The Option Investor Newsletter Wednesday 5-03-2000 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) ****************************************************************** 5-03-2000 High Low Volume Advance Decline DOW 10480.10 - 251.00 10732.20 10400.10 991,690k 821 1,290 Nasdaq 3,707.31 - 78.14 3787.43 3592.79 1,479,950k 2,144 2,751 S&P-100 761.18 - 18.07 778.44 751.54 Totals 2,965 4,041 S&P-500 1415.10 - 31.19 1444.21 1398.36 42.3% 57.7% $RUT 495.56 - 9.79 505.35 487.33 $TRAN 2796.45 - 62.23 2837.98 2784.79 VIX 34.51 + 3.64 35.83 32.03 Put/Call Ratio .74 ****************************************************************** Does Late Session Buying Break The Boycott? As we have been drifting lower on light volume this week, the commonly heard phrase "buyer's boycott" is being thrown around. What does this mean exactly? Well, seeing that volume isn't up to its typical levels, there has been a lack of real conviction on taking the market lower and no conviction on the buy side. That's why it has been a slow slide. But we did see a glimpse of strong buying into the close on both the NASDAQ and the DJIA. Now, as earnings season is winding down, all eyes are on the Fed again. Interest rate fears are the primary market mover this week and will be into the May 16th Fed meeting. Today, echoes of a "50 basis point hike" ring across the Street. Considering that a 25 basis point rate hike has been priced into the market already, are the markets preemptively pricing in 50 points? Maybe that's why the buyers are few and far between. The final 30 minutes, however, gave us signs of life as buyers came in at key support levels. Concern in the market has been volume. Without strong volume, the market moves are less convincing and indicate that traders just aren't willing to commit money. Volume at the NYSE was only 972 mln and this lack of liquidity usually means that institutions are remaining on the sidelines. The DJIA continued its slide since hitting 11128 on April 25th, where it fell into a downward channel. Note how the DJIA found key support at 10400, just at the bottom of its regression channel. It did manage to recoup 80 points on the bounce to close down 250 points at 10480. Big cap tech stocks took the brunt of the selling today with A(-9.25), NT(-7.06), HWP(-5.56), TXN(-3.81), and IBM(-3.25) all down, though well off their lows. Also taking a hit today were the retail stocks. Goldman Sachs came out today with a major downgrade on the entire sector, attributing their decision to the macroeconomic environment. Given that the U.S. is seeing slowing economic growth after two years of record consumer spending, Goldman removed a handful of retail stock from their recommended list including TIF(-4.44), KSS(-3.81), and ANF(-0.13). They did remain positive on WMT(-4.19) and COST(-2.56). The only standout today was the food sector. On the heels of news that Unilever is looking to make another acquisition, only a month after the Ben & Jerry's deal, food stocks rallied. Bestfoods Inc. revealed they had received an unsolicited bid from Unilever at $66 a share. That is a deal worth $66 billion. The owner of such well-known consumer brands as Hellmann's mayonnaise and Mazola cooking oil, saw its shares rise 22% to $61.44, up $10.88 today. This gave food for thought to investors who bid up the shares of other food stocks which were definitely the strongest sector of the day. Unilever's stock was down $2.19. Feeling the residual effect, rival food stocks saw heavier than normal gains on the day: OAT(+3.31), CPB(+3.06), HNZ(+3.69), and NA(+0.75). This may be a sign that a continuing consolidation is in store for the food industry. Turning to the tech index, the NASDAQ once again was in the spotlight as it continued to drift lower throughout the day. We watched the NASDAQ with anticipation as it steadily converged on key support levels. Last week, we mentioned how the NASDAQ was going to remain range bound in the short term between 3600 and 4000. That was exemplified this week as it neared the upper limit on Monday at 3982, only to begin a retreat that finally found a bounce late in today's session at 3592. At that 3600 level, the buyers finally came out and did so with stronger volume. This bounce lifted the NASDAQ to close at 3707, down 78.14. Notice on the chart that support below 3600 can be found at the 200-dma of 3557. Could this be the end of the "buyer's boycott"? It's difficult to say. Volume on the NASDAQ was 1.5 mln shares, decent but far from strong. Strong volume is essential to prove buying conviction. Also, there are a number of factors that have instilled fear in investors. Topping the list are interest rates and the hot economy. The release of the Fed's Beige Book today showed that the U.S. economy did indeed expand during March and April. Worker shortages are evident in all the nation's districts which pushed up wages in the last two months. Yet, on the upside, retail prices remained tame. This economic summary is just a teaser to the economic data scheduled for the rest of the week. With relatively no good news in the market, traders used this information to sell off semiconductor stocks and biotechs. Both indices made a stellar recovery in the final half hour of trading when the NASDAQ bounced, $SOX(-38.42) was down 3.4% and $BTK(-11.61) fell 2.4%. On flip side, the bad news was bad for selective stocks. From euphoria to disaster, NOVL was the biggest percentage loser in any market today. The Utah-based provider of network software enabled by directory services said Tuesday that the recent quarter would come in below revenue and earnings targets due to weak sales. Dennis Raney, chief financial officer, said "Novell thinks management and organizational issues in sales led to the decline". At least they owned up to it. Nevertheless, the Street punished NOVL for the problems as the stock fell to $10.63, down $6.94 on volume of 92 mln shares, about 15 times its ADV. Security