in the final hour of trading Tuesday, gaining $8 on heavy volume. The stock has ran into resistance twice at the $120 level. The announcement of a split tomorrow could propel the stock above resistance and position it to retest its 52-week high of $125. Watch for the stock to clear the $120 level and confirm any move with heavy volume. Be cautious though, if the broad market shows weakness, ADBE doesn't have much support until $115. Watch the trading early in the day, and pick an entry point that is suitable for your risk level. CMVT $79.69 +4.44 (-0.38) CMVT made the cut last weekend when the infamous Barron's published a list of the best performing companies for investors. CMVT came in 6th out of the 500 largest companies ranked by market capitalization. In the article, US Bancorp Piper Jaffray reiterated its $130 price target. The spotlight from Barron's didn't help CMVT Monday as the stock fell in early trading along with the rest of the tech sector. Traders stepped in late Monday afternoon to salvage the day and carry the tech sector higher. The buying carried over Tuesday morning as CMVT gapped higher by over $2. Traders are beginning to talk about the upcoming earnings for CMVT, though the report is a few weeks away, great numbers are expected. We're looking for momentum to build in the coming weeks as investors anxiously await earnings. The rally today put CMVT back above its 5-dma, a level that has provided support for the stock. The stock will face resistance at $82 before moving higher. Look for a breakout above that level on heavy volume as a possible entry point. If the market weakens, CMVT should find support at $76. Confirm direction in the broader market before entering the play, CMVT has the tendency to follow market direction. ARBA $66.94 +4.94 (-2.06) Heading the wrong way, ARBA plunged below support at $60 yesterday, but was saved by the late-day NASDAQ recovery. Finally clawing it's way above $60, ARBA closed the day at $62 on fairly heavy volume. The bounce that occurred in the last hour of trading provided an excellent entry as both volume and price increased right into the close. After gapping up at the open today, ARBA had very little price movement, trading within a $2 range for most of the day. The lack of price movement wasn't due to a lack of volume, as ARBA traded just above the ADV of 5.2 million shares. Another note of concern is the fact that the NASDAQ and the Internet index both closed strongly today, while ARBA remained flat right up to the closing bell. Support seems to be holding near $65, but with the strength of the broad markets, we would have liked to have seen more buying interest today. Use caution going forward and force ARBA to prove itself before putting your money at risk. Look for either a renewed bounce at the $60 support level or a break through resistance at $70. DHR $54.94 +1.50 (+2.00) How can you not love a chart like that? Mimicking the steady gains seen on the DJIA this week, DHR has continued to march upwards, pausing occasionally to allow new players to step on board and then continuing the ascent. Volume has been a bit anemic (probably an effect of the light volume in the market as a whole), but looks like it is gradually picking up. The bounce off the 200-dma a week ago looks like a confirmation of the trend change, and today DHR posted its highest close since last September. In the event of a market pullback, look for a bounce near $52 to provide for a better entry. If the uptrend continues, consider jumping onboard as buyers push through resistance at $55. Continued strength in the issue will likely be predicated on the continued health of "old economy" stocks on the NYSE, so check market strength before playing. RMBS $186.22 (+24.35) Sure enough, $150 provided support late last week and looks to have held yesterday when the NASDAQ finally "retested" lows. With that strength heading into today, RMBS had buyers throughout the day. The stock gapped up on the open to $166.88 and trended higher, finding intraday support at $180. The Semiconductor Index($SOX) was up almost 9% today. This strong move today looks very nice as we picked RMBS this weekend at $167.50. Yet, it is important to note that this stock traded as high as $471 in March and plummeted from there. Thus, trading in RMBS should be closely watched for entry and exit points during its short term pops and slides. Taking advantage of this volatility can be very profitable. Remember, if and when the NASDAQ falls under selling pressure, RMBS and the other Semis that have been bid up may come under that same pressure. As for now, this is the leadership sector and trading should be done using support levels and individual risk profiles. MERQ $75.44 +9.69 A top rebounding candidate? Not Shaq, but MERQ. Shaq may have received his first scoring title in the NBA, but MERQ certainly exemplified a strong rebound. We entered on April 16th at $58.75 and saw just that. And although trading has been volatile, up has been the general direction. Last week, MERQ managed to hold its head above $70 but with yesterday's NASDAQ sell-off, MERQ gapped down and found intraday support at $63. Yet it was today that MERQ reestablished itself firmly above the $70 level. Even more encouraging for this call play was the strong volume into the close, which was just off its highs. Last Tuesday and Wednesday, the stock tested $80 and encountered resistance. This is the next level to look toward on the upside. On the downside, MERQ found support last Thursday at $70 and below that, look to $65. These would be timely entry points, depending on personal risk levels. The NASDAQ has been the catalyst in this market, both up and down, so look to it for overall direction. VSTR $93.00 +6.13 (-7.94) We said that if the NASDAQ were to retest its lows that things could get tricky for VSTR. Monday was ugly as the NASDAQ dragged VSTR down until it found support at $85. Even with the NASDAQ rebound today, the stock once again tested the $85 support level. As of midday, it looked as if VSTR might have been a drop but our spirits were lifted, as well as the stock, in the afternoon. VSTR finished up just off its intraday high of $94.50. The fact that it crept back down to $85 initially was concerning, but with such a strong finish, we believe that a bottom may have been put in. Short term support lies at $85. VSTR's first resistance will be at its 10-dma of $93.50, above that look to $95 and $100. Watch to see how the stock deals with those overhead levels. Enter based on individual risk levels and watch the NASDAQ for overall market direction as that has been the prominent leader. SCMR $69.50 +6.69 (+4.94) Despite a NASDAQ nosedive yesterday that came close to retesting previous lows, SCMR only needed a brief encounter at $55 before deciding a rebound was in order. There is no specific new on the issue, however, Goldman Sachs initiated coverage on RBAK, SCMR's competitor, with an addition to its "recommended list". Their upgrade was based on two prominent trends - new access networks and upgrades in broadband infrastructure. SCMR's chart is remarkably similar to RBAK's and will act in sympathy with any news void. Yes, SCMR traded flat today after gapping up at the open, but the volume increased slightly to 45% over the ADV. Technically, there is intraday support at $66, which also happens to be the 5-dma. However, SCMR is having a tough time getting back over its 10-dma of $70.23. Though it can get through it intraday, it's been unable to hold. $75 is proving an even tougher level to penetrate. Given this morning's gap up and lack of movement thereafter, we're of the mind to let SCMR come to us by target shooting back at $66 (aggressive) or better yet, looking for an even better entry at $57, a previous level of support. This is still a risky play by virtue of its volatility. Sit this one out if you don't have a stainless steel stomach. TIBX $79.38 +14.38 (+11.50) Just like we wanted...a move over $73 backed by volume. TIBX has developed a pattern over the last three days of trading flat after the open then blasting off in the afternoon. Today was no exception. After the breakout over $73 (a spike to almost $79 actually), TIBX settled back to trade at just over $73 for most of the day, then took off to test mild resistance at $82. We still expect mild resistance there, but the upside once that breakthrough happens is the 50-dma of $95. Why the optimism? The 5-dma of $63.41 and the 10-dma of $60.90 are holding up nicely as intraday lows and support. As long as the market cooperates, momentum for this issue should remain strong, especially if today's volume of nearly 2.2 mln shares (48% over the ADV) is any indication. Target shooting at $70, $65 and $61.00 should yield a good entry (depending on the market), but if the market decides to test the bottom one more time, $57 could provide support too. While earnings won't affect the play (scheduled in June), shareholders have recently authorized an increase in the shares, which would enable a split. Once TIBX gets back over $100, it becomes a candidate again. BRCM $160.88 +19.00 (+8.38) Yesterday, true to the rest of the market, BRCM took a 10% nosedive despite being great earnings and being named to Barron's list of best-performing companies for investors among the 500 largest corporations. Too bad it had to break south of $143 support before finding its footing at $128 yesterday. If you caught it on that rebound into yesterday's close, you were richly rewarded in today's gap opening to $150 and move over $160. With volume at over twice the ADV, interest has returned to the issue and should continue thanks in part to a B of A Securities reiteration of their Strong Buy rating and price target of $300. Target shooting support looks good at $150. There's little bit of intraday support too at $155. Resistance is way up at $180, so there's room to run. With such a big gain today, be sure to keep your stops in place so as not to lose your profit. Just because it's only on paper doesn't mean you haven't earned it. ******************* PLAY UPDATES - PUTS ******************* DIGX $52.44 +1.06 (-23.00) Thank you EXDS! Last Thursday, EXDS reported earnings that beat analyst estimates, but warned that sales would slow down this year. Combined with a weak broad market, the announcement from EXDS sent a shockwave through the sector as DIGX lost 32% Monday. It appears that the once beloved infrastructure stocks have fallen from grace along with their counterparts in B2B and B2C. The days of 50% sequential growth are over, and investors are running for the exit. DIGX gapped lower Monday by more than $7 and continued to drop all the way to $50. The stock enjoyed a small bounce Tuesday, but failed to show significant strength. DIGX attempted to rally into the close, but failed in the last 15 minutes of trading as the broader market soared. Noting the relative weakness Tuesday, it appears the selling isn't over yet. The stock is now trading well below its descending 10-dma with minor support just below at $52 and again at $50. Below $50, there is no support in sight until $40. If the stock has a relief rally, an aggressive trader might look for an entry near resistance at $60. If the selling continues, look for DIGX to fall through support and confirm with heavy volume. NTPA $34.38 +3.38 (+2.88) As the broad indices soared today, NTPA couldn't help but go along for the ride. Posting volume just below the ADV, the stock has moved off of yesterday's low of $27, but is bumping into resistance at $34-35. NTPA seemed to be following the lead of the NASDAQ up until the last couple hours of trading today. As the NASDAQ surged into the close, NTPA flattened out and refused to move higher. As the economic reports continue to flow this week and Greenspan speaks on Thursday, any hiccup on the NASDAQ could be just the catalyst to cause further weakness in NTPA. Look for the stock to roll over near current levels or perhaps $37.50 before initiating new positions. The issue will likely find support near $30, but a lack of follow through in the tech market will make it that much harder for NTPA to prevent further losses. Also having negative implications, volume on the mild recovery over the past 2 days is significantly weaker than that posted during the decline last week; this is usually a good sign that the bounce to the upside lacks conviction. MCOM $30.38 +5.00 (+2.75) A rising tide floats all boats, sometimes even dinghies. MCOM never got a chance to test the low end of the descending channel at $23 though it did dip below the $27 entry point yesterday and stayed there. Sadly, its negative sentiment and lousy technical picture could not hold it back in the face of a 228 point NASDAQ gain. Since the picture hasn't changed for MCOM (they still have system build-out delays that will zap their projected revenue stream), view today's move back over $30 as a prelude to a buying opportunity, especially if the market gaps open tomorrow or Thursday and carries MCOM up to $37, a previous level of resistance. The point is to wait for a move back south after the open to get the best entry. At a current $30, MCOM is still in the middle of the descending channel with the upper band at $40 and the lower band at $20, so wait for it to get