The Option Investor Newsletter Wednesday 4-26-2000 Copyright 2000, All rights reserved. Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com Also provided as a service to The Online Investor Advantage ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 4-26-2000 High Low Volume Advance Decline DOW 10945.50 - 179.30 11141.90 10902.10 999,650k 1,408 1,530 Nasdaq 3,630.09 - 81.14 3777.08 3629.36 1,592,604k 1,813 2,324 S&P-100 789.07 - 2.24 801.59 786.09 Totals 3,221 3,854 S&P-500 1460.99 - 0.08 1482.94 1456.98 45.5% 54.5% $RUT 484.24 - 4.79 495.02 483.58 $TRAN 2883.52 - 30.51 2914.33 2881.12 VIX 29.46 + 2.40 30.26 26.83 Put/Call Ratio .50 ****************************************************************** Will The Markets Pay For Tomorrow's Employment Cost Index? The action on Wall Street today mirrored that of bulls and bears sleeping, not battling. The bears finally awoke to take control in the final hour, but the word on the street wasn't one of panic or heavy selling (the volume confirms this too). Instead, it was the lack of buyers which have plagued the markets for the past month. The Dow and Nasdaq had been slowly sinking all day before traders gave up in the final hour and watched the markets sink until trading curbs were put in place to quench the sellers. Let's face it, today was one boring, unproductive day for daytraders. But will today's late day sell-off provide the launching pad for a monster rally on Thursday? The key will be the inflation sensitive ECI and GDP reports due out tomorrow morning. For a closer look at the action on the Nasdaq, you have to start with the 10-dma. It is currently at 3627 and has been acting as resistance for most of the past month. Tuesday was the first day it had a solid close about that mark since late March. A confirmation of that trend reversal would be key to really awake the bulls. After trading higher during the first two hours of trade, the Composite rolled over, but held above the 10-dma all day. It was with only 45 minutes to go that all buyers walked away and let this market slip back below the 10-dma, before bouncing to close 3 points above it. The final tally left the Nasdaq at 3630.09, down 81.14. Despite the close at the 10-dma, this may not be the heavy anesthesia that knocks the markets cold for an extended period. More like a sleeping pill ahead of the ECI and GDP wake up calls for tomorrow. Keep in mind there is still a big pile of cash building in fund managers pockets and it will eventually need to get put to work. How did Jim put it yesterday..."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." I wouldn't be surprised to see this kind of action soon. Also remember that traders are extremely scared of inflation after the CPI and PPI numbers on the 13th and 14th of this month which caused a market massacre. This is the first major inflation news since then and you can smell the fear on Wall Street. So let's take the contrarian view and see if the bias lends itself towards upside or downside. The chart below is the view of the Nasdaq for the past week. Note the number of times it has bounced at 3600, disregarding Monday's gap down and retest of last week's low. It is a positive sign to see the Nasdaq test the same support level over and over in a short period of time and not breakdown. You could make an argument that 3600 is the downside to a bad report tomorrow. Now if you can concede that today's move back to the 10-dma was daytraders getting out in the final hour and no one buying ahead of the report, then we are still looking at 3800 as short-term resistance. That puts the upside potential greater than the downside for the short-term. The other factor is that if we do rally on Thursday, that will likely give us our third close over the 10-dma in three days and confidence will build. Perhaps the steak grabbing will begin. The Dow on the other hand, was less than inspiring. It wanted to go lower all day long and did just that. It finally bounced with ten minutes to go off support at 10,900. Nothing special happening here, just more range-bound trading. Wake me when the DJIA trades over 11,400 for more than 15 minutes. Volume was light at 985 million while the Nasdaq turned in a subtle 1.6 billion. The S&P 500 finished down 16.15 to 1460.99. AT&T's Wireless Group IPO, launching tomorrow, will be history in the making. Trading under the symbol AWE, this tracking stock will be the largest IPO in U.S. history. After the close on Wednesday, AWE was priced at $29.50, just about in the middle of its anticipated range of $26-$32. The hype and expectations for the tracking stock are immense as the issue is oversubscribed by a 2-1 ratio. This IPO will be a hefty 360 mln shares, brought to market by a 25 firm global underwriting team. Lead underwriters include Goldman Sachs, Merill Lynch, and Citigroup's Salomon Smith Barney unit. There are mixed feelings regarding the wireless tracking stock among analyst and investment professionals. One reason is that the current market frailty has resulted in a less attractive IPO market, with many scheduled IPOs of the past month postponing until better market conditions. The other reason is that tracking stocks typically do not act like company stocks and thus, may have less potential upside. Yet, as one IPO analyst said, "This is an institutional darling." AT&T Wireless has 12 mln customer subscribers and an existing network covering almost 65% of the U.S. population. In anticipation of its earnings report after the close, AMZN shares ran up $1.06 to $53.50. The report was much in line