One was another headache for investors today. The company released Q1 earnings last night that missed the mark and margins were lower than expected. This was due to the acquisition of three companies last year, according to SONE. Pacific Crest was first jump on the stock with a downgrade from Strong Buy to Buy after the news. The First Call estimate was for a loss of $0.23, but it came in at a loss of $0.35. SONE dropped $17.06 to $42.31 it today's trading. As we look forward to the last two trading days of the week, we have a slew of economic data scheduled for release. Tomorrow, Initial Jobless Claims are forecasted to be 275,000 and first quarter Productivity is expected to be 3.5%. Greenspan will be speaking tomorrow in Chicago on the Financial Industry Structure and Regulation. Fed-watchers will be tuning in to see if they can detect any hints about the upcoming Fed rate hike. But, Friday's Unemployment Rate and Hourly Earnings will take the spotlight. They are forecasted at 4% and 0.3%, respectively. These are two closely watched indicators of inflation and labor cost increases. Also on the agenda is Non-farm Payrolls. The markets will be watching all of these closely, trying to find some direction in this time of increasing uncertainty and volatility. Look for the markets to continue to be range bound and be cautious as interest rate worries drive the indices. When in doubt, stay out. Matt Russ Research Analyst ********** STOCK NEWS ********** Martha Stewart Beats the Street By: Cindy Christ Martha Stewart may be the Rodney Dangerfield of late-night TV, but after posting earnings Wednesday that beat estimates by 7 cents, her much-maligned brand earned the respect of Wall Street. Martha Stewart Living Omnimedia posted a 57 percent increase in earnings per share, buoyed by strong growth in advertising and circulation revenues and merchandise sales. For the first quarter, net income totaled $5.6 million or 11 cents a share compared to $3.4 million or 7 cents a share a year ago. Analysts polled by First Call/Thomson Financial were looking for earnings of 4 cents per share. First-quarter revenues increased 30 percent to $69.1 million from $53.4 million last year. The company's Internet and direct commerce segment nearly doubled revenues to $10.6 million compared to $5.6 million last year amid increased traffic on marthastewart.com and higher catalog circulation. Registered Web site users were up 73 percent to 1.3 million. Still, losses from the unit grew 275 percent to $6 million from $1.6 million due to increased spending on technology, marketing and promotion. Publishing revenues rose 26.5 percent to $45 million, while television and merchandising sales were up 11.1 percent and 9 percent respectively. Core earnings before interest, taxes, depreciation and amortization, or EBITDA, a measure of cash flow and a telling metric for media companies, grew 41.5 percent to $25.3 million. "The outlook for the balance of the year continues to be strong," said Martha Stewart, the company's chairman and CEO. "We will increase the frequency of our flagship magazine, Martha Stewart Living, from 10 issues to 12 issues per year. In merchandising we will launch our Martha Stewart Everyday Housewares line in the third quarter, and in Television we continue to explore international opportunities," Stewart added. New York-based Martha Stewart Living Omnimedia is a multimedia and retail company promoting information and products focused on home entertaining, gardening, crafts and weddings. The company's four business segments cover publishing, Internet/direct commerce, television and merchandising. Shares in Martha Stewart (MSO) shot up 25 percent on the news, closing up $4 at $20. Martha Stewart's Initial Public Offering debuted in October 1999 at $18 a share. During the last 52 weeks, shares have traded as high as $49.50. *************** ASK THE ANALYST *************** As the market turns, I get dizzy. By: Eric Utley Down, up, and back again. Talk of an early surprise from the Federal Reserve combined with an earnings warning from Ma Bell set the tone for Wednesday's trading session. Distribution by mutual funds and other institutions continues to rule the market, leaving the individual investors holding an empty bag. I've been writing about how difficult this market is to trade. I'd like to reinforce the idea that Jim and Ryan constantly profess, sell too soon! Over the past week, I've seen dozens of stocks breakout from consolidation, only to give back those gains in the following days. If your entering long positions in this market, don't be afraid to set tight stops and save your capital for another day. With inflation fears here to stay, traders have become paralyzed with fear and uncertainty. Volume has disappeared from the big blue chip tech stocks such as CSCO, DELL, and IBM. The lack of liquidity leads to continued volatility. I've seen 10,000 share block trades push stocks around by 2 sometimes 3 points. I asked our readers to send me their opinions about the current market conditions last Sunday, and I read some very insightful thoughts. I gathered that the consensus opinion is - uncertainty. I'm probably sounding like a broken record here, but it may be a good time to sit and watch. Exert patience, and wait for the market to come to you. Like Jim said a week ago, we'll probably see these gyrations for the next month until the next earnings season commences. Enough of my rambling, we have a few more charts to look at tonight, so let's get to it. I'm trying to analyze as many stocks as possible, so if I haven't done one of yours yet keep those symbols coming. Send your requests to asktheanalyst@OptionInvestor.com. Please put the symbol in the subject line of the e-mail. ---------------------------- Dun & Bradstreet - DNB Could you give your opinion on Dun & Bradstreet (DNB). Looking at the chart is it ready to move? Has it formed a Bottom Head and Shoulder? Thanks. - KG