The Option Investor Newsletter Thursday 5-11-2000 Copyright 2000, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 5-11-2000 High Low Volume Advance Decline DOW 10546.00 + 178.20 10575.10 10369.30 957,085k 1,999 933 Nasdaq 3,499.58 + 114.85 3502.53 3384.73 1,369,729k 2,522 1,481 S&P-100 754.74 + 14.83 756.03 742.33 Totals 4,521 2,414 S&P-500 1407.81 + 24.76 1410.26 1386.88 65.2% 34.8% $RUT 489.39 + 15.11 489.39 474.28 $TRAN 2901.39 + 38.22 2912.99 2862.69 VIX 31.25 - 2.05 32.86 30.92 Put/Call Ratio .72 ****************************************************************** Looks like a rally, is it a rally? After what seems like weeks of falling Nasdaq prices, (actually only three days), the Nasdaq finally managed to mount a charge that looks fairly good. But first a little humble pie. Chomp, chomp, chomp. That was me eating my words from Tuesday when I said I did not expect any more serious drops before the Fed meeting. Actually, I would like to thank IBM, INTC, MOT and CSCO for their part in providing an absolute incredible entry point on Wednesday. Of course it was not actually the companies that turned my prediction to toast, it was the analysts that follow them. When IBM and MOT were downgraded before the open on Wednesday and Intel admitted it would spend hundreds of millions of dollars recalling over one milliom faulty motherboards, there was no doubt about what would happen when trading actually began. IBM was down -$9, MOT -$17, INTC -$10 and CSCO -$4 on post earnings depression. The problems for these four major tech leaders just added to the Barrons initiated downdraft. Fortunately after analysts had time to look at the real facts these companies mounted strong rebounds today. MOT +4.75, IBM +1.44 but up +$5 intraday, INTC +$9.50 and CSCO +1.75. With strong earnings by AMAT last night the market was ready to rock and roll at the open this morning. After a brief "sell at the open and hold your breath" period the outcome was never in doubt. Money started coming in off the sidelines as traders began taking positions ahead of the PPI report on Friday. The last several months traders have moved to the sidelines in the week ahead of the PPI only to sneak back in the day before in anticipation of a relief rally on the announcement. This week was no different and with some analysts looking for a lighter than expected PPI the rush back into Wednesday's oversold market was made on better volume than we have seen recently. Adding to the desire to get back into the market was the Retail Sales Report this morning. The numbers for April came in at a less than expected -.2%. This sparked a faint hope that the Fed either may not raise +.50% next Tuesday or they may not need to raise again by the June meeting. Economists pointed to the drop in sales and the rise in mortgage interest as indicators that the economy is slowing. Fixed rate mortgage interest is at a five year high and adjustable ARM rates are at a nine year high. This is slowly impacting home sales but has not yet become the major deterrent the Fed would like. The only major earnings news today was of course Dell which announced $.17 after the close and beat estimates by a penny. There was a brief flurry of excitement when the number was first released at $.19 but that included $.02 of investment income. The stock traded up +$3 in after hours on a volume of two million shares before the number was qualified back to the $.17 operating results. Dell only increased revenue by +31% and not anywhere close to the +55% posted by CSCO. Dell did say PC growth was on track and Windows2000 was heating up as businesses began upgrading after the Y2K hold. The level of pessimism in the markets prior to today was intense and may have finally provided the retest we needed to rally again. The Nasdaq came within 140 points of the April 17th low and the Dow came with 100 points. Close enough for me! The volume was better but still anemic at 1.3 bln for the Nasdaq and 957 mln for the NYSE. Money is still waiting on the sidelines for the Tuesday Fed meeting and the PPI Friday morning. If the PPI comes in reasonable or even lower than expected we should get some major movement off the sidelines. The .50% hike is already priced in and there are just enough skeptics still saying .25% to cause uncertainty. Either way it will just be a relief to get it over with. Most analysts are hoping for the .50% at this point to keep this same "paralysis of analysis" from simply shifting to the June FOMC meeting. They feel a .25% hike now will only slow down the process and drag the uncertainty out several more months. Of course that would be okay with the Fed. Slow the markets, keep them guessing, stop any July earnings run in its tracks and make us enter the summer doldrums with a weaker market. Of course this is also an election year. If you were Greenspan which direction would you take. A quick .50% hike and have the markets roar off again creating more wealth effect or the slow and steady, painful but careful .25% hike and have the markets in turmoil for another month. See my point? I made an investment today that I think everyone should look at as well. DLJ joined the ranks of analysts that after reviewing the MSFT case felt that MSFT will win the case on appeal. They feel the stock is oversold and there is no bad news left. DLJ put a twelve-month price target on MSFT of $140. Microsoft is currently trading for $67 and only $2 off the low set in April on the last negative news. If MSFT wins on appeal the stock will rocket. If MSFT and the DOJ settle between now and then the stock will rocket. If years from now MSFT is actually broken up analysts feel the halves will be greater than the whole. There is no downside from here in my opinion. In order to be insulated from the day to day news hype I bought the Jan-2002-65 leaps for $18.75. Anything over $85 18 months from now is profit. In reality I would be surprised if MSFT was not much higher than that after reaching a settlement of some kind. I plan to sell calls against my leaps and have them paid