The Option Investor Newsletter Sunday 5-07-2000 Copyright 2000, All rights reserved. 1 of 5 Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com Entire newsletter best viewed in COURIER 10 font for alignment ****************************************************************** MARKET STATS FOR LAST WEEK AND PRIOR WEEKS ****************************************************************** WE 5-5 WE 4-28 WE 4-20 WE 4-14 DOW 10577.86 -156.05 10733.91 -110.14 10844.05 +538.28 - 805.71 Nasdaq 3816.82 - 43.84 3860.66 +216.78 3643.88 +322.59 -1125.16 S&P-100 769.79 - 11.63 781.42 + 4.30 777.12 + 45.18 - 89.58 S&P-500 1432.63 - 19.80 1452.43 + 17.89 1434.54 + 77.23 - 159.04 RUT 512.84 + 6.59 506.25 + 24.41 481.84 + 28.12 - 89.27 TRAN 2876.11 + 26.10 2850.01 + 16.76 2833.25 +106.21 - 100.68 VIX 30.42 + 1.64 28.78 + .37 28.41 - 10.92 + 12.39 Put/Call .53 .51 .75 .94 ****************************************************************** Wimpy, wimpy, wimpy! Don't look now but that rally on Friday really did not happen. Well, almost. Would it count if one team only used their third string players while their superstars were lounging in the stands sipping brews and laughing at their efforts? If you have ever played team sports then you know the victory would be real but it would not count in your mind. If you could not play the first string even a win against the bench team would be hollow. This was a hollow win on Friday. The volume on both the NYSE and the Nasdaq was the lowest of the year. Many traders never showed and of those there many left early. The NYSE only managed a wimpy 800 mln shares. No home runs, no doubles, no triples. The Nasdaq closed out the lightest day this year with only 1.19 bln shares. The Nasdaq closing total of +96.58 was very deceptive. If you take away the first hour and last hour the Nasdaq traded in a very narrow 30 point range all day. Don't get me wrong, I would much rather start next week with a close over 3800 at our backs but the numbers clearly don't illustrate the action today. The much dreaded non-farm payrolls report came out Friday morning stronger than expected but NOT as strong as some feared. With new jobs clocking in at +340,000, 30K over official estimates of 310,000, there was almost a sigh of relief. The unemployment rate finally broke the 4% barrier clocking in at 3.9% and a 30 year low. But the main component of the report that is most watched was the increase in the average hourly wage. That number showed a +0.4% gain and was in line with estimates. Kind of a good news, bad news report. The markets opened down on the headline news but quickly recovered and in the case of the Nasdaq soared +120 points in the next 45 min only to hit a ceiling after the initial relief buying passed. The gains were broad but not spectacular. Of the 100 stocks I watch only five had double digit gains and very few had gains over +3.00. Most of the big gains came in the last 30 min of trading as traders speculated on the direction for next week. The bad news for the day continues to be the Fed. Just like a recurring bad dream that will not go away and one you will have to live with for at least six more market commentaries prior to the event, the strong jobs data almost guarantees aggressive action. The Fed Funds Futures which have been right 30 of the last 31 meetings has now escalated from a 66% chance on Thursday to an 80% chance the Fed will raise +.50%. The good news is the market has already discounted this hike and is now just waiting to exhale. Fund managers, fresh from a week of net redemptions, are waiting patiently before moving back into the market. Even though the Fed move is crystal clear to most there is always the fear of the unexpected. Could the Fed see something we can't? Will the PPI on Friday show blowout inflation? Will the CPI on FOMC Tuesday show inflation rampant in the consumer sector? Everybody expects some inflation creep but is it worth possible multi million dollar losses if they are wrong? What if the Fed does the unthinkable and raises +.75% or even +1.00% to shock the market and take control of the future? While nobody expects this, stranger things have happened. So the funds sit and wait. This is historically a weak period anyway and with no buyers in sight there is a good chance of a better entry point next week. The earnings cycle is over. The last few majors to announce are CSCO and Dell next week. Then all eyes will start focusing on the next cycle in July. But until then we have to first get out of this cycle alive. CSCO is expected to beat estimates but many analysts are now expressing concern about Dell. With the PC sector soft for the first quarter some feel Dell may only post in line with estimates but some are expressing quietly that Dell may miss and telegraph another round of sector weakness. With earnings over the final group of earnings traders will sit back and plan their strategy for the next cycle which could include cooling off on the sidelines until after the Fed meeting. So what should we as the elite of the investing public do next week? It is all a matter of time frame. If you are day trading then you are likely to have a very tough week. If you are investing then get ready to rumble. What am I talking about? This is simple in my book. If you expect the markets to rally after the Fed meeting and at least trend upward into the July earnings cycle then next week will provide a great entry point for that run. It makes no difference if the Nasdaq is up 200 points or down 200 points before the meeting, it is still lower than we expect it to be by July 1st. In order to capitalize on this cycle you only need to buy longer term options like July/Aug/Sept and wait for the storm to pass. Is this heresy? Buy and hold from Jim? It depends on your outlook. If you are a trader then trade away but be prepared to roll with the punches until after the Fed meeting. For those who cannot remain tied to a PC during the trading day, the week ahead will provide you with that perfect entry point (we hope) for the next earnings run. The week before every Fed meeting in recent history was flat to down with a relief rally following the meeting even when they raised rates. Can you say "buying opportunity"? Sure there may be more down days and I am not saying that there may not be some nail biters ahead but the market is showing us a bottom in my opinion. If you buy enough time to get you past the rest of the May weakness then you could be rewarded handsomely. The challenge of course is the Fed and the market in general. The correction we saw in the Internet stocks and the biotechs could just as easily return and stocks do not always go back to their previous highs. One only needs to look at MSTR, CMDX/VNTR, ETYS, ACOM to prove this point. As I always tell my seminar students, "buy all the time you want, just don't use it." Buying time will give you that false sense of security and lull you to sleep. If the stock you pick next week for a July earnings run drops below your predetermined stop loss point then by all means close the position. You can always buy it back if it rebounds but sometimes you may never get a second chance to sell those options at the current price. Ask any one who ever had an option expire worthless. They did not plan it that way and they always thought it would come back. One of our recent seminar students has a huge position in the Jan-$125 MSFT leaps. He paid $25 and now they are worth $2. I have not talked to him personally this week but I am sure he is now a strong believer in stop losses. Up until recently he was also a strong believer that MSFT would always come back. After having made millions in MSFT over the last few years he stands to give it all back because times change, stocks change and "past performance is no guarantee of future results." But of course it only happens to the other guy. Back to the topic, I personally believe the market, that is the Nasdaq, will rally after the Fed meeting. While it will not go straight up it should rally into the July earnings. Normally this rally does not start until late May or early June but after the beating we have taken I don't believe there is much downside. Sure we could still see another retest of the recent lows but with every higher low that possibility diminishes. The low volume that the talking heads on CNBC are so quick to point out as the beginning of the summer doldrums is not in my opinion summer doldrums. It is simply Fed dread and will go away after the meeting. Sure we may not have the 2.8 bln share days from the last real rally but it should be over 2 bln again. Returning volume and a close over 4000 should be your sign to open long call positions. We have had two closes over 3800 and four higher lows. Support is building. I looked at several hundred charts on Nasdaq stocks Friday and better than 80% of them had a two or three level stair step up trend showing progressively higher support. As stocks go, so goes the market. I repeat, this does not mean we can't fall back on bad news. Bad news could rock the market back to 3600 without much effort. Getting below 3600 would require some really bad news and a total buyers strike. So here is the game plan. You have two choices. One, wait patiently until after the Fed meeting and for a confirming close over 4000 with higher volume. I can hear it now, that may never happen, I could be waiting weeks. DUH! If the Nasdaq does not close over 4000 that means it is either flat or down. Neither are great long call climates. Obviously this is the safer more conservative strategy. We let the market tell us when to play. It may be next week or even next month but I think the idea is to trade only when profitable not just trade to be trading. Choice two, for the more risk averse, wait for intraweek dips in the stocks you like and take a position before the Fed meeting. More risk is involved and there is always the possibility of being stopped out several times between now and 4000. Of course there is also the possibility of being $10-$20 in the money if stocks keep edging up. In reality you already know what you are going to do. You bias was already decided before you started reading this article. This bias is what will decide if you are going to make or lose money next week. With this attitude you have a 50% chance of being right. 50/50, red or green, odd or even, black or white. Sounds like table games in Vegas. If you watched a shooter throwing dice for several minutes the odds of getting a seven out of the 36 possible combinations of numbers will be 1 in 6. Would you buy call options with a 1 in 6 chance of success? If a voice from heaven told you that when the next seven was rolled it would be followed by a streak of ten sevens in a row. Would you bet on the next roll or wait for the next seven? You would wait, saving your money for the streak. If you lost your money before the streak you would not be able to profit from it when it happened. Would your bet be larger after the first seven, second, third, etc? Once you had confirmation that the promised streak was really happening would you be more profitable? Your risk/reward ratio would be skewed heavily in your favor after you got confirmation. In order for the Nasdaq to "streak" back to 5000 it has to pass 4000 first. Can it wander around aimlessly under 4000 for the next week or so before the Fed meeting? Sure. Will you make that much more money if you buy now instead of waiting for a close over 4000? I doubt it. I am not trying to scare you into staying out of the market until after the Fed meeting. I am not saying you should not take part in any rally. All I am trying to say is this. There are two more big economic reports between now and the rate hike. The markets may react negatively to either or both. The talking heads on TV will probably say Fed, rate hike and aggressive in the same sentence next week more times than there were shares traded on the NYSE Friday. Even though I am bullish about the market possibilities after the meeting I am cautious about the market before the meeting. I want to "hedge" my bets and conserve my cash until I have confirmation that the trend is really up. Black and white. I may cheat, just like many of you will cheat, but if I do it will be with the full realization of the risk I am taking. I will do it with only a small portion of my cash and only with stop losses. I suggest you do the same. I am happy to announce today a new project for OptionInvestor. Our regional seminar series where we bring the education to you. Check out the schedule for the first 13 cities listed below. These are two and three day seminars which focus on making you better traders in both stocks and options. The first day is spent entirely on technical analysis and once we give you a thorough understanding of the subject the second and third days are how to implement this information into winning option plays. Unlike the 600 person Denver Expo we held in March, these seminars are limited to a small class room environment to promote more personal interaction. You will still get the quality education of the big seminars but on a personal level. Option 101 writer and professional educator Chris Verhaegh will be the primary speaker. Chris has taught over 50 option seminars and many of our readers know him well. For more information check out the details in the Sunday newsletter. Trade smart, don't buy too soon. Jim Brown Editor Disclosure: My current long positions: NTAP, RAMP ****************************Advertisement************************* Options Traders ! Mr. Stock's new online trading site has been designed for you. Trade spreads, straddles, covered writes, and stocks online. Get real-time market data throughout our site. Advanced options tools include volatility graphs, implied volatilities, and more. http://mojofarm.mediaplex.com/adserver/click_thru_request/565-58-1875-3 ****************************************************************** *********** JIM'S PLAYS *********** After the market gapped open on Monday I was rethinking my cash position but I had reasoned it out that nothing real was likely to happen before the Fed meeting. When Tuesday failed to confirm the rally and started to roll over I breathed a sigh of relief. Wednesday I was out of town and watching from a distance as the Nasdaq dropped -190 intraday. This just confirmed my decision to stay mostly in cash. I did research stocks on Thursday night in hopes that the jobs report would be a blowout and we would get a real retest on Friday morning. The wimpy number and the more than wimpy dip at the open confirmed my bullish opinion on the Nasdaq but was not deep enough and not on enough volume to get me off the sidelines. Most of the stocks I was watching only dropped a dollar or two and then only rose a like amount. No conviction at all! So I still only have the two positions in NTAP and RAMP and at 9:35 Monday I will only have NTAP. Current plays: NTAP - Stock, $75 May Covered Calls When NTAP started falling on Monday I sold the May-$75 calls for $6.00. I own this stock from two weeks ago at $47. I was out of town on Wednesday or I probably would have bought my calls back when they were trading for $2.00. A strong case for a limit order at a cheap price just in case lightning strikes. Again, hindsight is 20:20. The plan is still to be called out on the 19th and go on to some other play. If called I will have the $3.25 from the April expired calls, $6.00 from the May and the $28 from the stock appreciation for a total of $37.25. I will take that for a busted April covered call play any day! RAMP - May-$20 Calls Several message boards had speculated that CSCO or LU would buy RAMP in the next two weeks. After CSCO announced they were buying ArrowPoint on Friday the stock gapped down at the open. This leaves Lucent and a weak rumor. If no news by the open on Monday I will close the position and take the loss. It was strictly a rumor play and high risk. My prospect list on any big dips next week looks like this: AFFX, EMLX, AMCC, ABGX, TIBX, RMBS, BRCM, TERN, SDLI, AETH PMCS, SCMR, JNPR, CIEN, HGSI, PDLI, KANK, BVSN, BEAS, CMTN With two weeks left on May options I may try to sneak in some naked puts on PMCS, AMCC, SDLI, JNPR, RMBS and some calls on KANA, EMLX, BVSN, BEAS, CMTN. The rest are targets of opportunity and will be evaluated as they develop but only with an eye on the coming Fed meeting. Good Luck Jim ************************ NEW SEMINAR ANNOUNCEMENT ************************ OptionInvestor.com's Regional Seminar Series 2 and 3 day Stock and Option Seminars coming to you! Who Should Attend? -Investors wanting to take control of their own investment accounts And want to discover the power and profit potential that online Stock and option trading can bring. -These seminars were created to provide investors of all experience levels the tools and knowledge needed to supercharge their investment returns. Seminar Format -Day 1 will focus on understanding the difference in types of Fundamental, Technical, Quantitative, & Predictive analysis, how and when to use each. The major indicators will be explained in detail with explicit examples of each. -Day 2 will consist of an indepth study of the different option strategies and when to use each. Cash flow, option pricing, choosing the right options, using stop losses and maximizing your returns. Chart patterns, entry points, and exit points will be covered in great detail matching the right strategy to the chart pattern. -Day 3 of the extended seminars will focus on the more advanced strategies including naked puts, Straddles, Strangles, Butterflys, and tax advantaged index strategies. The advanced day will also focus on implied volatility, option pricing, spreads and selling time as a cash flow tool. What You Will Learn? -Learn the difference between investing & trading. Know when to do each. -The right investment tools to fit your investment needs. -Technical analysis secrets that the pros use. -The best times to buy & sell stocks, options or mutual funds -Powerful market screening and timing tools. -Winning strategies that you can put into action immediately. -Using options to hedge your stock portfolio. -Which options to buy and which ones to avoid. -Which options offer significant tax savings regardless of time held. -Insights to understanding charts. -Fundamental, Technical, Quantitative, Predictive analysis. -Understand Moving Averages, MACD, RSI, Stochastics, -Histograms, momentum, Support and Resistance, Regression -Channels, reversals, divergences, VIX. -Bollinger Bands -Principles of successful money management. -Basic option strategies and how to leverage your returns. -Entry points and exit points. What you will receive? -Quality instruction from experts that have taught thousands of students. The seminar team is led by Chris Verhaegh, Option 101 writer for OptionInvestor.com who has also taught over 50 option seminars. -Winning option strategies you can put into action immediately to supercharge your investment returns. -A thorough understanding of technical, fundamental, fundamental and quantitative analysis and how to apply this information to your stock and option investing. -A comprehensive seminar workbook complete with examples and work study pages. This workbook will double as a reference book which you can refer to over and over as you try new and more complicated strategies. -A cd containing all the on screen examples and presentations Along with extra features like definitions, examples and Reference material not in the seminar manual. -A hearty breakfast and lunch is provided as part of the package. These seminars are designed to be smaller and provide more personal interaction than is available in our recent 600 person Denver Expo. To achieve this personal attention the seating must be limited. Not everyone requesting admission will be able to attend but we feel the quality of the education for everyone will be much appreciated. Date City Event May 25-26 Denver 2 day Stock & Option June 1-2 Houston 2 day Stock & Option June 16-17 Las Vegas 2 day Stock & Option June 22-24 Los Angeles 3 day Stock & Expanded Option June 27-28 Washington DC 2 day Stock & Option July 3-6 England 3 day Stock & Expanded Option July 13-15 New York 3 day Stock & Expanded Option July 21-22 Nashville 2 day Stock & Option July 27-29 Atlanta 3 day Stock & Expanded Option Aug 11-12 Pittsburgh 2 day Stock & Option Aug 17-19 Orlando 3 day Stock & Expanded Option Aug 24-26 Dallas 3 day Stock & Expanded Option Aug 28-29 Detroit 2 day Stock & Option The price for the two day stock and option seminars is $1995 and the expanded three day seminars are only $2495. Less than you would lose on a bad trade. At this price can you afford not to attend? If you are ready to take the next step to improving your investment returns then don't wait any longer. Reserve your seat now. https://secure.sungrp.com/seminar/signup2.asp ********** STOCK NEWS ********** Cisco Buys Arrowpoint For $6 Billion By Matt Paolucci Cisco Systems Inc. (CSCO) agreed Friday to acquire recently public ArrowPoint Communications Inc. (ARPT) for about $5.7 billion. Terms of the deal call for Cisco to exchange 2.1218 shares of its common stock for all outstanding shares of ArrowPoint. With shares of both companies trading higher after the news, it's looking more like a $6 billion deal. Acton, Mass-based ArrowPoint had counted Cisco among its competitors, along with Alteon WebSystems (ATON), F5 Networks (FFIV) and Foundry Networks (FDRY). ArrowPoint's products enable ISPs, Web hosting companies and other customers to create faster, more reliable content delivery. The Company's technology will also strengthen Cisco's presence in emerging markets, which include ASPs (Application Service Provider) and AIPs (Application Infrastructure Provider). Cisco's chief financial officer said the deal with ArrowPoint will have no impact on fiscal 2000 results, and will add slightly to earnings in calendar year 2001, which ends in July. Cisco officials said the market for content switching looks to be even stronger than industry forecasts, which see the market growing from $500 million now, to $2 billion in 2003. ArrowPoint's software and hardware-based architecture enable it to support content-aware features such as URL- and cookie- based switching. These features allow ArrowPoint to direct traffic based on information such as the content being requested and the frequency of the request. The acquisition will be accounted for as a pooling of interests, and is expected to close in the fourth quarter of Cisco's fiscal year 2000. In the last 12 months, Cisco has acquired 20 companies. In the upcoming 12 months, Cisco said it would acquire another 20 to 25 companies. In the last five years, the networking colossus has pocketed some 50 companies. Many of CSCO's acquisition targets have been nimble, fast- growing startups, companies with the potential to out-innovate Cisco or at least steal employees. One of the biggest challenges now facing Cisco is the ability to attract and keep its existing staff. And while trying to integrate the plethora of companies Cisco has ingested thus far, it must remain vigilant against existing competitors as well as upcoming network newbies such as Juniper Networks (JNPR), Sycamore Networks (SCMR), and Foundry Networks (FDRY). Some analysts say Cisco has overpaid for its recent acquisitions. Then again, when you generate in excess of $400 million in cash per month, maybe money isn't an issue. It will be interesting to see if Cisco can keep up its acquisition-juggling act. So far the Company seems to have executed without mistake. But for those investors who want to make sure the Company is playing by the book, all will be told when the router and networking behemoth announces its third quarter earnings next Tuesday. Estimates are for 13 cents per share. The boards of both companies have approved the deal with ArrowPoint, which is expected to close by the end of Cisco's fiscal fourth quarter, ending July. *************** ASK THE ANALYST *************** What Was That? By Eric Utley The jobless rate comes in lower than expected and the market rallies? The reason the market rallied is that traders got a dose of certainty about the future action of the Federal Reserve. Several of you sent in your opinions about the market last week and the common theme was uncertainty, you were correct! With some of the ambiguity removed from Friday, maybe we'll see some discernible direction in the market. There are several events I'll be watching closely next week. The Annual H & Q Summit will commence early next week. The gathering gives tech companies the opportunity to present to Wall Street and guide analysts about their future prospects. Good news from the conference could prompt analysts to raise price targets, initiate buy ratings, and speak positive comments about the companies. Any of the aforementioned actions would be good for the market, specifically the tech sector. I'll also be watching the earnings reports from two NASDAQ heavyweights. CSCO will report early in the week and DELL is scheduled to announce earnings on Thursday. Analysts expect both companies to meet estimates. A surprise by either of the two would help at this point. We'll delve more into CSCO below. You've probably heard Jim mention the name Ralph Bloch a few times. Mr. Bloch is one of the most distinguished technical analysts on Wall Street. He has been extremely accurate lately, calling the market tops and bottoms to the day. In an interview on CNBC late Friday, Bloch said something that bothered me. He said that he expects the market to churn sideways for 3, maybe 6 months. What troubled me is that he thinks the "new" investors will be "washed" out. He went on to say that the high expectations currently engraved in investors' heads is unhealthy for the long-term. Now, I'm not attacking Ralph, I actually agree with his thesis, in that investors have been excessively exuberant. His comments did cause me to pause, and rethink my trading strategy. And I