DNB is an interesting company. DNB is comprised of D&B operating company and Moody's Investors Service. The former division provides business services and the latter provides research and ratings on fixed-income securities. DNB has a steady earnings growth rate of 10%. The Sage of Omaha, Warren Buffet, owns nearly 15% of the company. Mr. Buffet has been acquiring shares of DNB since early February and rumors are circulating that he is considering purchasing the company outright. Remember though, sometimes rumors cost you money. Anyway, I don't see a clear head-and-shoulders bottom. But let me tell you what I do see. DNB traced a double bottom at $27 in early April and subsequently rallied into May. DNB is forming a wedge pattern, that may lead to higher prices if it can get above resistance at $30.50. What concerns me is the lack of volume during the recent rally. When a wedge forms, the volume usually tapers off near the apex, currently around $30. The premature decline in volume waves a caution flag. But, if buyers step in, the stock could rally above resistance and retest its recent highs. ---------------------------- Atmel - ATML OI played ATML about 2 months ago. Can you analyze this stock as it stands today? I think there is a lot of interest from other OI subscribers as well. Thanks. - Edwin You're right, we've played ATML a few times in this new millennium. Like most chip stocks, ATML had an incredible run from last Winter to early this Spring. ATML has subsequently consolidated those gains over the past two months. The stock is now range bound between $40 - 60. From here, a move above resistance or below support would be bullish or bearish, respectively. But there is just no clear trend right now. The only bullish sign I see on the chart is the declining volume in the past week while ATML slid from $50, at the same time volume has been anemic for the rest of the market as well. We need to see some buyers step up to the plate if ATML is going to bounce off support at $40. One thing that does worry me is that ATML's competitors such as SSTI and MU have shown a little stronger relative strength in the past two months. ATML peaked in early March, while MU extended its gains and SSTI kept on running through April. I do want to point out the bouncing pattern last Winter. That trading pattern that ATML formed would have been an ideal time to use an oscillator to pick entry points and take profits. ---------------------------- Citrix Systems - CTXS Hello OIN. What is your opinion on CTXS? It looks like one of the steaks on the table to me. Thanks! - Jim As you probably know Jim, we added CTXS as a put play on Tuesday. Let me explain what we saw on the chart and why we added CTXS as a put. From a fundamental perspective, the uncertainty surrounding MSFT has plagued shares of CTXS. Not only is Microsoft a large investor, they are also one of Citrix's largest customers. CTXS's business is closely tied to the viability of MSFT. Many investors feel that CTXS is oversold, considering the company's one year EPS growth rate of about 27%. For a long-term investment, CTXS may be a good buy now, but the MSFT variable may impede progress in the near-term. The chart for CTXS reveals quite a bit, and there are some interesting patterns that have developed over the past three months. Notice the big head-and-shoulders pattern that formed in February and March. The stock then fell into a descending channel in April. And look at the volume during the recent sell-off, indicating a massive distribution by institutions. ---------------------------- Varian Semiconductor Equipment Associates - VSEA Could you please comment on SSTI and VSEA, or at least SSTI? Thanks very much. - Q.T. Fang As you know, we've been bullish on the semiconductor equipment makers recently. Stocks such as AMAT and TER have had incredible runs thus far. And the outlook for the semis continues to remain positive. We'll get some numbers tomorrow that will report the sales for the month of March for the semis. Analysts are expecting a bullish report. I know you emphasized that you would like me to take a look at SSTI, but the chart for VSEA looked more interesting for study. So let's take a look. VSEA had a great run from the beginning of January to early March. After a big run like that, I like to see a consolidation for six to eight weeks, then a breakout on big volume. The 40% correction concerns me a bit, but we have to account for the market conditions during early April. A triple- top formation is usually bearish, but the rosy outlook for the semis may be enough to breakthrough resistance. Monitor the stock closely for a move above $70, and watch the volume. ---------------------------- 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. ************** TRADERS CORNER ************** Swing - Trading Systems By: Austin Passamonte Can trading systems be developed for any index or market? That's been a common theme in recent e-mails and also conversations I was privileged to share while attending the OptionInvestor Expo in Denver. What. is there something wrong with the OEX? Seriously though, I can understand why traders like to find systematic ways of trading markets they're comfortable and familiar with. Let's visit this topic today and then outline nightly research and CBOE option charts next. Saturday we'll key on subjective trading methods following the Skybox framework, which will pull the mechanics of trading the OEX together for us. For those who might not be 100% clear on how trades are placed and triggered via the Skybox model, may I respectfully suggest reading through yesterday's piece another time or three? I surely realize the methodology can be challenging to grasp, rest assured it took me quite some time to internalize the concept myself. I'll do my best to briefly crystallize & recap that precise topic tomorrow also. Through the years I've looked at many trend-following and swing- trading