with expectations as AMZN came in with narrower than expected losses of $0.35 per share vs. $0.36. Revenues, which has become the most scrutinized earnings component, were a strong $574 mln, about 10% better than the expectation of $521 mln. AMZN managed to attract an additional 3.1 mln new customers, on the higher end of analysts' predictions of 2-3 mln. Analysts will further dissect this number and the revenue per customer in order to determine repeat business and incremental costs. An analyst at Paine Webber said that at first glance, these numbers indicate a flat to slight buying bias, yet maintained that the brokerage house has a Neutral rating on the stock. AMZN said that its losses have peaked this quarter and foresee a narrowing throughout the year. Recently, investors and analysts have been frustrated with the company's performance as it continues to spend liberally and remains in the red. AMZN was trading lower in after-hours at $52. The AOL-TWX merger has heated up some opposition. Today, consumer and media groups asked the Federal Communications Commission(FCC) to block the proposed acquisition. They argue that such a concentration of television and Internet content, along with distribution means, will severely limit consumer choices. A marriage of the two companies would join multimedia forces such as CNN, TNT, Sports Illustrated, Warner Bros., EMI, and MovieFone just to name a few. Also, those groups opposed to the merger argued that AOL has engaged in "monopolistic behavior" with its instant messaging market. Oh, how we hate to hear those words, as does AOL. In response to these complaints, an AOL spokeswoman said that the merger would "deliver tremendous benefits to consumers, bringing people around the world more choice and more convenience, and accelerate the roll out of broadband services." AOL and TWX plans to complete the merger by the end of the year. In trading, AOL was off $1.38 to $59.63 and TWX was down $1.44 to $88.50. With so many uncertainties in this market, there is one sure bet. Which is the ECI and GDP will be the market movers tomorrow. The ECI is expected to come in up 0.9-1.1%. The GDP will likely run between 6.0-7.0%. The GDP price deflator is expected at 2.7%. These are all big numbers and anything bigger will result in more fear on Wall Street. Of course, anything under may result in a solid rally. The only real fear I see right now is if the numbers are good for Wall Street and we gap higher only to bleed away the gains all day. That would be disheartening to say the least. In that case, look for another retest of the 3300 level. I am optimistic of a rally, but will be prepared for a disaster. When in doubt, get out. Ryan Nelson Asst. Editor ********** STOCK NEWS ********** Theory and Reality By: S.P. Brown Anyone who has ever perused an economics textbook has, no doubt, been led to believe people are rational beings. After all, most standard theories of economic behavior and financial analysis are based on rational thought, meaning people always act in their own best interest. Famed Nobel Prize winning economist Milton Friedman has even gone so far as to state people weigh utility curves before making a decision. Being relatively well-versed in economic theory, I have to admit to never weighing utility curves. What's more, looking back at some of my recent trades, my decision making processes have been less than rational, which has me wondering if people - investors in particular - are indeed rational beings. Unfortunately, the evidence suggests that even the most rational investors are prone to fits of irrationality and illogical thought. One of the most common acts of irrationality is considering sunk costs in the investment decision-making process. For example, it's not unusual for an investor to buy a stock and then have that stock drop in price below the investor's cost basis. There may be nothing wrong with the company, except it's suffering from temporary market neglect. On the other hand, some event may have occurred which has permanently changed its outlook for the negative. If that's the case, the logical action would be to bail out. Nevertheless, its not unusual for an investor to "average down" in an attempt to lower his cost basis to try and re-coup his investment, even though the stock isn't likely to rise based on the company's current outlook. This sunk cost concept ties in with people's natural aversion to accepting a loss. As any good trader knows, losses should be cut and profits should be ridden. However, this is the exact opposite of what many traders do because they are loathe to accept a loss. Additionally, many traders attempt to distinguish between "paper losses" and "realized losses," believing the former is more onerous than the latter. Make no mistake, paper losses are every bit as real as realized losses. Wealth is fungible, meaning a million dollar portfolio is a million dollar portfolio, regardless of it's all cash or all stock, or a combination of any other assets. Decision framing can also hinder investor success. For example, many investors believe that derivatives are always high-risk , but that's not always the case. For example, say an investor has a diversified portfolio of stocks valued at $500,000. This same investor also has $100,000 in cash that he wants to use to lower the portfolio's risk. He has two options: He can either invest the $100,000 in US Treasury notes, or he can short $100,000 worth of S&P 500 Index futures contracts. On the surface, it would appear the logical choice would be to purchase