remembered there is no free lunch in this world, especially on Wall Street. I'm receiving many great e-mails from all of you, I wish I had more time and space to analyze more of your requests. I really appreciate the positive feedback and enjoy corresponding with our readers. Pleas keep sending your requests to me at asktheanalyst@OptionInvestor.com. Put the symbol in the subject line of the e-mail. ---------------------------- Red Hat - RHAT Would you please comment on both Red Hat and Covad Communications. Both (especially RHAT) have been brutalized like the rest of the NASDAQ. Where do you see them going? Thanks. - Ernie Brutalized is a good adjective to describe the recent action in the once beloved Linux stocks. RHAT has been punished by concerns over the company's financial viability. The popularity of the Linux Operating System has risen among Web site developers and corporate IT managers. But the financial success of RHAT remains the variable. Essentially, RHAT is a services company, rather than a software maker. Since the Linux OS is available for free, RHAT derives most of its revenues from servicing the product. Analysts feel that the upside revenue potential for RHAT's business model is limited. Linux was once thought to challenge Windows in the desktop arena, but it looks like the software will be no more than a niche technology for servers. Turning to the chart, RHAT appears to have stabilized and settled into a trading range. But there are a few things that still concern me. First of all, the stock is hovering above its 52-week low of $20. That low was traced back in August on the day of the IPO. That level is crucial support for RHAT to hold, below $20 is no man's land for tech stocks. Secondly, notice all the 6 mln share days in the past three months, most recently on May 1st. That tells me there are still plenty of sellers around to push RHAT lower. ---------------------------- SDL Incorporated - SDLI I have been trading this stock between $140 and $200. I like to own this stock for long-term, but I have to sell before it drops 20 points. You've gotta love the fiber optic stocks. But you could probably do without the wide intra-day swings of 20 points or more. The volatility is good for traders but unhealthy for long-term investors. SDLI has one of the highest EPS and relative strength rankings in its industry. If you don't mind the volatility, it's probably a pretty good stock to hold for the next 3 - 4 years. SDLI competitor JDSU announced earnings in late April. The company told analysts to expect 75% growth in the coming year. If you're looking for growth, and don't mind paying a high price, you'll find it in the in the fiber optic area, and SDLI is worth considering. In the near-term, there are several events that could carry SDLI higher. The company will hold its Annual Shareholder Meeting on May 18th. Investors are expected to approve a proposal to double the number of authorized shares. If the market stabilizes, executives may announce a stock split. The last time SDLI split was back in December of 1999 when the stock was trading at $174. Also worth noting, rumors have been circulating trading desks that consolidation is coming to the optical networking sector. Though just rumors, the talk could carry SDLI higher. SDLI formed a solid double-bottom in April and has rallied on healthy volume since. The stock is trending upwards forming a bullish wedge pattern. SDLI needs to clear resistance at $200 before retesting its highs from early March. The announcement of a stock split could be just the catalyst to lift the stock above resistance. I'd like to point out the natural reaction that occurred last week. This is normal for a stock that has rallied so swiftly. Notice the low volume during the decline, indicating profit takers were locking in their gains. The pullback is usually a good entry point if the stock remains in an up-trend. ---------------------------- Cisco Systems - CSCO Please give me your opinion about CSCO as a leap purchase. I know OI has it on the list, but is it sill a good option now? If so at what entry point? Thanks. - HD The ever endeared CSCO. Money managers across the country pledge allegiance to CEO John Chambers and his networking mammoth. One of the four horsemen of the NASDAQ, CSCO epitomizes our great bull run. We've had CSCO as a leap play since November 14th of 1999. Since that time, our play has returned over 250%! The relative strength of CSCO is simply amazing. For example, last Friday CSCO said they would acquire ArrowPoint (ARPT) for $6.1 bln. If CSCO were an average tech stock, arbitrageurs would have stepped in and sold the stock lower. Instead, traders applauded the acquisition and bought CSCO higher. On a more somber note, not even CSCO's relative strength could combat the massive selling seen during April. The massive distribution stems from hedge funds dumping tech stocks and raising cash. Another drag on CSCO has been the persistent rumor circulating that the company will miss earnings estimates when they report next week. But analysts have come to the CSCO's defense and insist the company will meet estimates. The stock has formed an interesting chart pattern over the past month. Technicians often refer to the pattern as a "coiled spring". As you can see on the chart, CSCO has developed a tight price pattern on declining volume. The psychology behind this pattern is that traders step aside, and wait for an important event to move the stock one way or the other. Once the stock breaks from congestion, it usually continues to move in the direction of the breakout. This pattern can be useful for long-term investors to find an entry point, ideal for LEAP investors. A good place to look for an entry point would be a strong move above $72 on healthy 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. ************** MARKET POSTURE ************** As of Market Close - Friday, May 5, 2000 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,000 11,400 10,577 Neutral 5.05 * SPX S&P 500 1,400 1,500 1,433 Neutral 5.05 * OEX S&P 100 750 800 769 Neutral 5.05 * RUT Russell 2000 450 550 513 Neutral 5.05 * NDX NASD 100 3,500 4,000 3,688 Neutral 5.05 * MSH High Tech 900 1,000 944 Neutral 5.05 * XCI Hardware 1,400 1,600 1,483 Neutral 5.05 * CWX Software 1,150 1,300 1,217 Neutral 5.05 * SOX Semiconductor 1,000 1,200 1,105 Neutral 5.05 * NWX Networking 900 1,100 1,058 Neutral 5.05 * INX Internet 600 800 608 Neutral 5.05 * BIX Banking 530 600 527 BEARISH 5.04 XBD Brokerage 400 500 457 Neutral 5.05 * IUX Insurance 540 620 587 Neutral 3.16 RLX Retail 900 1,000 868 BEARISH 5.04 DRG Drug 355 400 382 Neutral 4.28 HCX Healthcare 710 800 780 Neutral 4.28 XAL Airline 140 155 148 Neutral 3.10 OIX Oil & Gas 280 300 293 Neutral 3.16 Posture Alert Broad market indices reversed course Friday following the release of May's employment report. Several industry sectors recorded key bottom reversal signals. As such, we have shifted our market posture to Neutral from Bearish across many sectors including SPX, OEX, Technology and brokerage. Also, please make a note that we have adjusted many of our Bullish and Bearish benchmark levels. **************** MARKET SENTIMENT **************** Thursday, May 4, 2000 Market Posture Alert - Shift from Bearish to Neutral Pinnacle Capital Advisors has shifted its market posture to Neutral from Bearish across several broad market indices and industry sectors including SPX, OEX, Technology and brokerage. Broad market indices reversed course Friday (5/5) following the release of May's employment report. Several industry sectors recorded key bottom reversal signals. Also, please make a note that we have adjusted many of our Bullish and Bearish benchmark levels. Investors can view our market posture by clicking the Market Posture link on OI.com's website. Among the key indicators we observed was the collapse of the VIX (from 35.43 to 30.39) signaling that fear that had been building prior to the release of May's employment report may have finally evaporated. Next, Friday's market rally, although on light volume, has created several Bullish wedge formation across many key industry sectors including technology. We are still not out of the woods with the FED meeting ahead of us, but it appears that we have recorded a meaningful bottom from an technican's point of view. Therefore, we have updated our market posture accordingly. Market Stages Next, in our series of market and stock stages, see if you can tell the difference between the following charts - Hardware (XCI) and Banking. If you recall from Thursday's news letter (5/4), there are four key market and/or stock stages as outlined below: Stage 1 - Bottom Consolidation Stage 2 - Breakout Stage 3 - Top Consolidation Stage 4 - Breakdown Viewing a three-year chart of the two indices reveals that Hardware sector has enjoyed a nice run and is still trading above its UPWARD sloping 200dma. As such we characterize the Hardware sector as a "breakout" / Stage 2 sector. Conversely, the Banking (BIX) index has been trading BELOW its DECLINING 200dma. We therefore, characterized the Banking sector as a "breakdown" / Stage 4 sector. Take a moment over the weekend and graph each of the following industry sectors using OptionInvestor.com's interactive Chart tool on the website. See if you can correctly identify what market stage each sector is current trading within. Broad Market / Sector Indices DOW Industrials SPX S&P 500 OEX S&P 100 RUT Russell 2000 NDX NASD 100 MSH High Tech XCI Hardware Breakout Stage 2 CWX Software SOX Semiconductor NWX Networking INX Internet BIX Banking Breakdown Stage 4 XBD Brokerage IUX Insurance RLX Retail DRG Drug HCX Healthcare XAL Airline OIX Oil & Gas Use the following criteria: Time Frame: Time / 3 years; Frequency / Dail Indicators: Moving Averages: SMA = 200; Lower Indicator= Momentum Chart Style: Price Display = Mountain BULLISH Signs: Corporate Earnings: Major corporate earnings continue to come out strong and ahead of analyst expectations. General Electric is the latest bellwether to give positive comments regarding earnings. Volatility Index (30.39): The VIX continues to prove that the low 30's are an excellent buying opportunity, and the low 20's continue to be a great selling opportunity. The VIX collapsed from 35.43 to 30.39 following Friday's release of May's employment report. Short Iterest (NYSE): Short interest on the NYSE fell 1.33% to 4,055,931,190 shares on April 14; however, this is still a high level and from a contrarian viewpoint, would be considered bullish. Mixed Signs: BEARISH Signs: Interest Rates (6.192): Don't look now, but the 30-year Treasury bond Index has moved higher and closed above the key 6% level again. Higher interest rates generally are not good for the equity markets. Crunch: With the fear of inflation, and the most likely scenario of several more rate hikes, liquidity in the marketplace will become a more significant issue and put more pressure on equities. Energy Prices: With the rapid rise in crude oil, everything from manufacturing to transportation will be affected by higher costs. These higher costs will be felt 1-2 quarters out, and could put pressure on profit margins. ***************************************************************** The Power of Sentiment Analysis It has often been said that the crowd is right during the market trends but wrong at both ends. Measuring and evaluating the sentiment of the crowd, therefore, can give savvy option traders a decided edge. Pinnacle Index ***************************************************************** OEX Friday Tues Thurs Benchmark (5/5) (5/9) (5/11) ***************************************************************** Overhead Resistance (805-830) 5.40 Overhead Resistance (775-800) 1.53 OEX Close 767.79 Underlying Support (745-770) 2.10 Underlying Support (715-740) 10.54 What the Pinnacle Index is telling us: Direct overhead resistance is light while underlying support under the 740 level is strong. Put/Call Ratio ***************************************************************** Friday Tues Thurs Strike/Contracts (5/5) (5/9) (5/11) ***************************************************************** CBOE Total P/C Ratio .53 CBOE Equity P/C Ratio .46 OEX P/C Ratio 1.25 Peak Open Interest (OEX) ***************************************************************** Friday Tues Thurs Strike/Contracts (5/5) (5/9) (5/11) ***************************************************************** Puts 750 / 5,998 Calls 800 / 12,108 Put/Call Ratio .49 Market Volatility Index (VIX) ***************************************************************** Major Date Turning Point VIX ***************************************************************** October 97 Bottom 54.60 July 20, 1998 Top 16.88 October 8, 1998 Bottom 60.63 January 11, 1998 Top 26.38 March 4, 1999 Bottom 28.15 May 14, 1999 Top 25.01 July 16, 1999 Top 18.13 August 5, 1999 Bottom 32.12 October 15, 1999 Bottom 32.06 January 28, 2000 Bottom 29.09 April 14, 2000 Bottom 39.33 May 4, 2000 Bottom 35.43 ************* COMING EVENTS ************* For the week of May 8, 2000 Monday None Scheduled Tuesday Wholesale Inventories Apr Forecast: 0.6% Previous: 0.7% Wednesday None Scheduled Thursday Retail Sales Apr Forecast: 0.5% Previous: 0.2% Retail Sales ex-auto Apr Forecast: 0.5% Previous: 0.9% Initial Claims 05/06 Forecast: 285K Precious: 303K Export Prices ex-ag. Apr Forecast: N/A Previous: 0.4% Export Prices ex-oil Apr Forecast: N/A Previous: 0.2% Friday PPI Apr Forecast: -0.3% Previous: 1.0% Core PPI Apr Forecast: 0.1% Previous: 0.1% Business Inventories Mar Forecast: 0.3% Previous: 0.5% Michigan Sentiment May Forecast: 108.5 Previous: 109.2 Week of May 15th 05/15 Industrial Production 05/15 Capacity Utilization 05/16 CPI 05/16 Core CPI 05/16 Housing Starts 05/16 Building Permits 05/16 FOMC Meeting 05/18 Initial Claims 05/18 Philadelphia Fed 05/18 Treasury Budget 05/18 FOMC Minutes 05/19 Trade Balance ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at http://www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 DISCLAIMER *********** This newsletter is a publication dedicated to the education of options traders. The newsletter is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The newsletter picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. 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The Option Investor Newsletter 5-07-2000 Sunday 2 of 5 ************* WOMAN'S WORLD ************* Volume confirms the trend By Mary Redmond We know that it is important to pay attention to trading volume on individual stocks and the indexes to confirm that a true breakout may be occuring. On Monday through Thursday of this week it was suggested that the weakness in the Nasdaq may have been attributed to lack of buyers and lack of sellers. How can we tell? Low volume as compared with previous periods of strong rallies. Actually, if you look at a chart of the Nasdaq with volume over the last six months you can see that it has really only been since November that we started to have daily average volume of over a billion shares. Last summer through October the Nasdaq was averaging only about one billion shares per day. This was considered average volume. In November of last year, the cash flows to mutual funds doubled from the level of September, with aggressive growth funds taking in over $8.4 billion. This is when the Nasdaq volume really started to accelerate. If you look at a chart you can see that the Nasdaq started trading about 1.25 to 1.5 billion shares per day. In December of last year, aggressive growth funds took in about $11.5 billion in cash, and the Nasdaq volume was in the range of 1.25 to 1.5 billion shares per day. In January of 2000, fund inflows were an incredible $39.98 billion, with almost all of the money going into growth, technology and aggressive growth funds. Also, in February the flows to technology funds were close to $10 billion. The share volume during January and February on the Nasdaq was an average of well over 1.5 billion shares per day. During March and April the share volume remained high, and during a couple of the selloffs in April the volume spiked to well over 2 billion shares. It seems that toward the end of April and the first week in May the Nasdaq volume has been dwindling down. This might be indicative that there aren't that many sellers left, and that buyers are waiting on the sidelines. What are we looking for? The last six month period has shown us that we really want to see volume of over 1.5 billion shares a day and closer to 2 billion to confirm a strong Nasdaq rally. This has usually correlated with period in which the flows to aggressive growth funds were well over $2 billion per week. Studies of the liquidity trends have shown that we really need a strong cash inflow to help support this market. There is no shortage of cash out there. Right now there is close to 1.7 trillion in cash in money market funds. In addition, flows to equity funds during April averaged around 5 to 10 billion weekly, and alot of that money hasn't been spent yet. In fact, some market analysts have estimated that there is more cash on the sidelines now than at any other time in the last two years next to August of 1998. According to both trimtabs.com and AMG Data Services for the week ending May 3 there was a net outflow of cash from US equity funds in the range of approximately .5 to .7 billion. However, a closer look at the numbers reveals that this might not be as alarming as it seems. According to AMG, large cap growth funds received approximately 1.2 billion in cash flows. The primary outflow was from international equity funds, or US funds which invest in international stocks. This is not surprising considering the deterioration of the Euro. The fund flows seem indicative that buyers and fund investors are sitting on cash waiting. Remember, in the last nine years, there was only one month in which equity funds showed a net outflow of cash, and that was August of 1998. One week doesn't really indicate a trend of investing patterns is changing. All I have been doing this week is buying some two year leaps on stocks I think will do well. You can make money in an up market or a down market, but a flat or sideways market is a real killer in terms of option deterioration. It eats away at time value until there is nothing left. Hopefully the Nasdaq will close over 4000 soon. In addition to the Fed's rate increase, we also have to consider the Treasury's ongoing program of buying back government bonds. Although most market analysts expect a 50 basis point increase in the Fed Funds rate in May, we don't know exactly how much the bond buy backs will lower long term rates and what effect this will have on the market. Contact Support ***** When the Moon is in the Seventh House and Jupiter Aligns With Mars By Lynda Schuepp This week we had historical alignment of the planets; maybe that explains what's going on in the market. The talking heads tell us there is no volume, that's bearish, but my understanding is that for every buyer there's a seller. So, if there are no buyers than there are no sellers. If there are no sellers, doesn't that tell us that the bears are retreating? I guess it depends on your perspective. As I wrote last week, I am working on an article, and hopefully a book, on the psychology of trading and how men and women approach the market. However, because of the odd alignment of planets this week I didn't get many war stories and the ones I did get were mostly from the guys. In order to understand the differences in emotional trading between the sexes I need responses from you gals. So I will have to table this article for probably a few weeks, but a number of you have encouraged me to write about it, so I think there is a genuine interest out there. So for this week I plan to address the main questions that were emailed to me regarding my trading of the OEX. The question I was asked most often was in a nutshell, "what do you use for trigger points to enter and exit?" My short answer is: Japanese candlestick patterns, MACD, stochastics, Tick readings, Vix levels, advance/decline line, bid direction, volume in the market and last but not least the famous "Lynda gut feeling" indicator. Now, for the long answer. It seems that everyone is looking for the silver bullet: a fail-safe, no-lose system that doesn't require any work. Sorry to disappoint you, ladies and gentlemen, but I don't have it. Just when I think I've got it down pat, the market throws me a new curve to incorporate into my own system of hard knocks. Your emails this week made me really think about my signals and try to determine, if I really could modify my trading style and get more mechanical. If I could, I know I could make more money. Look at the Skybox; it is a purely mechanical trading system that really works. I was asked by many of you, "Do you use Skybox, and if not, why not?" My answer is yes, AND no (for all you Libra's). I am an aggressive trader ("A"-type personality) so, a system that doesn't trade actively does not suit my personality. I know I could probably make more money initiating fewer trades and making more money on them would be a better game plan, but it doesn't suit me. It's like putting a square-peg in a round hole. I think that is the lesson everyone has to learn on their own. That's why OIN is great, there is something for everyone but remember it is just a tool--you still need to do most of the work yourself. Now let's look at some charts and I will show you some of the things I am looking at when I am trading. I will use the OEX because it's my favorite. By the way, did you know that 60% of the gain is considered long-term capital gain? That can really add up and increase your returns if you're in a hefty tax bracket. Step 1: Step back and smell the roses or fertilizer, whichever the case may be. By that I mean, look at a longer-term view and then come in closer and closer. For me, a long-term view is 6 to 12 months, looking at a weekly chart. You need to determine the overall trend so see which indicators you need to place more emphasis on. I find stochastics can give you an earlier signal but you can also get a lot of false alarms. For the longer term trader you could get some nice moves and with proper money management, and stops you could do nicely. See the chart below. Step 2: Come in for a closer look. Next we'll look at a daily chart and see if the up-trend is still in place and look at moving averages. As you can see in the chart below, the 200-day moving average provides very strong support. While overall, the OEX is still trending up, it is extremely volatile which leads me to my favorite-- intra-day and swing trading. See chart below: Step 3: Time for the magnifying glass. This is not recommended for the faint of heart. Here's where it's hard to deny we are not in a bearish market. When you apply a regression analysis to the 60-minute chart, you will see we have been in a decline since March 24th! This view might change whether you play calls or puts depending on your time horizon. See chart below: Step 4: Time for the Microscope. From the 10-minute chart below, you can see there was a lot of movement intra-day. Out of the eleven different positions I took this week only one was in calls. That's because my overall short-term feeling is negative as evidenced in the 60-minute chart. I held puts over the close, although I am more neutral than anything. This is where the psychology stuff kicks in. I didn't want to sell at the close because I would have taken a loss and my winning streak for the week was nine out of eleven! Call me an idiot if I'm wrong or call me brilliant if I'm right on Monday. I convinced myself that the lack of volume with this rally was justification for further selling. Time will tell. Check the chart and come to your own conclusions. Contact Support ***** Understanding Your Trade Is A Critical Part Of The Strategy By Renee White First, an interesting chart came up when an astute reader questioned an equity I had listed in my recent article on Leaps I wanted to buy. It seems there was bad press affecting one of the positions listed. In review, it became apparent that I had mistakenly listed NOVL, instead of the intended NVLS. These are completely different companies. Novellus Systems (NVLS) manufactures, markets & services systems within the semiconductor equipment industry, an area that I am particularly interested in playing this year. It is found in the Semiconductor Industry of the Technology Sector. Novell, Inc. (NOVL) provides network, internet directory software & services making networks more manageable and secure. It is in the Computer Networks Industry of the Technology Sector. Thank you Jeffrey, for bringing this to my attention. Also, had I not looked at both charts, I would not have noticed that NOVL had a very nasty week. At first glance, it sure looks oversold badly right now. I have not read the news reports leading up to this sell-off and as I write this, my Qcharts aren't working so detailed chart information is hard to evaluate. But, it appears NOVL reached a 52 week low on Wednesday, with a huge gap down on the open. I'm going to watch this one for a possible wild cat play due to its oversold chart. Friday it traded in a narrow range, losing 1/8 on higher than average volume. Although I did not initially intend it to be a Leap play, on review of the premiums, the January '02 plays look awfully cheap. Also, it might make a good combination strategy play. A little homework and watching could make this a potential play for me soon. This leads me to comment about Covered Calls. Several readers have asked through the months, for clarification on Covered Calls. It is true that Covered Calls are considered less risky than straight calls or puts. With directional option plays, your total risk is the amount of money you spent buying the option. You can't loose more than the amount you paid for either the "call" or the "put". Covered Calls are considered less risky because you already own the equity and