systems designed for a host of different markets. Pork bellies, live hogs & cattle, soybeans, currencies, bonds and the S&P 500 to name a few. Every method differs from another due to the intricate behavior each market exhibits. The basic premise remains the same regardless the underlying market. Traders attempt to identify points of potential support & resistance and look to enter trades when the market bounces or breaks out decidedly. This is a market-neutral approach - the trader doesn't care which way the market heads as long as it moves strongly. The plan is to catch the market when a movement is clearly defined and then ride it for a quick profit. Being a breakout strategy, we merely attempt to trade our stock, commodity or option once it pops free and begins to sprint away. Easier said than done. Most of the volatile markets tend to chop around these points of congestion and trigger numerous signals, some false and some real. Bond markets are notorious for this. It's almost a cliché for bonds to break through support or resistance and spin 180 reversal after triggering orders. How frustrating! Of course, that's probably why we trade options and not bonds. There must be a way to define the eventual trend change from normal market "noise". Futures traders pick points of congestion based on recent and past support & resistance, moving averages and also where they guess traders have their stops in place. Would you believe traders are human and tend to cluster protective stops in highly predictable places? It's true, and locals in thinly traded markets can and do target these stop orders but that's another subject away from the topic here. Obviously there's more to the concept than this and I'm certainly no expert, but let me share some ideas with you I use to trade the QQQs and DJX for short and mid-term plays. Perhaps you can glean a tip or two that may help with markets that interest you. Option traders don't have a real picture where stop orders may cluster. What's clear for us to see on any given day is the volume and open interest of each option strike price every for stock or index that options trade on. Considering option traders are dwarfed by stock players and equity fund managers in sheer size and number, would you agree the majority of option contracts probably serve as hedging tools for the big boys? That being said, we can almost see where they load up in anticipation of market breaks that may cause them to buy, sell or ride out the pain. I'd surmise these points of congestion could serve as support and resistance to the markets we intend to trade. As an example, I took a look at the CBOE option chains found in this website for the QQQ and DJX last Sunday night as I do several times a week. It's my opinion the weekend gives a great indication of large investor's sentiment for at least the beginning of next week ahead. I've often noticed open orders soar from Thursday's close to Friday's close, which tells me someone is making decisions on Friday for the week ahead. The largest volume and open interest is usually in the front- month option contracts. You should see much of the action clustered near the given day's strike price, with similar or more volume at prices a few strikes out of the money each direction. Total call volume usually exceeds put volume when equal strike prices are averaged out. Times when this is greatly skewed tell us market sentiment is directionally strong. I always check the nearestback month as well; when volume and open interest is high in the current and back months, to me that shows much anticipation for the market to reach this point. Next, we pull up the charts and confirm these clusters of congestion with candles and bars. I prefer to view charts after looking at option chains because I don't want a personal bias towards any strike price. If I knew where support and resistance was on the charts before looking at option chains, my opinion would likely be skewed with anticipation of what I expect to see. Just my personal quirk, feel free to do as you please! Now that I've identified key prices on the charts that confirm to me what I learned in the option chains, it's time for a written plan of action. I decide where the heaviest near-term resistance a market has in each direction and plan my trades if it bounces or breaks there. Keep in mind this concept works regardless whether the market punches through resistance or bounces off it, we don't care which. Let me share a couple of live examples to illustrate the idea. This weekend my research indicated to me that the Dow might reach mild resistance at 10,800 and heavier at 11,000. The NASDAQ had that 4,000 mark to beat. No mystery there for anyone who reads newsprint, charts or watches tv. This prompted me to target specific QQQs and DJX calls and puts if the markets hit these points and reacted. I chose June contracts instead of May to give a little staying power should I decide to hold near the FOMC meeting three days before May's option expiration. I also like to determine potential profit prices should the market reach my projections. For example, when looking at call options three strikes away from the money, I check the value of put options currently at the money, in the money and three strikes deep in the money. This price relationship provides me approximate targets to shoot for if and when I'm executed and the trade is performing my way. Well, the markets rallied sharply on Monday and the Dow sailed through the 10,800 mark with ease. Everyone figured 11,000 might be the next ceiling to hold. The NASDAQ banged 3970 -3980 range several times early on and slowly retreated from there. After all those consecutive up moves we've had lately, one could expect a bit of exhaustion. I pulled the trigger on those June QQQ puts and actually bought at the low price of the day for a change. Wow, how'd that happen? I'm more accustomed to buying near a high price for the day instead! When