T-notes because on stand-alone basis they're the less risky instrument. However, in this case, that would be the wrong choice. Returns on T-notes are virtually uncorrelated with stock, meaning if stocks move up or down, T-notes generally remain neutral. However, returns on a short position of S&P 500 Index futures would be negatively correlated with a long position in stocks, meaning as the stocks move in one direction, the short position in the S&P 500 futures contracts would move the opposite direction, which would reduce the portfolio's overall risk more than the T-notes. Even within the world of derivatives, investors will often view the same trading strategy as possessing different levels of risks. For example, many investors believe a strategy of writing covered calls against a portfolio is a fairly conservative strategy, while selling a naked put short is a risky strategy. The fact is, the payoff diagrams of both strategies are the same. Overconfidence is another bane of successful investing. Studies show whenever a security analyst believes that the probability of a stock rising is 80 percent or more, he is correct only 50 percent of the time. Another reasoning mistake investors make is to equate good stocks with good companies. It's probably not a stretch to say Cisco Systems has a brighter future that US Steel, but does fact alone make Cisco the better investment? Not necessarily. The capital asset pricing model (CAPM) proselytizes that all risk-adjusted returns should be equal, meaning the expected returns from investing in the shares of "good" companies should be lower than the expected returns on the shares of "bad" companies, and that's generally the case when examining different companies' earnings yields. So, if investors attempt to maximize some sort of excess return-to-risk ratio, the market prices of securities will adjust so that one investment is as good as any other from a return-to-risk perspective. Therefore, an investor who sought to maximize returns irrespective of risk would rationally seek out companies with dim prospects because, on average, their expected return would be higher. But investors often do the opposite; they seek out the Ciscos of the world when the US Steels of the world are more likely to provide higher absolute returns. The herd instinct also poses a problem, particularly for the long-term investor. Most everyone knows that in order to outperform the market, an investor must shun conventionality by making unconventional choices. Even so, employing unconventional wisdom and shunning today's "hot" stock can cause an investor to look incredibly stupid in the short-run (Warren Buffett comes to mind). Nevertheless, most investors will opt for short-term euphoria (Cisco over US Steel when Cisco is trading at 150 times earnings), despite the statistical likelihood that a Cisco purchased at a high price will produce mediocre results in the long-run. Finally, be careful of spurious correlations. For years, the performance of the US stock market correlated highly with whether or not the winner of the Super Bowl came from the old American Football League. But this high "correlation" was spurious because the supposed relationship between the winner of the football game and the subsequent behavior of the stock market was statistical and not logical. I can't understate the importance of knowing and and understanding the difference between a legitimate "cause-and- effect" relationship and statistical happenstance, particularly for technical traders who are looking at past trading patterns to determine future performance. Standard finance and economic theories assume people make rational, wealth-maximizing decisions. In other words, people don't make cognitive errors. In the real world, though, when the perception of reality come into conflict with reality itself, the perception usually wins. ************** TRADERS CORNER ************** THE OEX SKYBOX: OptionInvestor's Best-Kept Secret By: Austin Passamonte E-mail messages have been streaming in over the past three days. Rest assured that I do read every single one. Many have questions or comments on the OEX index and/or Skybox trading system, and we'll try to cover them in one fell swoop over the next few discussions. Actually, I had my wife Wendy count the messages received that mentioned the OEX and she totaled more than one hundred so far. I promised her if she did this for me we'd buy expensive jewelry with the profits of my next big trade, and she replied she couldn't wait until next year, maybe I should talk to Jim about a writer's raise instead. See the kind of spousal support & respect I command in my own home office? Let's move right into discussion about the OEX and what I feel might be some ways to trade it. Today will outline my interpretation of the Skybox system. Tomorrow we'll detail the specific methods and discipline guidelines required for trading it precisely. Sunday is for discussing some actual scenarios, market behavior and experiences I've had trading the OEX that may help you become better prepared. First of all, let me STRONGLY emphasize that the OEX index and its options are a fast-moving game, especially during these volatile times. Big money is there to be made or lost on most given days. Seems much easier to lose than make money without following some sort of discipline and methodology guideline. Buying calls or puts on gut feeling or market whim is the fastest track to broke I can think of. For those who asked for the website that provides this trading method I'm pleased to