off dead-center first. ************** NEW CALL PLAYS ************** TER - Teradyne Inc. $103.38 +10.88 (+7.06 this week) Teradyne is one of the world's top makers of automated test equipment for electronics and telecommunications. Teradyne systems are used by manufacturers to analyze the performance of semiconductors, circuit boards, and software, and by telecommunications companies to test subscriber lines and equipment. Teradyne also makes backplanes, assemblies that house circuit boards and connect their electrical impulses with other elements in a system. The company has operations in Ireland, Japan, and the US, and gets almost half of its sales from international business. If there is a group of stocks that are going to lead the market higher it's going to be the Semis. The Semiconductor industry is experiencing a phenomenal period of growth in what is a very cyclical business. The recent earnings reports are a testament to the exploding growth in the sector as the semis blows away estimates. And blow away estimates is exactly what TER did last week. The company earned 60 cents per share versus a 52 cent estimate. That prompted Bear Sterns to upgrade TER from an Attractive rating to a Buy, and AG Edwards raised their rating from Accumulate to Buy. The earnings report and analyst upgrades pushed TER to an all-time high of $102 last Thursday. Momentum fizzled Monday as the tech sector was led lower by MSFT, but Tuesday was a new day and TER hit a new high. The stock blasted through $100 to hit an intraday high of $107 on impressive volume. It appears the momentum has returned to the Semis and we're looking for TER to continue to make new highs. One event that may push TER higher is the upcoming earnings report from semiconductor giant AMAT, scheduled May 10th. The gap up Tuesday morning put TER well above its 10-dma, and used it to climb higher throughout the day. Watch for the stock to roll higher using its 10-day as support, the only resistance in the way is the intraday high of $107. If traders take profits, TER will most likely find support at $100. Target shoot to your risk level and confirm any move higher with healthy volume. Another catalyst that may push TER higher is the upcoming Annual Shareholder Meeting scheduled for May 25th. Investors will vote on a proposal to increase authorized shares from 250 mln to 1 bln. TER's last split was in August of last year when the stock was trading in the $70 range. BUY CALL MAY-100*TER-ET OI=445 at $13.25 SL=10.00 BUY CALL MAY-105 TER-EA OI=522 at $10.38 SL= 7.50 BUY CALL MAY-110 TER-EB OI= 23 at $ 8.38 SL= 6.00 low OI SELL PUT MAY- 95 TER-QS OI= 22 at $ 7.00 SL=10.00 (See risks of selling puts in play legend) Picked on Apr 25th at $103.38 P/E = 59 Change since picked +0.00 52-week high=$107.00 Analysts Ratings 9-9-0-0-0 52-week low =$ 21.81 Last earnings 03/00 est=0.51 actual=0.60 Next earnings 07-20 est=0.65 versus=0.20 Average Daily Volume = 1.97 mln /charts/charts.asp?symbol=TER GE - General Electric Co. $166.00 +3.94 (+7.75 this week) Unless you've been a cave dweller for the last 100 years, you probably know what GE does. Just in case you need a refresher, GE is a diversified services, technology and manufacturing company that operates in more than 100 countries and employs nearly 340,000 people worldwide. They make light bulbs, jet engines, medical equipment, however they are mostly a finance company from which they derive most of their profits. If you are in the financial markets, you probably know them as the parent company of the CNBC business television. Forget CSCO, MSFT and INTC - this is a breakout play. It's good to be King of the Market caps again thanks to the recent technology shellacking. Just like in drag racing where there is no substitute for cubic inches, so it is with solid businesses where there is no substitute for huge revenue. At $117 billion in annual revenue, it exceeds the other three combined by 67%. Despite its size, it still grows at a respectable 15% a year, carries a profit margin of 26%, a return on equity of 29% and sports over $11 bln in cash. Well, today GE finally did it - it broke out to a new high in a steady increase right from the open. Support has been moving up, even during the selloff in technology that had 50% or more of the value squashed from it in recent weeks. Strong support is at $150, then $155. If history repeats itself and old resistance becomes new support, then look for $164 to hold. The magic of a breakout of such an industry leader should create lots of excitement among investors since GE is considered a proxy for the market (and perhaps a confirmation of a green flag for a new leg up in the overall market - don't lose composure over it though). Careful. Though we may see more blue sky from this issue since the MACD and RSI indicators have just turned positive, the stochastic indicator is getting into the "overbought zone" (though it too won't turn over on a dime). We don't say that to throw cold water on the play, but more as a reminder to exercise restraint and use good judgement in taking a position. As an added bonus, remember that GE will be splitting its shares 3:1 shortly, and will set the actual date tomorrow. In the news, today GE announced they were entering the online consumer banking business by partnering with CompuBank under the GE financial network umbrella. No great shakes, but naturally, it was the buzz on CNBC. BUY CALL MAY-160*GE-EV OI=3230 at $10.88 SL=8.00 BUY CALL MAY-165 GE-EM OI=4080 at $ 7.88 SL=5.50 BUY CALL MAY-170 GE-EW OI=2504 at $ 5.25 SL=3.25 BUY CALL JUN-165 GE-FM OI=1897 at $11.75 SL=8.75 BUY CALL JUN-170 GE-FW OI=2455 at $ 9.13 SL=6.25 Picked on Apr 25th at $166.00 P/E = 48 Change since picked +0.00 52-week high=$166.31 Analysts Ratings 7-15-1-0-0 52-week low =$ 91.81 Last earnings 04/00 est= 0.76 actual= 0.78 surprise=3% Next earnings 07-18 est= 0.97 versus= 0.85 Average Daily Volume = 7.70 mln /charts/charts.asp?symbol=GE CVS - CVS Corp $46.75 +2.75 (+2.94 this week) CVS operates 4,078 drugstores in 27 states in the US and the District of Columbia. Through its acquisitions of Revco and Arbor Drugs. CVS is the #2 drugstore chain when it comes to total sales. But if you're tallying store count and prescriptions filled, then it takes the lead position away from Walgreens. The company also expanded its market reach to the Internet through its purchase of Soma, an online pharmacy. The broad rally, new coverage, and a piece of good press revved up CVS today. Salomon Smith Barney started CVS with an Outperform rating priming the stock for a solid run to $53.44, its all-time high. The company's announcement that it received