for within six months. That would make anything over $65 profit. Just my opinion but with Internet companies without earnings going for big bucks the MSFT cash machine that generates billions in profits will attract investors back by the millions once there is a hint of settlement. I commented on Tuesday that I bought the dip with half of my capital and planned to spend the other half on Wednesday if the market rallied. Thank you IBM, INTC, MOT, CSCO! That was even better than a rally confirmation. I backed up the truck as you will see from the disclosure list below. One strange thing however. I have told many seminar attendees before that I have never been put stock from my deep in the money naked put strategy. I can't say that any more. I sold the Jun-$150 RBAK naked put yesterday for $91.88 with RBAK at $59 and rebounding just before the close. It fell back a little at the close to $57.75. When I logged on this morning somebody had put me 10 contracts of RBAK at $150. It opened at almost $63 and I sold it after the open for slightly over $60 and a $2000 profit. I only relate this because readers always ask me why this does not happen all the time. It does not happen because there is normally time value associated with the option and nobody wants to give up the time value. This is the only time this has ever happened but shows that you must be ready and able to have stock put to you at any time when using this strategy. Proper use of stop losses will prevent this 99.99% of the time. I did have a reader who got burned on EXDS recently. He sold the April $105 puts. The stock price at the close on expiration day was $107.50 and it appeared they had expired worthless. However EXDS announced earnings after the close and the stock dropped -$17 in after hours trading. On Monday he found the stock put to him at $105 with an opening value of $87. This is a prime example of why you should never let any option expire worthless. If it goes worthless before expiration buy it back for an eighth or sixteenth and save yourself the unexpected. I can't tell you how many times worthless options miraculously regained value at the worst possible moment. It never happens if you are long the options only when you are short. Save yourself the heartbreak and the money by spending a few cents for insurance. We are going to be in Las Vegas next week for the Money Show and look forward to seeing many of you there again. It is being held at the Paris/Ballys hotel complex Tue/Wed/Thr. Stop by and say hi! If the PPI is lower than expected on Friday, fasten your seatbelt because it could be a brand new ride! Trade smart and don't buy too soon. Jim Brown Editor Current long positions include: SNE, VIGN, SFE, EXDS, RMBS, GLW, SDLI, DNA, ITWO, PMCS, AMCC, CHKP, CIEN, PDLI, AETH, ARBA, MSFT, VOD, NOK, ETEK, CREE, VNTR *************************************************** Technical Analysis, Stock & Option Trading Seminars *************************************************** Has the market been beating you up? Did you give back your gains from April? Would you like to understand all the technical indicators our writers use? Does the alphabet soup of technical terms like RSI, DMA, MACD, ROC, Stochastics, Bollinger bands, sound like Greek to you? You can learn from the experts how to interpret all these indicators, read charts, pick stocks and which option strategies to use on those stocks for less than the cost of one bad trade. Reserve your seat now for one of our regional seminars. Click here for more info: http://www.OptionInvestor.com/seminar/seminar.asp ****************************Advertisement************************* Do You Trade Options? Mr. Stock offers state-of-the-art trading capabilities & specialized options tools designed by experienced market makers. Trade spreads, straddles, covered calls and stock online. Get real-time market data throughout our site. Learn basic to complex option trading strategies. www.mrstock.com http://mojofarm.mediaplex.com/adserver/click_thru_request/565-58-1875-3 ****************************************************************** *********** IN THE NEWS *********** Enel and Echelon Agree to Network 27 Million Homes By Matt Paolucci Shares of Echelon Corp. (ELON), the leading networker of household devices, soared after signing a memorandum of understanding with Enel SpA (EN), the largest traded electric utility worldwide, under which Enel will integrate Echelon's LonWorks system into its digital meter project. Enel will provide its electricity digital meters and a complete home networking infrastructure to over 27 million Italian households over a three-year period. The giant Italian utility will also purchase 3 million shares of newly issued Echelon common stock. LonWorks networks, developed by Echelon, uses devices called nodes, which communicate with each other using a common protocol. Each node in the network contains embedded intelligence that implements the protocol and performs control functions. These nodes performs simple tasks and can be used as proximity sensors, switches, motion detectors, relays, motor drives, and instruments on the network. As a whole, the network is able to perform complex control applications, such as running a manufacturing line or automating a building. Upon the signing of a definitive agreement, Enel would provide complete end-to-end home networking infrastructure for the homes, enabling communication over the existing power lines, data transmission, software, as well as communication to indoor devices. "This is a very important event for Echelon and for the entire LonWorks industry," said M. Kenneth Oshman, Echelon's chairman, CEO, and president. "Our agreement with Enel will provide the largest network infrastructure in the world for networking everyday devices, in every home and building in Italy that has an electric meter." Enel and Echelon are actually negotiating two definitive agreements, one agreement for Enel's purchase of three million shares of Echelon's common stock, and a separate agreement relating to the products and