say it's right here in OI! In the upper left-hand column of the home page you will see an icon that says "OEX Skybox". Click on this to open up a simple but all-inclusive environment for trading the index with success. Let me encourage those who are interested in trading this market to study and explore the section in great detail; it has everything one needs to perform successfully. Skybox is the product of Pinnacle Capital Advisors. It is a 100% objective, mechanical system known as a trend following method. The concept in a nutshell is to identify key points of support & resistance on a daily basis and test-enter the market only when these critical areas are reached. It is truly market neutral and without subjective bias, taking trades every time all of the parameters indicate to. Tight protective stops after entering the market lets one exit quickly without great loss if the direction proves wrong. There are other safeguards built in that help prevent a trader from being in the market when it isn't safe to trade as well. With a futures trading background, I have examined quite a number of mechanical systems for volatile markets like pork bellies, soybeans, bonds, currencies and S&P 500. I've never run profit/loss analysis on any of them that target a specific market that even begin to approach the historical performance of the Skybox. Very impressive indeed. The only tough part about this trading model for many is the fact that it's 100% objective (mechanical) instead of subjective (emotional). It's a well-known fact that most traders feel more in control of their trading and results when they make most decisions based on technical and/or fundamental news. In reality, most traders and practically all new ones would be much better off following a proven mechanical system in part or whole instead of calling their own shots. The key word here is PROVEN, for there is no end of "get-rich" systems for sale out there that only drive wealth to a single person...the one selling it! Not only will most traders feel out of control following a mechanical system, they'll usually confirm these feelings while watching the model take a series of small losses. This drives new traders crazy. What commonly happens is that a newbie will test a system, take a small loss or two and abandon the model just before it hits a string of inevitable winners. That can be downright maddening! Good mechanical systems usually lose more trades than they win, but are of course profitable overall. The Skybox history is no exception to this...on average it has six losses and four gains out of every ten trades taken. I can almost feel you wince as you read that. The good news is that the six losses average 3 points each while the winners average 9 points apiece. Totaled up, you lose +/-18 points and gain +/-36 points for a NET GAIN of +/-18 points on every ten trades by historical data's average. Compound a systematic, 2/1 profit-loss ratio for a few months or years and see where you end up financially. The Skybox method isn't the most exciting option trading one could experience, either. With a history of only two trades executed per week on average, that leaves too much idle time for undisciplined traders to have on their hands. The urge to tinker and second-guess is powerful, let the voice of experience tell you. If these are the worst possible factors involved with Skybox, what's the problem? Think about subjective trading over the past few months during these tumultuous times where many traders' accounts have literally been chopped to pieces. Do you feel they might prefer boring to gut-wrenching right now? Let me close this note with some fun & interesting homework. Go into the OEX Skybox environment and click on "Scoreboard". This will give you the actual history of profit/loss performance from every trade since January 2000. Take a moment to add up the total profits and subtract the total losses to see where a trader who followed this system EXACTLY might be today. Don't forget to include today's winning trade listed underneath the live chart's applet, and keep an eye on the current play tomorrow. The second request I'll make is for you to enter the "Game Plan" section in the environment and write down tomorrow's benchmark instructions from the list at the bottom. We will use these to explain just what the objective plan should have been for tomorrow with the benefit of hindsight to examine what might have theoretically taken place if we did. Have fun with your brief assignment, and let's begin learning in earnest tomorrow! Trade the Right Direction Open positions: long OEX puts ********************** PLAY OF THE DAY - CALL ********************** MERQ - Mercury Interactive Corp. $80.25 +4.81 (+7.88) Mercury Interactive Corp. is the leading provider of Web performance management solutions that help e-businesses deliver a positive user experience. Mercury Interactive solutions enable its customers to turn Web application performance, scalability and user experience into competitive advantage. The company's performance management products and hosted services are open and integrated to best test and monitor business-critical Web applications. Mercury Interactive is headquartered in Sunnyvale, California and has more than 40 offices worldwide. Most Recent Write-Up 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. Comments Today, MERQ essentially opened at its low and never looked back. On a day that the overall markets grew weak as the day went on, MERQ did the opposite. It worked hard throughout the day and managed