the "2000 Best in E-commerce Systems Award" for its ability to integrate its Web and "bricks-and-mortar" systems from Retail Systems Alert Group also boosted traders' interest. In 1999 acquired Soma.com (now CVS.com) "with the goal of providing the highest degree of convenience and quality service to our customers, both on and offline," said Bernie Segal, director of merchandising/store operations for CVS/pharmacy. "This award further validates our strategy" and demonstrates a solid e- business model for our investors. Granted one day doesn't make a trend, but we're adding CVS on the prospect its momentum will stay intact ahead of earnings expected in less than two weeks. This "click-and-brick" company is confirmed to report on May 9th, before the bell. Near-term support is firm at $43 and $44, which currently corresponds to the 5-dma ($43.88) and 10-dma ($42.98). Consider waiting for dips and bounces off these technical indicators. Today CVS broke its short-term resistance level and moved through $45, which is definitely a bullish sign. However the stock may experience some mild profit taking at these higher levels. Pay close attention to market direction and pick your entries carefully. On April 19 announced that its Board of Directors has approved its quarterly cash dividend at the rate of $0.0575 per share on the Company's common stock, payable May 4, BUY CALL MAY-40 CVS-EH OI= 968 at $7.50 SL=5.25 BUY CALL MAY-45*CVS-EI OI=1260 at $3.50 SL=1.75 BUY CALL MAY-50 CVS-EJ OI= 83 at $1.13 SL=0.00 BUY CALL JUN-45 CVS-FI OI= 0 at $4.75 SL=2.75 Wait for OI! BUY CALL JUN-50 CVS-FJ OI= 14 at $2.50 SL=1.25 low OI Picked on April 25th at $46.75 P/E = 30 Change since picked +0.00 52-week high=$53.44 Analysts Ratings 8-5-2-0-0 52-week low =$27.75 Last earnings 12/99 est= 0.43 actual= 0.46 Next earnings 05-09 est= 0.47 versus= 0.40 Average Daily Volume = 2.85 mln /charts/charts.asp?symbol=CVS NOC - Northrop Grumman $72.56 +2.13 (+5.63 this week) Northrup Grumman is a leader in the US aerospace and defense markets. The company provides integrated systems and electronics, aerostructures, and information technology services. It makes Joint STARS battlefield surveillance systems, AWACS radar for the US Air Force, and airplane parts for its customers. It supplies upgrades, modifications, and missile systems for the B-2 Stealth bombers and computer systems for the government and private sector. The company has focused on consolidating operations to lessen the blow of its failed acquisition by Lockheed Martin and cutbacks from Boeing. NOC flew past analyst radars and blasted away estimates. Unlike most stocks with positive earnings announcements, NOC rose smartly after announcing earnings Monday morning. The company reported net income of $173 mln, or $2.47 per share versus estimates of $1.80. The results reflect an increase in profit margins from its Integrated Systems, and information technology units. During the conference call Monday, Kent Kresa, NOC's CEO, said the company will focus on businesses with the greatest growth potential. Kresa said, "We are continuing to strategically redefine Northrop and are pursuing a plan that focuses on our high-growth business areas of defense electronics, systems integration, and information technology." In anticipation of the earnings report, NOC has made a steady climb in the last month. The chart is looking beautiful as the stock looks positioned to test its all-time high of $75.94. The last time NOC was trading at these levels was before the announcement of the failure to merge with Lockheed Martin last August. The stock will face major resistance at $75. A breakout above that level would provide an excellent entry point. Use a bounce off the 5-dma to look for a more aggressive entry point. Keeping with its new focus, NOC is said to be exploring a possible business alliance with DaimlerChrysler Aerospace. The Wall Street Journal reported Tuesday that the two companies will focus on areas including reconnaissance and surveillance systems. An official announcement is expected sometime this week. BUY CALL MAY-65 NOC-EM OI=499 at $8.50 SL=6.00 BUY CALL MAY-70*NOC-EN OI=155 at $4.75 SL=2.75 BUY CALL MAY-75 NOC-EO OI=101 at $2.13 SL=1.00 BUY CALL JUN-70 NOC-FN OI= 0 at $6.00 SL=4.00 Wait for OI! Picked on Apr 25th at $72.56 P/E = 9 Change since picked +0.00 52-week high=$75.94 Analysts Ratings 4-4-4-0-0 52-week low =$42.63 Last earnings 04/00 est=1.76 actual=2.47 Next earnings 07-21 est=1.92 versus=1.64 Average Daily Volume = 393 K /charts/charts.asp?symbol=NOC ************* NEW PUT PLAYS ************* PG - Procter & Gamble $64.25 -6.25 (-4.69 this week) Providing a broad range of consumable products, PG manufactures cleaning, paper goods, beauty care, food and health care items that we have likely all been using our entire lives. From toothpaste to facial tissue, laundry detergent to water filters, and cosmetics to coffee, it is difficult to make a trip to the grocery store without buying a handful of PG products. The company has been reorganized around global business units rather than geographic regions and about half of sales come from outside the US. Managing to barely match downward-revised earnings estimates this morning did nothing to reassure PG investors that the picture is particularly rosy going forward. The economy is still strong and people have not stopped blowing their noses or washing their hair, but PG is being pressured by increased investment costs and a decrease in gross margins. In typical "buy the rumor, sell the news" fashion, investors punished the company, slashing $6.25 from the share price on volume 25% over the ADV. In this fickle market, the smallest infraction can cause investors to jump ship, and those that do return are less tolerant of future disappointments. With selling volume picking up into the close and the final trade near the low of the day, it looks like there may be more downside in store. This came on a day where the DJIA posted a strong 200+ point gain, and it is clear that investors are looking for stocks that will provide strength for more than 2 or 3 days. As an old-line manufacturing company, PG will be susceptible to any market downturn caused by increasing interest rates. With the markets expecting more rate hikes ahead, mediocre earnings, and the usual summer doldrums just around the corner, look for today's decline in PG to continue. PG tried to find support near $65 today, but when the selling resumed, it became clear there was more downside to be had. Use any failed rally as an opportunity to enter new positions as sentiment deteriorates and PG sets its sights on support at $60 and