the Dow began to slip, a clear evening-star candle formation began on the 60 minute chart and that was all I could take. Coupled with the fundamental weakness this index has heaped upon it near-term, I bought DJX puts in the middle of their trading price for the day. I targeted what I felt might be obvious levels of support and was prepared to sell later this week or into next. However, the Q contracts were up by 40% and the DJX puts up almost 25% by 3:45 on Tuesday. I entered sell limit orders at those prices right then and was filled on both lots by 4:10. Yes, I know the charts looked awesome for a continued drop Wednesday but I don't care. too many times I've held on and watched those hard-fought gains evaporate! Jim's mantra of sell too soon is now firmly entrenched in my head. We'll use the chicken's approach and face tomorrow in cash with a fresh outlook on the day instead of holding over. Should either index have broken resistance and soared into the stratosphere boldly enough to make Greenspan & the Fed Govs. blanch, I would've just as happily bought calls and "rode the waves of success, my man" (to cop Ameritrade Stewart's line). Doesn't matter what the market does. we're prepared to trade whichever way the water flows. These days it seems to run both ways with equal aplomb. Sure hope you have fun jumping in when the tides begin to turn, regardless which profitable direction it takes you! Wishing you prosperous trading. ***** Do As I Say, Not As I Do By: Molly Evans My accounts hate me. Can't blame them really. Forced, emotional and just plain dumb trades have dwindled them down to where I'm no longer a cowgirl. At this point I'm just hanging in there and staying out of the way of falling trees. I'm laughing here as I say it....I'm not in a cave or a catatonic state. I hate losing my hard earned money like anyone else but I consider it tuition and I know that we're dealing with the Harvard Institute of Markets. Sure, I can cuss like a sailor, pout and stammer about, and I have, but in my brief sane moments, rational thinking synapses start to connect. I've forced myself to look at my mistakes, forgive myself and promise my ports to do better by them. It's really not my intention to dole out the advice in my writing. Someday, I certainly hope to be there but I think my job now is to be the voice of the common grunt striving to learn how to first survive and then be able to pull out superior gains in the marketplace. I read all the other writers just like you. We've heard it over and over: this is not a beginner's market, don't buy too soon, when in doubt get out, sell too soon, bearish sentiment prevails et al. We know they're right and yet, somehow, someway, we think that we've now got a play that's a "can't lose deal." Woops. I've done it and betting you know what I'm talking about too. It's ok. This too shall pass. I know I'm in the ocean and there's some mean fish in these waters. A minnow has to run for cover quick but you know, they grow up too. We'll all get through this if we keep ourselves out of danger. I'm not going to lecture you but some of the ranting I do to myself is probably worth eavesdropping upon. Stop forcing those trades! Get out of the way when trouble starts and don't get back into the market until the storm passes. How many times have we heard about the volume indicator? I have for over a month. I'm listening now. I promise! Stop trying to be the one to pick the bottom. It CAN go lower as you well know by now. It's just plain double trouble playing options and not getting the trade that's going in that direction. Stop caring if the market is up 200 points. Stop caring if the market is down 300 points. You "know" it's crazy and you "know" it's irrational. Think with your head. Don't be scared that you've missed the train leaving the station. The markets have and will be here for a long, long time. There will be another train. Buy low and sell high, or buy puts at highs and buy calls at lows. Trade the greed, trade the fear. If you know TA, use it! Draw the lines and WAIT! Be patient. Which brings me to my next point. I'd like to think I've gotten pretty good at drawing these support, resistance, and trendlines. They work. For today, I drew support lines on 19 stocks, shopped the best value in an ITM call at that level and then set the alerts. Only ONE went off. I'm now the proud owner of AMAT calls as it bounced beautifully off 90. I've not had a losing trade when I stick to this method. The problem for me is that when I never get an alert I get itchy and fudge my entry point. Dumb, dumb, dumb. Another problem for me is that I hate stop losses. I know; you all gasp as that's the mantra of OIN. My reasoning, which is poor at best, is that it allows the market maker to pull it out quickly and then the stock immediately rebounds. I so hate that. But, I must admit, I hate losing my capital even more and I've had plenty of that bitter medicine. I'm cured. I'm using stops now. A couple gap down days in March and April have cleared my clouded vision. I wince when it happens But feel oh so vindicated when I see that my options are now trading at half what I sold out. Since my introduction to the world of options about a year ago, I've dug my heels in to learn the ropes. I think I'd forgotten that I could actually own stock long. It's my pleasure to say that is still a viable option (pun intended). I found a reasonable play and am selling covered calls...yep, just like OIN had told us to do. The perspective is so different now. I just really don't care that I won't make a five bagger on that money. I don't care if the shares get called out. If they don't, and the market is still poor, I'll do it again for the next month. Let someone else do the gulping thing on what I sold them. It's very liberating. I'm not saying that I'm changing my modus operandi. Not at all! This is just another venue of putting money to work safely...uh, relatively