to close up over resistance of $80. Looking forward to tomorrow, after the economic data is announced(ECI and GDP), the markets will likely move strongly. Watch for support at $75 if MERQ doesn't hold $80. This would be a good entry point if it holds. Targetshoot in this uptrend based on personal risk levels. BUY CALL MAY-75*RQB-EO OI=468 at $11.63 SL= 9.25 BUY CALL MAY-80 RQB-EP OI=455 at $ 9.25 SL= 6.75 BUY CALL MAY-85 RQB-EQ OI=134 at $ 7.25 SL= 5.50 BUY CALL JUL-75 RQB-GO OI= 33 at $18.50 SL=14.50 SELL PUT MAY-65 RQB-QM OI= 62 at $ 2.63 SL= 3.50 (See risks of selling puts in play legend) Picked on Apr 16th at $58.75 PE = 165 Change since picked +21.50 52 week high=$134.50 Analysts Ratings 10-3-1-0-0 52 week low =$ 11.38 Last earnings 04/00 est= 0.11 actual= 0.10 Next earnings 07-13 est= 0.12 versus= 0.09 Average daily volume = 1.53 mln /charts/charts.asp?symbol=MERQ *************** ASK THE ANALYST *************** Looking for Answers By: Eric Utley Questions loom ahead of Father Greenspan's sermon. Traders await the release of two key economic indicators, the ECI and GDP, along with guidance from Mr. Greenspan. The closely watched ECI (employment cost index) is the broadest measure of wage inflation. Greenspan is worried the tight labor conditions are putting upward pressure on wages. The market is expecting the Fed to continue to raise interest rates and a strong ECI would only confirm those fears. However, analysts suggest that an ECI less than 0.9% may prompt the Fed to ease its tightening ways and send the market into rally mode. Estimates for the GDP growth range from 6% to over 7%. Needless to say, traders remained cautious Wednesday ahead of the economic data. It was just two weeks ago when traders got an inflation scare from a higher than expected CPI number. That surprise produced a market malaise. So what is a trader to do? The famed and sometimes fictional trader Jesse Livermore succinctly said, "There are times when one should trade, and just as surely there are times when one should not trade." Noting Wednesday's tepid trading, the professional traders and money managers chose the latter, do nothing. One of the most costly mistakes traders commonly make is forcing a trade. Sometimes the best thing to do is just sit and watch. I agree with Jim in that we will see a narrow trading range until the FOMC meeting in May and then rally into the summer earnings season barring any major catastrophe. Until then, we can expect more volatility. If you can't wait for the market to establish a discernible trend, you might try to take advantage of the volatility and target shoot from day to day. But proceed with caution, set your stops, and know your risk levels. Probably the best strategy right now is to be patient, let the market digest the inflation fears, and wait for a new bull to emerge. I really appreciate the positive feedback from all of you after my inaugural Ask the Analyst column. I received a lot of requests and I will try to do as many as time permits. Send your requests to Contact Support. Please put the symbol in the subject line of the e-mail. ---------------------------- Exodus - EXDS I am looking to sell volatility in this market (naked puts). Please analyze EXDS and feel free to mention any other likely candidates. I look forward to your columns. Many thanks. - Cheri Well Cheri, you probably know what happened to EXDS Monday after the company announced stellar earnings but warned analysts that sales would slow in the coming year. Investors are less concerned with the past and more focused on the future prospects. The problem here is that investors had factored in 40% sequential growth into the stock price. The first sign of slowing growth is bad news for a company like EXDS. Traders have been particularly harsh on the infrastructure stocks as of late. You'll see on the chart below that EXDS gapped down Monday morning and continued to slide in the following days. Also of note, the volume has been heavy during the recent selling, indicating that institutions have been liquidating. You mentioned you're looking to sell volatility. CBOE has EXDS historical volatility at 101, as of close on Wednesday, the MAY 70 put had implied volatility of 134. You're right about the high volatility, but remember, high volatility means high risk. The stock is in a downward trend with support at $75, if EXDS falls through support it could get real ugly. If support fails, the stock could retest its lows from last fall, all the way down to $50. ---------------------------- General Electric - GE Hi, please do the needful with GSTRF, CEFT, ERICY, GE, and NITE. Thanks. - Kevin Ruberu I thought it would be appropriate to take a look at GE since we added it as a call play on Tuesday. Since GE is so diversified in its operations, the company is considered a barometer of the US stock market. We added GE because of the classic breakout on Tuesday and its upcoming stock split. The stock showed incredible strength Monday while the rest of the market struggled. The momentum from Monday and Tuesday carried GE to an all-time high of $167.94 on Wednesday, but the stock fell to broad market weakness later in the day. The only thing that really concerns me with the chart is the lack of volume during the recent rally. A breakout on above average volume usually provides a clearer sign of future prices. The lack of conviction waves a caution flag, but we have to consider the light trading in the broader market recently. If we get some decent numbers from the ECI and GDP Thursday, GE could plow higher. The