services used in Enel's Contatore Elettronico system. The companies expect to reach a definitive agreement in June and to begin installing systems in the first quarter of 2001. "We are planning to add intelligence to the power grid. It is an important strategic initiative for Enel," said Franco Tato, CEO of Enel. "The LonWorks platform will allow us to both improve the quality of our service and to lower our costs." The initial set of planned services includes remote meter reading, demand side management, and remote customer connect/disconnect. Even though the parties have not yet entered into a definitive agreement, it is anticipated that more than $300 million of Echelon products will be used in the Enel's system over the three-year deployment period. Shares of ELON closed up $9.50 at $40.50, while EN moved up $0.38 to $41.75. ************** MARKET POSTURE ************** As of Market Close - Thursday, May 11, 2000 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,000 11,400 10,545 Neutral 5.05 SPX S&P 500 1,400 1,500 1,408 Neutral 5.05 OEX S&P 100 750 800 755 Neutral 5.05 RUT Russell 2000 450 550 490 Neutral 5.05 NDX NASD 100 3,200 4,000 3,382 Neutral 5.05 MSH High Tech 860 1,000 878 Neutral 5.05 XCI Hardware 1,360 1,600 1,369 Neutral 5.05 CWX Software 1,100 1,300 1,170 Neutral 5.05 SOX Semiconductor 960 1,200 966 Neutral 5.05 NWX Networking 900 1,100 987 Neutral 5.05 INX Internet 550 800 570 Neutral 5.05 BIX Banking 530 600 547 Neutral 5.11 ** XBD Brokerage 400 500 447 Neutral 5.05 IUX Insurance 540 620 603 Neutral 3.16 RLX Retail 900 1,000 910 Neutral 5.11 ** DRG Drug 355 400 378 Neutral 4.28 HCX Healthcare 710 800 770 Neutral 4.28 XAL Airline 140 155 153 Neutral 3.10 OIX Oil & Gas 265 300 305 BULLISH 5.11 ** Posture Alert The tail is definitely wagging the dog, as every economic indicator now moves the equity market dramatically up or down. Today's positive surge was with the help from slower Retail Sales; however, tomorrow brings us the Producer Price Index, which can easily shake things up. Leading sectors today include Semiconductors (+6.25%), Software (+4.90%), and the Morgan Stanley High Tech (+4.80%). With this most recent action, we have upped Oil & Gas to Bullish from Neutral, as well as the Retail and Banking sectors (from Bearish to Neutral). **************** MARKET SENTIMENT **************** Thursday, May 11, 2000 The Sooner the Better! Economic data continues to dominate this marketplace, as today's Retail Sales numbers came in favor of the bulls. This figure helped spark a nice broad market rally, which made up for many of the loses from yesterdays trading. However, with the Producer Price Index due out tomorrow and then the Consumer Price Index as well as the Fed meeting next week, we could still be in some rough waters. Corporate earnings continue to be stellar, as Dell, Cisco and Applied Materials all came out with good numbers. So far, these excellent earnings haven't helped push the market to any significant level, let alone their own stock prices. However, when a significant rally does come, look for the big boys to lead the way. Currently, the sentiment on interest rates dictates that we will see a 50-basis point rate hike next week. The statistics are predicating that a 50-basis point hike has a 90% chance of occurring, so anything less will be a positive. Now we do have the PPI tomorrow, which technically, can only help the bulls' camp. If the PPI comes in negative, we already have that priced into this upcoming rate hike; however, if it comes in better- than-expected, a rally may ensue as traders speculate about a lower rate hike. Regardless, there has been too much attention to this Fed Meeting, so the sooner it is over, the better for everyone. BULLISH Signs: Corporate Earnings: Major corporate earnings continue to come out strong and ahead of analyst expectations. Walmart and Cisco Systems are the latest bellwethers to beat expectations. Short Interest (NYSE): Short interest on the NYSE fell 1.33% to 4,055,931,190 shares on April 14; however, this is still a high level and from a contrarian viewpoint, would be considered bullish. Mixed Signs: Volatility Index (31.25): Up until recently, the VIX has proved that the low 30's are an excellent buying opportunity, and the low 20's continue to be a great selling opportunity. However, new highs (41.53) were just recently reached, so we may be at the beginnings of a new trading range. BEARISH Signs: Interest Rates (6.147): With the long bond breaking significant support levels, new highs may be attempted in the near future. Liquidity Crunch: With the fear of inflation, and the most likely scenario of several more rate hikes, liquidity in the marketplace will become a more significant issue and put more pressure on equities. IPO Dilution: With so many IPO's hitting the market, there seems to be dilution occurring where shares of finally freed up to sell by insiders. $58.6 billion of stock was freed up for trading in March, $67.3 billion this month, and $118.3 billion in May. This is too much stock for the system to handle. Energy Prices: With the rapid rise in crude oil, everything from manufacturing to transportation will be affected by higher costs. These higher costs will be felt 1-2 quarters out, and could put pressure on profit margins. Investor Expectations: More and more investors are now expecting high double-digit growth if not triple-digit expansion in their portfolios. This extreme positive sentiment could help fuel a future sell-off in technology shares. ***************************************************************** The Power of Sentiment Analysis It has often been said that the crowd is right during the market trends but wrong at both ends. Measuring and evaluating the sentiment of the crowd, therefore, can give savvy option traders a decided edge. Pinnacle Index ***************************************************************** OEX Friday Tues Thurs Benchmark (5/5) (5/9) (5/11) ***************************************************************** Overhead Resistance (805-830) 5.40 5.54 