speaking of course. I am confident that the craziness will die down pretty soon. I'm done trying to guess which way the gauntlet will fall but I do know that I'll live to trade another day whether it is on the long or short side if I simply use a little discipline. Shall we review the thou's? -Thou shalt not force a trade or trade just to trade. Click your mouse elsewhere. -Thou shalt listen to the opinions of those wiser and more experienced regarding market sentiment and counsel. Give these opinions due consideration but do not forget to use own brain in determining what is happening at that time whether it be fortuitous or grievous. -Thou shalt set stop losses on each play. Capital preservation is the first rule of order in investing. One should know his own risk tolerance, both subjective and objective. There is a difference. -Thou shalt have a predetermined and logical sell point before ever opening the position. -Thou shalt keep the mind open to consideration of other venues of investment such as covered calls, puts, calendar spreads, straddles etc etc etc. Study and do due diligence before tackling of course. -Thou shalt study a new concept in investing at a personally acceptable pace. Consider learning technical analysis, fundamental analysis, how to work an options calculator and what it's telling you, or read a book. -Thou shalt not panic when the market is running hard and you're not in. Conversely, do not panic when the market is tanking and you are in. (I know, that's a particularly tough one...sorry.) -Thou shalt sell too soon. (I'm reaching here, can you tell?? - have to borrow!) -Thou shalt not buy too soon. -Thou shalt survive to trade another day. Good luck to you all. Contact Support ********************** PLAY OF THE DAY - CALL ********************** ARBA - Ariba, Inc. $78.13 +3.56 (+3.94 this week) A leading provider of Intranet and Internet based B2B e-commerce solutions, ARBA enables organizations to automate the procurement cycle through the company's Operating Resource Management System (Ariba ORMS). The recently launched Ariba.com network is a global B2B e-commerce network that enables buyers and suppliers of operating resources to automate transactions on the Internet. Among the company's more notable customers are DuPont, Federal Express, Chevron and Hewlett Packard. Most Recent Write-Up If you didn't watch the markets the past couple days, you might think trading in ARBA has been really quiet this week with a gain of only $0.38. Nothing could be further from the truth as shares of the Internet software shot up $9.75 on Monday and then gave up all but a fraction of that gain today. Following the lead of the Internet sector, ARBA saw strong buying volume yesterday, and suffered from a lack of buyers today. As the NASDAQ weakened late in the day, there was nothing to support the gains from Monday and the price dropped to support at $75 as volume increased. The decline finally halted and bounced in the last 5 minutes, but use caution as the week progresses. Interest in the Internet sector and the NASDAQ will likely dictate ARBA's near-term fate as the April earnings cycle winds down. Wait for the buyers to return and confirm a bottom for the stock before playing - a drop to the next support level at $70 may be necessary before the bounce occurs. Comments What can you say about B2B today? This sector was holding strong, even holding some gains, the entire day until the market finally bounced with 30 minutes left. It was at that point that you saw this group really take off. ARBA perked right up to close just off the high. Look for momentum in this group tomorrow. Hopefully, it will provide a good entry point to let us in. BUY CALL MAY-70 IUR-EN OI=1726 at $12.00 SL=8.00 BUY CALL MAY-75*IUR-EO OI=2149 at $ 8.63 SL=5.75 BUY CALL MAY-80 IUR-EP OI=2031 at $ 6.25 SL=4.00 BUY CALL JUN-75 IUR-FO OI= 325 at $13.63 SL=9.00 BUY CALL JUN-80 IUR-FP OI= 366 at $11.13 SL=7.50 Picked on Apr 23rd at $69.00 P/E = N/A Change since picked +9.13 52-week high=$183.34 Analysts Ratings 9-12-1-0-0 52-week low =$ 15.25 Last earnings 04/00 est=-0.08 actual=-0.06 Next earnings 07-12 est=-0.08 versus=-0.12 Average Daily Volume = 5.30 mln /charts/charts.asp?symbol=ARBA ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** Inflation worries cause a buying strike... The market retreated today on concerns over inflation and rising interest rates. Earnings reports also troubled investors and companies that warned of poor revenue growth were severely punished. The industrial group endured the brunt of the sell-off with classic issues falling significantly during the session. Most analysts believe that "old economy" stocks will be noticeably affected by rising interest rates because the cost of borrowing money will reduce their future growth. Of course, no one knows what the Fed will do on May 16 but it is widely expected they will again raise rates to attempt to slow the economy. The majority of economists are expecting a quarter-percentage point increase, but concerns that they could boost the prime lending rate even higher are unnerving investors. The next sample of economic data will be reported on Friday, when the Labor Department releases key employment data for the month of April. Until then, the outlook can only be one of cautious optimism and we will draw upon that attitude in today's selection of plays. 