thus, you are "covered". When you write a call against equity that you own, you receive the call premium as cash. You just sold someone else the right to buy your equity at the strike price of their call, for which you received premium, IF the stock goes UP through the strike price. All of us like to receive money. No doubt about that. But before you start trying new strategies, it is important that you understand the worse case scenario of each, not just the part that benefits you. Covered Calls are frequently tooted as a first time option trade for beginners because it is a covered position with limited downside. Without going into the covered aspects of calendar spreads, I think it is important that new traders think through their short-term worse case scenarios using Covered Calls. Covered Calls are a great way to add cash flow to your account. Just make sure you understand what you are doing. When I first started trading options, I was green, naive and had dollar signs in my eyes (sound familiar?). I had a small portfolio of stocks I had been buying, many I had owned for several years. These stocks, I intended to hold for many years, oil & gas, pharmaceuticals, early technology. Having just attended my first seminar, I had been taught that I could hardly loose with Covered Calls. Since the markets had been in a similar tumultuous time, choppy due to interest rate increases, I naturally thought I had found a gold mine. Immediately I compounded out the premiums I might be receiving against my shares every month. I estimated the year, month, day, and of course the hour, of my impending retirement from middle class America. Salivating with thoughts of easy wealth, I wrote Covered Calls against every company I proudly owned, in addition to buying more shares on any that were not in round lots of 100 shares. I know I was an idiot. All I thought about were the premiums I would be receiving. I never considered anything else. Being the idiot that I was, I was just doing what I was told and never even thought about questioning any part of the strategy, much less my own homework. Heck, I couldn't question the strategy because I didn't understand enough to even ask a question. I had just been to my first conference, so my excitement to play was high. Exposing my backside to you, should give plenty the confidence of knowing that dumb mistakes or not, we can all grow and learn. Anyway, after filling out my holdings to 100 shs round lots, I wrote slightly OTM Covered Calls and received nice premiums into my account. Then I went fishing and ignored them completely. (I thought that was all I needed to do.) My plan was to write more calls against the shares each month, after option expiration Friday. But to my surprise, on option expiration, every one of my stock shares vanished from my account. They were called away by the buyer of the contracts I had written. This was horrible because I had no desire to sell those shares, especially during a temporary weak market on strong companies I had owned for years. Focusing only on the premiums and feeling I HAD TO PLAY, I wrote only slightly OTM calls on good companies that were at support, not giving them enough room to bounce up off of support levels without me being called out. I had written them in a down week, on a big down day. That was dumb. I had not thought through the play. Also, it never dawned on me that I could have bought the calls back any time before the close of expiration day, if I did not want to lose my shares. That was even dumber. When I looked back, the tiny premium I had received on some (because they had such low volatility) was just not worth the risk I took of being called out on these good companies. Sure I got cashed out on the shares, but my rewards would have been much higher by holding the companies as intended. In my situation, I did not want to sell the shares so my mistake was not realizing that I could really lose them. If you own shares you do not want to lose, be careful picking narrow OTM strike prices that could become ITM on a bouncing rally by expiration, or at least be prepared to buy the calls back, if you become at risk. An alternative thought are those who buy the equities for the sole purpose to write Covered Calls against them, expecting to be called out. They do not want to own the shares beyond expiration. Be aware that these stocks could drop further, below their breakeven point. With the help of a weak overall market, they could be depressed for some time. Naturally the options would expire worthless and the call buyer would not call them away. The downside risk to you the writer, is that you may become married to shares of a company you did not intend or want to own, tying up precious money that could be used elsewhere, while waiting for the price to go back up to your breakeven. You could sell the shares for a loss to free up money for better plays or you could continue to write calls against these shares with premiums that may be less than exciting due to falling out of favor. The point is that people can use the same option strategy for different reasons. Depending on your motive, the risk and rewards may be different for different people depending on their goal. Make sure you understand not only the strategy, no matter how simple it may sound, and how the risk & rewards will affect your decision. This will be my last routine Sunday Article. It's time for a summer break. Please follow me for my continued Tuesday and Thursday reports. Contact Support *************** TRADERS CORNER *************** How Many Should I Buy? By Austin Passamonte Math is an exact science. It does not lie. I'm not talking about theories, formulas or quantum physics murky enough to leave Steven Hawking scratching his head in puzzlement. I mean simple stuff like 50%, 1+1=2, 2x2=4. Can we agree that whatever the end result is must clearly be correct? Considering it's the standard unit of comparison our banks and the IRS hold us to, I suppose we have little choice but to comply. I'd like to share two money-management strategies with a couple of caveats first. Number one, I'm no math wizard or genius of any kind ("hey Wendy, can you come here for a minute and tell these nice people I'm no genius. Oh...you think they figured that out for themselves by now? Never mind then, thanks for the input")I know results of these equations because I ran them many times myself with calculator, pencil and paper. I don't always understand why some things work, all I know is what the results are at the end. You do not want to apply any of these tactics with your hard earned money UNTIL you test them exhaustively for yourself. I can tell you this; some results may keep you from sleeping all night, for sure! Number two, these strategies are only proven on quantifiable systems that have a solid history of blended average returns. They are designed to work on systematic, non-random games like blackjack. I'm serious! Did you think blackjack was a random game? Me too until I read a book about the science and methodology many years ago. Needless to say I never made a living (or even tried) counting cards, but the one cash- management system learned was worth the price of that whatever that book's entire print-run cost was to me. I'd like to share it with you for free, how's that? Before we begin, let me finish the above thought. These strategies are designed to work where a consistent pattern of repeat performance exists. Personally, I doubt they will work on random trading like buying calls on stock A, LEAPS on stock B and selling puts on C. It could even accelerate losses by a wide margin. However, they are tailor-made for trading certain repetitive markets like the OEX Skybox, pivot-point trading index options or other markets that can be played in both directions. The money strategies will also work to a degree with specific methods such as splits and earning runs when market conditions aren't tilted like they have been recently. Enough of the disclaimers, let's dig in! First we need to pick a sample market. Of course I'll choose the OEX, and we'll use Skybox recent history for our standard example. Select a dollar amount you want to trade the OEX with. I feel it has to be $10,000 or more. Remember, we are just pretending here but in real life you would choose the amount of money you dare employ for one type of market play. Oh, and one more thing. Let's pretend commissions don't exist to simplify our math. Do keep in mind that they are very real indeed. Here we go, time to trade. $10,000 in our account and we're ready to work the OEX. We know there are times when the market chops around both sides of a benchmark and we end up holding a call and a put position (long strangle) on either side. Therefore, we can never use more than 50% of our available balance on any one play. But that's precisely how much we will use every time, 50% of our current account balance to buy all the options it can afford or get filled on. Fair enough? This leaves at least 50% balance to take the other side of a trade in the event we need to initiate a long strangle. An example would be as follows: the OEX rests at 756 after the close. Our instructions are to buy May 750 calls @ 14.5 if the 752 trigger is hit, so we can afford to buy three of them with our $5,000 balance. $5,000 divided by $1450 = 3.44 options or three whole options with money left over. That gets swept to the side for now. There is $4350 in play. The stops are set and we await execution. If the 748 trigger is also hit, we use the remaining $5,000 to buy three puts. We do not use the entire $5650 balance to buy more than three options if it could, because we do not want imbalance on the straddle. One leg of a straddle will lose for certain, so we don't risk more money on the losing side to draw down our profits. The greed in me points out there is a 50/50 chance the second leg with more options (when affordable) might win and really offset the opposing loss, but that's not how the system is best worked over the long haul. At times when the remaining balance is drawn down after one straddle leg has been stopped, we may have to place that same trade again if the market returns to our trigger. Should there be too little money to buy the same number of contracts our live leg still has, we're forced to settle for what we can get and go on from there. For the sake of this discussion we'll say only the calls were bought, the market bounced off support and rallied to our close of $2250 per option target. We bought three options for a total of $4350 and sold them for $6750. We now have $6750 from the winning trade plus the $5650 parked for a cash balance of $12,400. Not bad. What now? Why, we wait for the next play and use 50% of the new total to purchase all the options we can afford. Shall we take one more trade? OK, the market stalls at the next benchmark up (758) and we buy May 750 puts for 14. If our account balance now stands at $12,400 how much do we use? That's right, $6200 which is 50% of the new total. That will buy us 4.428 options, so we get filled on four 750 puts if our Skybox criteria is met. Again, we're on a roll and the market eventually tanks. Those options are sold @ $2250 each or a total of $9000. We used $5600 of our balance to buy and our account held the difference. $6800 added to $9,000 gives us a total closed out balance of $15,800 after two wins. All in a day's work, albeit a busy one. Isn't it fun to take two nice winners like that? The flip side is you handle losers exactly the same way. When trades stop out on you, recalculate the new remaining balance and use 50% of that for the next play. After every single closed trade, you simply use 50% of the new adjusted balance to buy as many options as it will afford. This varies depending on account growth or drawdown and the price of options being traded at the time. Keep in mind when we began with $10,000, up to half of it was put in play but only +/- $900 was actually at risk because of our stop loss order placed immediately upon execution. If three options get stopped out a -3 each, we have $9100 left to split in half and head back to the trenches with. Therefore, we only risk 10% total on that play. If this is too much for you, feel free to buy two or even one OEX option instead of three. As you can see, pyramiding this bankroll on consecutive winning trades can drive your account to incredible heights. But that's not the power of it... the beauty is in the way it handles drawdowns. You see, this system is built to take a large string of small losers before hitting a small string of big winners. Sort of like playing blackjack and the OEX Skybox. Now try it for yourself with a few fun and simple scenarios. Go into this year's history of the Skybox and use our money system from the first trade until the last one listed and see where historical results end up. Remember, past results may not equal future gains, etc. etc. but this is just a fun exercise demonstrating the power of multiplication. I won't tell you what the results are, see for yourself. Hopefully you're less impressed with the winners as you are in the way it saves you from ever wiping out. By scaling your trades up or down using 50% of your last balance to purchase options that vary widely in price, you are always working your cash inventory to its utmost leverage. Worst case scenario? Find the biggest string of losing trades the Skybox recorded to date and start from there. How did it handle that period of drawdowns and where have you ended up since? Heck add two, three or four more losses onto that and see what happens to your account. Get tough with it, double the worst historical results so far this year. Where are you now? Next time we'll share another multiplier that when used in a one- directional market can even outperform this one. See you then! Trade the right direction with the proper amount of capital. ***** Anatomy of a Call Trade By Janar Wasito Here is a step-by-step procedure for making a profitable trade on a new call choice--QCOM. I cruised through the web site tonight, quickly. I read the market wrap, market sentiment, and other sections. I thought the most useful thing for a beginning trader is a detailed description of what to look for to enter a single, specific call trade. 1. Read the Site. Ryan is saying that investors are still playing it safe. The sellers and buyers are on strike. We bounced off of 4000 on the upside today. Going into the Market Sentiment section, we see that the Pinnacle Index is telling us that resistance is light above and below. It's a listless market. Might be more on the downside, to set up a range bound market ahead of the Fed in two weeks. Here's a contrarian indicator I love--in the Market Posture section, the indicators are all pegged to the left on the major indexes and the technology sectors. That tells me that it has to swing to the middle soon, if even for a few days. 2. Select your Trade. I know QCOM. This always helps a bit if you are trading the option on it. So, I go to the QCOM write up. I am looking for one thing--an entry point. $108. Got it. Rumor of NOK acquiring QCOM. Ah, yeah? And if so, so what? I just want to make a quick play for 25%. I know the companies, love 'em, own LEAPs on them. But this is about a trade. 3. Select your Contract. May 110 Call. AAFEB. Load it into a quote sheet in Qcharts. Load QCOM into another quote sheet. Set an alert at $110 and $108. Now, the call contract has 2.5 weeks of life in it. The stock is trading at $113, so the intrinsic value of the contract is a little over $3, but the contract is trading at $9. This is a ticking time bomb. As soon as you take possession of it, your goal is to toss it to someone else for more than you bought it. 66% of the value of the contract is based on time and volatility premium, and you have a little over 12 trading days until all that time value disappears. No matter, we're option trading fools. 4. Decide how much you are going to risk. As a beginning option trader, we have placed $15,000 into a Preferred Trade Account, which represents 15% of our assets. The rest are in safe investments, like KOOP and TSCM (just kidding). So, using our risk management rule of thumb, we are going to put 20% of our option trading money into the trade. The contract is trading at $950, but it should come down if QCOM goes down to $108 from $113. We decide to trade 3 contracts. 5. Entering the Trade. Key indicators to open the trade: QCOM at 108; signs of a short term bottom; VIX spikes and heads back down; volume in a buying surge on the NASDAQ; positive movement in related stocks like NOK. Right click on the option symbol, set the trade up in Preferred, enter 3 contracts, hit the lowest ask in your time & sales screen. 6. Exiting the Trade. We get filled at $6.50 on 3 contracts. $1950 is our value at risk on the trade. $6.50 + 25% = $8.125. Set a limit sell at $8.125. Set a mental stop loss at -25%. I, personally, would rather have a limit sell in place above the current spot price of the option, IF I have used good discipline in entering a trade. Intraday spikes will take you out of the trade, often in a hour or two. Set a drop dead time limit too. Friday. Over a weekend, a call with 2.5 weeks of life in it will drop like a rock. I know, I sell them, and I love it. But that is another story. If your contract is just hovering at $7.875, take a profit, and look for another trade in the Sunday newsletter. Good job. Your $15,000 is now $15,300. You just traded a stock that George Soros dumped like hot potatoes. Hey Druck, Pow! ***** Calendar Spread Transition By Janar Wasito It's halfway through the monthly options cycle, so it's time for a calendar spread update. In triathlons(which I sorely need to get ready for again), one of the crucial parts of the race is the transition from the swim to the bike, then from the bike to the swim. In my Calendar Spread Strategy, I am getting ready for a monthly transition, which experience tells me is crucial to realizing a steady stream of profits. I am getting ready for the transition to the June Cycle now that there are two weeks left in the May cycle. My LEAPs have moved up 20% in value since the start of the May cycle. None of my short calls are in-the-money, but two of my positions are causing me some concern about the short calls going ITM. At the same time that the LEAPs have moved up in value, each of the short call positions are profitable. On average, I have realized 33% of the value of the short calls because of time decay. The next two weeks are when time decay really picks up. At the same time, the "curve" drops off so that it is really not worth it to milk the short plays until the bitter end. Most of the fat has dropped off the bone in the ribs I am roasting. Therefore, I am getting ready to take the Mays off the grill (already bought back 2 of the 12 positions for 80% + profit), and toss the June rack of short calls on the time-decay-omatic-roaster. Each month, I take the same spreadsheet, imbedded with the live quotes from Qlink, and update it for the following month. I go through the next month series options and determine which ones to sell, update the links and formulas, etc, etc. I treat selling calls as my business--the LEAPs are my plants, property and equipment; the short calls are the product that I sell. This transition could be tricky. As I see it the key date is May 16 and the Fed decision. I see a range bound market continuing until then, though I see a slight chance of a major downward break in the NASDAQ next week because of the low volume consolidation which looks a lot like mid-Sept '98. I am going to shoot for any weakness late next week and/or May 15 & 16 to buy back my short calls. If we get a relief rally after FOMC, I am going to be looking for major moves up to sell calls 20% OTM. I think that there is the possibility of a move up after FOMC, a relief rally once a 50 basis point hike is a known and past event. The strategy is working. Since March 20, the NASDAQ is down 21% and my LEAP portfolio is down 1%. When I add in the cash flow from short calls for May, I am up 6%. Again, the goal of the strategy is to systematically pull ahead of the NAS by 11% a month, and this appears to be working. Contact Support ***** Quit Whining and Pull in Some Money By Molly Evans Yes, we all agree that we liked the October 99 - March 2000 market a whole lot better than this tangled, schizophrenic ball of string we've been playing with recently. All the message board participants give their versions, "We're in a bear market. No, we're in a sideways market. No, this is still a bull market with a compensatory pause." Whatever. Will we get the 50 basis point hike? Will there be more in store? How will this affect the market? If we get the bigger hike, does that mean the markets tank or will we get a relief rally? Enough already. Quit the whining. We won't really know how it will all play out until we see it in the rear view mirror of hindsight. I'm going to go out on a limb here and say that in my humble estimation, we're in that sideways market. My book sources tell me that this occurs 70- 80% of the time so I feel pretty safe in asserting that. Generally people make money in up or down markets. However, for now, we seem to be stuck in that gray zone where we've got the lack of buying power to convince the powers that be that we're starting a new uptrend. Tell me you don't wake up each day and say, "Is today the day it all falls out of the bottom and we hit 2800?" See, you wonder but you can't convince yourself that it will happen so you sit there doing nothing or trade intraday ranges to scalp a few points. That's not fun as we know it. That's work. That's risk. We like it none! We've got to come up with a better plan for times like these. It's been said here before but it's worth repeating. You CAN make money in sideways markets. Janar has mentioned calendar spreads numerous times but judging from a few of my emails from subscribers there's room to go another round on this topic. A few of my friends had this very discussion the other day so I'm going to present their scenario for you to follow: Say I own a SUNW 2001 strike 60 LEAP. I bought it for $25 when SUNW was $73. I essentially paid $13.00 of intrinsic value and $12 of time value. Now, I want to sell a call on this holding. SUNW is now at $90.50 so I want to sell a June $100 as I want some positive money into the account but don't really wish to have my shares called away. I realize the risk is there if SUNW gets to the strike plus the cost of the option that I've sold. The June 100 is bid at $3 5/8. I sell that and $362.50 is credited to my account. I'm the seller of the option, the time value erosion works in my favor. I've also lowered my own cost basis of my leap to $68 3/8 as it was $72 (strike plus TV). Now, say that SUNW goes down in a heap with the rest of the market one day. Do I think that SUNW will recover so quickly and be worth $103.625 by June OE? If so, I'd buy to close my call position for less than I sold it. Let's say the market goes up 200 points on big volume starting Monday and never looks back. SUNW goes to $110 by June OE. I will have to exercize my leap to be able to deliver the shares if I'm called out. If the leap were exercised, I'd incur the costs of doing that but will receive $100 share and pocket the $18 or so profit ($60 per share to buy the stock, plus $25 paid for the LEAP minus the premium I took in = $81.38) but be able to make a new play. On the other hand, I could buy to close that call and would just turn around and sell a further out strike and add the difference of the call purchase and the subsequent new sale to the cost basis of the leap. Another less obvious advantage to rolling it out like this is that by retaining the LEAP for 366 days, it qualifies for LT capital gains rather than ST capital gains. That's a major consideration to those in those higher tax brackets. If SUNW is still under $103 by June OE, that call is worthless and I take my boys out to McDonald's and buy them another Playstation game because they're so good. Not! This is essentially the same as covered calls on stock that is owned. Of course there are better plays out there than the SUNW hedge as there's not a lot of volatility priced into the SUWN calls. If you have LEAPS or long stock sitting there idling in your port, put them to work. You're lowering your cost basis, reducing your net exposure and risk. On a different note, I just have to share with you something one of my crazy friends sent to me. I don't know who to credit but they've obviously got a great sense of humor . . . or pain maybe. Do you think my buddy meant anything personal by sending me this? HMMMM. See anyone you know? Good luck to you all and let's go make some money! Contact Support ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** **************************** SEE DISCLAIMER IN SECTION ONE