6.10 Overhead Resistance (775-800) 1.53 1.88 2.02 OEX Close 767.79 757.82 754.74 Underlying Support (745-770) 2.10 2.23 1.60 Underlying Support (715-740) 10.54 12.81 7.95 What the Pinnacle Index is telling us: Based on the above statistics, direct overhead resistance and direct underlying support both remain light, while OTM support and resistance levels are extremely strong. Put/Call Ratio ***************************************************************** Friday Tues Thurs Strike/Contracts (5/5) (5/9) (5/11) ***************************************************************** CBOE Total P/C Ratio .53 .50 .68 CBOE Equity P/C Ratio .46 .42 .55 OEX P/C Ratio 1.25 1.07 1.30 Peak Open Interest (OEX) ***************************************************************** Friday Tues Thurs Strike/Contracts (5/5) (5/9) (5/11) ***************************************************************** Puts 660 / 5,521 710 / 5,506 700 / 7,363 Calls 800 / 5,916 800 / 5,440 800 / 11,345 Put/Call Ratio 0.93 1.01 0.65 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 11, 2000 31.25 ************* WOMAN'S WORLD ************* Using Support and Resistance Levels Profitably By Renee White If you are determined to play in this market of uncertainty and stagnation, make sure you have a very good understanding of how to interpret support and resistance levels. Having a clear signal of where buyers may show up, or when sellers may choose to take profits, will help you tremendously with your short-term trading decisions. With low volume and a narrow trading range, I have been able to scalp profits consistently by carefully paying attention to these S&R levels. Profits came easier a few months back. The bullish sentiment made option traders become complacent, choosing to hold their options instead of taking frequent profits because the equity went up 3 days, down 1, or up 5 days, down 1 day. Yep, those were the good-ol-days. I hope they return soon. Mistakenly, the self defeating thinking became, "I have a winner. Why sell? It will cost more if I try to buy it back." On rare occasion, they are right. The majority of the time though they tricked themselves into holding too long, past the point of peak profit taking and sometimes a loss from an opening gap down. We have all done it. It is part of the game. Experienced traders really know better, but it still happens. I wonder, how many of you have noticed a difference in your trading skills from the adjustments you have made during this melancholic market? My distrust for the markets lately has actually helped my trading improve. I have primarily played QQQ (Nasdaq 100 index) and an occasional equity play. With the markets whipsawing up & down every other day, if the index goes against me, I just hold for two days. All I am looking for is a few points here and there; on most days, only 1-2 points. I'm taking larger positions on 1-3 equities at a time. My profit expectations are minimal and I want to exit most at the end of day. This has worked better than I ever expected. In fact, when we do return to our familiar bull market attitude, I am confident that these changes will incredibly improve my overall returns. The key to this turnaround has been using support and resistance levels on a shorter time frame than before. Now I draw intra-day lines on both the composite and the equity I trade. Every morning, I turn on CNBC, then my chart screen. I listen to clues on where the market will open. Are the futures up or down? Will it be a strong open or mixed? Next, I go to my Nasdaq Composite 5 min screen and I draw a thin red line to show the its high for yesterday (yesterday's resistance level) and another line to show yesterday's close. These lines will move with my charts, regardless if I change to 1 min, 5 min, or any other time period. The significance of these two lines is the bullish sentiment that follows taking out yesterday's high, or at least our bullish desire to close higher than yesterday's close. I also draw a "thick" red line, showing yesterday's low (yesterday's support level) as a warning sign to me and a potential stop-loss exit point. It's a bad sign if it drifts this low, indicating a time to exit because sellers will start showing up. Once the markets open, I draw a turquoise line to show where the open was. This moving line clues me all day, evaluating how close we are to yesterday's levels. With these initial 4 lines, I have the beginnings of my support and resistance levels for the day, until today's levels establish themselves. Learning to read the market is very important to the overall trading success. So too is the ability to observe intricate patterns that the market gives us. For instance, if the futures are up strongly (and fair value is up), we will usually see a gap UP, on the open. The majority of time, this opening gap immediately starts fading away slowly drifting lower and lower right after the open. Many a beginner has been treated with this poisoned candy, tempted to enter right at the open when prices were at their highest. The thing to watch though is where the reversal comes. Once the sell-off stops, the buy orders begin and typically send the index back up. It is at this lower reversal point, I draw my first "thin" purple line: a signal to myself of today's first support level. It is important to know where this line is in relation to yesterday's hi, lo, and open because this information affects my trading decisions all day. Also, I know that during the day, if we violate that line lower, potential sellers will most likely show up and we will be heading south. Our next support would be yesterday's resistance level. Not a good sign. But, if the buyers come in on that reversal up, the next thing to look for is how high the index will go before it stalls and rolls over again. Will this roll over be higher than the opening turquoise line? If so, that's good. Buyers are around and jumping on board. Or will it not quite get back up to where we opened the session, before heading south again. That's bad, a sign of a bad opening. Either