then $55. Remember to pay attention to selling volume - when it starts to dry up, this will likely be the first indication of a bottom forming. BUY PUT MAY-65*PG-QM OI=2032 at $3.38 SL=1.50 BUY PUT MAY-60 PG-QL OI=1259 at $1.50 SL=0.75 Average Daily Volume = 7.60 mln /charts/charts.asp?symbol=PG AKAM - Akamai Technologies $73.06 -2.81 (-13.88 this week) Akamai Technologies provides a global Internet content delivery service that improves Website speed and reliability and enables richer, more engaging Website content. Its FreeFlow technology analyzes Web traffic and transmits the content via the most efficient route. Currently Akamai has over 2000 servers deployed in 40 countries across 55 telecommunications networks. Akamai (pronounced AH-kuh-my) is Hawaiian for intelligent, clever and cool. If you want to talk about a good prospect for the long-term investor then AKAM should be on your list! Since its IPO in October 1999, the company parlayed its client list from a mere 49 to 227, increased revenues eight-fold to $7.2 mln, and clearly dominates the Internet traffic management market. And now with the acquisition of INTERVU completed, Akamai is the world's largest Internet streaming media and broadband content delivery services company. But for our purposes, let's focus on the present moment. In the last six weeks AKAM has lost over 75% of its share price. It's likely the impending release of 74+ mln shares coming into the market today scared away quite a few investors (the 180-day lockout period was over today). As it turned out, the company announced along with earnings that most of the above mentioned shares held by insiders and management have been re-locked. No dice. We still have a post-earnings decline play. Being a new company, they released numbers yesterday that indicated they'd missed estimates by 0.07 cents coming in at -$0.47 versus First Call's consensus of -$0.40. Even though after you discount goodwill amortization and compensation costs, Akamai actually beat estimates by $0.08. But no matter, it was too late to change the negative disposition. In rallying market conditions today, AKAM shed another 3.7% adding to its already 12.7% loss from Monday. The 5 and 10 DMAs are typically good gauges to use for evaluation. Currently AKAM is below both technical indicators. A downward move off the 5- dma ($79.88) is a reasonable entry point into this momentum play. Know your portfolio's tolerance and keep trailing stops in place because this play is HIGH-RISK. First its below the IPO prices and second it's an Internet, which always adds some excitement! Despite the disclaimers, it appears AKAM isn't going to recover in the very near-term following the earnings' blunder. Plus, we've got the MOM and Stochastic also in our favor. Both are indicating further descent with their bright red arrows pointing south. BUY PUT MAY-75*RUG-QO OI=58 at $13.50 SL=10.75 BUY PUT MAY-70 RUG-QN OI=58 at $10.63 SL= 8.25 Average Daily Volume = 918 K /charts/charts.asp?symbol=AKAM ********************** PLAY OF THE DAY - CALL ********************** AMD - Advanced Micro Devices $87.00 (+6.00) Advanced Micro Devices is a leading semiconductor manufacturer. 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. Most Recent Write-Up The shareholders' meeting is just two days away and we're eager for a split announcement to create even more excitement and momentum. The company is asking shareholders to increase the number of authorized shares to 7.25 mln, which would give the BoD plenty of room for a stock split. The investors' anticipation was evident today by the rising volume levels (over 5+ mln) and bullish $6 climb. Take a look at a chart and you can see firm support is much lower at $75 near the 10-dma. However in today's session, intraday support established itself much higher at $82-$83. This is quite a spread. If there's no earth-shattering event and the markets hold up, then its unlikely AMD will experience much of a pullback in the next couple of days, but there's never a guarantee. If this turns out to be the case and you decide to add new positions, then you'll have to jump in on an intraday dip. This is a more aggressive trading style and not for everyone, so be careful. Yesterday AMD demonstrated a prototype processor platform, the Athlon, featuring support for double data rate (DDR) memory. This new performance technology operates with the highest-bandwidth and lowest-latency PC memory technology currently available; thus providing advanced levels of performance. The technology should be available in the 2nd half of 2000. Comments AMD has taken flight, and analysts and money managers really like its prospects. Even during yesterday's NASDAQ sell-off, AMD was up almost $2. Today AMD just kept going and closed at its highs. Their earnings were strong and the business outlook appears to offer AMD good upside. It certainly has become the leader in the Semiconductor sector and professionals are hot for this one. Look for AMD to continue making new highs with NASDAQ advances. BUY CALL MAY-80*AMD-EP OI=7249 at $11.75 SL=9.50 BUY CALL MAY-85 AMD-EQ OI=1692 at $ 9.00 SL=6.75 BUY CALL MAY-90 AMD-ER OI=7010 at $ 6.63 SL=4.75 BUY CALL MAY-95 AKD-ES OI= 387 at $ 4.75 SL=2.75 Picked on April 21st at $78.38 P/E = 61 Change since picked +8.63 52-week high=$88.00 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 ************************ COMBOS/SPREADS/STRADDLES ************************ A Banner Day! Monday, April 24 Technology stocks retreated for the third consecutive session as Microsoft's woes dragged the Nasdaq lower. Meanwhile, the Dow industrials posted impressive gains as investors rotated to old economy stocks in a brisk flight to quality. The Dow finished 62 points higher at 10,906 and the Nasdaq Composite ended 161 lower at 3482. The S&P 500 Index was down 4 points at 1429. Small cap issues also slipped with the Russell 2000 Index ending slightly lower at 468. Nasdaq trading volume hit 1.53 billion shares with declines beating advances more than 2-to-1. Volume on the NYSE was 873 million shares, with declines beating advances 1,671 to 1,272. The 30-year Treasury fell 20/32, bid at 105 8/32, where it yielded 5.86%. Sunday's new plays (positions/opening prices/strategy): Omnicon OMC MAY105C/M100C $0.75 credit bear-call Recoton RCOT MAY15C/MAY12C $0.00 credit bear-call Magna MGA AUG55C/MAY55C $1.19 debit calendar Unocal UCL MAY25C/MAY27C $2.00 debit bull-call The market moved lower in early trading and there was little opportunity to participate in the bearish spreads. The Omnicon position offered a favorable credit for only a short period and the opening price for the