stock could continue its run in the next week fueled by the upcoming split on May 5th. GE is an interest rate sensitive company, so if we get detrimental numbers Thursday GE might suffer. A breakdown below support at $160 would most likely signal an end to its recent trend. ---------------------------- Dell Computer - DELL I have two OTM MAY 60 call options on Dell Computer, what is your short-term outlook for DELL? Thanks. - Ron Reimer DELL has been relatively quiet lately in light of the NASDAQ meltdown. The composite index is down more than 30% since March 10th while DELL has lost about 17%. Most tech stocks have been slaughtered but DELL has held up relatively well. Money managers and individual investors alike have turned to the leading tech names keeping stocks like DELL afloat. Earlier in the year, DELL was hurt by slow sales in Europe and a slowdown of corporate spending in the US because of Y2K. The PC business may be picking up again noting the positive news coming from CPQ Tuesday. Another catalyst for DELL is the release of Windows 2000, which is expected to spur computer sales. DELL will have to break through several formidable resistance areas before your MAY 60 calls will be in the money. You can see on the chart that DELL is currently trading just below resistance at $52. The stock has even heavier resistance at $56. Earnings may be the spark that lights the flame for DELL if it is going to move higher. The company is expected to report in the coming weeks. An earnings run combined with optimism surrounding Windows 2000 could take out the various resistance levels. You can also see at the bottom of the chart that volume has substantially declined during DELL's recent retreat. That's a good sign, signaling that sellers have disappeared and the stock has built a strong base. In all cases, remember we are not here to advise you on entry and exit points. You are playing a front month option that is considerably out-of-the- money and requires your undivided attention in this market. ---------------------------- DISCLAIMER: This column is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The Ask the Analyst picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable, but is not guaranteed as to its accuracy. ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** Inflation concerns plagued the market today... A bullish commerce department report revived fears the Federal Reserve will continue to raise interest rates. The latest sign of economic growth; an increase in orders for durable goods, brought the recent rally to a screeching halt. With uncertainty rising to extreme levels, many investors retired to the sidelines to await Thursday's release of the first-quarter gross domestic product figures. Corporate earnings reports continued to generate volatility in the major groups and technology companies held up better than their blue-chip counterparts. Our portfolio fared relatively well considering its broad market base and with the current range-bound outlook, our focus will be on conservative, high probability positions. Summary of Previous Picks: Covered Calls: (Margin would double the listed Monthly Return) Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return CY MAY 45 42.06 50.00 $2.94 7.1% SEPR MAY 75 70.75 88.25 $4.25 6.1% AMD MAY 60 55.25 82.25 $4.75 5.9% PVN MAY 85 80.38 91.13 $4.63 4.7% BRKS MAY 70 66.88 81.75 $3.12 4.7% AHP MAY 55 52.75 56.63 $2.25 4.3% CSCO MAY 68 62.88 66.75 $3.87 4.3% INSUA MAY 35 32.19 33.56 $1.37 3.5% Consolidating CGNX MAY 55 51.34 51.25 -$0.09 0.0% No Lower! IMNX MAY 50 46.56 36.63 -$9.93 0.0% Closing Naked Puts: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return CY MAY 40 38.56 50.00 $1.44 12.6% SEPR MAY 65 63.25 88.25 $1.75 8.8% INSUA MAY 30 29.06 33.56 $0.94 8.7% BRKS MAY 60 58.94 81.75 $1.06 5.9% AHP MAY 50 49.12 56.63 $0.88 5.8% PVN MAY 70 68.75 91.13 $1.25 5.2% CGNX MAY 45 44.25 51.25 $0.75 4.8% Watch Closely! Naked Calls: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return CMTN MAY 115 117.19 83.50 $2.19 12.4% ITWO MAY 185 187.25 114.50 $2.25 9.5% CHKP MAY 270 273.25 171.00 $3.25 9.3% New Candidates: This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. *************** BULLISH PLAYS - Covered Calls & Naked Puts *************** NVLS - Novellus $59.69 *** On The Rebound! *** Novellus Systems manufactures, markets, and services advanced automated wafer fabrication systems for the deposition of thin films within the semiconductor equipment market. Novellus is a supplier of high productivity deposition systems used in the fabrication of integrated circuits. These unique systems include Chemical Vapor Deposition, Physical Vapor Deposition, and a technique called Electro-fill. CVD systems employ a chemical plasma to deposit all of the dielectric (insulating) layers and certain of the conductive metal layers on the surface of a semiconductor wafer. PVD systems are used to deposit conductive metal layers by sputtering metallic atoms from the surface of a target source via high DC power. Electro-fill systems are used for depositing copper conductive layers in a dual damascene design architecture using an aqueous solution. Novellus has been on the rebound since it recently beat analysts' estimates in its first quarter earnings report. The semiconductor equipment-maker reported net income of $57 million, or $0.45 per share. First Call's survey of 22 analysts predicted a profit of $0.39 per share for the quarter. Revenue rose to $274.1 million, a 43% gain sequentially and a 138% improvement year-over-year. In