The Option Investor Newsletter 5-07-2000 Sunday 3 of 5 ************* DAILY RESULTS ************* Index Last Week Dow 10577.86 -155.42 Nasdaq 3816.82 -43.80 $OEX 769.79 9.94 $SPX 1432.63 17.98 $RUT 512.84 6.60 $TRAN 2876.11 9.95 $VIX 30.39 1.53 Calls Week EPNY 89.38 23.31 Clear winner in this sideways market ABGX 112.88 23.31 New, breakout over $100 last week AFFX 156.06 21.00 Leading the Biotech recovery EMLX 62.50 17.13 Great example of price gap methodology KANA 55.34 12.78 Sizzling stock graced w/ 2 upgrades SEPR 103.25 11.25 New, just what the market ordered MEDI 170.25 10.31 New, looks to be on the road to recovery HIFN 43.13 9.19 New, $40 resistance turns into support SCMR 86.00 7.50 Undervalued?? Thanks J.P. Morgan BVSN 49.63 5.69 New, a slew of upgrades & good technicals AMD 92.25 5.44 The sky is the limit for AMD! BRCM 177.81 5.44 Historical support at $165 SFE 44.25 2.13 Dropped, earnings on Wednesday 5/10 NOC 72.75 1.88 Dropped, it's time for us to fly ARBA 76.00 1.81 Dropped, throwing in the towel QCOM 109.75 1.31 Lehman reiterates price target of $180 ADBE 119.69 -1.25 Leading the charge in the software sector TER 108.63 -1.38 Sector upgrades should give a boost NTAP 69.88 -4.06 Earnings on May 18th MERQ 85.00 -5.00 Took off like a rocket on Friday... CMGI 65.25 -6.00 Dropped, refused to participate upward TIBX 82.13 -6.94 Dropped, loved it while it lasted JNPR 193.38 -19.31 Shares authorized to effect 2:1 split RMBS 207.63 -22.38 Hanging tough after a bumpy week Puts CTXS 43.38 -17.69 Continues to slide south on higher vol SNE 221.56 -4.08 Well, the glory days are over...for now BOBJ 93.88 -4.00 Dropped, BOBJ will be missed GCI 60.75 -3.13 New, pullback turned into all-out selling LOW 47.81 -1.69 Looking for a bottom and still falling STOCKS ADDED TO THE PICK LIST ***************************** Calls ABGX - Abgenix Inc BVSN - Broadvision SEPR - Sepracor HIFN - Hi/fn Inc MEDI - Medimmune Puts GCI - Gannett Co *************************** PICKS WE DROPPED THIS WEEK *************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS NOC $72.75 (+1.88) In an attempt to capitalize on NOC's extensive logistics experience, the company announced Friday the formation of a new Logistics Systems and Materials Division. The new division will combine existing resources with new ones to provide support for defense and commercial business opportunities. The announcement of the new division had no effect on traders last Friday. We saw some buying late Thursday afternoon, and we were expecting investors to continue accumulating the stock into the weekend. But the buyers never showed up. Instead, a wave of selling overcame shares of NOC Friday morning, and the stock sank to $72.25 in the first hour of trading. In light of NOC's weakness during Friday's broad market rally, it's time for us to fly. ARBA $76.00 (+1.81) With a huge yawn we are throwing in the towel on this play. Spending most of the week in a narrow trading range is bad enough, but as the NASDAQ rallied towards the end of the week, ARBA continued to drift aimlessly. Volume was near the ADV on Friday, but the $2 sell-off at the end of the day on increasing volume does not bode well for the week ahead. The final straw was the fact that ARBA closed below the ascending trendline which had acted as support since mid-April. The breakout may still materialize next week, but in light of the poor performance this week, we'll fold our tent and move on in search of more robust plays. CMGI $65.25 (-6.00) As the NASDAQ appeared to regain its feet late in the week, CMGI refused to participate. Although Friday did see a positive close, the stock is having a hard time penetrating the $65-66 resistance level. Like much of the rest of the market CMGI is suffering from anemic volume, and the lack of buyers makes it difficult to stay excited about the prospects going forward. Support is still holding in the low $60's, but the stock needs to move if we are going to make money. Right now CMGI is not giving any indications that it is ready to move, so we will drop it in favor of other stocks that are taking advantage of the nascent NASDAQ recovery. TIBX $82.13 (-6.93) We loved this play while it lasted (+$21), but now it's over. TIBX not only failed to gain ground on Friday while the rest of the NASDAQ gained roughly 90 points, it lost over $6 in the process. We can forgive a bit of profit taking, but it appears that TIBX may want to consolidate around $80 before taking off again. Descending weak volume with support at $80 confirms this. While there aren't many sellers around, there aren't many buyers either. Don't get us wrong. We still like TIBX, and it may yet see a sympathy move into CSCO's earnings and a nice bounce off $80. We just don't want to wait around for it to make up its mind. SFE $44.25 (+2.25) SFE made a nice run for it, at the opening bell on Friday hitting $46 in the first 90 minutes of the day. The lack of buyers or lack of interest in general is not the reason we are dropping SFE this weekend. They are scheduled to report earnings before the open on Wednesday. For those wanting to hang on for another day or two, SFE did pull back to an intraday support level near $43.50 late Friday. A bounce off that area, especially if it's supported by any new buyers could provide a last minute run into earnings. SFE had a bit of a rough week but did give us a couple of good entry points for a short-term trades. The long-term potential for this company appears to be excellent, but for now its time to close open positions and move on. PUTS BOBJ $93.88 (-5.00) BOBJ rewarded us right off the bat on Wednesday with a swift descent to $88.88 from an early morning high of $97. The next day traders were afforded plays amid intraday volatility from spikes peaking at $97.50 before BOBJ traded tightly around $93.50. This was encouraging, but on Friday we were looking for this technical play to at least offer us tradable spreads, if not a decisive plunge below the 30-dma line. Recall from the initial write-up on Tuesday, this level at the 30-dma ($93.49) was historically consequential. Instead we saw BOBJ trade in a narrow channel giving hint it may be finding contentment at the current level. This inclination towards complacency gives us reason to drop BOBJ and move on to greener pastures. STOCK SPLIT CANDIDATES *********************** Stocks we are playing that are on a Split Run RMBS - Rambus MEDI - Medimmune JNPR - Juniper Networks Current Split Candidates AMD - Advanced Micro Devices ADBE - Adobe Inc BRCM - Broadcom ABGX - Abgenix Inc AFFX - Affymetrix Inc SEPR - Sepracor STOCKS WITH UPCOMING SPLITS **************************** We don't list all splits available, only those we feel may have play possibilities. Symbol - Stock Splits/Date NT - Nortel 2:1 05-08-00 ex-date 05-09 CYSV - Cysive Inc 2:1 05-08-00 ex-date 05-09 ZOMX - Zomax Inc 2:1 05-08-00 ex-date 05-09 BALT - Baltimore Tech 5:1 05-10-00 ex-date 05-11 AXP - American Exprs 3:1 05-10-00 ex-date 05-11 TFS - Three Five Sys. 3:2 05-12-00 ex-date 05-15 SYK - Stryker Corp 2:1 05-12-00 ex-date 05-15 ALKS - Alkermes 2:1 05-12-00 ex-date 05-15 PWAV - Powerwave Tech 3:1 05-15-00 ex-date 05-16 AMK - Am Tech Ceramics 2:1 05-15-00 ex-date 05-16 SIVB - Silicon Valley 2:1 05-15-00 ex-date 05-16 CMOS - Credence Systems 2:1 05-17-00 ex-date 05-18 ACLNF- A.C.L.N. Ltd 5:4 05-18-00 ex-date 05-19 RI - Ruby Tuesday 2:1 05-19-00 ex-date 05-22 SNE - Sony Corp 2:1 05-19-00 ex-date 05-22 CXR - Cox Radio 3:1 05-19-00 ex-date 05-22 SBSI - Southside Banc. 2:1 05-19-00 ex-date 05-22 DG - Dollar General 5:4 05-22-00 ex-date 05-23 PAYX - Paychex 3:2 05-22-00 ex-date 05-23 PCCC - PC Connection 3:2 05-23-00 ex-date 05-24 EBAY - eBay Inc 2:1 05-24-00 ex-date 05-25 MSA - Mine Safety App. 3:1 05-24-00 ex-date 05-25 AEG - AEGON N.V. 2:1 05-30-00 ex-date 05-31 SCH - Charles Schwab 3:2 05-30-00 ex-date 05-31 IBI - Intimate Brands 2:1 05-30-00 ex-date 05-31 LTD - The Limited 2:1 05-30-00 ex-date 05-31 AVX - AVX Corp 2:1 06-01-00 ex-date 06-02 AES - AES Corp 2:1 06-01-00 ex-date 06-02 MOT - Motorola 3:1 06-01-00 ex-date 06-02 EMC - EMC Corp 2:1 06-02-00 ex-date 06-05 KPN - KPN Telecom 2:1 06-02-00 ex-date 06-05 MEDI - Medimmune 3:1 06-02-00 ex-date 06-05 NXTL - Nextel Comm 2:1 06-06-00 ex-date 06-07 FKL - Franklin Capital 3:2 06-07-00 ex-date 06-08 LMGA - Liberty Media Grp2:1 06-09-00 ex-date 06-12 CMB - Chase Manhattan 3:2 06-09-00 ex-date 06-12 ANEN - Anaren Micro 3:2 06-09-00 ex-date 06-12 AA - Alcoa 2:1 06-09-00 ex-date 06-12 RHI - Robert Halg Intl 2:1 06-12-00 ex-date 06-13 RMBS - Rambus 4:1 06-14-00 ex-date 06-15 JNPR - Juniper Networks 2:1 06-15-00 ex-date 06-16 NXLK - Nextlink 2:1 06-15-00 ex-date 06-16 MEAD - Meade Inst. 2:1 06-19-00 ex-date 06-20 EXDS - Exodus Comm 2:1 06-20-00 ex-date 06-21 AAPL - Apple Computer 2:1 06-20-00 ex-date 06-21 XETA - Xeta Corp 2:1 07-17-00 ex-date 07-18 POS - Catalina Mktg. 3:1 08-17-00 ex-date 08-18 For a complete list of all the coming splits check out the "split calendar" on the side of the online edition newsletter page. ******************** THE PLAYS OF THE DAY ******************** With all the great plays each week we can never decide on just one so take your pick. Call plays of the day: ********************** SCMR - Sycamore Networks $86.00 (+7.50) See details in sector list Chart = /charts/charts.asp?symbol=SCMR **** ADBE - Adobe Systems $119.69 (-1.25) See details in sector list Chart = /charts/charts.asp?symbol=ADBE Put play of the day: ******************** CTXS - Citrix Systems $43.38 (-17.69) See details in sector list Chart = /charts/charts.asp?symbol=CTXS ************* DEFINITIONS ************* SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. TP/P= True premium or Time premium RRR = Risk/Reward/Ratio ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume MTD = Move to double - amount stock must move to double option price in one week. ONE WEEK MOVE ONLY ! Numbers within ( ) are the amount of change for the week. Numbers within ( ) may be designated with PxW, like P3W, prior 3 weeks The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ********** CALL PLAYS ********** ******** HARDWARE ******** NTAP - Network Appliance Inc. $69.88 (-4.06)(+17.06) Network Appliance, a veteran in network file serving and caching, has been providing data access solutions since 1992, and is a member of both the S&P 500 and NASDAQ 100 index. Corporations and ISPs, including Lycos, Yahoo!, Citicorp Securities, Siemens, Lockheed, Cisco, Motorola, and Texas Instruments have deployed NetApp solutions. NetApp Internet caching solutions, NetCache appliances and file servers deliver fast, simple, reliable and cost-effective access to network-stored data and enable simultaneous shared file services for UNIX, Windows NT and the World Wide Web. All things considered, the results this week could have been worse. NTAP lost about 5.5% in the last five days, but did show pretty good resiliency after testing the $62 level on Wednesday. The lack of participation seems to have caused many investors to take a wait and see attitude towards NTAP and the broad markets. Whether they are waiting for the Fed or waiting for the volume to pick up, the fact is, the buyers are simply not ready to jump back in just yet. The positive point here is there aren't many sellers either. Another plus backing our play is that NTAP is scheduled to report earnings May 18th after the close. Although stocks making a strong run into earnings have been few and far between this go around, NTAP certainly could be one of the few. Remember this is a stock that lost over 67% of its market cap recently, and has only repaired a small portion the damage. So with investors on hold how do we approach this play? We are still looking at the $65 area to provide support with the next level seen at $62. Technically most studies point north and we would certainly view moves higher as a chance to buy calls. We would also be prepared to sell to soon, if a move up the chart is not accompanied by better volume. The lack of conviction has provided traders with some decent day-trading opportunities, but we will need to see more players in the game to establish a clear trend. We are not suggesting or promoting a day-trading approach to NTAP, but until the sentiment in the market changes, we must play the cards we are dealt. It was a rather slow week on the news front, however last Monday NTAP did introduce a new low end product, the NetCache C1100, a thin specialized server built around an Intel Chip. On Wednesday, they announced that Concentric Network Corporation(CNCX) a provider of Internet business solutions has reaffirmed NTAP as its strategic provider of data storage. Concentric has relied on Network Appliance as its vendor of choice for four years. ***May contracts expire in 2 weeks*** BUY CALL MAY-60 NUL-EL OI= 634 at $12.25 SL=9.25 BUY CALL MAY-65*NUL-EM OI= 791 at $ 8.63 SL=6.00 BUY CALL MAY-70 NUL-EN OI=1278 at $ 5.88 SL=4.00 BUY CALL MAY-75 NUL-EO OI=1156 at $ 3.63 SL=1.75 BUY CALL JUN-70 NUL-FN OI= 744 at $10.00 SL=7.00 BUY CALL JUN-75 NUL-FO OI= 748 at $ 7.88 SL=5.75 SELL PUT MAY-70 NUL-QN OI= 438 at $ 5.13 SL=7.25 (See risks of selling puts in play legend) Picked on Apr 30th at $73.94 PE = 393 Change since picked -4.06 52 week high=$124.00 Analysts Ratings 11-5-1-0-0 52 week low =$ 9.84 Last earnings 02/00 est= 0.11 actual= 0.11 Next earnings 05-18 est= 0.06 versus= 0.03 Average daily volume = 4.57 mln /charts/charts.asp?symbol=NTAP HIFN - hi/fn Inc. $43.13 (+9.19) Designing, developing and marketing a variety of products for networking and storage applications, HIFN has a resume full of technical jargon. The company's multi-protocol, packet- processor products perform the computation-intensive tasks of compression, encryption/compression and public key cryptography, providing its customers with high-performance, interoperable implementations of a wide variety of industry-standard networking and storage protocols. Simply put, HIFN's products allow network equipment vendors to add bandwidth enhancement and security capabilities to their products. After falling out of bed with the rest of the NASDAQ in early March, shares of HIFN were looking like they might find support near $40. That was before the company announced earnings though. Posting no profits vs. an estimate of $0.20 per share sent the bulls running for cover and the stock fell all the way to the high $20's before the carnage ended. Recovering for the past week and a half, the HIFN chart is showing the beginnings of a nice higher highs and higher lows pattern. Finally back above the 10-dma ($35.19), the stock has impressed us with the strength of the move through the $40 level. This could have been formidable resistance, but the intraday chart on Friday leads us to believe it may provide support going forward. Adding to the rosy picture is volume, which has been steadily increasing for the past 3 days as HIFN moves off of its most recent low. Friday actually saw over 600 K shares trade hands, and this was in the midst of extremely light volume in the broad markets. Given that the earnings estimates for the next quarter are right in line with those from last quarter, we think that the numbers may have been an aberration. At any rate, they are already factored into the stock price and investors are stepping forward to vote with their wallets. Look for new entries if the stock pulls back and bounces between $38-40, and keep your eye on the volume. If it continues to be strong, it is a good indication that the recovery will continue. HIFN continues to build alliances, the latest of which was announced last Monday. The company has announced interoperability between SSH Communications Security's IPSec (Internet Protocol Security) toolkits and HIFN's high-speed encryption processors. This will allow OEMs to achieve higher levels of performance and take their IPSec-based new products to market faster. ***May contracts expire in 2 weeks*** BUY CALL MAY-40*HXQ-EY OI=255 at $6.13 SL=4.00 BUY CALL MAY-45 HXQ-EZ OI=191 at $3.50 SL=1.75 BUY CALL MAY-50 HXQ-EJ OI=102 at $2.00 SL=1.00 BUY CALL JUN-45 HXQ-FZ OI= 49 at $7.00 SL=5.00 BUY CALL JUN-50 HXQ-FJ OI= 23 at $5.13 SL=3.00 Picked on May 7th at $43.13 P/E = 45 Change since picked +0.00 52-week high=$151.75 Analysts Ratings 0-2-3-0-0 52-week low =$ 28.00 Last earnings 04/00 est= 0.20 actual= 0.00 Next earnings 07-18 est= 0.21 versus= 0.35 Average Daily Volume = 496 K /charts/charts.asp?symbol=HIFN ************* SEMICONDUCTOR ************* AMD - Advanced Micro Devices $92.25 (+4.75)(+9.13)(+12.38) Advanced Micro Devices is a leading semiconductor manufacture. They ranked #2 in the microprocessor market, standing only behind Intel (INTC). Their integrated circuits are primarily used for computers, telecommunications equipment, and data and networking devices. The company has operations in the US, Germany, and throughout Asia. Over 50% of its sales are outside the US. The sky is the limit for AMD! It rocketed to new highs three times this week. And what a great entry point off key support at $85.88 on Wednesday. The following trading sessions gave way to AMD taking flight and shooting through resistance at $92. Apparently the traders didn't care that Josephtal & Co downgraded the stock from a Buy to a Hold on Thursday. By Friday, AMD rallied with the markets and set the latest 52-week record at $93. From a technical perspective, firmer support lies at $86 and $84, although a more short-term measurement is at the 5-dma ($89.53). Resistance is now at its all-time high, and then of course we face the psychological $100 level. And be aware of the inescapable consolidation that every stock experiences at some time when planning your strategy. Although the professionals and individual investors still appear to be very hot for this issue. Look for AMD to continue powering higher on sheer momentum as the Semiconductor Sector ($SOX) leads the market. Entries can be found by target shooting on dips based on your individual risk levels. When to comes to rivaling Intel in the PC microprocessor market, AMD is a serious contender. But its market share for servers and workstations is practically nonexistent. In an effort to change that, AMD teamed up with privately held, HotRail, to produce a chipset product that would allow AMD's chips to work in groups of four or more. Unfortunately, HotRail announced this week that it's changing its focus to the more lucrative networking and communication chips. As a result, AMD's long- range plans were abruptly put on hold. ***May contracts expire in 2 weeks*** BUY CALL MAY- 85 AMD-EQ OI=2676 at $10.38 SL=7.50 BUY CALL MAY- 90 AMD-ER OI=9423 at $ 7.38 SL=5.25 BUY CALL MAY- 95 AMD-ES*OI=1492 at $ 4.75 SL=2.75 BUY CALL JUN- 95 AMD-FS OI= 447 at $ 9.75 SL=6.75 BUY CALL JUN-100 AMD-FT OI= 978 at $ 7.75 SL=5.50 Picked on April 21st at $78.38 P/E = 65 Change since picked +13.87 52-week high=$93.00 Analysts Ratings 7-9-6-0-0 52-week low =$15.63 Last earnings 03/00 est= 0.46 actual= 1.15 Next earnings 07-14 est= 1.09 versus=-1.10 Average Daily Volume = 5.24 mln /charts/charts.asp?symbol=AMD TER - Teradyne Inc. $108.63 (-1.38) (+8.56) Teradyne is one of the world's top makers of automated test equipment for electronics and telecommunications. Teradyne systems are used by manufacturers to analyze the performance of semiconductors, circuit boards, and software, and by telecommunications companies to test subscriber lines and equipment. Teradyne also makes backplanes, assemblies that house circuit boards and connect their electrical impulses with other elements in a system. The company has operations in Ireland, Japan, and the US, and gets almost half of its sales from international business. The chip equipment stocks showed strong gains Friday as the SOX edged 1.6% higher. The chip stocks can thank Merrill Lynch for part of Friday's gains. The Wall Street bull reiterated its strong buy rating on Cypress Semi (CY). TER received an additional boost Friday stemming from traders' optimistic anticipation of several upcoming events. It's pretty much a forgone conclusion that AMAT will surpass Wall Street estimates when the chip equipment giant reports earnings next week. Ahead of the announcement, SG Cowen reiterated its strong buy rating on AMAT. Also, executives from TER are scheduled to present at the 28th Annual H&Q Summit next week. The conference is a tech mecca, where companies guide Wall Street on future prospects. The combination of AMAT's earnings report along with the tech conference may lead to exciting trading next week. With the unexpected positive response to the economic data Friday, TER easily cleared resistance at $105 and sailed higher into the weekend. The stock will have to take-out minor resistance at $110 before retesting its 52-week high reached early last week. You might look for a move above $110 for an entry point. If your looking to minimize risk, wait for a move above $115 on heavy volume before entering the play. TER will hold its Annual Shareholders Meeting on May 25th. Investors are expected to approve a proposal to increase the number of authorized shares from 250 mln to 1 bln. The last time TER split their shares was back in July of 1999 when the stock was trading at $74. ***May contracts expire in 2 weeks*** BUY CALL MAY-105 TER-EA OI= 738 at $10.13 SL=7.00 BUY CALL MAY-110*TER-EB OI= 562 at $ 7.13 SL=5.00 BUY CALL MAY-115 TER-EC OI=1216 at $ 5.38 SL=3.50 BUY CALL JUN-115 TER-FC OI= 46 at $11.63 SL=8.75 SELL PUT MAY- 95 TER-QS OI= 22 at $ 7.00 SL=10.00 (See risks of selling puts in play legend) Picked on Apr 25th at $103.38 P/E = 59 Change since picked +5.25 52-week high=$115.44 Analysts Ratings 9-9-0-0-0 52-week low =$ 21.81 Last earnings 03/00 est=0.51 actual=0.60 Next earnings 07-20 est=0.65 versus=0.20 Average Daily Volume = 1.97 mln /charts/charts.asp?symbol=TER BRCM - Broadcom, Inc. $177.81 (+5.44)(+19.88)(+30.25) Broadcom Corporation is a provider of highly integrated, silicon solutions that enable broadband digital transmission of voice, data and video content to and throughout the home and within the business enterprise. In other words, they make communications chips with integrated software. Broadcom's products enable the high-speed transmission of voice, data and video content over existing communications infrastructures, most of which were not originally intended for digital transmission. Broadcom designs, develops and supplies integrated circuits for some of the most significant broadband communications markets, including the markets for cable set-top boxes, cable modems, high-speed office networks, home networking, digital subscriber line, direct satellite broadcast and terrestrial digital broadcast. Last week's Hardware Heaven conference sponsored by Merrill Lynch brought BRCM good news. It should come as no surprise that Merrill is high on the stock. Here's how briefing.com characterized their statements: "bookings during April haven't slowed at all, and [Merrill] believes that [BRCM's] 15% sequential revenue growth forecast is easily achievable." It didn't hurt either that their CEO unveiled a new 2-way communications chip for set-top boxes, (which would presumably allow phone conversations as well as interactive TV), and a new 10-gigabit optical transceiver chip. Technically, BRCM finds support at about $165 on a historical basis. However, the 10-dma is providing intraday support, currently at $168.88. BRCM even closed above its 5-dma of $176.88 on Friday. But don't look for that to provide much support forward - Friday was a slow day for BRCM and the market, making it susceptible to big swings with little trade sizes. Not only that, but $180 is proving to be tough resistance to break through. The descending volume last week won't help BRCM anytime soon either. We really need to see volume take hold on a move over $180 in order to take a position. Otherwise, you may want to consider target shooting at $165 to $168, depending on your risk profile. Just be sure to look for the bounce and to confirm market direction before playing. While BRCM is a split candidate again, we may not see the announcement of such until the next earnings report in July. No news this week except the Merrill Lynch conference mentioned above. ***May contracts expire in 2 weeks*** BUY CALL MAY-170 RDU-EN OI=1010 at $16.13 SL=11.50 BUY CALL MAY-175*RDU-EO OI=1544 at $13.25 SL=10.00 BUY CALL MAY-180 RDU-EP OI=1034 at $10.50 SL= 7.75 BUY CALL JUN-175 RDU-FO OI= 36 at $24.25 SL=16.50 BUY CALL JUN-180 RDU-FP OI= 279 at $22.00 SL=14.50 SELL PUT MAY-165 RDU-QM OI= 620 at $ 5.25 SL=7.50 (See risks of selling puts in play legend) Picked on Apr 18th at $152.50 P/E = 395 Change since picked +25.31 52-week high=$253.00 Analysts Ratings 7-15-1-0-0 52-week low =$ 29.00 Last earnings 04/00 est= 0.16 actual= 0.17 surprise=6% Next earnings 07-18 est= 0.17 versus= 0.09 Average Daily Volume = 4.2 mln /charts/charts.asp?symbol=BRCM RMBS - Rambus Inc. $207.63 (-22.38)(+62.50)(+11.25) Rambus Inc. develops and licenses high bandwidth chip connection technologies to enhance the performance of computers, consumer electronics and communications products. Current Rambus-based computers supported by Intel chipsets include Dell, Compaq, Hewlett-Packard, and IBM PCs and workstations. Sony's PlayStation(r) video game system uses Rambus memory. Providers of Rambus-based integrated circuits include the world's leading DRAM, ASIC and PC controller manufacturers. Currently, eight of the world's top-10 semiconductor companies license Rambus technology. It is said that we are a product of our environment. The same could be said for stocks. That would seem to be the case for our play in RMBS. After the bounce late Wednesday afternoon from $185, RMBS has spent the better part of the past two sessions edging higher, but drifting for the most part in a narrow $10 range. Although the volume was better mid-week buying interest slowed to a crawl on Friday. Many traders appear to be taking a break from buying or selling, attempting to rest up from some of the recent volatility. Some analysts suggest the margin calls that hit traders last month as the primary reason for buyers shying away from the markets, while others point the finger at the Fed. Truth is, probably both scenario's warrant some merit. Friday, after a stutter step lower at the opening bell, RMBS did manage to bounce back up and trade between $205 and $213 for the rest of the day. Although the volume wasn't that bad on Friday, with 3.1 million shares traded, we are somewhat concerned that there wasn't better follow-through from the bounce mid-week. With a lack of conviction and the Fed cloud hanging over the markets, perhaps we should be grateful RMBS hasn't continued south. We don't have earnings to help move our play, but with the upcoming special board meeting scheduled for May 23rd, we could begin to see some excitement generated for the stock. Shareholders are being asked to approve an increase in the number of authorized shares, which if approved, will result in a 4-for-1 split of the company's stock. The technical picture has changed very little and bounces off the $200 or $185 level could still be considered