Recoton spread was well below our target. In contrast, the bullish Unocal play offered a number of possible entry points during the first 30 minutes of the session. The Magna debit was based on a 5-contract trade near 9:40 a.m. Portfolio plays: The technology group made a valiant, late session effort Monday but the Nasdaq eventually fell victim to Microsoft's most recent shortcoming; its revenue outlook. The software company reported disappointing revenues last Thursday and said it remains guarded about near-term growth. Analysts followed the news with reduced earnings projections and lower price targets, even as Microsoft posted solid third-quarter earnings of $0.43 per share, which actually beat the estimates. The uncertainty of the impending break-up has also created concern among investors and it appears the Justice Department may now ask a federal judge to split the firm's "Windows" operating system from the rest of the company. Sources close to the government's antitrust suit believe federal regulators favor dividing Microsoft along product lines and that may be the only solution that will appease those involved in the landmark case. Today's sell-off affected the market in a broad manner including shares of leading computer companies as well as many blue-chip technology stocks. The good news is the hi-tech group recovered from a severe downtrend early in the session to close well above the lows of the day. The Nasdaq index was down almost 300 points at one point but rallied in the last 30 minutes of trading on strength in the industry leaders. Analysts now suggest the low in mid-April is a benchmark level and the current consolidation will likely be followed by a successful test of that range. The validity of the recovery is also based on a number of components including breadth, volume, and volatility and unfortunately, only time can determine if a technical bottom has occurred. Despite the renewed slump in the technology group, many industrial issues performed well during the session. The Dow recovered from an early deficit to eventually post gains as investors rotated to some of the "old economy" stocks. In the broad market, hardware, defense and financial issues advanced, while computer software, telecom and communication stocks moved lower. Funds also shifted to the pharmaceutical sector along with individual companies that have delivered favorable earnings reports. Our portfolio had a number of big movers during the session and Warner Lambert (WLA) topped the group with a $5 rally to $118. Our bullish position is now trading near maximum profit and should be closed to protect gains and limit losses. Johnson & Johnson (JNJ) rallied over $2 during the session, closing near $83 and slightly below the sold strike in our bullish calendar spread. The position will retain maximum profit at $85. Another long-term spread issue, Medtronics (MDT) also participated in the upside activity, climbing almost $2 to close at $54. Our LEAPS/CC's play is at maximum profit above $45. Those of you that closed the short (call) options on Friday to remain in the neutral Halliburton (HAL) calendar spread were rewarded with a nice rally this morning. The position was easily closed for a $0.75 profit during the first hour of the session. Tuesday, April 25 Optimism returned to the market today as stocks rallied in almost every sector. The Nasdaq Composite rose 228 points to 3,711, its second largest one-day point gain ever. Strength in bellwether issues boosted the Dow Jones Industrial Average 218 points to a recent closing high of 11,124. The broader market also moved up with the S&P 500 Index rising 47 points to 1,477. Nasdaq volume hit 1.62 billion shares with advances beating declines more than 2-to-1. Trading volume on the NYSE reached 1.06 billion shares, with advances leading declines 2-to-1. The 30-year Treasury slid almost a full point, with the yield rising to 5.94%. Portfolio plays: The market rallied across the board Tuesday as blue-chip shares benefited from strong corporate earnings reports and the Nasdaq recovered from a recent downward trend. Bullish profit forecasts swayed investors back to the technology industry after Monday's wave of selling and industrial issues rose on confidence in the outlook for classic, "old economy" corporations. Analysts also suggested that technology stocks have been sold down so sharply that most investors can no longer avoid the "bargain-hunting" mentality. Indeed it appears the majority of Nasdaq issues are oversold and the short-term upside potential is excellent. In fact, after severe downturns earlier this month, the Nasdaq is more than 25% below its all-time high of 5,048. The technology index is also "in the red" for the year 2000, but fortunately it has remained well above its year-ago levels. Now the question how well the recovery trend will endure the post-earnings slump that normally plagues technology stocks in the Spring months. The Spreads Portfolio enjoyed a number of favorable moves in today's session and most of the big winners were market-leading issues. Sepracor (SEPR) has outperformed most of our selections in the past week and the stock led the section again today with a $3 rally to close near $90. The bullish LEAPS/CC's position has reached the break-even point after just two weeks in play. Many of our other long-term issues participated in the rally including Bank One (ONE), Computer Associates (CA), Johnson & Johnson (JNJ), Network Associates (NETA), and Vodaphone (VOD). Small-cap stocks also experienced upside activity and Andrew (ANDW), Kellogs (K), and Summit Bancorp (SUB) were the top performers in that group. In the Straddles Section, Jones Apparel (JNY) has moved well into the $30 range and our new debit straddle is now profitable. The recent calendar-spread on Magna International (MGA) also received a favorable boost as the stock rallied $1.50 to $47. The position achieves maximum return near $55 but will profit in the near-term far below that price range. Summary Of Monthly Positions: ****************************************************************** - CREDIT SPREAD SUMMARY - ****************************************************************** Stock Pick Last Position Credit Cost G/L Status APCC $41.06 $39.94 APR30P/35P $0.75 $0.38 $0.38 Closed CAMP $31.00 $24.75 APR45C/40C $1.00 $0.31 $0.68 Closed CA $61.56 $52.06 APR75C/70C $0.43 $0.00 $0.43 Closed CA $61.56 $52.06 APR50P/55P $0.50 $2.93 ($2.43) Closed ESIO $64.00 $60.25 APR45P/50P $1.25 $0.88 $0.38 Closed IRF $38.12 $42.44 APR50C/45C $1.12 $0.38 $0.75 Closed JBL $41.12 $36.81 APR32P/35P $0.62 $0.31 $0.31 Closed NTRS $72.06 $65.19 APR55P/60P $0.81 $0.31 $0.50 Closed NVDA $93.12 $80.63 APR55P/65P $1.25 $0.50 $0.75 Closed NVLS $55.12 $54.94 APR70C/65C $0.50 $0.25 $0.25 Closed SUNW $93.69 $87.75 APR75P/80P $0.50 $0.00 $0.50 Closed SUNW $93.69 $87.75 APR115C/110C $0.75 $0.00 $0.75 Closed TER $96.25 $96.31 APR70P/75P $0.50 $0.43 $0.06 Closed TLAB $58.12 $46.31 APR70C/65C $0.43 $0.00 $0.43 Closed TQNT $73.50 $83.25 APR115C/110C $0.00 $0.00 $0.00 Closed TTN $53.25 $40.81 APR35P/40P $0.62 $0.38 $0.25 Closed VNWK $57.50 $43.56 APR80C/70C $1.00 $0.00 $1.00 Closed Note: The majority of these positions were closed early to protect gains and limit potential losses. Computer Associates (CA) was assigned at $55 and we sold the MAY-$50 call to reduce our overall debit in the stock. The current cost basis is $48.56. ****************************************************************** - CALENDAR SPREAD SUMMARY - ****************************************************************** Stock Pick Last Position Debit Value G/L Status ABT $37.81 $39.25 MAY40C/APR40C $0.93 $1.50 $0.56 Closed EPIC $9.56 $5.28 JUL12C/APR12C $0.93 $0.62 ($0.31) Closed HAL $40.18 $42.38 MAY40C/APR40C $1.93 $2.25 $0.31 Open KR $15.56 $17.69 JUL17C/APR17C $0.93 $1.31 $0.38 Closed LGTO $43.38 $16.00 JUN50C/MAY50C $2.62 $3.25 $0.62 Closed LNY $7.06 $8.38 OCT7C/MAY7C $0.75 New Play Open MO $20.31 $21.38 JUN25C/APR25C $0.56 $1.00 $0.43 Closed MO $20.31 $21.38 JUN22C/APR22C $0.88 $1.38 $0.50 Closed NAV $36.25 $34.31 JUL45C/APR45C $2.00 $3.12 $1.12 Closed STRX $8.43 $4.88 MAY7C/APR7C ($0.50) $0.31 $0.81 Closed The calendar (or time spread) is profitable if the value of the position exceeds the initial debit (or cost-basis) at the end of the expiration period for the long position. However, because we track the plays based on the current closing cost/value, the gains for time spreads will rarely be reflected until the play closes. Each month, as we sell a new option against the long position, the net debit should decline or the position value should increase. ****************************************************************** - COVERED-CALLS WITH LEAPS - ****************************************************************** Stock Pick Last Position Debit Value G/L Status AOL $63.75 $60.25 JAN40/MAY70C $26.00 $24.00 ($2.00) Closed CA $53.56 $52.06 JAN60/MAY60C ($4.62) $5.75 $10.38 Closed CS $16.80 $20.31 JAN15/APR40C $17.75 $18.50 $0.75 Closed JNJ $81.50 $81.75 JAN85/MAY85C $7.50 New Play Open MDT $39.38 $52.44 JAN37/MAY45C $4.00 $9.00 $5.00 Open NETA $25.12 $24.38 JAN15/MAY25C $4.62 $9.25 $4.62 Open NETA $32.31 $24.38 JAN15/MAY25C $10.38 $9.25 ($1.12) Open ONE $28.56 $31.44 JAN20/MAY30C $9.12 $9.12 $0.00 Open PTEK $8.94 $4.31 JAN5C/MAY7C $2.50 $1.62 ($0.88) Closed SEPR $84.00 $89.25 JAN60/MAY90C $28.00 New Play Open VOD $49.25 $46.00 JAN45/MAY50C $4.50 $8.12 $3.62 Open LEAPS/Covered-Calls are profitable if the value of the position exceeds the initial debit at the end of the expiration period for the long position. However, because we track the plays based on the current closing cost/value, the gains for these time spreads will rarely be reflected until the play closes. ****************************************************************** - DIAGONAL SPREAD SUMMARY - ****************************************************************** Stock Pick Last Position Debit Value G/L Status ANDW $27.38 $23.19 JUL15C/MAY22C $6.50 $6.00 ($0.50) Open BCGI $5.12 $9.25 JUN5C/APR7C $0.31 $1.75 $1.43 Closed CDN $22.81 $16.19 MAY15C/APR20C $1.68 $4.25 $2.56 Closed CRUS $14.06 $15.38 JUN10C/MAR17C $4.75 $6.38 $1.62 Closed DRMD $10.12 $5.00 JUN5C/MAY7C $1.88 $1.12 ($0.75) Closed EPTO $16.94 $8.78 JUL7C/MAY12C $5.12 $2.75 ($2.38) Closed ESPI $10.88 $5.38 JUN5C/APR10C $3.88 $3.00 ($0.88) Closed HLT $8.38 $7.25 MAY7C/APR10C $1.00 $0.88 ($0.12) Closed KEG $6.81 $9.19 JUL7C/APR10C $0.93 $2.75 $1.81 Closed KR $15.56 $17.69 JUL17C/MAY20C $1.43 $2.31 $0.88 Closed LGTO $43.38 $16.00 MAY30C/APR40C $8.25 $3.25 ($5.00) Closed MFNX $44.88 $27.13 MAY30C/APR40C $8.50 $9.25 $0.75 Closed MSGI $20.43 $6.75 MAY12C/APR20C $3.75 $4.50 $0.75 Closed NAV $36.25 $34.31 JUL25C/APR35C $9.00 $10.12 $1.12 Closed ORG $14.62 $10.50 JUN10C/MAY12C $1.62 $1.12 ($0.50) Closed PCMS $10.06 $9.63 MAY7C/APR17C $6.00 $7.50 $1.50 Closed R $23.93 $22.19 MAY15C/APR22C $6.88 $7.25 $0.38 Closed RCOT $7.50 $9.44 MAY5C/APR10C $3.43 $4.62 $1.19 Closed SUB $27.00 $26.13 JUL20C/MAY25C $4.12 $4.12 $0.00 Open SVGI $16.38 $25.63 JUN17C/APR25C $3.88 $6.25 $2.38 Closed TERA $6.62 $5.94 JUN5C/APR7C $0.68 $1.88 $1.19 Closed TGX $14.56 $7.75 JUN10C/MAY12C $1.75 $0.88 ($0.88) Closed TLXN $22.62 $13.63 JUN12C/MAY20C $5.12 $4.00 ($1.12) Closed TTWO $18.38 $10.00 JUN7C/MAY12C $5.00 $2.75 ($2.25) Closed * The majority of these positions were closed early to protect profits or prevent (limit) potential losses. The diagonal spread is profitable if the value of the position exceeds the initial debit (or cost-basis) at the expiration of the long position. However, because we track the plays based on the current closing cost/value, the gains for diagonal spreads will rarely be reflected until the play closes. Each month, as we sell a new option against the long position, the net cost should decline or the position value should increase. ****************************************************************** - DEBIT SPREADS SUMMARY - ****************************************************************** Stock Pick Last Position Debit Value G/L Status AAPL $131.75 $118.88 AP110C/120C $8.38 $7.00 ($1.38) Closed AMD $58.12 $78.63 APR37C/50C $8.62 $10.00 $1.38 Closed BILL $8.31 $5.06 APR7CC/NP $6.62 $5.75 ($0.88) Closed BMCS $51.43 $42.13 APR35C/45C $8.50 $8.25 ($0.25) Closed EGRP $29.25 $20.13 APR15C/25C $8.75 $8.25 ($0.50) Closed ESCM $11.31 $9.00 APR7C/10C $1.38 $2.12 $0.62 Closed HELX $51.00 $54.00 APR25C/45C $15.75 $19.25 $3.50 Closed K $26.25 $26.44 MAY22C/25C $1.88 $1.75 ($0.12) Open MBK $14.00 $14.06 MAY12C/15C $1.38 $1.38 $0.00 Open PG $63.43 $68.94 MAY50C/60C $8.50 $9.88 $1.38 Closed QCOM $154.81 $109.50 AP130C/140C $8.25 $7.12 ($1.12) Closed RMII $11.00 $5.22 MAY5C/10C $3.62 $3.25 ($0.38) Closed XRX $25.81 $24.94 APR20C/22C $1.75 $2.38 $0.62 Closed WLA $103.94 $113.63 MAY85C/95C $8.75 $9.50 $0.75 Open * A number of these positions were closed early to protect profits or prevent (limit) potential losses. A debit-spread is profitable if the value of the position exceeds the initial cost of the spread when the play is closed. However, because we track plays based on the current cost/value, potential gains may not be reflected until both positions are closed. ****************************************************************** - DEBIT STRADDLES SUMMARY - ****************************************************************** Stock Pick Last Position Debit M/V C/V Status AEG $80.50 $75.50 AUG80C/80P $13.00 New Play Open APLX $14.62 $8.25 JUL15C/15P $6.50 $8.25 $7.38 Open CBR $27.19 $18.00 MAY25C/30P $10.25 $13.50 $12.00 Closed JNY $30.00 $30.19 AUG30C/30P $7.12 New Play Open LIPO $16.50 $17.00 AUG15C/17P $5.88 New Play Open MTZ $73.00 $75.31 JUL75C/70P $13.00 $16.00 $15.75 Open NLCS $49.56 $47.00 JUL50C/50P $9.62 $10.75 $9.75 Open UBID $31.44 $14.94 JUL30C/30P $10.75 $15.50 $15.25 Closed M/V = Maximum Value C/V = Current Value A debit-straddle is profitable when the value of the position exceeds the initial cost. ****************************************************************** Note: We trade the Spreads portfolio just as we would trade our personal account and the ongoing narrative is a service we provide to help novice traders understand how various positions might be opened and closed. It is not intended to substitute for your own trading techniques nor does it replace your duty to manage the positions in your portfolio. We post a list of the current plays after each expiration period and the summary is a reasonable representation of the positions offered during the month. Questions & comments on spreads/combos to Click here to email Ray Cummins ****************************************************************** - NEW PLAYS - ****************************************************************** GE - General Electric $166.00 ** New All-Time High! *** General Electric (GE) is one of the largest and most diversified industrial corporations in the world. Manufactured merchandise includes appliances; lighting; industrial automation; medical diagnostic imaging equipment; motors; electrical distribution and control equipment; locomotives; power generation and delivery products; nuclear power support services and fuel assemblies; commercial and military aircraft jet engines; and engineered materials. Their services include; electrical supplies and electrical apparatus installation, engineering, repair and rebuilding services; and computer-related information services. Through the National Broadcasting Company, GE delivers network television services, operates television stations, and provides cable, Internet and multimedia programming and distribution services. Through General Electric Capital Services, GE offers a broad array of financial and other services. General Electric is one of the biggest, and one of the best and today's bullish activity suggests it is still a market favorite. The analysts are in agreement, GE is the leading conglomerate in America with 18 of the experts surveyed recommending at least a "strong buy" on the issue. Analysts at Lehman Brothers offered the most recent upgrade and it appears they have timed the move correctly, riding the stock to a new all-time high. Our spread position is conservative with a favorable risk/reward outlook. PLAY (conservative - bullish/credit spread): BUY PUT MAY-145 GE-QI OI=1722 A=$1.06 SELL PUT MAY-150 GE-QU OI=4287 B=$1.62 INITIAL NET CREDIT TARGET=$0.62-$0.68 ROI(max)=15% B/E=$149.31 Chart = /charts/charts.asp?symbol=GE ***** TER - Teradyne $103.38 *** Another Break-out! *** Teradyne is a leading manufacturer of automatic test equipment and related software for the electronics and communications industries. Their unique products include systems to test semiconductors, circuit boards, telephone lines and networks, and software. The company also is a leading manufacturer of backplanes and associated connectors used in electronic systems. Teradyne was on the move today with a $12 rally to a new closing high near $103. The bullish activity stems from resiliency in the technology index, a strong semiconductor industry, earnings that beat analysts expectations, and some optimistic comments from several industry experts. In fact, most brokerages that have reports on the issue consider Teradyne to be the leading growth-stock opportunity in the sector. Our technical opinion is also bullish but we favor a conservative approach to profit in this deep-out-of-the-money credit-spread. With any luck, there will be a small pullback to help increase the credit premium in the position. PLAY (conservative - bullish/credit spread): BUY PUT MAY-65 TER-QM OI=34 A=$0.50 SELL PUT MAY-75 TER-QO OI=147 B=$1.43 INITIAL NET CREDIT TARGET=$1.06-$1.12 ROI(max)=12% B/E=$73.88 Chart = /charts/charts.asp?symbol=TER ***** ARW - Arrow Electronics $41.69 *** New Trading Range! *** Arrow is the world's largest distributor of electronic components and computer products to industrial and commercial customers and is the distributor of choice for hundreds of suppliers. ARW's global distribution network spans the world's three dominant electronics markets: North America, Europe, and the Asia/Pacific region. The company is the largest electronics distributor in each of these vital industrialized regions, serving a diversified base of original equipment manufacturers and commercial customers worldwide. These OEMs include manufacturers of computer/office products, industrial equipment (including machine tools, factory automation, and robotic equipment), telecommunications products, aircraft and aerospace equipment, scientific and medical devices. Their commercial customers are mainly value-added resellers of computer systems. Last week Arrow Electronics reported record quarterly income that increased to $63 million on sales of $2.8 billion, compared with net income of $28 million in last year's first quarter. Arrow's net income more than doubled over last year's first quarter and grew by over 40% from the trailing quarter, reflecting improving market conditions in each of the core components operations in North America, Europe, and the Asia/Pacific region. Officials also noted that first quarter sales and earnings were at record levels and that improved gross profit margins helped the outcome and last year's dramatic improvement in earnings accelerated in the first quarter as the industry's recovery continued to gain momentum. Regardless of the reason, Arrow's share value has rallied in the past two months and today the issue broke to a new all-time high. Unfortunately, the issue is probably due for some consolidation and we will use that activity to increase the credit premium in this conservative position. PLAY (conservative - bullish/credit spread): BUY PUT MAY-30 ARW-QF OI=0 A=$0.25 SELL PUT MAY-35 ARW-QG OI=0 B=$0.62 INITIAL NET CREDIT TARGET=$0.50 ROI(max)=11% B/E=$34.50 Chart = /charts/charts.asp?symbol=ARW ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? 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