way, I place another purple line at this high reversal to indicate today's resistance level because sellers will be taking profits near that range again so I want to remember it. All day long, the market cycles and creates patterns to be plotted. I do not touch yesterday's lines but during the day, I do adjust today's support and resistance levels. If we bounce off the same support level several times, then a thicker line is drawn and purple becomes a red line. The same is true if we sell off at a particular resistance level several times within the day, that line becomes thick. Those changes signal breakout or breakdown points for me, when I would expect volume to pick up for either buyers or sellers. By paying attention to these simple support and resistance levels, your short term trading profits should significantly improve. If the highs continue higher and you keep raising your resistance line, then entering on a bottom reversal isn't so scary. Also, there is a sense of pleasure that comes when you take profits at a resistance point you anticipated, then watch the index rollover as you thought. My support lines are red for a reason, a clue for an exit. By the way, I mark my entry with a green line (the color of money), and I put a thicker green line at my potential limit-sell profit goal. This also affects my intra-day trading decisions, as I notice how far away my entry and exit points become from today's support and resistance levels. Keep in mind, intra-day trading with options is difficult because of the slippage affects of the spread, and the time decay of holding over in a choppy market. Regardless, if I am scalping option profits or profits from the underlying equity, becoming hypersensitive to these S & R levels has greatly improved my trading techniques. I doubt I will ever buy and hold an option for days on end again. Contact Support ************* DAILY RESULTS ************* Index Last Mon Tue Wed Thu Week Dow 10545.97 25.77 -66.88 -168.97 178.19 -31.89 Nasdaq 3499.58 -147.44 -84.37 -200.28 114.85 -317.24 $OEX 754.74 -6.20 -5.77 -17.91 14.83 -15.05 $SPX 1407.81 -8.46 -12.03 -29.09 24.76 -24.82 $RUT 489.39 -12.76 -9.22 -16.58 15.11 -23.45 $TRAN 2901.39 59.76 -31.71 -40.99 38.22 25.28 $VIX 31.25 0.73 0.59 1.59 -2.05 0.86 Calls Mon Tue Wed Thu Week CDWC 118.75 -2.00 3.18 -0.81 8.75 9.13 New BSX 25.25 0.82 0.94 -1.63 -1.44 -1.31 Profits? WLA 116.19 2.84 -1.53 -1.69 -2.25 -2.63 Merger vote SEPR 100.13 1.19 2.31 -9.25 2.63 -3.13 Bold move MSFT 67.88 -1.32 -2.00 -1.62 1.69 -3.25 New FLEX 51.13 -2.06 -1.81 -4.32 4.81 -3.38 New AMD 87.75 -3.38 -5.75 -3.50 7.81 -4.81 Rising up QCOM 99.31 -6.75 2.00 -7.56 2.00 -4.81 Dropped BVSN 43.31 -3.31 -1.19 -3.63 1.81 -6.31 Golf club JDSU 86.50 -5.43 -2.57 -5.62 6.31 -7.31 New HIFN 34.38 -3.50 -3.50 -2.25 0.50 -8.75 Dropped MERQ 76.00 -3.88 -3.19 -6.00 4.06 -9.00 Traveling ADBE 108.38 -10.31 2.94 -6.13 2.19 -11.31 Dropped AMCC 98.81 -11.69 -6.25 -9.12 12.19 -14.88 New MEDI 154.69 -12.00 2.31 -8.19 2.31 -15.56 Consolidate EPNY 72.56 -1.75 -2.88 -6.50 -5.69 -16.81 Dropped KANA 38.25 -2.66 -6.31 -7.13 -1.00 -17.09 Scoop?? ABGX 93.47 -5.88 -9.50 -9.00 4.97 -19.41 Vigil time AFFX 133.25 -7.94 -8.63 -11.44 5.19 -22.81 Resist@138 Puts FDRY 66.75 -5.63 -0.63 -11.06 -6.06 -23.38 New EBAY 117.75 -5.50 -7.31 -10.19 6.75 -16.25 Drowning CMRC 45.47 -4.82 -3.31 -1.81 -0.47 -10.41 Gapped down SBL 43.38 -1.75 -3.81 -2.56 1.75 -6.38 Supp @ $40 SNE 217.44 -2.25 -5.94 -2.13 6.19 -4.13 Dropped GCI 60.81 -0.50 -1.00 1.13 0.44 0.06 More to go CTXS 47.75 0.56 -2.88 1.94 4.75 4.38 Dropped PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** ADBE $108.38 +2.19 (-11.31) The ascending channel that ADBE has traded in for the past two months was finally broken Thursday. The stock failed to make a higher low in Thursday's trading. ADBE dipped below its support line at $105 during an early morning sell-off. Volume surged in the first hour of trading as ADBE shed nearly $10. The software sector showed substantial gains across the board Thursday. The positive guidance from CA sent a rising tide through the sector sending ORCL, VRTS, and BMCS into rally mode. Because of the early morning liquidation, and relative weakness, it's time to leave ADBE. QCOM $99.31 +2.00 (-10.44) There was a rumor going around today the BancAmerica Securities would be coming out with bearish comments, but so far it's just a rumor. Thestreet.com even noted that CNBC bulled the issue thereby derailing the rumor. Even so, QCOM has dropped below its historical support level of $100, and yesterday closed just over $97, also its 200-dma. This could very well be a bottom and we believe there to be strong support at the $95 to $100 level, especially since $96 was tested again today followed by a small bounce. That said, the sour mood in front of the FOMC meeting puts QCOM in dangerous water. It's either going to bounce hard with a full-fledged market recovery (unlikely), bounce soft with a few point intraday gain (maybe a good exit point), flat-line, or fall more. The first scenario is a really big "if" and not enough to make us like it as a call play going forward. To that end we are dropping QCOM tonight. EPNY $72.56 -5.69 (-16.81) Looks like our caution on Tuesday was well founded. EPNY never got a bounce from $85, or even $80 support for that matter. 