an attractive entry point. If trading is choppy this week, be prepared to pull some profits off the table in profitable positions. There was little in the way of company specific news this week for Rambus. The buzz for those in the industry still seems to be centered around whether RMBS technology will be adopted as the industry standard. Morton Topfer, a director at Dell, spoke at an investor meeting this week sponsored by Merrill Lynch. Topfer said the company isn't having trouble getting chips and other components for its PC's. He also said Rambus's memory-chip technology won't become the standard until prices drop. ***May contracts expire in 2 weeks*** BUY CALL MAY-200 BYQ-ET OI= 620 at $24.00 SL=18.50 BUY CALL MAY-210*BYQ-EB OI= 386 at $19.00 SL=13.75 BUY CALL MAY-220 BYQ-ED OI= 584 at $15.00 SL=11.00 BUY CALL MAY-230 BYQ-EF OI=1083 at $11.50 SL= 8.50 BUY CALL JUN-200 BYQ-FT OI= 137 at $41.00 SL=29.75 SELL PUT MAY-190 BYQ-QR OI= 161 at $10.00 SL=13.25 (See risks of selling puts in play legend) Picked on Apr 23rd at $167.50 PE = N/A Change since picked +40.13 52 week high=$471.00 Analysts Ratings 1-1-2-0-0 52 week low =$ 51.50 Last earnings 04/00 est= 0.14 actual= 0.15 Next earnings 07-12 est= 0.16 versus= 0.08 Average daily volume = 3.56 mln /charts/charts.asp?symbol=RMBS ******** INTERNET ******** EPNY - E.piphany Inc. $89.38 (+23.31) E.piphany, Inc. is a provider of web-based software solutions that enable companies to get, keep and grow customer relationships. The E.piphany E.4 system is an integrated suite of software solutions that allow businesses to collect, analyze and act on customer data from existing software systems as well as third-party data providers. Business users throughout the company have the ability to continuously identify and differentiate customers, then customize and personalize products, services and interactions based on customers' wants and needs. E.piphany, Inc. is headquartered in San Mateo, California. We noted Thursday that this CRM (customer relationship management) software maker has moved up $21 since Monday's open while the rest of the NASDAQ market has shed 210 points. The sector is hot. Unfortunately, EPNY stopped dead in its tracks and gave up a small piece of ground ($1.63) on Friday while the rest of the market moved ahead. That's OK. Don't read too much into it as it happened on volume just 83% of the ADV. EPNY has been a clear winner in this sideways market, especially since hitting a recent bottom at $43 on April 17th, when it beat the Street's earnings estimate by 38%. Revenues were up over 61% sequentially and over 660% from last year. HWP, CSCO, and EK all use its products. Technically, EPNY had been really strong and held its 5-dma (slightly under on Friday, but close enough to count), currently $89.61, while other tech stocks got killed. While there is still relative strength, we expected a better performance on Friday. The good news is that an ascending wedge pattern has formed over the last four weeks indicating a possible breakout with upper resistance around $100. Support can be found on the severe low end at $45, then $65, then more recently at $80 (prior resistance), followed by intraday support at $85 and $87. EPNY is however extremely volatile and can have $20 price swings, even in the current flat market with low volumes. If you are not well-seasoned in this kind of environment, you may want to pass the trade up in favor of something more stabile. THE SPREADS ARE HUGE, GENERALLY $2-$3, which will kill you unless there is a "more huge" price move. That means the stock needs to move $5 or $6 just for you to break even from the spread on an ATM strike. Only swelling volume is going to make that possible. Again, experts only. For a more conservative play in the same sector (still volatile), check out BVSN. Still no news. The company web site hasn't even posted an article since April 17th earnings. Next earnings are in July. ***May contracts expire in 2 weeks*** BUY CALL MAY- 85 PEY-EQ OI= 31 at $11.88 SL= 8.75 BUY CALL MAY- 90 PEY-ER OI=128 at $ 9.25 SL= 6.50 BUY CALL MAY- 95*PEY-ES OI=154 at $ 7.25 SL= 5.00 BUY CALL JUN- 95 PEY-FS OI= 1 at $13.13 SL=10.00 Low OI! BUY CALL JUN-100 UEP-FU OI= 57 at $10.75 SL= 8.00 SELL PUT MAY- 70 PEY-QN OI= 11 at $ 1.00 SL= 2.00 Low OI! (See risks of selling puts in play legend) Picked on May 2nd at $ 90.94 P/E = N/A Change since picked -1.56 52-week high=$324.88 Analysts Ratings 3-4-0-0-0 52-week low =$ 38.00 Last earnings 04/00 est=-0.22 actual=-0.16 surprise=38% Next earnings 07-17 est=-0.16 versus= N/A Average Daily Volume = 585 K /charts/charts.asp?symbol=EPNY MERQ - Mercury Interactive Corp. $85.00 (-5.00)(+17.63)(P2W-14.19) 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. Well, MERQ certainly took off like a rocket Friday morning. Just when it appeared as though our play may go into orbit, it ran out of gas, as traders took their money and went home, exiting early for the weekend. In less than 90 minutes traders drove the price of MERQ shares to $88. For the final five hours of the day most of the action took place in a narrow range between $84.50 and $86.50. Just how slow was the trading Friday in MERQ? Volume for the day was about 75% of the norm with 1.2 million shares traded. Of the 1.2 million changing hands about half of that occurred in the first hour and a half of the session. What we're getting at is there does seem to be buyer interest in MERQ, but the empathy or fear in the broad market is keeping our current favorite from gaining much momentum. MERQ did drop about $1.50 in the final 15 minutes of trading on Friday, with a fair amount of sellers. However, it really appeared to be day-traders exiting positions going into the weekend. Our take on MERQ? After a test of $77.63 on Wednesday, the software company, is making higher highs, higher lows, and two consecutive higher closes, which is plus. The way the $80 area provided support on several occasions Thursday is good sign for our play. The 10-dma at $81.84 did its job of finding a few buyers on Friday as well. We definitely aren't out of the woods yet, as a move through this week's high at $94.50 with solid volume, may be necessary to confirm the strength of the new trend. Next week could continue to be a bit tricky. We would look to enter on further moves higher, but would be somewhat suspicious if the volume doesn't pick up. Intraday charts show support at $85, $83 and $80. Goldman Sachs was more friendly to MERQ, than others this week. Citing the company has the unique ability to offer a full range of products aimed at eBusiness application testing and performance monitoring, the brokerage firm added MERQ to its Recommended List, with a target price of $110. We would also keep in mind the possible split announcement later this month, as the annual stockholders meeting is scheduled for May 24th, with a request to increase the authorized shares to 240 mln. on the agenda. ***May contracts expire in 2 weeks*** BUY CALL MAY-75 RQB-EO OI=412 at $12.50 SL= 9.50 BUY CALL MAY-80*RQB-EP OI=459 at $ 9.25 SL= 6.50 BUY CALL MAY-85 RQB-EQ OI=215 at $ 6.13 SL= 4.00 BUY CALL MAY-90 RQB-ER OI=356 at $ 4.38 SL= 2.75 BUY CALL JUL-90 RQB-GR OI=376 at $12.63 SL= 9.50 SELL PUT MAY-85 RQB-QQ OI= 63 at $ 7.38 SL=10.00 (See risks of selling puts in play legend) Picked on Apr 16th at $58.75 PE = 195 Change since picked +26.25 52 week high=$134.50 Analysts Ratings 8-3-1-0-0 52 week low =$ 12.25 Last earnings 04/00 est= 0.11 actual= 0.10 Next earnings 07-13 est= 0.12 versus= 0.09 Average daily volume = 1.58 mln /charts/charts.asp?symbol=MERQ BVSN - Broadvision Inc. $49.63 (+5.69) Headquartered in Redwood City, California, BroadVision, Inc. is the self-proclaimed leader in personalized e-business applications. That means they are in the customer relationship management (CRM) software business. BroadVision's comprehensive suite of integrated applications is built for delivery via the Web and wireless devices. Companies using BroadVision's applications get to market quickly, launching innovative e- commerce, self-service and enterprise information sites. These sites enable personalized interactions and transactions with customers, partners, suppliers and employees. BroadVision One- To-One (TM) applications power business-to-consumer and business- to-business sites for many of the world's top companies in the financial services, telecommunications, electronics, manufacturing, retail and travel industries. BroadVision applications are available in more than 120 countries worldwide. Seeking a good play in the hot customer relations management (CRM) sector? On Tuesday, Goldman Sachs said that it has upgraded BroadVision Inc. to its U.S. Recommended for Purchase list from its Market Outperform rating. Not to be outdone, CS First Boston upgraded the issue to a Strong Buy from Buy with a price target of $70. According to briefing.com, recent implementation of tiered partner program (Jan'00) is driving enhanced revenue visibility for BVSN as Tier 1 partners are dedicating set minimums for license revenue in CY '00 (some in excess of $25 mln). CSFB believes the stage is set (with minor bumps in the road) for BVSN to emerge as one of the top guns in the e-commerce platform industry. Despite flagging volume for the overall market, BVSN's volume has remained at least 30% over the ADV for most of last week, telling us that there is substantial buying interest. You may have noted that BVSN has already made a nearly 100% gain off its low of $25 set in the mid-April selloff. Technically, MACD has turned up again, while the stochastic too has made an about face and headed north. Good support over the last week is $42.50, which had moved to $48 by the end of the week. The higher lows are an indication of a pending breakout. We love to see that since it is one of the strongest signals of investor interest. Careful, resistance is at $50. For the conservative, you may want to see a move over $50 backed by continued strong volume. Otherwise, consider target shooting at $45 or $48.50 depending on your risk profile. In the news, BVSN shares began trading in Belgium last week, which will give the stock more international visibility. It was also announced that idmarket.com (www.idmarket.com), the business-to-business marketplace for the packaging and product identification industries, has launched its electronic exchange using BroadVision, according to Bloomberg News. ***May contracts expire in 2 weeks*** BUY CALL MAY-45*BDV-EI OI=2568 at $6.50 SL=4.50 BUY CALL MAY-50 BZV-EJ OI=4983 at $3.75 SL=2.00 BUY CALL MAY-55 BZV-EK OI=2275 at $2.13 SL=1.00 BUY CALL JUN-50 BZV-FJ OI=1965 at $7.50 SL=5.25 BUY CALL JUN-55 BZV-FK OI= 744 at $6.00 SL=4.00 SELL PUT MAY-45 BDV-QI OI= 842 at $1.69 SL=3.50 (See risks of selling puts in play legend) Picked on May 2nd at $ 49.63 P/E = N/A Change since picked +0.00 52-week high=$93.25 Analysts Ratings 7-13-1-0-0 52-week low =$ 4.44 Last earnings 04/00 est= 0.02 actual= 0.04 surprise=100% Next earnings 07-26 est= 0.02 versus= 0.01 Average Daily Volume = 8.0 mln /charts/charts.asp?symbol=BVSN ********* SOFTWARE ********* ADBE - Adobe Systems $119.69 (-1.25)(+8.31)(+14.81)(-27.19) Adobe Systems is a leader in desktop publishing software, the company's Acrobat Reader is popping up all over the Internet as users clamor to display portable document format (PDF) documents on the Web. Three of Adobe's products, Photoshop, Illustrator, and Page Maker generate about 60% of its sales. The company also markets print technology to OEMs and has stakes in a string of technology firms whose products complement its own offerings. Adobe is hoping a restructuring effort and the introduction of its InDesign publishing package will spur sales and accelerate its product growth track record. We love ADBE, unlike that nasty e-mail virus. ADBE led the charge in the software sector Friday, gaining over 5%. Stocks such as VRTS, ORCL, and even Big Softee earned solid gains in end of week trading. After discounting the employment number Friday morning, traders decided to snap up quality techs stocks trading at favorable prices. With a forward-looking P/E of 50 and an earnings growth rate of 30%, ADBE seems more than favorable. With the massive amount of cash sitting in money managers' pockets, institutions are beginning to accumulate the tech leaders like ADBE. While the recent trading volume in ADBE isn't necessarily conducive of a typical accumulation phase, the stock's relative strength paints a different picture. In the three weeks we've played ADBE, we've pounded the table about how the stock has managed to remain in its ascending channel while other leading techs have stumbled. Last Wednesday, ADBE traced a higher low at $104, and quickly recovered $15 in the following two days. We're looking for ADBE to continue its ascent, and break-through overhead resistance. Watch for a bold move above $120 on strong volume for a possible entry point. ADBE announced late last week that they would be an official sponsor of the One Show Festival. The gathering is the most prestigious awards show for media professionals and students. The program will give ADBE an opportunity to showcase its Photoshop and Illustrator applications. ***May contracts expire in 2 weeks*** BUY CALL MAY-115*AXX-EC OI=2090 at $11.25 SL=8.25 BUY CALL MAY-120 AXX-ED OI= 548 at $ 8.75 SL=6.00 BUY CALL MAY-125 AXX-EE OI= 346 at $ 6.63 SL=4.50 BUY CALL JUN-125 AXX-FE OI= 100 at $13.00 SL=9.75 SELL PUT MAY-110 AXX-QB OI= 648 at $ 4.13 SL=6.00 (See risks of selling puts in play legend) Picked on Apr 11th at $119.50 P/E = 58 Change since picked +0.19 52-week high=$125.00 Analysts Ratings 4-7-3-0-0 52-week low =$ 27.50 Last earnings 02/00 est=0.43 actual=0.47 Next earnings 06-15 est=0.47 versus=0.35 Average Daily Volume = 2.41 mln /charts/charts.asp?symbol=ADBE ******* TELECOM ******* QCOM - Qualcomm Inc. $109.75 (+1.31) Ever heard of CDMA technology? QUALCOMM Incorporated is a leading developer and supplier of digital wireless communications products and services and is the innovator of CDMA, a technology that has become the world standard for the wireless communications industry. Just as Microsoft gets paid almost every time a PC is sold, QCOM gets paid the same way every time a Sprint PCS or GTE phone is sold in the U.S. The rest of the world adds more. China is likely to adopt the standard soon too, which will open up CDMA's potential to 1 bln people. What rumor? It's like the rumor that circulated among traders last Tuesday that NOK would make a buyout offer for QCOM never happened. In fact, the rumors currently appear to be false. Nonetheless, that didn't stop QCOM from moving up nearly 10% this week despite a NASDAQ market that came up short. No matter, briefing.com reports that Lehman Brothers reiterated their Buy rating and price target of $180 based on growing confidence in the near-term & longer-term outlook. Lehman cited strengthening momentum in the CDMA chipset business. Technically, $105 is providing excellent historical and intraday support. In fact, despite NASDAQ turmoil, QCOM stayed above $104.75 all week. Tapering volume though (just 48% of the ADV on Friday) is telling us that selling has run its course and that QCOM may consolidate here until after the FOMC meeting on May 16th. To us, that looks like a great point to target shoot. If you really want to get aggressive, try $100, but the chances of getting filled there are much slimmer. The worst case scenario is to aim at the 200-dma (currently $95.23), a technical level from which QCOM has ALWAYS bounced. Resistance? Plenty of room to run up to $120. QCOM will need a spark though to get the volume moving for the next leg up. Let volume be your guide. News is contained above. ***May contracts expire in 2 weeks*** BUY CALL MAY-105*AAF-EA OI=7323 at $ 9.25 SL=6.50 BUY CALL MAY-110 AAF-EB OI=9704 at $ 6.75 SL=4.75 BUY CALL MAY-115 AAF-EC OI=7609 at $ 4.75 SL=3.00 BUY CALL JUN-110 AAF-FB OI=1574 at $12.00 SL=9.00 BUY CALL JUN-115 AAF-FC OI=2217 at $ 9.75 SL=6.75 SELL PUT MAY-105 AAF-QA OI=5374 at $ 4 13 SL=2.50 (See risks of selling puts in play legend) Picked on May 2nd at $113.69 P/E =141 Change since picked -3.94 52-week high=$200.00 Analysts Ratings 8-6-4-0-0 52-week low =$ 21.50 Last earnings 04/00 est= 0.24 actual= 0.26 surprise=8% Next earnings 07-18 est= 0.27 versus= 0.19 Average Daily Volume = 16.4 mln /charts/charts.asp?symbol=QCOM KANA - Kana Communications $55.34 (+12.78)(+2.56) Kana Communications is a leading provider of comprehensive online customer communications solutions for marketing, sales and service. These mission critical applications support multiple channels of online contact including inbound and outbound e-mail, web based customer self-service, web forms, real-time messaging and voice over the Internet. The company offers a comprehensive suite of online customer communication products for managing the entire customer lifecycle. This sizzling infrastructure stock was graced with two upgrades this week. Goldman Sachs upgraded KANA from a Market Outperform to the Recommended List on Tuesday which drove the share price upwards 6.5%. Then on Thursday, Chase H&Q upped their rating to a Strong Buy from Buy which again gave the stock a nice boost. Despite a set-back on Wednesday and others in the sector like EXDS, ISLD and AKAM consolidating, KANA continues to inch higher and higher. Another bullish sign is that the stock's pattern of higher-lows continues to demonstrate its recovery potential. Looking at the stock's technicals, short-term support is at $48 and $50 in-line with the 5-dma ($49.06). Solid bounces off this level in provide great entry points. The breakout above $55 on almost triple the volume Friday validated this play's momentum is intact. This week Kana Communications announced it's providing Firstdoor.com, an emerging human resources and benefits center, with the technology needed to develop a B2B online source. ***May contracts expire in 2 weeks*** BUY CALL MAY-50*URW-EJ OI=731 at $7.50 SL=5.25 BUY CALL MAY-55 URW-EK OI=234 at $5.25 SL=3.25 BUY CALL MAY-60 URW-EL OI=281 at $3.38 SL=1.75 BUY CALL JUN-55 URW-FK OI=122 at $9.50 SL=6.50 BUY CALL JUN-60 URW-FL OI= 97 at $7.38 SL=5.00 BUY CALL JUN-65 URW-FM OI=183 at $6.00 SL=4.00 Picked on April 30th at $42.56 P/E = N/A Change since picked +12.78 52-week high=$175.50 Analysts Ratings 5-2-0-0-0 52-week low =$ 22.78 Last earnings 03/00 est=-0.23 actual=-0.19 Next earnings 07-26 est=-0.23 versus= N/A Average Daily Volume = 1.09 mln /charts/charts.asp?symbol=KANA ********************************* CALLS - CONTINUED IN SECTION FOUR ********************************* ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************************* SEE DISCLAIMER IN SECTION ONE
The Option Investor Newsletter 5-07-2000 Sunday 4 of 5 ***************** CALLS - CONTINUED ***************** ******* BIOTECH ******* AFFX - Affymetrix Inc. $156.06 (+21.00) AFFX has established itself as a worldwide leader in the field of DNA chip technology. The Company has developed and intends to establish its GeneChip system as the platform of choice for acquiring, analyzing and managing complex genetic information in order to improve the diagnosis, monitoring and treatment of disease. The Company's GeneChip system consists of disposable DNA probe arrays containing gene sequences on a chip, certain reagents for use with probe arrays, a scanner and other instruments to process the probe arrays, and software to analyze and manage genetic information from the probe arrays. The company sells its products to Drug and Biotech companies involved in gene research. The free-fall in the Biotech sector, which began in early March finally reached bottom in mid-April, and stocks like AFFX are leading the recovery. Providing the products and information needed by companies involved in genetic research, AFFX is well positioned to profit from the growth in the sector, much like companies like CSCO and EMC are profiting from the growth of the Internet. The past 3 weeks have seen a nice recovery as shares of the company have been posting higher highs and higher lows. The light volume is still an area of concern, but is likely due to the buyers strike in the broad markets. With AFFX still trading more than 50% off its highs of 2 months ago, there is plenty of upside potential. The stock has moved solidly through resistance in the low $130's (which should now provide solid support) and is now above the 200-dma (currently $140.88). With the gains on Friday, AFFX has now broken through resistance at $152, and if buyers start showing up, the gains could be impressive. The next level of resistance is near $158 and pushing through this level would be a good trigger for entering on strength. With the current unsettled state of the broad markets, we could see a pullback next week. A bounce near the 200-dma would make for an attractive entry point as well. GeneLogic Inc., a leading provider of genomic information, announced last Monday that they will exercise an option in their GeneChip agreement with AFFX to include access to custom GeneChip probe arrays. GeneLogic will provide proprietary information from its internal sequence database to AFFX so that the company can design and manufacture a series of custom arrays. These custom arrays will allow AFFX to expand their current 60,000 human gene set, which consists of current sequences emerging from the Human Genome Project. ***May contracts expire in 2 weeks*** BUY CALL MAY-150*FIQ-EZ OI=938 at $17.63 SL=12.75 BUY CALL MAY-160 FUE-ES OI=156 at $13.00 SL= 9.75 BUY CALL MAY-170 FUE-ET OI=212 at $ 9.63 SL= 6.75 BUY CALL JUN-150 FIQ-FZ OI= 44 at $29.50 SL=22.00 SELL PUT MAY-135 FIQ-QG OI= 15 at $ 4.88 SL= 7.00 (See risks of selling puts in play legend) Picked on May 4th at $150.09 P/E = N/A Change since picked +5.97 52-week high=$327.00 Analysts Ratings 2-6-2-0-0 52-week low =$ 32.50 Last earnings 04/00 est=-0.26 actual=-0.14 Next earnings 07-20 est=-0.12 versus=-0.32 Average Daily Volume = 1.08 mln /charts/charts.asp?symbol=AFFX SEPR - Sepracor Inc. $103.25 (+11.25) Sepracor develops and commercializes new, patented forms of existing pharmaceuticals by purging them of nonessential molecules. The company's products can reduce side effects, provide new uses, and improve safety, performance, and dosage. Sepracor focuses its efforts on gastroenterology, neurology, psychiatry, respiratory care, and urology. The company is also developing its own new drugs to treat infectious diseases and conditions of the central nervous system. Feeling ill from the recent ups and downs in the market? Perhaps a dose of SEPR is just what the market ordered. SEPR improves existing, widely prescribed drugs, increasing efficacy and reducing side effects. SEPR works with the biggest names in the industry such as Schering-Plough, Lilly, and Johnson & Johnson. SEPR has been instrumental in improving some of the most popular medications on the market right now. Allegra, Claritin, and Prozac are all beneficiaries of SEPR's technology. SEPR is also developing and marketing its own line of drugs through an internal development program. The program is expected to add to SEPR's earnings stream, taking the company to profitability. Since falling from its high of $126 in early March, SEPR bounced and regained nearly 75% of its lost value. We're looking for the renewed momentum to carry SEPR higher, especially since the stock just crossed the psychologically important $100 level. SEPR edged above resistance of $103 on Friday. From here, the stock won't face heavy congestion until $114. Watch for a bounce off support at $100 or wait for a strong move above current levels as a confirmation that momentum is alive and well for SEPR. A rally on above-average volume would provide an additional verifier. Deutsche Bank Alex Brown will hold their Healthcare 2000 Conference next week. The gathering is the premier event for healthcare companies to present to Wall Street. SEPR will be a headline presenter at this year's conference. Positive guidance from the company could lead to analyst upgrades. ***May contracts expire in 2 weeks*** BUY CALL MAY-100 ERU-ET OI=418 at $ 9.00 SL=6.25 BUY CALL MAY-105*ERU-EA OI=375 at $ 7.00 SL=5.00 BUY CALL MAY-110 ERU-EB OI=149 at $ 5.00 SL=3.00 BUY CALL JUN-105 ERU-FA OI= 34 at $13.13 SL=9.75 SELL PUT MAY- 95 ERU-QS OI= 13 at $ 3.88 SL=6.00 (See risks of selling puts in play legend) Picked on May 7th at $103.25 P/E = N/A Change since picked 0.00 52-week high=$126.81 Analysts Ratings 5-4-2-0-0 52-week low =$ 27.50 Last earnings 03/00 est=-0.96 actual=-0.76 Next earnings 07-24 est=-0.55 versus=-0.56 Average Daily Volume = 1.09 mln /charts/charts.asp?symbol=SEPR MEDI - MedImmune Inc. $170.25 (+10.31) MedImmune is a biotech company focused on developing and marketing products that address medical needs in areas such as infectious disease, autoimmune disorders, cancer, and transplantation medicine. The company has six products on the market and a diverse product development portfolio. The products currently on the market include Synagis, CytoGam, RespiGam, Ethyol, Neutrexin, and Hexalen. Faring better than the rest of the Biotech sector during the March panic, MEDI looks like it is really on the road to recovery. After falling all the way to the 200-dma (near $132), the stock halted its decline and after posting strong earnings on April 19th, began to recover. On the back of a 46% year-over- year revenue increase, the company's net profits jumped by 126% in the same period. Combining sales far in excess of projections with increasing gross margins, the company looks to be in a healthy growth phase and this always appeals to investors. After the last bounce at the 200-dma a little over a week ago, the stock has moved strongly, adding $39 and slicing through every moving average, including the 50-dma ($169.25). The strong move last week pushed MEDI through the resistance zone between $160-165, and this area should provide support going forward. If the buying interest continues next week, the next level of resistance will be