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 49.50 $2.94 7.1% INSUA MAY 35 32.19 34.88 $2.69 6.9% SEPR MAY 75 70.75 93.00 $4.25 6.1% AMD MAY 60 55.25 87.75 $4.75 5.9% TQNT MAY 80 76.65 101.31 $3.35 5.8% TER MAY 85 81.56 100.19 $3.44 5.6% NVLS MAY 50 48.06 60.94 $1.94 5.3% PLXS MAY 65 62.56 67.56 $2.44 5.2% 50 dma bounce? PVN MAY 85 80.38 89.75 $4.63 4.7% BRKS MAY 70 66.88 80.00 $3.12 4.7% AHP MAY 55 52.75 55.88 $2.25 4.3% CSCO MAY 68 62.88 66.06 $3.18 3.5% earnings soon CGNX MAY 55 51.34 53.50 $2.16 3.5% holding above 50 IMNX - Closed. Naked Puts: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return CY MAY 40 38.56 49.50 $1.44 12.6% PLXS MAY 60 58.75 67.56 $1.25 10.1% NVLS MAY 45 44.06 60.94 $0.94 9.7% TER MAY 75 73.50 100.19 $1.50 9.0% SEPR MAY 65 63.25 93.00 $1.75 8.8% INSUA MAY 30 29.06 34.88 $0.94 8.7% TQNT MAY 70 68.87 101.31 $1.13 7.5% BRKS MAY 60 58.94 80.00 $1.06 5.9% AHP MAY 50 49.12 55.88 $0.88 5.8% PVN MAY 70 68.75 89.75 $1.25 5.2% CGNX MAY 45 44.25 53.50 $0.75 4.8% Naked Calls: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return CMTN MAY 115 117.19 82.00 $2.19 12.4% ITWO MAY 185 187.25 112.13 $2.25 9.5% CHKP MAY 270 273.25 175.44 $3.25 9.3% AAPL MAY 145 143.44 115.06 $1.56 7.8% AMAT MAY 125 123.87 94.50 $1.13 7.8% NEWP MAY 160 158.75 124.47 $1.25 7.3% 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 *************** BBRC - Burr-Brown $65.69 *** On The Move! *** Burr-Brown is a global developer, manufacturer, and marketer of high performance analog and mixed signal integrated circuits. They target high growth segments of the communications, consumer, computing, and industrial markets. Their major customers are among the world's leading electronics manufacturers, including 3Com, Cisco, Fujitsu,IBM, Lucent,Motorola, Nokia, Sony, and many others. In mid-April, Burr-Brown announced record results with sales of $90 million and net income of $18.5 million or $0.31 per share. This compares to revenue of $61 million and net income of $7.5 million or $0.13 per share for the first quarter of 1999. The incredible report reflects a 148% increase in net income on a 48% increase in revenue. Burr-Brown also expects to post earnings growth for the year of 75-80% percent as it moves to fulfill a backlog of orders for its integrated circuits. That's a very positive report with bullish forecasts and the technical history agrees with the fundamental outlook. BBRC - Burr-Brown $65.69 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call MAY 60 BQB EL 28 8.13 57.56 8.1% *** Sell Put MAY 55 BQB QK 30 0.94 54.06 10.8% *** Sell Put MAY 60 BQB QL 4 2.25 57.75 18.7% Chart = /charts/charts.asp?symbol=BBRC ***** PDLI - Protein Design Labs $108.09 ** On The Rebound! *** Protein Design Labs uses computer modeling and unique genetic engineering to develop SMART humanized antibodies, which combine the binding site of a mouse antibody (the small part of the antibody that attaches to its target) with approximately 90% of a human antibody. Clinical studies with SMART antibodies have confirmed the hypothesis that because SMART antibodies use only a very small amount of a mouse antibody, they will not cause the immune responses common with mouse antibodies that have been used in the past. PDL's partner Hoffmann-La Roche currently markets the first humanized antibody created by PDL, Zenapax, in the U.S., Switzerland and other countries. Other PDL humanized antibodies in clinical testing include SMART Anti-CD3 for transplantation and autoimmune diseases and SMART M195 for myeloid leukemias. Complementary to its expertise in antibodies, PDL also has a program to develop novel antibiotics to treat infections. The market has punished the biotech sector in recent weeks but the brisk sell-off appears to have abated for now. Investors are beginning to focus on progress in each individual company's developmental technologies and the most promising issues will recover soon. PDLI's recent rally suggests that activity may already be underway and we are going to speculate on that outcome with some moderately aggressive, in-the-money positions. In the event of further consolidation, we will plan to roll our plays into June with a lower cost basis. PDLI - Protein Design Labs $108.09 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call MAY 85 PQI EQ 47 25.38 82.71 5.3% *** Sell Call MAY 90 PQI ER 25 21.88 86.21 8.4% Sell Put MAY 70 PQI QN 140 0.81 69.19 6.9% *** Sell Put MAY 75 PQI QO 37 1.19 73.81 9.9% Sell Put MAY 80 PQI QP 50 2.50 77.50 19.7% Sell Put MAY 85 PQI QQ 13 3.00 82.00 23.2% Sell Put MAY 90 PQI QR 66 4.38 85.62 28.2% Chart = /charts/charts.asp?symbol=PDLI ***** STT - State Street $106.12 ** A New Trading Range? *** State Street Corporation is a bank holding company and is one of the world's leading specialists in serving institutional investors. State Street provides a full range of products and services for portfolios of investment assets. Customers include mutual funds and other collective investment funds, corporate and public pension funds, corporations, unions and non-profit organizations. State Street ended the session near a record closing high today after moving out of a recent trading range on increasing volume and heavy institutional buying. Public investors also began to participate in the rally after the company announced quarterly revenues and profits that topped analysts' estimates. In April, the State Street reported quarterly profits of $0.92 per share, easily beating the consensus by $0.05. Now the issue is trading in a new range above previous resistance and if the share value moves higher in the short-term, the momentum will likely carry the stock to $110 or possibly even higher. STT - State Street $106.12 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put MAY 85 STT QQ 60 0.69 84.31 6.0% *** Sell Put MAY 90 STT QR 86 1.19 88.81 8.2% Sell Put MAY 95 STT QS 89 2.13 92.87 12.1% Chart = /charts/charts.asp?symbol=STT *************** BEARISH PLAYS - Covered Puts & Naked Calls *************** BRCM - Broadcom $175.95 *** On The Rebound? *** Broadcom develops highly integrated silicon solutions that enable broadband digital data transmission to the home and within the business enterprise. Their products enable the high-speed transmission of data over existing communications networks, most of which were not originally intended for digital data transmission. Using proprietary technologies and advanced design methodologies, Broadcom has designed and developed integrated circuits for some of the most