10-dma at $81.93...nobody cared. That's why we often note to wait for the bounce backed by volume before taking a position. EPNY saw $66.50 before it ever found any support, and that's not going to cut it on the call play list. As a presenter at the H&Q tech conference today in San Francisco, you can see a flattening of the descent on an intraday chart during the CEO's presentation. Once finished, EPNY resumed its downward course. No news in particular - just an overall demand by investors that companies figure out how to make money fast. On that score, EPNY has some work to do before getting back in good graces with the investing community. Accordingly, we're dropping it tonight. HIFN $34.38 +0.50 (-8.75) How many different ways can we say "buyer's strike" without it getting boring? HIFN is being impacted by aggressive indifference, continuing to fall a little bit every day, as volume drops further and further, (posting less than 40% of the ADV today). Support appears to be firming near current levels, but it was rather discouraging to see HIFN fail to participate in the rally on the NASDAQ today. If strength in the broad markets can't attract buyers to our play, it seems we would be prudent to move on. PUTS: ***** CTXS $47.75 +4.75 (+4.38) The Chase H&Q Technology Conference proved to be detrimental to our put play. Senior Analyst, Christopher Galvin said he continues to recommend CTXS as a Buy. Galvin pointed out that CTXS will reap rewards from the Windows 2000 release. The talking heads at the conference provided the catalyst to turn CTXS around. The stock dipped below $40 for a moment Wednesday, then rebounded into the close. The momentum carried over into Thursday's trading as CTXS gapped higher and rose steadily throughout the day on heavy volume. In light of the renewed interest in CTXS, it's time to step aside. But we enjoyed the play while it lasted. SNE $217.44 +6.19 (-4.13) After the long painful slide, SNE was due for a relief bounce eventually, but rather than a pause, this looks like a potential bottom. Although volume is still weak (near 75% of the ADV), SNE is seeing volume increase as the price rises. The bounce from $210, a major support level, makes it look like this may be as far as our play is willing to go. Possibly adding to the change in sentiment was the company's announcement of the U.S. and European market launch dates for the PlayStation2. Whatever the cause, we don't want to fight the tape and are dropping SNE tonight. ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 DISCLAIMER ********** This newsletter is a publication dedicated to the education of options traders. The newsletter is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The newsletter picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. The newsletter staff makes every effort to provide timely information to its subscribers but cannot guarantee specific delivery times due to factors beyond our control.
The Option Investor Newsletter Thursday 5-11-2000 Copyright 2000, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. ***********************Advertisement*************************** fnCentral.com: it's where you are! Be deskbound no more. No software to buy or learn. Use the web's first fully integrated personal finance manager from any PC, PALM, phone, internet appliance! Manage your money. Consult with CPAs. Estimate taxes. Track investments. fnCentral.com. It's where you are! OPEN A FREE ACCOUNT NOW! http://www.fncentral.com/cgi-bin/ad?from=op504 **************************************************************** ******************** PLAY UPDATES - CALLS ******************** MERQ $76.00 +4.06 (-9.00) MERQ has traveled an interesting path since Tuesday. Early Wednesday afternoon, our software company found something that had eluded many of the companies on Wall Street for most of the week. Buyers. After falling $17.50 for the week, a few brave souls ventured into the market, nibbling at shares of MERQ. Today the buying continued as the MERQ and the broad market reacted favorably to economic data released this morning. While today's 5.5% gain is certainly better than a loss, we would keep your stops close if you re-entered somewhere along the lines. Technically we are sitting in no-mans land, as the high of the day and the close, edged up against the 100-dma at $76.44. Intraday indicators closed pointing north, which is encouraging. The next levels of resistance show up near $78 and again at $82, with support near $72. Remember we have three more sessions, with important economic data and a Fed meeting ahead. Again we are by not trying to scare anyone out of the play, just be prepared to take profits if necessary. BSX $25.25 -1.44 (-1.25) The profit takers we had warned of last Tuesday came out of hiding in the past two days. BSX also had to cope with an all around nasty market Wednesday. It appears the selling in the past two days is nothing more than profit taking. After rallying over 50% from early March, traders decided to lock in their gains. Although BSX fell through its support level of $26 Thursday, the stock remains in a solid up-trend. The recent sell-off may prove to be a good entry into the play. We'll want to watch BSX closely Friday to see if the stock rebounds from its current levels. Support at $24 needs to hold if BSX is going to remain in its up-trend. If the selling continues Friday morning, look for BSX to bounce from $24 for a possible entry point. But, if buyers step back in, and lift BSX higher, watch for a strong move above new resistance at $26 for an additional entry point. Confirm a move above resistance with heavy volume. SEPR $100.13 +2.63 (-3.13) SEPR weakened Wednesday and followed the broader market lower. The selling came on relatively light volume, suggesting that profit takers were swayed by the weak market conditions. Although SEPR fell through the ever-important $100 support level Wednesday, the near-term upward trend-line remains intact. In fact, SEPR managed to edge back above the century mark in Thursday's trading. The stock received a boost Thursday from positive comments coming from analysts at the Deutsche Bank Alex Brown Healthcare Conference. Analysts reiterated SEPR as a Strong Buy and said the company is on track with the development of several new products. With SEPR moving back above $100, we're looking for momentum to build in the stock. From here, watch for a bold move higher from current levels. If you're looking to exercise caution in this market, wait for SEPR to clear the $105 level before entering the play. BVSN $43.19 +1.81 (-6.44) Whew! $40 support held up yesterday and provided a nice entry, but only if you got out around $45 after the open this morning. The weak market is keeping many issues on a downhill course - BVSN too. Volume has popped