near $180, followed by $190. The stock has moved over $20 in the past 2 days, and volume is still on the light side, so a pullback to test support would not be out of the question. Consider entries if the bounce is confirmed by good buying volume, and stand aside if $160 fails to hold as support. As an added incentive on the play, MEDI announced in February a 3-for-1 stock split payable on May 18th. The split is contingent on the shareholder approval, which should be forthcoming at the Annual Shareholder Meeting on May 18th. ***May contracts expire in 2 weeks*** BUY CALL MAY-170 MEU-EN OI= 304 at $12.00 SL= 9.00 BUY CALL MAY-175 MEU-EO OI= 388 at $ 9.63 SL= 6.75 BUY CALL MAY-180*MEU-EP OI=1137 at $ 7.50 SL= 5.25 BUY CALL JUN-175 MEU-FO OI= 263 at $19.00 SL=13.75 BUY CALL JUN-180 MEU-FP OI= 143 at $17.50 SL=12.75 SELL PUT MAY-150 MEQ-QJ OI= 339 at $ 3.13 SL= 5.00 (See risks of selling puts in play legend) Picked on May 7th at $170.25 P/E = 119 Change since picked +0.00 52-week high=$228.75 Analysts Ratings 12-1-0-0-0 52-week low =$ 53.13 Last earnings 04/00 est= 0.75 actual= 0.80 Next earnings 07-19 est=-0.07 versus=-0.19 Average Daily Volume = 1.61 mln /charts/charts.asp?symbol=MEDI ABGX - Abgenix Inc $112.88 (+23.31) Abgenix is a biopharmaceutical company that develops antibody therapeutics for transplant-related conditions, inflammatory and autoimmune disorders, cancer, and cardiovascular disease. It uses its own technology, called XenoMouse (use of genetically engineered mice), which it bought from Japan Tobacco. The parent company, Cell Genesys, spun off Abgenix in 1996 and retains nearly a 15% stake. The Biotech slump, which began in early March, left ABGX struggling to keep its share price above $60 by the time all was said done in mid-April. Despite a bright spot in trading where ABGX pinnacled at $109.75 on April 7th, which paralleled the company's 2:1 split, the stock quickly returned to its bottom. Over the past few weeks ABGX developed a pattern of higher-lows and made valiant attempts to break out of its trading range, but continually hit a wall of resistance at $100. However, the building momentum of the Biotech sector changed all that this week. On Thursday, ABGX moved through $100 on moderate volume and confidently held the higher share prices. We need to see ABGX hold this level going forward with support establishing itself at $100-$105, or better. It'd be nice to see an increase in trading volume too, but considering the light volume in the broad markets this would be icing on the cake. Entries into this momentum play can be considered on intraday dips or during a reasonable pullback to support. A more cautious approach would be to wait for ABGX to confirm its upward trend over the next few sessions. On Tuesday, Abgenix announced it signed an agreement with Genzyme Transgenics Corporation (GZTC). For an undisclosed amount, GZTC will produce ABGX's fully human monoclonal antibody, ABX-IL8, through the development of transgenic goats that express the antibody in their milk. ABX-IL8 is currently in Phase II clinical trials for psoriasis. This is the kind of news that can drive a stock higher over the short-term. Also this week, Abgenix held its Annual Shareholders' Meeting. The BoD asked for an increase in the number of authorized shares from 50 mln to 100 mln. Perhaps there'll be another stock split this year! ***May contracts expire in 2 weeks*** Note: Currently there are no June contracts above a $100 strike BUY CALL MAY-105 AXY-EA OI= 43 at $14.38 SL=10.50 BUY CALL MAY-110*AXY-EB OI=107 at $11.00 SL=11.00 BUY CALL MAY-115 AXY-EC OI= 16 at $ 8.75 SL= 6.00 BUY CALL MAY-120 AXY-ED OI= 27 at $ 6.75 SL= 4.50 BUY CALL JUN- 95 AZG-FS OI= 0 at $21.88 SL=17.00 BUY CALL JUN-100 AXY-FT OI= 3 at $19.50 SL=14.00 Picked on May 7th at $112.88 P/E = N/A Change since picked +0.00 52-week high=$206.50 Analysts Ratings 2-0-0-0-0 52-week low =$ 6.56 Last earnings 03/00 est=-0.11 actual=-0.09 Next earnings 07-27 est=-0.09 versus=-0.12 Average Daily Volume = 763 K /charts/charts.asp?symbol=ABGX ********** NETWORKING ********** EMLX - Emulex Corporation $62.50 (+17.13) Emulex designs three types of network connectivity products: network access servers, printer servers, and high-speed fibre channel products. Its LightPulse fibre channel adapters and hubs provide high-performance interfaces for computer networks. EMLX's network access servers enable remote access to WANs, and its printer servers connect directly to LANs, enhancing network performance. EMLX sells its products mainly to equipment manufacturers and distributors. IBM and Compaq account for 19% and 14% of sales, respectively. Accomplished author and successful trader, Jake Bernstein, once said, "Of all the systems I've researched, traded with, and developed, my favorite ones are those which use price gaps as a methodology for entering trades." Bernstein went on to explain that when a stock gaps down, then rebounds and begins to fill its gap, it presents an ideal time to go long. After opening sharply lower April 14th, EMLX has rebounded smartly in the past three weeks, and now trades at a pivotal point. Now, our play doesn't hinge solely upon the gap, EMLX has the highest EPS ranking in its sector and a very respectable relative strength ranking to boot. Also, EMLX rebounded on healthy volume while trading activity in the overall market has been bleak. Focusing on volume, the light trading Friday reveals why EMLX struggled during the tech rally. It appears profit takers locked in their recent gains ahead of the weekend. The most obvious entry point would be a move above $66 on heavy volume. If you can handle more risk, you might look for a bounce from current levels. Pick your entry point carefully, if profit takers continue their selling ways, EMLX won't find major support until the $55 range. EMLX is scheduled to present at two upcoming technology events. Next week EMLX will attend the NetWorld+Interop conference in Las Vegas. Two weeks later, EMLX will appear at the Applied Computing Conference in Santa Clara, California. ***May contracts expire in 2 weeks*** BUY CALL MAY-60*UMQ-EL OI=834 at $7.00 SL=5.00 BUY CALL MAY-65 UMQ-EM OI=444 at $5.00 SL=3.00 BUY CALL MAY-70 UMQ-EN OI=352 at $3.25 SL=1.75 BUY CALL JUN-70 UMQ-FN OI= 74 at $9.00 SL=6.25 Picked on May 4th at $62.63 P/E = 82 Change since picked -0.13 52-week high=$225.50 Analysts Ratings 2-4-1-0-0 52-week low =$ 11.13 Last earnings 03/00 est=0.18 actual=0.20 Next earnings 08-07 est=0.20 versus=0.10 Average Daily Volume = 2.69 mln /charts/charts.asp?symbol=EMLX SCMR - Sycamore Networks $86.00 (+7.50)(+13.94)(+13.56)(-64.50) A growing thorn in Cisco's side (but still small by comparison), Sycamore Networks develops and markets intelligent optical networking products that transport voice and data traffic over wavelengths of light. The Company combines significant experience in data networking with expertise in optics to develop intelligent optical networking solutions for network service providers. Sycamore's products are based on a common software foundation, enabling concentration on the delivery of services and end-to-end optical networking. Sycamore's products and product plans include optical transport, access and switching systems and end-to-end optical network management solutions. SCMR experienced a breakout this week over previous resistance of $78, while re-testing an important support at $73 in the process. This came on the previous Friday's heels of news that a J.P. Morgan Securities Inc. analyst said customer spending remains on target and the stock is undervalued. Whoa, undervalued? Perhaps since SCMR's is often referred to as "the next CSCO" in networking circles, and its price has been cut by 60% from its $200 high in late March. SCMR now appears ready to move up another level and CSCO's earnings on May 9th could be the catalyst. Optical networking is hot, and nowhere is there better evidence than in JDSU, GLW, and NT's earnings releases in previous weeks. After CSCO, SCMR reports earnings on May 18th, as does CIEN, which could give SCMR an added sympathy boost. Technically, $75 remains good support for aggressive target shooting, while $90 remains overhead resistance. Intraday, the 10-dma currently at $75.05 provides an added measure of safety. In fact, Friday CSMR closed above its 5-dma of $82.74, which may also provide mild support going forward if the market cooperates. Want to play it a little bit safer? Closing level support (former resistance too) is $78 and could make the best target (in our opinion) at which to shoot. Pick one according to your level of risk tolerance. Just make sure you see a bounce no matter where you get in. News? Pretty thin this week. However, CS First Boston did reiterate a Buy rating, but mentioned no price target. ***May contracts expire in 2 weeks*** BUY CALL MAY-80*SMZ-EP OI=605 at $10.50 SL= 7.50 BUY CALL MAY-85 QSM-EQ OI=318 at $ 8.00 SL= 5.75 BUY CALL MAY-90 QSM-ER OI=897 at $ 6.13 SL= 4.00 BUY CALL JUN-85 QSM-FQ OI=215 at $14.38 SL=10.75 BUY CALL JUN-90 QSM-FR OI=615 at $12.38 SL= 9.25 SELL PUT MAY-70 SMZ-QN OI=225 at $ 1.69 SL= 3.50 (See risks of selling puts in play legend) Picked on Apr 16th at $51.00 P/E = N/A Change since picked +35.00 52-week high=$199.50 Analysts Ratings 5-3-0-0-0 52-week low =$ 48.94 Last earnings 02/00 est= 0.00 actual= 0.01 Next earnings 05-18 est= 0.01 versus= N/A Average Daily Volume = 2.9 mln /charts/charts.asp?symbol=SCMR JNPR - Juniper Networks Inc $193.38 (-19.31)(+26.56) Juniper Networks develops and provides next-generation Internet infrastructure systems that are designed to meet the scalability, performance, density, and compatibility requirements of IP networking systems. The company's M40 and M20 Internet backbone router use JUNOS network traffic management software, ASICs. Its clients include some of the world's leading service providers such as Ericsson and MCIWorldcom. JNPR gave us a thrilling roller coaster ride this week! We saw a perilous pullback to the depths of old support at $180. The question to sell or to buy more was in our minds. As we contemplated our strategy and closely watched for JNPR to snap back, two things happened. First, the broad markets rallied and then good news hit the press on Friday. Shareholders approved the increase in authorized shares from 200 mln to 1 bln to effect the 2:1 stock split announced on April 13th. The stock is now expected to go ex-dividend next month on June 16th. JNPR popped $10.38, or 5.7% in Friday's trading. However, the stock is below the converging 5 and 10 DMAs at $197.63 and $197.24, respectively. A move through these technicals and a breakout above previous resistance at $200 would give us better confirmation. The good news about the upcoming split should generate excitement in the near-term and give JNPR's momentum a shot of adrenaline. But be aware that the Fed meeting is quickly approaching and interest rate fears are imminent. In the news, Juniper announced it's setting up a $23 mln charitable fund to benefit education, emergency relief, and other deserving causes through employee stock donations and the company's own holdings. ***May contracts expire in 2 weeks*** BUY CALL MAY-190 JUX-ER OI= 197 at $18.63 SL=13.50 BUY CALL MAY-195 JUX-ES OI= 560 at $16.38 SL=11.75 BUY CALL MAY-200*JUY-ET OI=1060 at $14.00 SL=10.50 BUY CALL MAY-210 JUY-EB OI= 824 at $10.13 SL= 7.00 BUY CALL JUN-200 JUY-FT OI= 313 at $24.13 SL=18.75 BUY CALL JUN-210 JUY-FB OI= 65 at $20.38 SL=14.75 Picked on April 27th at $208.94 P/E = N/A Change since picked -15.56 52-week high=$312.94 Analysts Ratings 10-4-0-0-0 52-week low =$ 30.04 Last earnings 12/99 est= 0.03 actual= 0.06 Next earnings 07-13 est= 0.06 versus=-0.03 Average Daily Volume = 3.37 mln /charts/charts.asp?symbol=JNPR ***** LEAPS ***** By Mark Phillips Contact Support Is it for real this time? I would like to believe that we are ready for a real recovery in the markets, but the low volume continues to make me nervous. The buyer's strike is keeping volume at levels we haven't seen since late last year, and the result is that every move up is regarded with suspicion. Many investors got badly burned in the past 2 months and they are likely sitting out, crying about their losses and waiting for their wounds to heal. The good news is that the current market environment is acting to bring the volatility back down to earth, hopefully meaning we won't see those wild swings in price again in the near future. We got another spike in the VIX this past week, as it moved as high as 36.38 when the ECI report came out on Thursday. Fortunately, Friday saw a bit of relief, and the VIX dropped to close the week at 30.42, right near the upper end of the "normal" range we have become accustomed to. Looking at the charts of many of our plays such as CSCO, QCOM, JDSU, and EMC, it looks like the recovery may be for real. The lows are moving progressively higher, as there are fewer and fewer sellers at these levels. A market like this can be a boon to LEAPS investors as the premiums do not see-saw as much as short term options. This gives us the ability to find the entry points we want, so don't get over-anxious. Pick your plays and your entry points and wait for them to come to you. Current Plays SYMBOL SINCE LEAPS SYMBOL PICKED CURRENT RETURN EMC 11/07/99 JAN-2001 $ 80 ZOH-AP $15.38 $66.13 329.97% JAN-2002 $ 90 WUE-AR $19.00 $68.50 260.53% IBM 11/07/99 JAN-2001 $100 ZIB-AT $13.63 $21.38 56.86% JAN-2002 $110 WIB-AB $16.50 $27.00 63.64% CSCO 11/14/99 JAN-2001 $ 40 ZCY-AH $ 9.56 $32.50 239.96% JAN-2002 $ 45 WIV-AI $11.00 $34.63 214.82% GE 11/21/99 JAN-2001 $150 ZGR-AU $16.25 $26.75 64.62% JAN-2002 $150 WGE-AU $25.50 $39.13 53.45% NT 11/28/99 JAN-2001 $ 75 ZOO-AO $22.25 $45.25 103.37% JAN-2002 $ 75 WNT-AO $30.25 $57.00 88.43% VOD 12/05/99 JAN-2001 $ 50 ZAT-AJ $10.75 $ 6.75 -37.21% JAN-2002 $ 50 WHV-AJ $15.00 $11.00 -28.57% TXN 12/12/99 JAN-2001 $110 ZTN-AB $22.25 $58.13 161.26% JAN-2002 $120 WGZ-AD $28.50 $69.75 144.74% NXTL 12/19/99 JAN-2001 $ 90 ZFU-AR $23.50 $40.38 71.83% JAN-2002 $100 WFU-AT $27.25 $45.38 66.53% SUNW 12/19/99 JAN-2001 $ 80 ZJX-AP $17.63 $25.25 43.22% JAN-2002 $ 90 WJX-AR $22.00 $32.25 46.59% CY 01/16/00 JAN-2001 $ 40 ZSY-AH $ 9.13 $25.13 175.25% JAN-2002 $ 40 WSY-AH $12.63 $30.88 144.50% ERICY 01/30/00 JAN-2001 $ 65 ZYD-AM $19.75 $32.00 62.03% JAN-2002 $ 65 WRY-AM $27.00 $41.13 52.33% NSM 02/27/00 JAN-2001 $ 70 ZUN-AN $18.50 $14.00 -24.32% JAN-2002 $ 70 WUN-AN $24.25 $22.75 - 6.19% AOL 03/12/00 JAN-2001 $ 60 ZKS-AL $14.00 $10.50 -25.00% JAN-2002 $ 65 WAN-AM $18.63 $16.00 -14.12% AXP 03/12/00 JAN-2001 $130 ZXP-AF $21.75 $31.25 43.68% JAN-2002 $140 WXP-AH $28.00 $40.75 45.54% WM 03/19/00 JAN-2001 $ 25 ZWI-AE $ 5.00 $ 4.38 -12.40% JAN-2002 $ 30 WWI-AF $ 5.38 $ 4.75 -11.71% QCOM 03/26/00 JAN-2001 $150 YQO-AJ $39.25 $16.75 -57.32% JAN-2002 $160 XQO-AL $52.88 $27.88 -47.28% AMD 04/16/00 JAN-2001 $ 70 ZVV-AN $17.50 $35.88 105.03% JAN-2002 $ 70 WVV-AN $26.00 $45.63 75.50% CMGI 04/16/00 JAN-2001 $ 50 ZB -AJ $21.50 $27.25 26.74% JAN-2002 $ 55 WCK-AK $27.75 $33.88 22.09% JDSU 04/16/00 JAN-2001 $ 80 XJU-AP $27.50 $34.75 26.36% JAN-2002 $ 80 YJU-AP $39.63 $48.63 22.71% VSTR 04/16/00 JAN-2001 $ 90 ZTB-AR $23.88 $47.50 98.91% JAN-2002 $ 90 WWP-AR $35.00 $56.38 61.09% YHOO 4/30/00 JAN-2001 $140 ZYM-AH $32.13 $28.25 -12.07% JAN-2002 $140 WYZ-AH $46.38 $43.63 - 5.93% To review the play description on any of our current plays, go to the LEAPS section for the date the play was added. Option Selection: Notice that many of our LEAP plays have moved considerably since initially being picked. The listed options may therefore be deep in the money and very expensive. When entering a new position, look to buy LEAPS according to your suitability level, but note that we typically initiate strikes that are slightly out of the money from the stock's current price. Leap of the Week NXTL - Nextel Communications $119.75 Wireless is heating up again and NXTL looks poised to reap the rewards. After falling from its lofty heights with the rest of the tech sector for most of the past 6 weeks, NXTL found solid support at the 200-dma (currently at $98.31), and looks like it may be ready to pick up the pace. Helped along by improving sentiment in the Wireless sector, and the well received AT&T Wireless IPO, NXTL is doing some of the work itself. Reporting earnings at the end of April that just barely beat the estimates is not necessarily cause for celebration, especially when still showing a loss. But it is a good thing when the loss is only half of what was reported in the year-ago period. NXTL is currently sitting just below its 100-dma ($121.25), and this level may present some resistance going forward. Above that, $125 and $130 are waiting to give our play a hard time. Target shooting intraday dips may give your best entry, especially if any market weakness forces a test of support at either $116 or $112. BUY LEAP JAN-2001 $120.00 ZFG-AD at $30.50 BUY LEAP JAN-2002 $130.00 YFG-AF at $39.88 New Plays None Drops None ***** Who Wants To Get Paid to Buy LEAPS? By Mark Phillips In a bull market like we have seen over the past few years, it seemed like you could just buy Call options and watch your account grow month after month. In case you haven't noticed, the market has changed significantly and if you are still playing by the old rules, it is unlikely that you will be playing for very long. Money can still be made in this market, but it requires a change of strategy. As has been written many times in recent issues of the newsletter, this is not the type of market to learn how to trade options. It will be frustrating and expensive. Trading short-term options in this market is challenging for experienced traders and downright dangerous for those just learning their first few option strategies. A safer way to profitably trade options in a turbulent market like we have now is to extend the time horizon from short-term to long-term. Buying more time costs more up front, but allows you more time to be right. Designed for option traders wanting a longer time frame, LEAPS provide the ability to take advantage of the great entry points provided by this turbulent market, while avoiding the rapid time decay of short term options. In my last article I covered some of the details of how to handle money management on LEAPS, but deliberately left the issue of Covered Calls for a separate article. The term "Covered Call" normally refers to writing calls against a long stock position, but since a LEAP can be used as a substitute for the stock, the term "Covered Call" is still appropriate. The big difference between writing Covered Calls against stock vs. LEAPS is that with LEAPS you do not want to have the short-term option exercised. In other words, you don't want to get called out of the LEAP you just bought. This would result in having to liquidate your long LEAP position, and you would throw away all the extra time value acquired by purchasing the LEAP. There are several different Covered Calls approaches that can be employed, but the one we will cover here (and my personal favorite) involves writing front month calls against the LEAP with the goal of having them expire worthless. The first part of the strategy involves purchasing the LEAP at a good entry point (sounds easy, huh?). Although LEAPS give you the ability to profit without having the perfect entry point, exercising the discipline necessary to achieve a good entry point will obviously improve the profitability of the position. Since we have covered entry points on LEAPS before, we don't want to spend a lot of time on them. Simply put, we want to purchase the LEAP when the stock bounces from a major support level. Once the LEAP has been purchased, we need to decide if we will employ a buy-and-hold approach or if we want to more actively manage the position by writing covered calls. Covered Calls on LEAPS is the type of strategy that needs to be legged into - specifically, the front month call is sold against the LEAP when the underlying stock moves up to resistance and rolls over. Since you want the call that you sell to expire worthless, you want to sell a strike above the resistance level that you think will hold. The best way to describe the dynamics of this strategy is by example; so let me describe one of my recent trades. I have been watching QCOM for quite some time and when the turmoil in the markets pushed the price below $100, followed by a strong bounce in the low $90's, I pulled the trigger and purchased the JAN 2001 110 LEAP for $21.25. This completed the first half of the position and I began watching for the stock to move up to a definable resistance level. Although $110 looked like it might provide what I was looking for, I wasn't quite convinced as $120 looked like stronger resistance. Exercising a little extra patience ended up being rewarding as the rumor-motivated spike in price on Tuesday afternoon gave me the opportunity I wanted. As the move up lost momentum, I sold the May 125 Call for $4.38. This completes the position and in a more stable market, all I would have to do is wait for the sold option to expire worthless and then start looking for an opportunity to sell the June call against my LEAP. However, with the dynamics of this market I have 2 other possibilities to consider. First and foremost is risk management - if the stock turns higher and trades through my defined resistance level ($120), I will cover the short call by buying it back. As soon as I received the confirmation of the sale of the May call, I placed an order to buy the option back if the stock were to trade above $120.50 (slightly above the highest trade seen before the price rolled over). The second possibility to consider is that the stock price could drop significantly, providing an opportunity to buy back the short call for a fraction of the premium received from the original sale. If the premium of the sold call drops by 70-80%, I will consider buying the option back. This locks in profits on the sold call, eliminates the risk of a subsequent strong move up in the stock and reduces the cost basis of the LEAP. As the weakness on the NASDAQ on Wednesday seemed to bottom, the premium on the May call had dropped to $2.25; the option had dropped by nearly 50%, but not enough to justify closing the short position. If the premium drops below $1.38, my criteria is satisfied and I will buy the May option back. This will free up my LEAP, allowing it to be used as security to write another front-month option should the stock move back up to resistance. The Covered Call strategy can be viewed as a risk reduction strategy in a sideways to down market, as it produces profit from the position on a regular basis, even if the LEAP is dropping in value. The real power of this strategy becomes apparent when some simple math is applied; selling short-term calls on a monthly basis can reduce the cost basis to zero in a relatively short period of time. Coming back to the QCOM position, if I sell one front month option per month with an average net credit of $4, the LEAP becomes free in a little over 5 months. Remember, my net cost for the LEAP was $21.25, and $4x5 = $20. Five months takes me out through the September expiration cycle, and when I sell the October Call, my cost basis for the LEAP moves into the credit column. So by the time October rolls around, (anybody remember what has been happening to tech stocks for the last several Octobers?), I'll have a JAN 110 option on QCOM with a net cost of zero. Math wasn't my strongest subject in college, but with a net cost of zero, my calculator tells me that any residual value on the LEAP translates to an infinite return on investment. Either that is a great return, or maybe I should consider a new line of work; I hear they need creative minds to calculate the latest estimates for the Federal Budget Surplus. Contact Support ********* PUT PLAYS ********* Put plays can be very profitable but have a larger risk than call plays. When a stock is falling the entire investment community (except the shorts) is hoping it will reverse and start back up. The company management is also doing everything they can to shore up their stock price. The company issues press releases, brokers talk it up, analysts try to put a positive spin on everything. Then of course there is the death knell, the "buy recommendation" simply because the price has dropped to some level that analysts feel attractive again. Buyers who like the stock wait until it appears a bottom has been reached and then jump on it in a feeding frenzy. They may already have a large position and are averaging down. Many factors can stop a free falling stock in mid drop. **** CTXS - Citrix Systems $43.38 (-17.69) Citrix Systems helps juice up Windows-based computer networks. The company's WinFrame and MetaFrame software products enable networked computers such as Macintoshes, UNIX machines, and pre- Windows PCs to run Windows-based applications from a central server. Customers outside the US account for about a third of sales. Co-founder and chairman Edward Iacobucci led the IBM-Microsoft engineering team that created the OS/2 operating system back in the mid-1980s. Microsoft accounts for about 15% of the company's sales and owns about 6% of CTXS. The CTXS slide began in late March when fears of a Microsoft break-up flooded the market. The antitrust debacle has had a widespread, detrimental effect on many of MSFT's key business partners. Stocks such as EXDS, CAIS, and CTXS have drastically fallen from their Spring highs. While most tech stocks have rebounded, or at least stabilized, CTXS has continued sliding southward. After Friday's showing, it appears the selling of CTXS has not yet subsided. The massive institutional liquidation seems to be in full swing. While the volume has been sick in the broader market, CTXS continues to slide on higher than average trading. Friday's weakness places CTXS just above its trading range low of $42.31, traced earlier in the week. That level will provide minor support before CTXS will retest its lows