significant broadband communications markets, including the markets for cable set-top boxes, cable modems, high-speed networking, digital broadcast satellite and terrestrial digital broadcast and xDSL. The recent recovery of Broadcom continued Tuesday after the company introduced its first chip for the optical networking market. The largest maker of semiconductors used for Internet access via cable-TV lines, said it has designed a new optical networking chip that can be used in wide-area networks, which are larger than the local area networks limited to one or a few buildings. The company is basically adapting its 10-gigabit technology for corporate local area networks using copper wires, where it has been a dominant supplier, and extends it into wide area fiber optic networks. The announcement was viewed as very positive news for the company, but unfortunately, analysts say the full impact of the technology will not be realized one to three years. With all the excitement over a new product, call-option buyers have come out in force. During the recent upside momentum, the option prices have increased exponentially and we plan to sell this premium until technology stocks demonstrate greater strength in each successive rally. BRCM - Broadcom $175.95 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call MAY 220 RDU ED 2048 2.00 218.00 5.4% *** Sell Call MAY 210 RDU EB 1352 3.00 207.00 7.6% Chart = /charts/charts.asp?symbol=BRCM ***** JNPR - Juniper Networks $194.88 *** Searching For A Bottom *** Juniper Networks is a leading provider of Internet infrastructure solutions to Internet service providers and other telecom service providers. Juniper delivers next generation Internet backbone routers that are specifically designed for service provider networks. The company's flagship product is the M40 Internet backbone router. The M40 combines the features of the JUNOS Internet Software, high performance ASIC-based (application specific integrated circuit) packet forwarding technology and Internet optimized architecture into a purpose-built solution for service providers. Unlike conventional routers that are developed for enterprise applications and are increasingly inadequate for service provider use in public networks, Juniper's routers are specifically designed to accommodate the size and scope of the Internet. Although the majority of well-known technology stocks have fared better than the broad market in recent sessions, there remains a significant amount of technical damage to repair before the sector leaders can recover. Juniper is certainly one of the top companies in the Internet Software group but for now the issue is simply trying to find solid footing in this volatile market. We will use the current consolidation period to benefit from overpriced options premiums with these relatively conservative, bearish positions. JNPR - Juniper Networks $194.88 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call MAY 260 JUY EL 620 2.25 257.75 5.5% *** Sell Call MAY 250 JUY EJ 1101 3.00 247.00 7.1% Chart = /charts/charts.asp?symbol=JNPR ***** PWAV - Powerwave $176.06 *** A Big Split Rally! *** Powerwave Technologies designs, manufactures and markets ultra-linear radio frequency (RF) power amplifiers for use in the wireless communications market. Their power amplifiers, which are key components of wireless communications networks, increase the signal strength of wireless transmissions from the base station to a handset while reducing interference, or noise. Their primary focus is on the cellular and PCS markets. Powerwave Technologies has continued to rally over the past week after the company said that its shareholders approved a 3-for-1 split of PWAV common stock. The split would increase the number of outstanding shares to 135 million and will be paid on May 15. The bullish move carried the issue to incredible highs near $215 and the call option premiums extend well beyond that price range. In this case, we don't believe there is a high probability that the issue will reach our sold options in the next two weeks. However, a close above the recent high near $218 would signal a renewed Stage II rally and if that occurs, we will simply buy the stock to cover the short position. PWAV - Powerwave $176.06 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call MAY 240 AHV EH 56 4.38 235.62 11.1% *** Sell Call MAY 230 AHV EF 497 5.38 224.62 13.3% Sell Call MAY 220 AHV ED 174 6.25 213.75 15.1% Chart = /charts/charts.asp?symbol=PWAV ***** TDS - Telephone Data Systems $100.12 *** Technicals Only! *** Telephone and Data Systems is a diversified telecommunications service company with cellular telephone and telephone operations. At the end of 1999, TDS served approximately 3.2 million customer units in 35 states. TDS conducts its cellular operations through its subsidiary, United States Cellular Corporation. This play is simply based on the current price or trading range of the underlying issue and its recent technical history. The TDS price trend reflects a negative divergence from the long-term moving average (200-day) moving average line and the new downtrend has endured successively lower highs and lower lows, on increased selling pressure. With today's drop, the issue has again failed to recover after a recent consolidation and for now it appears the stock has little chance of reaching our sold positions. TDS - Telephone Data Systems $100.12 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call MAY 120 TDS ED 83 1.13 118.87 5.3% *** Sell Call MAY 115 TDS EC 92 1.38 113.62 5.2% Sell Call MAY 110 TDS EB 424 1.69 108.31 5.3% *** The collateral formulas in this position affect the ROI - or Return On Investment. Be sure to check with your broker for his or her specific requirements. Chart = /charts/charts.asp?symbol=TDS ************************Advertisement************************* Tired of waiting on trades to execute? 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