addition, revenue grew strongly in all geographic markets. The company's record bookings, revenues, and net income are the result of accelerated capital spending by their customers for expanded capacity and advanced technology. Fortunately, the growth trend is expected to continue. The company is currently participating in an offering of over 8 million shares of its common stock at $59.62 per share. The offering is being made by Banc of America Securities and the proceeds, expected to total about $488 million, will be used for general corporate purposes. This should provide support for the issue near our cost basis. NVLS - Novellus $59.69 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call MAY 50 NLZ EJ 605 11.63 48.06 5.3% *** Sell Call MAY 55 NLZ EK 1707 8.50 51.19 9.8% Sell Put MAY 45 NLQ QI 368 0.94 44.06 9.7% *** Sell Put MAY 50 NLZ QJ 2793 1.94 48.06 15.9% Sell Put MAY 55 NLZ QK 1478 3.63 51.37 21.0% Chart = /charts/charts.asp?symbol=NVLS ***** PLXS - Plexus $75.56 *** New All-Time High! *** Plexus provides product realization services to original equipment manufacturers in the medical, computer (mainframes, servers and peripherals), industrial, networking, telecommunications and transportation electronics industries. Plexus offers product development and design, material procurement and management, prototyping, manufacturing and assembly, and functional and in-circuit testing. Plexus provides these services primarily through its Plexus Technology Group, SeaMED Corporation, and Plexus Electronic Assembly Corporation subsidiaries. Plexus is another issue that is rallying through the current sell-off and as you might expect, the fundamental reason is solid earnings. The company recently reported record net income of $9.4 million, or $0.49 per share, for the second quarter of fiscal 2000. Net income and EPS were up 49% and 44% respectively, over the same period last year. Second quarter net sales increased 35% to a record $162 million, up from $119 million in the prior-year period. Gross profit increased 37% percent to $23 million and the return on average equity for the second quarter was 23%, compared to 19% in the year-ago quarter. Overall, the company accelerated growth in both revenues and earnings and the outlook for the future is very favorable. New upgrades by Prudential and A.G Edwards helped the issue reach a new all-time high this week and with the strength in the trend, we believe there is an excellent opportunity for future upside potential. PLXS - Plexus $75.56 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call MAY 65 QUA EM 54 13.00 62.56 5.2% *** Sell Put MAY 60 QUA QL 20 1.25 58.75 10.1% *** Sell Put MAY 65 QUA QM 0 2.13 62.87 12.9% Chart = /charts/charts.asp?symbol=PLXS ***** TER - Teradyne $102.19 *** New Trading Range? *** 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 rallied this week with a $12 move on Tuesday to a new closing high near $103. The bullish trend has enjoyed support from the short-term recovery in the technology index, solid semiconductor industry performance, earnings that beat analysts expectations, and some optimistic comments from several experts in the chip sector. In fact, most brokerages that follow the issue consider Teradyne to be the leading growth opportunity in the group. Our technical opinion is also bullish but we favor a conservative approach to profit with a cost basis near the recent bottom of the trading range. TER - Teradyne $102.19 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call MAY 85 TER EQ 77 20.63 81.56 5.6% *** Sell Call MAY 90 TER ER 754 17.25 84.94 7.9% Sell Put MAY 75 TER QO 152 1.50 73.50 9.0% *** Sell Put MAY 80 TER QP 126 2.31 77.69 13.4% Sell Put MAY 85 TER QQ 112 3.75 81.25 18.1% Sell Put MAY 90 TER QR 128 5.50 84.50 21.3% Chart = /charts/charts.asp?symbol=TER ***** TQNT - Triquint Semiconductor $93.53 *** On The Move! *** TriQuint Semiconductor designs, develops, manufactures, and markets a broad range of high performance analog and mixed signal integrated circuits for communications markets. Their integrated circuits are incorporated into many communications products, including cellular phones and pagers, fiber optic telecommunications equipment, satellite communications systems, high performance data networking products and various aerospace applications. Triquint uses its proprietary gallium arsenide technology to enable products to overcome the performance barriers of silicon devices in a variety of applications. Earnings and revenues are driving the market these days and last week TriQuint Semiconductor reported record financial results for the first quarter of the year 2000. Revenues increased 76% to $59.3 million while net income rose 237% to $10.8 million. Net revenues for the first quarter of fiscal 2000 increased 20% over the $49.4 million reported in the previous quarter and operating income increased 42% to $13.4 million over the $9.4 reported the previous quarter. Company officials were elated with the results and the CEO commented that record bookings, revenues, operating income, and net income all reflected Triquint's strength in their target markets. It appears that investors agree with the results and the bullish outlook for the issue as the share value has rebounded sharply in the past few days. With the semiconductor sector expected to outperform the broad market, this should be a favorable issue for any long-term portfolio. TQNT - Triquint Semiconductor $93.53 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call MAY 80 TNN EP 313 16.88 76.65 5.8% *** Sell Call MAY 