from last Winter. The $40 level is seen as a critical support level for CTXS, both psychologically and technically. In fact, a prominent money manager said in an interview late Friday that CTXS remains a buy unless the stock falls below $40. From here, an aggressive trader might look for an entry if CTXS falls below $42. If you're looking to minimize directional risk, wait for the stock to fall below key support at $40. As always, confirm any move lower with heavy volume. Another factor putting pressure on CTXS is the recent issue of a large number of convertible securities. The holders of the convertibles have engaged in an arbitrage strategy, shorting the stock. Essentially, the arbitrageurs are attempting to scalp the spread between the stock and convertibles. ***May contracts expire in 2 weeks*** BUY PUT MAY-45 XSQ-QI OI=1233 at $4.88 SL=3.00 BUY PUT MAY-40*XSQ-QH OI= 148 at $2.25 SL=1.25 BUY PUT MAY-35 XSQ-QG OI= 0 at $1.06 SL=0.00 Average Daily Volume = 4.53 mln /charts/charts.asp?symbol=CTXS SNE - Sony Corporation $221.56 (-4.06) If you like to be entertained, Sony has your fix. Its PlayStation home video game system alone accounts for about 11% of the electronics and entertainment giant's worldwide sales. As the #2 consumer electronics firm, SNE makes a host of products including cameras, DVD players, MiniDisc and Walkman stereo systems, computers, TVs, and VCRs. Rounding out the company's assets are Columbia TriStar and record labels Columbia and Epic. It wasn't that long ago that we were playing SNE on its strong run up above $300 per share. Well, the glory days are over...at least for now. The company has seriously dropped the ball and investors are not in a forgiving mood, especially in this uncertain market. So what's the problem, you ask? Starting with a less than stellar release of the Playstation2 at the beginning of March, rife with technical glitches and unhappy customers, the problems only got worse as earnings season arrived. Reporting in late April, SNE didn't give us the usual happy song and dance about a rosy future. Profits for the latest fiscal year fell 32%, led lower by a 43% decline in operating profits for the company's cash cow, the game unit. This drop was primarily due to startup and launch costs of the new Playstation2, but investors don't seem to be in a forgiving mood lately. The other shoe hit the floor when company officials stated that they expect higher sales revenues in the year ahead, but are expecting a drop in net profit. Huh, how does that work? Added to all of that is the fact that the yen has been strong over the past year, impacting the company's profitability outside of the Japanese market. With all of these negatives, SNE looks like a candidate for further losses in the near-term. The tech sector is recovering, but the stock of the consumer electronics giant is continuing to deteriorate. Volume continues to be weak, although the small gain on Friday did come on above average volume. We do want to exercise caution going forward. SNE is more than 30% off its highs from a couple months ago and has come down to major support between $215-217. Conservative traders will want to wait for the bears to scare away the bulls and push the price below this level before initiating new positions. The stock is finding resistance at its descending trendline though, and more aggressive traders can consider jumping on board as the price rolls over near current levels. ***May contracts expire in 2 weeks*** BUY PUT MAY-230 SMW-QF OI= 84 at $14.25 SL=10.50 BUY PUT MAY-220 SMW-QD OI=103 at $ 8.38 SL= 6.00 BUY PUT MAY-210 SMW-QB*OI=118 at $ 4.38 SL= 2.50 Average Daily Volume = 396 K /charts/charts.asp?symbol=SNE LOW - Lowe's Companies Inc. $47.81 (-1.69)(-5.81) Lowe's Companies is the world's second largest home improvement retailer, serves more than four million do-it-yourself retail and commercial business customers weekly through more than 580 stores in 39 states. Headquartered in Wilkesboro, N.C., Lowe's is the 18th largest retailer in the U.S. as well as the 40th largest retailer worldwide. The 54-year-old company employs more than 98,000 people. As we mentioned Thursday, Lowe's is trading "like" a stock that's trying to find a bottom. After Wednesday's broad downgrade of the whole retail sector by analysts at Goldman Sachs, LOW has traded for the most part between $47 and $48. The buying strike mentioned this week could be a double-edged sword. Investors aren't buying and really aren't selling. They are either on hold or afraid to make much of a move in any direction. The question that comes to mind for our play is whether or not the current levels seen in LOW will be the bottom. At this point we don't believe that's the case. First, we have yet to see any kind of exhaustion selling where the volume picks up on a sharp decline and buyers step up to the plate. That may or may not happen, but if it did, it would suggest the low had been put in. The second item of note is we are beginning to see what could be a descending triangle formation appear in the chart, which again suggests a period of consolidation, before another move south. On the other side of the coin, technically Lowe's has hit the oversold area of several indicators and could be due for a bit of a bounce. However, with little reason to mortgage the farm and buy, we would look for any bounces to be met by folks ready to sell near the $52-$54 area once again. The hardware retailer is due to report quarterly results on May 15th, which could revive interest in the company, but in the current market environment, an earnings run is unlikely. LOW did find at least one friendly face in the crowd on Friday. Analyst Aram Rubinson at Paine Webber reiterated a Buy rating, with a twelve-month price target of $85. Long term he may be right but for now, with little reason to buy Lowe's stock at this time, we continue to suggest buying puts on either bounces up to resistance or further weakness. ***May contracts expire in 2 weeks*** BUY PUT MAY-60 LOW-QL OI= 86 at $13.25 SL=10.00 BUY PUT MAY-55 LOW-QK*OI=683 at $ 7.63 SL= 5.25 BUY PUT MAY-50 LOW-QJ OI=718 at $ 3.38 SL= 1.75 Average daily volume = 2.01 mln /charts/charts.asp?symbol=LOW GCI - Gannett Co. $60.75 (-3.13) Gannett is an international news and information company that publishes 74 daily newspapers in the USA, including USA TODAY, the nation's largest-selling daily newspaper. The company also owns a variety of non-daily publications and USA WEEKEND, a weekly newspaper magazine. Newsquest plc, a wholly owned Gannett subsidiary acquired in mid-1999, is one of the largest regional newspaper publishers in England with a portfolio of more than 180 titles. Gannett also operates 22 television stations and is an Internet leader with sites sponsored by most of its TV stations and newspapers including USA TODAY.com, one of the most popular news sites on the web. What began as pullback in early April has turned into all-out selling. The reasons for the weakness in shares of GCI could be attributed to several reasons. First, we all know the broad market psychology has been tough for the last month or so. After reporting respectable quarterly results in early April, analysts at Deutsche Banc Alex Brown downgraded the publisher from a Strong Buy to a Buy, which may have started the ball rolling. A few days later, a former editor sued Gannet over a series of articles which ran in the Cincinnati Enquirer, claiming the company made him the scapegoat in the debacle with Chiquita Brands International. The suit probably is not a big deal in the overall scope of things at Gannett, but investors typically don't like legal problems. What else could happen? Well on Tuesday the company's CEO, John Curley, surprised shareholders at the company's annual meeting, announcing he was leaving the company as the chief executive, effective next month. Curely said he would remain as chairman until he retires next year. Gannett is known for the most part as being one of the best-run publishers in the country, so shareholders should notice little difference, according to Michael Beebe of Goldman Sachs. That may be true, however, Wall Street is not any more fond of surprises than they are of legal problems. How do we approach our new play? GCI closed near its low of the day, suggesting there may be more selling pressure ahead. In late February the $61-$62 area provided support for GCI. Friday's move down came on better than average volume, again suggesting a continuation of the current trend. The next area of support is not found until $55 and again at $50, a level not seen since October 1998. Bounces up to between $62 and $64 followed by weakness should also be viewed as a chance to join in on our new play. ***May contracts expire in 2 weeks*** BUY PUT MAY-70 GCI-SN OI= 4 at $9.00 SL=6.25 BUY PUT MAY-65*GCI-SM OI=33 at $5.25 SL=3.25 BUY PUT MAY-60 GCI-SL OI= 6 at $2.63 SL=1.25 Average daily volume = 878 K /charts/charts.asp?symbol=GCI ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***************************** SEE DISCLAIMER IN SECTION ONE *****************************
The Option Investor Newsletter 5-07-2000 Sunday 5 of 5 ************* COVERED CALLS ************* Charting: The study of historical pricing... Our new series on technical analysis with Candlestick Charting has generated some interesting comments from the readership. One of the most common questions we receive is, "Why do we focus so heavily on the issue's price history as opposed to company's fundamental valuation?" First, it's important to understand the difference between the two approaches. Fundamental analysis deals with factors that affect the earnings potential and market value of a corporation, whereas technical analysis is concerned primarily with price and trading history (trend and character) of the company's shares. Technicians welcome the idea that revenues and profitability ultimately determine the value of a company, but they also accept the concept that price, at any one point in time, represents an accurate consensus of share value to all market participants. In today's markets, a significant portion of daily trading is conducted by technical traders and that fact makes understanding the technical character of an issue as important as knowing the outlook for revenues and earnings. The premise of the technical trader is that past price behavior can be used to forecast future trends. There are many advantages to this style of trading. At the lowest level, it eliminates the necessity to understand the infinite components of fundamental valuation that analysts find so intriguing. In addition, trading strategies based on technical analysis generally provide more precise entry and exit signals, a benefit to investors who participate in short-term techniques. The methods of chart study vary from the simplistic approach; trend-lines and moving averages to elaborate and complex programs such as the Elliot Wave Theory. Of course, the goal of any trading system is to increase the odds of success and most analysts suggest the best place to begin is with well-known practices such as evaluating price/trend/volume, that have stood the test of time. Price charts are the basis for the oldest form of market analysis. A chart is simply a picture of price history. As market opinions change, so do the prices of the underlying instruments. Charts are constructed in various time-frames and are of many different types, but the key is that as more prices are plotted, historical patterns and formations evolve. This concept allows a technician to forecast how the current market will perform based on how it reacted to similar conditions in the past. There are also methods that attempt to identify price formations within seemingly random movements. Some technical studies, such as seasonal or cyclical analysis, believe prices tend to follow a predetermined pattern. Technicians that subscribe to the Elliott Wave Theory believe that collective trading behavior is predictable enough to project waves of price movement. Proponents of cyclical analysis suggest there there is a regularity in the way specific instruments perform at certain times in the calendar year. In most cases, drawing a chart is relatively simple, but reading and understanding one is often considered an art. As is the case with fundamental analysis, there are many interpretations to the formations of a chart, a fact that ensures the markets will remain fluid and dynamic. Fortunately, the study of Candlestick Charting offers a method in which most traders can easily discern price tendencies or patterns that would be difficult or impossible to identify by more conventional means. That's the primary reason we are devoting a number of educational narratives to the subject and next week, the series will continue with an introduction to "Reversal Patterns." Good Luck! SUMMARY OF PREVIOUS PICKS ***** NOTE: Using Margin doubles the listed Monthly Return! Stock Price Last Call Strike Price Profit Monthly Symbol Picked Price Month Sold Picked /Loss Return SPGLA 7.81 7.81 MAY 7.50 1.19 *$ 0.88 14.4% CEGE 18.69 21.50 MAY 15.00 4.50 *$ 0.81 8.3% ANET 12.38 13.75 MAY 10.00 2.88 *$ 0.50 7.6% SPLH 12.06 13.13 MAY 10.00 2.69 *$ 0.63 7.3% MATK 15.50 15.00 MAY 12.50 4.13 *$ 1.13 7.2% PSIX 23.19 22.50 MAY 15.00 8.88 *$ 0.69 7.0% WWFE 15.63 17.63 MAY 12.50 3.88 *$ 0.75 6.9% MXTR 11.94 11.31 MAY 10.00 2.38 *$ 0.44 6.7% ALSC 20.38 19.06 MAY 17.50 3.63 *$ 0.75 6.5% UGLY 7.50 8.09 MAY 7.50 0.50 *$ 0.50 6.2% BBBY 39.06 35.31 MAY 32.50 8.25 *$ 1.69 6.0% ANET 10.56 13.75 MAY 7.50 3.63 *$ 0.57 6.0% PSSI 9.13 9.56 MAY 7.50 2.19 *$ 0.56 5.8% IM 18.88 19.00 MAY 17.50 2.25 *$ 0.87 5.7% MATK 16.63 15.00 MAY 12.50 4.75 *$ 0.62 5.7% BWEB 23.44 21.94 MAY 15.00 9.00 *$ 0.56 5.6% APC 35.81 47.00 MAY 35.00 2.88 *$ 2.07 5.5% LPNT 16.38 18.00 MAY 15.00 2.25 *$ 0.87 5.4% NUHC 22.13 19.06 MAY 17.50 6.00 *$ 1.37 5.3% CAR 20.81 22.50 MAY 20.00 1.94 *$ 1.13 5.2% PIR 10.50 10.50 MAY 10.00 1.00 *$ 0.50 4.6% MRL 26.88 27.00 MAY 25.00 3.25 *$ 1.37 4.2% ACF 17.63 17.88 MAY 15.00 3.13 *$ 0.50 3.7% BSX 21.75 26.56 MAY 20.00 2.50 *$ 0.75 3.4% DGX 44.50 59.63 MAY 40.00 6.00 *$ 1.50 3.4% *$ = Stock price is above the sold striking price. Comments: We had the bullish move pegged on Rexall Sundown (RXSD) but the acquisition by Royal Numico was announced before Monday's open and thus nullified any chance of entering the position. With luck, Marine Drilling (MRL) and Nu Horizons (NUHC) might just make it to the May expiration. Positions Closed: Cole National (CNJ). NEW PICKS ********* Sequenced by Company ***** Stock Last Call Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return CEGE 21.50 MAY 17.50 UCG EW 4.63 150 16.88 14 8.0% GENE 20.13 MAY 15.00 GUG EC 5.63 275 14.51 14 7.4% PETC 13.31 MAY 12.50 QPT EV 1.44 733 11.87 14 11.5% PLCE 21.00 MAY 17.50 TUY EW 4.13 140 16.88 14 8.0% NCNT 17.00 MAY 12.50 ULY EV 5.13 15 11.87 14 11.5% WGR 18.75 MAY 17.50 WGR EW 1.88 0 16.87 14 8.1% WLV 16.06 MAY 15.00 WLV EC 1.50 5 14.56 14 6.6% Sequenced by Return ***** Stock Last Call Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return PETC 13.31 MAY 12.50 QPT EV 1.44 733 11.87 14 11.5% NCNT 17.00 MAY 12.50 ULY EV 5.13 15 11.87 14 11.5% WGR 18.75 MAY 17.50 WGR EW 1.88 0 16.87 14 8.1% CEGE 21.50 MAY 17.50 UCG EW 4.63 150 16.88 14 8.0% PLCE 21.00 MAY 17.50 TUY EW 4.13 140 16.88 14 8.0% GENE 20.13 MAY 15.00 GUG EC 5.63 275 14.51 14 7.4% WLV 16.06 MAY 15.00 WLV EC 1.50 5 14.56 14 6.6% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MR-Monthly Return. ***** CEGE - Cell Genesys $21.50 *** Technicals Only! *** Cell Genesys is focused on the development and commercialization of cancer vaccines and gene therapies to treat cancer and other major, life-threatening diseases. The company is conducting two multicenter Phase II human clinical trials for its GVAX® cancer vaccine in prostate cancer and a multicenter Phase I/II trial of GVAX® vaccine in lung cancer. Preclinical stage programs include gene therapy for hemophilia, cancer, cardiovascular disorders and Parkinson's disease. Cell Genesys' assets outside gene therapy include its approximately 12% ownership of Abgenix, Inc. and the company's licensing program in gene activation technology. Cell Genesys has moved into a Stage I base after correcting from its (and the biotech sector's) meteoric rise in February. The current technicals suggest a lateral to bullish future. MAY 17.50 UCG EW LB=4.63 OI=150 CB=16.88 DE=14 MR=8.0% Chart = /charts/charts.asp?symbol=CEGE ***** GENE - Genome Therapeutics $20.13 *** Technicals - Part II *** Genome Therapeutics is a leader in the commercialization of genomics-based drug discovery. The company's gene discovery strategy is to identify and characterize human genes associated with major diseases and elucidate microbial genes as novel drug targets against many serious infectious organisms. Together with its strategic partners, including Schering-Plough, AstraZeneca, Wyeth-Ayerst and bioMerieux, Genome Therapeutics is using genomic information to develop a new generation of pharmaceutical, vaccine and diagnostic products. Genome Therapeutics is on the verge of making money, a rarity these days, though it did take a hit with the Biotech sector when the commercial patents appeared to be threatened. Genome has entered a Stage I base and recently moved above its 13 dma. Reasonable speculation on a recovering sector and Genome's technicals suggest a potentially bullish movement is forthcoming. MAY 15.00 GUG EC LB=5.63 OI=275 CB=14.51 DE=14 MR=7.4% Chart = /charts/charts.asp?symbol=GENE ***** PETC - Petco Animal Supplies $13.31 *** Buyout Rumors? *** Petco Animal Supplies is a specialty retailer of premium pet food and supplies. Petco operates more than 500 specialty food and supply stores in 39 states and District of Columbia. Petco offers a category-dominant national chain of community pet food and supplies superstores. Petco reported favorable earnings last quarter showing continued strong comparable store sales growth and gross profit margin improvement. The company continues to expand and recently celebrated opening its 500th store. There was no news to explain Friday's break-out but the message boards have a few people mentioning a buyout. The heavy volume Friday suggests there may be something to the rumors. Speculators only! MAY 12.50 QPT EV LB=1.44 OI=733 CB=11.87 DE=14 MR=11.5% Chart = /charts/charts.asp?symbol=PETC ***** PLCE - Children's Place $21.00 *** Sales Are Up! *** The Children's Place Retail Stores is a leading specialty retailer of high quality, value-priced apparel and accessories for children, newborn to age twelve. PLCE designs, contracts to manufacture and sells its products under the "The Children's Place" brand name. As of April 29, 2000, the company operated 335 stores in 40 states and also sells its merchandise through its web site. PLCE just announced a 40% increase in sales this quarter as it opened 43 new stores and moved into the West Coast market. The stock has been in a Stage II climb since February and recently moved up after coverage was initiated by CFSB with a "buy" recommendation. We favor a conservative cost basis as the issue nears technical resistance. MAY 17.50 TUY EW LB=4.13 OI=140 CB=16.88 DE=14 MR=8.0% Chart = /charts/charts.asp?symbol=PLCE ***** NCNT - Netcentives $17.00 *** Some New Friends! *** Netcentives is a leading developer of e-marketing infrastructure software and services. Netcentives powers multiple corporate and commerce loyalty networks, including AOL AAdvantage, BlueLoot, the ClickRewards(TM) Shopping Network, GO Awards and Lycos Rewards. Netcentives reported a 180% increase in revenues this quarter as the company experienced customer expansion and completed three acquisitions this year. On Friday, Netcentives rose 19% on news that they had signed AOL, American Express, Citigroup, and CMGI as customers. Reportedly, each company purchased a 5% stake in Netcentives. A speculative issue that offers a favorable cost basis, taking advantage of a short term rally. MAY 12.50 ULY EV LB=5.13 OI=15 CB=11.87 DE=14 MR=11.5% Chart = /charts/charts.asp?symbol=NCNT ***** WGR - Western Gas Resources $18.75 *** It's a Natural Gas *** Western Gas Resources is an independent gas gatherer and processor, producer, transporter and energy marketer providing a full range of services to its customers from the wellhead to the sales delivery point. The Company designs, constructs, owns and operates natural gas gathering, processing and treating facilities in the major gas producing basins of the United States. The company is in position to reap a rich bounty as the fundamentals for natural gas prices strengthen. Western Gas has resumed its uptrend after consolidating during recent market weakness. We favor a conservative cost basis though Friday's move suggests a new 52-week high is in the company's near-term future. MAY 17.50 WGR EW LB=1.88 OI=0 CB=16.87 DE=14 MR=8.1% Chart = /charts/charts.asp?symbol=WGR ***** WLV - Wolverine Tube $16.06 *** They Beat the Street! *** Wolverine is a leading North American manufacturer and distributor of copper and copper alloy tube. Wolverine believes that it offers the broadest product line of any North American tube manufacturer and focuses on custom-engineered, high value-added tubular and fabricated products, which enhance performance and energy efficiency in many applications. The company also manufactures and distributes copper and copper alloy rod, bar and strip products. Wolverine Tube beat the street by $0.04 this quarter due primarily to strong demand for its industrial tube and cost reduction programs. The stock moved off its March low shortly after announcing new technical tube products: Turbo-CSL(TM) and Turbo-CLF(TM). Wolverine has moved above the November - January consolidation area which should now provide support. A short-term play with a favorable cost basis. MAY 15.00 WLV EC LB=1.50 OI=5 CB=14.56 DE=14 MR=6.6% Chart = /charts/charts.asp?symbol=WLV ****************** BIG CAP NAKED PUTS ****************** By Matt Russ Stock Stock Strike Option Option Margin Percent Support Symbol Price Price Symbol Price At 25% Return Level ADBE 119.50 110 AXX-QB 4.00 2988 13% 110 AETH 167.63 145 HEX-QI 6.50 4191 16% 140 AFFX 156.06 140 FIQ-QH 6.38 3902 16% 130 ALTR 99.50 95 LTQ-QS 3.38 2488 14% 90 BRCM 178.25 170 RDU-QN 7.00 4456 16% 165 CHKP 187.00 175 YKE-QO 8.63 4675 18% 170 CIEN 137.25 130 UEE-QF 6.63 3431 19% 120 CMOS 148.69 140 CYS-QH 7.63 3717 21% 130 CMTN 91.81 85 KUA-QQ 3.25 2295 14% 85 DITC 98.94 90 DUI-QR 5.00 2474 20% 90 DNA 123.94 120 DNA-QD 5.50 3099 18% 115 DTPI 83.63 80 DUP-QP 4.13 2091 20% 75 ETEK 194.00 185 FNY-QQ 6.63 4850 14% 180 GLW 189.13 190 GRJ-QR 8.75 4728 19% 180 HGSI 94.31 85 HHA-QQ 4.13 2358 18% 78 ISSX 87.81 80 ISU-QP 5.63 2195 26% 80 ITWO 116.50 105 QYJ-QA 4.63 2913 16% 105 LHSP 107.94 100 XQL-QT 3.38 2699 13% 98 MEDI 170.25 160 MEQ-QL 6.13 4256 14% 150 MLNM 88.13 80 QMR-QP 3.63 2203 16% 75 NSOL 148.94 135 JNV-QG 5.25 3724 14% 130 NVDA 92.13 85 UVA-QQ 4.25 2303 18% 80 PDLI 129.25 110 PQI-QB 4.88 3231 15% 100 PMCS 180.00 170 SZI-QN 7.63 4500 17% 160 PWAV 195.00 180 AHV-QP 9.75 4875 20% 180 QLGC 99.94 90 QLC-QR 3.63 2499 15% 90 SCMR 86.00 80 SMZ-QP 4.50 2150 21% 74 SDLI 184.75 170 YAL-QN 7.00 4619 15% 170 SEBL 133.44 125 SGW-EQ 4.75 3336 14% 120 SEPR 103.25 95 ERU-QS 4.75 2581 18% 90 STM 204.50 195 SDM-QS 7.50 5113 15% 180 SWCM 85.25 75 UGM-QO 4.50 2131 21% 80 TQNT 104.50 95 TNN-QS 4.75 2613 18% 95 VRSN 138.75 130 XVR-QF 6.38 3469 18% 120 SEPR AGGRESSIVE SELL PUT MAY-100 ERU-QT at $7.00 = 27% MODERATE SELL PUT MAY- 95 ERU-QS at $4.75 = 18% CONSERVATIVE SELL PUT MAY- 90 ERU-QS at $2.44 = 10% SCMR AGGRESSIVE SELL PUT MAY-85 QSM-QQ at $6.88 = 32% MODERATE SELL PUT MAY-80 SMZ-QP at $4.50 = 21% CONSERVATIVE SELL PUT MAY-75 SMZ-QO at $2.81 = 13% QLGC AGGRESSIVE SELL PUT MAY-95 QLC-QS at $5.63 = 23% MODERATE SELL PUT MAY-90 QLC-QR at $3.63 = 15% CONSERVATIVE SELL PUT MAY-85 QLC-QQ at $2.25 = 9% DISCLAIMER: Before entering any of the positions listed above, you need to understand your risk tolerance. Selling puts can be a High-Risk endeavor depending on the strike you choose to sell. For a greater return, you run a higher risk of being exercised. Therefore, please consider other strikes than the ones listed below if you aren't comfortable with the one we choose. We are gearing these towards higher-risk players. In any case, you can always select a lower strike with a lower return if it better meets your suitability. *********************** CONSERVATIVE NAKED PUTS *********************** Successful Trading: Another look at Risk versus Reward... Risk, by definition, is the possibility of loss. Potential gains and positive returns are the reward for accepting risk. In short, the goal of every trader is to minimize the likelihood of monetary loss while attaining acceptable profits in a consistent manner. Unfortunately, the overwhelming desire to achieve success in the market is often a considerable distraction in the evaluation of risk. Before you can evaluate risk versus reward in financial positions, the potential for loss must be determined. The first step is to calculate the overall probability of success by obtaining as much information as possible on the position, its merits and drawbacks. Obviously, the more knowledge you have regarding the underlying market and the specific strategy being used along with the manner in which it is executed, the better your assessment of the odds will be. The end result is a more accurate judgment and when it becomes apparent that the probabilities are unfavorable, you must merely avoid the trade. There may be times when the position can not be adequately appraised and for that reason, the risks will be exponentially higher without a comparable rate of return. In fact, the concept of disguising high risk while promoting extravagant rewards is the basis for most games of chance. That in turn, is the primary reason why novice investors are unable to correctly assess the fundamental potential of any position. In most cases, they simply fail to separate the analysis of risk from the allure of reward. The majority of poor trading decisions could be avoided if investors evaluated risks separately from returns. Inexperienced traders believe that when the possibility of losses is greater, the position should offer a higher return. With this attitude, they attempt to justify the risks of unfavorable positions. It is very important to understand that if the odds are not in your favor, the trade should be avoided regardless of the size of the initial investment or the potential winnings. The reason is very basic; risk is an obligation you accept and return is the profit you hope to achieve. The two concepts are separate and absolute. Return is defined by the components of the position, not by the potential for loss. Obviously, the probability of success does not change based on a higher return. Once again, if the odds are unfavorable, the potential value of the position is probably not worth the risk, regardless of the returns or the initial cost of participation. Evaluating risk versus reward requires a different approach when the trade is purely speculation. Many investors have difficulty making that distinction in the analysis of aggressive positions. One common method of speculation used by experienced traders is to participate in as many favorable positions as possible, increasing the probability of a successful outcome. Of course, the potential returns should be capable of covering all of the combined losses with an additional margin for profit. For most novice investors, a speculative posture appears to be the quickest way to increase portfolio value. Unfortunately, it is also a common avenue to financial ruin. With that consequence in mind, new traders should generally avoid the lottery approach until they have developed a solid understanding of the methods that are used to profit in that style of investing. The advantage of participating in the options market is that it is not necessary to accept high risks in order to achieve favorable profits. In fact, many strategies allow you to attain high returns without the potential for comparable losses. The difficulty in accurately evaluating risk versus reward is a problem that all traders must overcome to be successful. It is also one of the most common concepts that novice investors fail to understand when they begin to participate in the options market. The key to consistent profits is to identify the potential losses inherent in a position (before you accept it) and never let greed become a substitute for the courage to take risks. Good Luck! *** WARNING!!! *** Occasionally a company will experience catastrophic news causing a severe drop in the stock price. This may cause a devastatingly large loss which may wipe out all of your smaller gains. There is one very important rule; Don't sell naked puts on stocks that you don't want to own! It is also important that you consider using trading STOPS on naked option positions to help limit losses when the stock price drops. Many professional traders suggest closing the position when the stock price falls below the sold strike or using a buy-to-close STOP at a price that is no more than twice the original premium from the sold option. SUMMARY OF PREVIOUS PICKS ***** Stock Price Last Put Strike Price Profit Monthly Symbol Picked Price Month Sold Picked /Loss Return ACF 17.63 17.88 MAY 15.00 0.75 *$ 0.75 15.8% TSEM 22.06 20.25 MAY 15.00 0.50 *$ 0.50 14.7% CCCG 13.88 12.75 MAY 10.00 0.31 *$ 0.31 14.5% DRTE 22.88 24.44 MAY 17.50 0.50 *$ 0.50 14.3% ANLY 9.81 10.50 MAY 7.50 0.38 *$ 0.38 14.1% PPDI 15.56 17.25 MAY 12.50 0.56 *$ 0.56 13.1% RAMP 20.00 19.88 MAY 15.00 0.38 *$ 0.38 12.6% OCR 14.31 15.81 MAY 12.50 0.50 *$ 0.50 12.3% EXCA 35.50 35.00 MAY 25.00 0.63 *$ 0.63 11.8% LPNT 16.38 18.00 MAY 15.00 0.81 *$ 0.81 11.8% LYNX 20.88 29.25 MAY 12.50 0.50 *$ 0.50 11.6% PAIR 21.69 26.25 MAY 17.50 0.50 *$ 0.50 10.9% ELNT 40.50 42.38 MAY 32.50 0.63 *$ 0.63 10.3% KR 19.06 19.56 MAY 17.50 0.75 *$ 0.75 9.6% NTPA 41.75 40.75 MAY 30.00 0.56 *$ 0.56 9.1% RDC 26.69 29.50 MAY 22.50 0.63 *$ 0.63 7.7% CQ 19.75 25.38 MAY 15.00 0.38 *$ 0.38 7.6% SUPX 30.06 31.81 MAY 17.50 0.69 *$ 0.69 7.5% TOS 32.06 31.38 MAY 30.00 0.75 *$ 0.75 7.1% CYBX 23.81 19.88 MAY 17.50 0.50 *$ 0.50 6.9% VTS 28.06 24.25 MAY 20.00 0.56 *$ 0.56 6.6% BBBY 39.06 35.31 MAY 27.50 0.50 *$ 0.50 6.5% VANS 17.06 14.88 MAY 15.00 0.56 $ 0.44 6.0% AFWY 20.06 17.19 MAY 17.50 0.38 $ 0.07 1.0% *$ = Stock price is above the sold striking price. Comments: Tosco (TOS) is testing its 30 dma and Cyberonics (CYBX) is testing its 150 dma. Watch them closely! VANS needs to close above last week's high as the technicals have weakened. You may consider an early exit. American Freightways' (AFWY) technicals have remained bullish during a recent consolidation phase and thus a successful test of its 50 dma should propel the stock price back above the sold strike. Positions Closed: Jakks Pacific (JAKK). NEW PICKS ********* Sequenced by Company ***** Stock Last Put Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return BBSW 16.94 MAY 12.50 UUO QV 0.31 40 12.19 14 18.3% CENT 11.50 MAY 10.00 EQH QB 0.50 1611 9.50 14 30.2% CLPA 34.00 MAY 22.50 QJC QX 0.31 347 22.19 14 9.5% HYSL 29.13 MAY 22.50 WQE QX 0.44 75 22.06 14 15.3% TBI 19.00 MAY 17.50 TBI QW 0.44 5 17.06 14 14.6% VRTL 19.13 MAY 12.50 TUJ QV 0.44 99 12.06 14 22.3% OCR 15.81 JUN 12.50 OCR RV 0.31 140 12.19 42 6.5% Sequenced by Return ****** Stock Last Put Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return CENT 11.50 MAY 10.00 EQH QB 0.50 1611 9.50 14 30.2% VRTL 19.13 MAY 12.50 TUJ QV 0.44 99 12.06 14 22.3% BBSW 16.94 MAY 12.50 UUO QV 0.31 40 12.19 14 18.3% HYSL 29.13 MAY 22.50 WQE QX 0.44 75 22.06 14 15.3% TBI 19.00 MAY 17.50 TBI QW 0.44 5 17.06 14 14.6% CLPA 34.00 MAY 22.50 QJC QX 0.31 347 22.19 14 9.5% OCR 15.81 JUN 12.50 OCR RV 0.31 140 12.19 42 6.5% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MR-Monthly Return. ***** BBSW - Broadbase Software $16.94 *** Bottom Fishing! *** Broadbase Software is a leading provider of customer-focused analytic and marketing automation applications that analyze customer data from multiple touch points, and utilize that information to execute marketing campaigns, improve online merchandising and content, increase site stickiness and personalize all customer interactions. Broadbase applications are designed for rapid time to value and they can be installed quickly. The company provides e-commerce infrastructure to customers such as ADP, BEA Systems, Cisco, Fidelity Investments, Hewlett-Packard, Kodak, LoanCity.com, Mercata.com, The Sharper Image and United Airlines. Broadbase also has a major global presence with locations around the world. This unique software company recently announced more than 30 new global customers, a number of strategic resale contracts, and they are planning a significant International expansion. MAY 12.50 UUO QV LB=0.31 OI=40 CB=12.19 DE=14 MR=18.3% Chart = /charts/charts.asp?symbol=BBSW ***** CENT - Central Garden & Pet Company $11.50 *** Spin-Off! *** Central Garden & Pet Company offers a broad array of proprietary branded lawn and garden and pet supply products; Pennington, Four Paws, Zodiac, Kaytee, Nylabone, and Grant's. Central also is the leading national distributor of lawn and garden and pet supply products. Central's operations are grouped into three business segments: the lawn and garden branded products business, the distribution business, and the pet branded products business. Recent solid earnings with improving revenues due to some new acquisitions and an upcoming spin-off of Central's distribution business to shareholders make this a unique speculation play. MAY 10.00 EQH QB LB=0.50 OI=1611 CB=9.50 DE=14 MR=30.2% Chart = /charts/charts.asp?symbol=CENT ***** CLPA - Cell Pathways $34.00 *** Drug Sector *** Cell Pathways Holdings is a pharmaceutical company focused on the research, development and commercialization of products to prevent cancer and to treat cancer. CPI's technology may also prove to have applicability beyond the field of cancer. The company's technology is based upon its discovery of a novel mechanism which may eventually be targeted to induce selective apoptosis, or programmed cell death, in cancerous cells without affecting normal cells. CLPA has also created a new class of selective apoptotic anti-neoplastic drugs and has synthesized over 500 new chemical compounds in this new class. CLPA has a number of products in the pipeline and the sector appears to be recovering from the recent slump. As with any speculative issue, due diligence is a mandatory requirement before opening this position. MAY 22.50 QJC QX LB=0.31 OI=347 CB=22.19 DE=14 MR=9.5% Chart = /charts/charts.asp?symbol=CLPA ***** HYSL - Hyperion Solutions $29.13 *** Entry Point! *** Hyperion Solutions Corporation develops, markets and supports enterprise analytic application software that helps companies better understand, optimize and operate their businesses. The company's products integrate with, extend and enhance transaction processing applications, enterprise resource planning and customer relationship management packaged applications, and data warehouses. Hyperion delivers client/server and other web-based products for a broad range of analytic applications including budgeting and planning, financial consolidation and reporting, activity-based management, performance management, campaign management analysis, promotional analysis, forecasting, demand planning, e-business analysis and other industry-specific solutions. Hyperion recently reported record revenues along with bullish forecasts that include a number of high-yield strategies, new products, and an expanded partnership network. Our cost basis appears to offer a relatively conservative entry point and a favorable price for the issue. MAY 22.50 WQE QX LB=0.44 OI=75 CB=22.06 DE=14 MR=15.3% Chart = /charts/charts.asp?symbol=HYSL ***** TBI - Tuboscope $19.00 *** Oil Sector *** Tuboscope is the world's leading supplier of oilfield internal tubular coating and tubular inspection services; oilfield solids control equipment and services; and coiled tubing and pressure control equipment to the petroleum industry. Additionally, the company provides in-service inspection of pipelines; constructs high pressure fiberglass tubulars; leases/sells advanced in-line inspection equipment to makers of oil country tubular goods; and provides quality assurance and inspection services to a diverse range of industries. In mid-April, Tuboscope reported excellent earnings with solid revenues and a bullish forecast. The company is also beginning to experience an increase in demand for coiled tubing capital equipment, a bonus for future earnings. The chart is favorable and the cost basis appears to be a good entry point for those who want to own the issue. MAY 17.50 TBI QW LB=0.44 OI=5 CB=17.06 DE=14 MR=14.6% Chart = /charts/charts.asp?symbol=TBI ***** VRTL - Vertel $19.13 *** On The Move! *** Vertel is a provider of telecommunications network management software and solutions. The company offers multiple software technologies supporting network management for operations support systems. Vertel's solutions are deployed worldwide by service providers, network operators, telecom equipment manufacturers, independent software vendors and systems integrators. Vertel delivers turnkey management applications that fit individual customer requirements and provides professional services that include system analysis and design, source code portation and interface, custom application development, conformance and certification testing and technical support services. Vertel's solutions also support seamless network operation and management over diverse transmission media and protocols. The stock moved up last week on rumors that the company is likely to win orders from Ericsson and Nortel Networks. We favor a simple speculation play on the potential trend reversal. MAY 12.50 TUJ QV LB=0.44 OI=99 CB=12.06 DE=14 MR=22.3% Chart = /charts/charts.asp?symbol=VRTL ***** Long-Term Play ***** OCR - Omnicare $15.81 *** Own This One! *** Omnicare is a provider of pharmacy services to long-term care institutions such as skilled nursing facilities, assisted living communities and other institutional health care facilities. Their Pharmacy Services segment provides distribution of pharmaceuticals, related pharmacy consulting, data management services and medical supplies to long-term care facilities. Omnicare's CRO Services segment provides comprehensive product development services globally to client companies in the pharmaceutical, biotechnology, medical devices and diagnostics industries. In this position, we favor the fundamental outlook of the company and the technical character of the underlying issue. However, because of the June expiration, we are going to "target shoot" the entry price with an opening bid of $0.50, providing an initial cost basis of $12.00. JUN 12.50 OCR RV LB=0.31 OI=140 CB=12.19 DE=42 MR=6.5% Chart = /charts/charts.asp?symbol=OCR ************************ SPREADS/STRADDLES/COMBOS ************************ A Great Way To End The Week! Friday, May 5 Equity markets enjoyed impressive gains today as traders ignored the robust employment report along with the potential for higher interest rates. The Dow closed up 165 points at 10,577 and the Nasdaq Composite ended 96 points higher at 3816. The S&P 500 Index finished the day up 23 points at 1432. Volume on the NYSE was a light 802 million shares with advances beating declines 1,672 to 1,242. Volume on the Nasdaq was very thin with just 1.15 billion shares exchanged. Advances beat declines 2,264 to 1,681. The long bond fell 12/32, bid at 100 26/32, where it yielded 6.18%. Thursday's new plays (positions/opening prices/strategy): Cabletron CS JAN15C/MAY25C $9.25 debit LEAPS/CC's Dean Foods DF AUG30C/MAY30C $1.75 debit calendar Abgenix ABGX MAY145C/MAY80P $2.12 credit strangle Today's rally did little to help our new positions. None of the plays offered entries at the suggested targets and the prices we observed were available for only a brief period. Portfolio plays: Industrial stocks rebounded from a recent slump Friday despite the bullish jobs report and a belief that the Federal Reserve will raise rates by half a percentage point at the May 16 FOMC meeting. Analysts offered various explanations for the rally but the common belief is that the market simply anticipated the news earlier in the week and began adjusting to the possibility of higher than expected rates after last Friday's employment cost index and strong GDP data. Traders were concerned that volume remained extremely light with many participants unwilling to commit large sums of capital in an environment of rising rates and analysts still see the economic outlook as unfavorable to stocks based on labor shortages and wage inflation pressures. Today's outcome was positive for the Nasdaq with stocks moving higher in all groups. Biotech stocks were particularly strong and technology bellwethers again led the rally. In the broad market, air freight, semiconductor and networking issues edged upwards while healthcare, gold mining, and defense issues were mostly lower. Our portfolio enjoyed a number of winners during the session and today's leader was in the semiconductor sector. Cypress (CY) rallied almost $6 to lead the entire group of Spreads/Combos issues and the stock is now trading over $10 about the maximum profit range. Other leaders in the technology industry included Adobe Systems (ADBE), up $5.75 to $120 and Teradyne (TER) which rose $3 to a recent high near $108. Our major drug positions continued to perform well with Warner Lambert (WLA) climbing $5 to $122 and Sepracor (SEPR) eclipsing a recent resistance area with a close near $103. Johnson & Johnson (JNJ) also continued higher and the stock is within $1 of our target price ($85) for the month of May. The majority of mid-cap issues performed well during the bullish activity and the leaders in that group were Unocal (UCL), up $2 to $35 and Computer Associates (CA) with a $2 move to $53. Andrew Corporation (ANDW), Medtronics (MDT), and Magna International (MGA) also participated in the rally. Questions & comments on spreads/combos to Click here to email Ray Cummins ****************************************************************** - NEW PLAYS - With two weeks until expiration, and almost as if on cue, the requests for credit spreads have begun to increase in number. Here are a few candidates that may be favorable, based on your strategic approach, trading style and risk/reward outlook. ****************************************************************** SCMM - Scm Microsystems $94.50 *** On The Rebound? *** SCM Microsystems designs, develops and sells hardware used to control access to computers, networks and digital television broadcasts, to conduct secure electronic commerce, and to exchange information from devices such as digital cameras and audio recorders. Their target customers are manufacturers in the computer, telecom and digital television industries. SCM Microsystems provides OEMs with key standards-compliant enabling hardware, firmware and software products, technologies used in smart card and other token-based network security systems, and conditional access to DVB content and services. Through the use of its extensible core technologies, SCM is able to offer many products that address the specific needs of diverse market applications such as enterprise data security, electronic commerce and DVB conditional access. SCM has a number of new products in the pipeline, all designed to enhance their ability to deploy a broad range of new digital applications, from pay-TV to satellite Internet multicasting to secure e-commerce to digital copyright protection. These new technologies are the driving force in the growth of their target markets: Digital TV, Broadband Access, PC & Network Security and Digital Media Transfer. SCM's recent achievements include an interoperability milestone with their OpenCable PC receiver for the U.S. cable TV market. This system is being developed with Microsoft and demonstrates the ability to receive and descramble signals from the world's major conditional access providers. They have also announced a pact with Nokia to develop a broadband PC receiver to enable the delivery of secure applications and services over the terrestrial digital TV network, including regional push Internet services and secure local intranets. Obviously the company is headed in the right direction as far as new technology. The question is whether or not their share value can follow through with the recent recovery. There are a number of favorable technical indications and the most recent support level is near our cost basis. PLAY (conservative - bullish/credit spread): BUY PUT MAY-75 SIU-QO OI=48 A=$0.93 SELL PUT MAY-80 SIU-QP OI=11 B=$1.56 INITIAL NET CREDIT TARGET=$0.68-0.75 ROI(max)=17% B/E=$79.25 Chart = /charts/charts.asp?symbol=SCMM ***** SII - Smith International $83.69 *** Oil Sector Hedge *** Smith International is a worldwide supplier of premium products and services to the oil and gas exploration and production industry, the petrochemical industry, and other industrial markets. Smith provides a comprehensive line of highly advanced products and engineering services; drilling and completion fluid systems, solids-control equipment, waste-management services, three-cone and diamond drill bits, fishing services, drilling tools, under-reamers, casing exit and multilateral systems, packers and liner hangers. The company also offers supply-chain management solutions through an extensive network providing pipe, valves, fittings, mill, safety and other maintenance products. Their operations are classified into two segments: The Oilfield Products and Services Group and the Distribution Group. Oil service stocks have been on the move in recent weeks and most industry analysts believe the trend will continue. According to a research report released last month, the Services Group is in the early stages of an up-cycle that should be both longer and more stable than the 1995 to 1997 rally, in terms of earnings and share value performance. Based on the current earnings and forecasts for the sector, that outlook appears to be correct. In this case, the technical character of the issue also supports the fundamental optimism and it appears there is little to hold the share value down in the short-term. PLAY (conservative - bullish/credit spread): BUY PUT MAY-70 SII-QN OI=64 A=$0.50 SELL PUT MAY-75 SII-QO OI=1500 B=$1.06 INITIAL NET CREDIT TARGET=$0.62-$0.68 ROI(max)=14% B/E=$74.38 Chart = /charts/charts.asp?symbol=SII ***** AMAT - Applied Materials $101.88 *** Reader's Request *** Applied Materials 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 other semiconductor integrated circuit manufacturers that either use the ICs they manufacture in their own products or sell them to similar companies. These ICs are the key components in most advanced electronic products such as computers, telecom devices, automotive engine management systems and electronic games. The company recently completed the acquisition of Etec Systems, a manufacturer of mask pattern generation solutions for the semiconductor and electronics industry. This company has been one of the favorite OIN positions over the last few months and this week I received a request for a bullish combination play on the issue. Of course the options have been quite active with the anticipation of the upcoming earnings report. Applied Materials is expected to report second-quarter earnings of $0.55 a share when it releases results on May 10, 2000, but rumors suggest the actual report will be better than expected. With the popularity of the issue and its options, there are very few large disparities to take advantage of with spread trading. Those of you with a very conservative, bullish outlook could participate in this deep-out-of-the-money credit spread with little probability of loss. Fortunately, the daily movement in the underlying issue should allow us to improve the initial credit in this position. PLAY (very conservative - bullish/credit spread): BUY PUT MAY-70 ANC-QN OI=2274 A=$0.56 SELL PUT MAY-80 ANC-QP OI=4729 B=$1.31 INITIAL NET CREDIT TARGET=$0.88-$1.00 ROI(max)=10% B/E=$79.12 Chart = /charts/charts.asp?symbol=AMAT ***** ANTC - Antec Corporation $51.19 *** A $60 Ceiling! *** Antec is a developer, manufacturer and supplier of optical and radio frequency transmission equipment for the construction, rebuilding and maintenance of broadband communications systems. Antec supplies equipment and services for these systems primarily to broadband communication providers and is a one-stop provider of substantially all of the equipment necessary for hybrid fiber coax (HFC) networks between the head-end and the home. Antec has developed a full line of technologically advanced fiber optic products to capitalize on current and future upgrades of HFC cable systems capable of providing state-of-the-art video, voice and data services. The company has offices around the globe. There is not much to get excited about in the recent history of this issue but a review of the technical background suggests the stock has a firm resistance level at $60. Since October 1999, the issue has made three separate attempts at a new high, all of which resulted in failed rallies. Now the stock is making another try and we are going to speculate on the outcome with a conservative, out-of-the-money credit spread. PLAY (conservative - bearish/credit spread): BUY CALL MAY-65 AQC-EM OI=283 A=$0.56 SELL CALL MAY-60 AQC-EL OI=397 B=$1.25 INITIAL NET CREDIT TARGET=$0.75-0.81 ROI(max)=17% B/E=$60.75 Chart = /charts/charts.asp?symbol=ANTC ***** BFO - Best Foods $63.75 *** Takeover Play *** Bestfoods is among the largest U.S. consumer food companies with operations in more than 60 countries of North America, Europe, Latin America, Asia, the Middle East, and Africa and products sold in about 110 countries. Bestfoods markets various leading food brands, and operates over 115 plants around the world through retail outlets and its foodservice business. Their products include Knorr soups, sauces, bouillons and related products; Hellman's and Best Foods dressings; Mazola corn and canola oils; Skippy peanut butter; Entenmann's sweet baked goods; Thomas' English muffins; Oroweat, Arnold, and Freihofer's breads; Mueller pasta products; Maizena corn starches; Boboli Italian pizza crusts; Alsa desserts; Pfanni potato products; and Pot Noodle instant hot snacks. Of course they are known for their Mayonnaise but Bestfoods is also the largest fresh premium baker in the United States. Bestfoods is currently the merger target of Anglo-Dutch Unilever (ULVR) and the offering is a cash bid of $66. There is also renewed interest in the company from Heinz (HNZ), the famous maker of ketchup from Pittsburgh. That company is urging BFO to consent to a friendly merger valuing the Hellmann's mayonnaise and Knorr soups group at up to $72 a share. A number of analysts suggest that Bestfoods investors would prefer cash rather than a revival of the Heinz-Bestfoods deal which ended last September. The continuation of Unilever-Bestfoods talks are likely to hinge on price, with analysts seeing Unilever able to afford up to $70 a share. Currently, Bestfoods is expected to explore all of its options before agreeing to any deal and based on that outlook, we are going to offer another speculative credit-strangle. The profit range for this position is relatively large and there is little chance the issue will trade far from its current price in the next two weeks. PLAY (speculative - neutral/credit strangle): SELL CALL MAY-65 BFO-EM OI=1076 B=$1.68 SELL PUT MAY-60 BFO-QL OI=769 B=$1.31 INITIAL NET CREDIT TARGET=$3.12-$3.25 ROI(max)=11% UPSIDE B/E=$68.12 DOWNSIDE B/E=56.88 Chart = /charts/charts.asp?symbol=BFO ************************Advertisement************************* Tired of waiting on trades to execute? 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