82.5 TNN EX 28 15.25 78.28 7.1% Sell Put MAY 70 TQN QN 81 1.13 68.87 7.5% *** Sell Put MAY 72.5 TQN QV 20 1.50 71.00 9.8% Sell Put MAY 75 TQN QO 219 2.00 73.00 12.7% Sell Put MAY 77.5 TNN QW 31 2.56 74.94 14.1% Sell Put MAY 80 TNN QP 83 3.25 76.75 15.8% Chart = /charts/charts.asp?symbol=TQNT *************** BEARISH PLAYS - Covered Puts & Naked Calls *************** AAPL - Apple Computer $121.31 *** A Great Run At An End? *** Apple designs, manufactures and markets personal computers and related personal computing and communicating solutions for sale primarily to education, creative, consumer and business customers. The majority of the company's net sales are derived from the sale of personal computers from its Apple Macintosh line of computers and related software and peripherals. Their subsidiary FileMaker makes database software. The company manages its business on a geographic basis. Geographic segments include the Americas, Europe, Japan and Asia Pacific. Each operating segment provides similar hardware and software products and similar services. Apple Computer has enjoyed a great run since last summer but the end may have finally arrived. As expected, the issue enjoyed a brief earnings rally but the recent technical failure indicates there is a potential change of character underway. In today's trading, AAPL fell $7 and with slower-than-expected personal computer sales forecast, the issue has little incentive to move higher. There is of course the split in late June but until that rally begins, we don't foresee a substantial upside move in the issue. AAPL - Apple Computer $121.31 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call MAY 135 QAA EG 1527 3.38 131.62 8.8% Sell Call MAY 140 QAA EH 2572 2.25 137.75 7.0% Sell Call MAY 145 QAA EI 379 1.56 143.44 5.9% *** Sell Call MAY 150 QAA EJ 494 1.00 149.00 4.0% Chart = /charts/charts.asp?symbol=AAPL ***** AMAT - Applied Materials $90.44 *** Much Work To Do! *** Applied Materials is the world's largest semiconductor equipment company. AMAT develops, manufactures, markets and services semiconductor wafer fabrication equipment and related spare parts for the worldwide semiconductor industry. Customers for these products include semiconductor wafer manufacturers and semiconductor integrated circuit (IC or chip) manufacturers that either use the ICs they manufacture in their own products or sell them to other companies. These ICs are the key components in most advanced electronic products such as computers, telecommunications devices, automotive engine management systems and electronic games. Applied Materials has been one of the leading stocks in the chip industry over the past few months but recently the bullish trend has begun to lose momentum. Technically this issue has performed fairly well given the overall performance of the technology group but it appears a short-term trading top is firmly established and a brief consolidation is the likely outcome. Looking forward, the issue is expected to continue sideways for a few weeks and there is relatively little chance the stock will test our sold positions. AMAT - Applied Materials $90.44 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call MAY 115 ANC EC 1465 2.06 112.94 10.2% Sell Call MAY 120 ANC ED 4102 1.56 118.44 7.9% Sell Call MAY 125 ANC EE 1425 1.13 123.87 5.9% *** Chart = /charts/charts.asp?symbol=AMAT ***** NEWP - Newport Corporation $107.00 *** Finding A New Range! *** Newport Corporation, together with its consolidated subsidiaries, is a global supplier of high precision components, instruments, micro-positioning and measurement products and systems to the fiber optic communications, computer peripherals, semiconductor equipment and scientific research markets. The company designs, manufactures and markets components and systems that enhance productivity and capabilities of automated assembly and test and measurement for high precision manufacturing and engineering applications. Newport also provides sophisticated equipment to commercial, academic and governmental research institutions worldwide. The company operates in three business segments, two comprising domestic operations, Components and Subassemblies, and Instruments and Systems. The third business segment is comprised of the Company's Europe operations. In early April, Newport reported that first-quarter profits more than tripled, easily beating analyst's expectations, as sales to the optical communications and semiconductor equipment markets soared. The company's sales rose 55% on strength in the fiber optic and chip sectors. Looking ahead, Newport said it expects revenue in the second quarter to rise sequentially based on its current backlog and anticipated sales in their target markets. Total expenses, however, are expected to rise in coming quarters because of sales commissions and incentives, higher personnel costs and increased research and development spending. Overall, Newport is a great company and we like the chart in the long-term. However, the probability of the share value reaching our sold strikes appears rather low and we will use the inflated option premiums to benefit from this outlook. NEWP - Newport Corporation $107.00 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call MAY 150 NZZ EJ 12 2.00 148.00 8.5% Sell Call MAY 155 NZZ EK 1 1.56 153.44 6.8% Sell Call MAY 160 NZZ EL 8 1.25 158.75 5.5% *** Sell Call MAY 165 NZZ EM 0 1.00 164.00 4.5% Chart = /charts/charts.asp?symbol=NEWP ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. 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