up to match the ADV over the last two days telling us there may have been some selling taking place. With price drops, there certainly have been no buyers. Be careful going forward. Today's gain was probably just a function of an advancing NASDAQ market and doesn't confirm that BVSN will make an advance from here. While support is quite solid at $40, today's chart action shows a golf club formation (we just made that up) with a low open at $42.56, a big rise to $48.13, fall to $42, and close $1.31 over the open. In layman's terms, that means investors were willing to carry it to $48, but there was no strength to hold it there. $48 may become near-term resistance. It bares repeating - take a position only after you see a BOUNCE off support with the rest of the market moving in your favor. $40 is our number, but move on if it drops below that. AMD $87.25 +7.31 (-5.00) Yesterday MOT and INTC troubles caused a chain reaction in the sector, which led AMD down $4.31 on strong volume. But today AMD staged its own comeback from the recent sell-off. It rose from the trenches of bottom support at $80 and tacked on a premium 9.1%. This recovery propped the stock back up onto the intersecting 5-dma ($86.29) and 10-dma ($87.46). Entries off the higher level of support at $84 and $85 were available; although with such uncertainty in the markets, it's a better plan to wait for a breakout off the current price level. Overhead opposition is at last Friday's all-time high of $93, so be prepared for resistance once AMD moves through $91 and $92. Economic data and the Fed meeting on Tuesday will obviously have great effect on how AMD performs in the coming days. However with a strong demand for semiconductors worldwide and the Semiconductor Sector ($SOX) leading the market, look for AMD to move higher on momentum. KANA $38.25 -1.00 (-14.44) Ok here's the scoop. KANA didn't provide us with a definitive upward bounce on Wednesday. Instead the stock slid back to old resistance at $38-$40 and appears to have entered into a consolidation phase. There wasn't any bad news or other earth-shattering event to have caused the pullback. However one unnerving aspect was the stronger volume on the descent. On Wednesday this could be attributed to profit taking during the NASDAQ sell-off, but no matter, let's keep a tight leash on KANA for the time being. Look for positive moves through the $45 mark and the now converged 5, 10, & 30 DMAs for confirmation of its recovery momentum. In the news today, Kana Communications announced a co-marketing and e-media product integration with Witness Systems, a provider of recording and analysis software. ABGX $93.47 +4.97 (-19.41) After the downdraft on Monday and Tuesday, we patiently watched ABGX. The stock isn't off our probation list yet, however it's showing strength at this near- term support level. Since this play is based on pure momentum, ABGX needs a shot of adrenaline. It could draw intensity from the Biotech sector or even from a show of better technicals. A break through the 10-dma (currently at $97.79) followed by another move above previous resistance at $100 would be just fine. For now, keep a vigil and watch for positive signs before opening new plays. The pop-up on a spike of volume during the last minutes of today's session was the first inclination that ABGX may be poised to run again. WLA $116.19 -2.25 (-6.06) The drug sector wasn't operating up to par the last couple of days and neither was WLA. After setting an all-time high at $126.25 on Tuesday, WLA swung back down to firm support. Was it simple profit-taking or market pressure? Likely the downdraft was a combination of both. But still the good news is potential entry points off this level. A solid bounce followed by a definitive move through $120 would be considered a bullish sign. Look for the volume to back the climb before jumping into the play. Keep in mind too, the jittery market could take another turn for the worse following the PPI data out tomorrow. WLA's shareholders' meeting to vote on the merger acquisition by Pfizer (PFE) is also scheduled for tomorrow. Approval is expected and it'd be unfortunate if this favorable event is overshadowed. AFFX $133.25 +5.19 (-22.81) Hanging on by its fingernails to the fledgling recovery, AFFX is following the example of the Biotech industry as a whole. After moving above the 30-dma ($127.75) on May 1st, AFFX is finding support here. On the upper side, the stock is finding resistance at the 200-dma ($142.25), and the lack of volume is keeping the trading range tight. We hate to sound like a broken record, but in the absence of increasing volume, AFFX will have a hard time making a significant move in either direction. Traders are waiting for news on interest rates, and a bullish PPI tomorrow could be just the catalyst to get some buyers into the market ahead of the FOMC meeting next Tuesday. Aggressive investors can consider new entries as AFFX confirms support near the 30-dma with the return of buyers. Otherwise wait for buyers to push the price through near term resistance near $138 or at the 200-dma. MEDI $154.69 +2.31 (-15.56) Confirming that it is tough for a stock to move up in the absence of strong volume, MEDI is continuing to consolidate above the tenuous $150 support level. The light volume is continuing to keep this Biotech stock from breaking out as investors wait for direction from the Fed. The 5, 10, and 30 day moving averages are converging near $158 as investors wait, wait,...and wait. Volume is barely topping 40% of the ADV and until the interest rate waiting game is over next Tuesday, MEDI will likely continue to be rangebound. In light of the bad news coming from Entremed today it was encouraging to see other stocks in the Biotech sector like MEDI post gains. A bounce near $150 or $145, confirmed by increasing volume is buyable, but don't try to catch the falling knife until it sticks. More conservative investors will wait for MEDI to move through resistance at $160, indicating that the stock may run into the shareholder meeting (remember the pending 3-for-1 split) on May 18th. ******************* PLAY UPDATES - PUTS ******************* GCI $60.81 +0.44 (+0.06) The few buyers that emerged the past two days is not a bad thing for our play. Gannett really was due for a bounce. Actually the bounce could continue a bit further and not hurt our feelings at all. Today's move up ran out of gas near the $62 area. Technically a move to $64 followed by more selling would suit us just fine. Could our put play have hit a near-term bottom and be turning around? Possibly, but the major indices gained 2%-3% today, while GCI could only manage to finish with a 0.79% gain. The volume on Wednesday was solid with over 1.4 million shares traded. The lack of strong follow-through buying today, with only 625K changing hands doesn't bode well for folks expecting a move higher. Long-term GCI may be a real gem at these levels, as analysts at CIBC World Markets initiated coverage of Gannett with a Buy rating this morning. GCI appears to have more room to move south, but for now most indications are that it's simply catching its breath. SBL $43.00 +1.38 (-6.75) Sometimes a rising market lifts the sinking stocks. After briefly dipping below support at $40 on Wednesday, traders decided a relief rally was in order for SBL. The stock was carried higher by a broad rally in the electronic manufacturer sector. SBL may have also benefited from traders' anticipation of the company's presentation at the Chase H&Q Tech Conference. SBL presented to analysts at 7:30 PM EST. If traders view the comments from SBL positively, the stock may extend its gains into Friday's trading. If that happens, watch for SBL to run into resistance at $45. Watch for the selling to return if SBL is unable to breakthrough resistance. On the flip slide, if the sellers step in early Friday morning, wait for SBL to fall through its major support level of $40. The stock has very little support below $40, look for heavy volume as confirmation that the sellers have returned. EBAY $117.75 +6.75 (-16.25) Sucking canal water with the best of them yesterday, EBAY gave up $10 on volume exceeding the ADV by 15%. Today's $7+ recovery came on less volume of 89% of the ADV. Sellers still appear in control, making today's gain a possible put buying opportunity, given today's weak market recovery. $120 support has been cleanly violated and has proven to be resistance over the last two days. Consider taking a position on any bounce down from $120 (historical) or $122.49 (5-dma). Otherwise, you'll need to confirm a drop under $110 (yesterday's intraday support) before opening a new position. As a technical play only at this point, we need to keep our ears and eyes open for news items that could affect EBAY - analyst meetings, comments, upgrades, CEO interviews - that sort of thing. Otherwise, as long as the market cooperates, EBAY has the technical potential to move to $80 before finding support again. Earnings are in July. CMRC $45.47 -0.47 (-10.41) Weak relative strength is continuing to make CMRC an unattractive stock. Gapping lower with the rest of the tech sector yesterday, the price dropped below $42 before finding any buying relief. Recovering late in the day yesterday, CMRC provided an attractive entry this morning with a surge above $48. Volume continued to be strong as shares of the B2B company declined all day. The downward pressure is being maintained by the 5-dma ($49.25), as investors dump stocks that are not participating in any rally (no matter how slight) in the broad markets. Volume picked up late in the day as resistance firmed near $46. The one point of concern is that volume picked up on the two mini-rallies up to resistance, so CMRC could be firming near $45. Consider new entries as CMRC rolls over at resistance and then ride the next wave down. ************** NEW CALL PLAYS ************** FLEX - Flextronics International $51.13 +4.81 (-3.50 this week) Flextronics is one of the world's leading providers of contract electronics manufacturing services. The company offers design, manufacturing, and distribution services for electronics makers in such industries as networking, telecommunications, computers, consumer electronics, and medical instrumentation. Customers include Philips, Ericsson, and Cisco. Customers outside Asia account for almost 80% of sales. FLEX's recent acquisition of rival The DII Group made it the world's #4 contract manufacturer. We're looking for the recent rebound to flex its muscles. After selling-off sharply in the past two weeks, FLEX found a bottom Wednesday, and rebounded smartly Thursday. The quick reversal stems from a broad rally in the tech sector and an analyst upgrade Wednesday. Raymond James upgraded FLEX from a Buy rating to a Strong Buy. The upgrade comes from analysts' beliefs that the long-term prospects for FLEX remain positive and concerns over component shortages are behind. Analysts feel that FLEX will benefit from the unprecedented growth of the Internet. FLEX is positioned to benefit from the increasing demand for the hardware that runs the Web. Also worth noting, part of the recent decline can be attributed to shortages in electronic components. But, analysts believe that those worries have been fully factored into the stock price, and that business remains booming for FLEX. We're looking for the recent rebound in FLEX to extend its gains as renewed interest in the stock builds. Look for an entry near current levels if Thursday's momentum carries FLEX past resistance at $52. If the stock stumbles Friday morning, watch for a bounce off support at $50. Volume has been an accurate indicator of FLEX's movement lately, confirm any move higher with above average trading activity. FLEX has been on the acquisition trail this year. The company has acquired the operations of Palo Alto Products and The DII Group, and a manufacturing plant in Denmark. FLEX's continued growth by acquisition is helping the company expand into new markets and increase profitability. ***May contracts expire next Friday*** BUY CALL MAY-45 QFL-EI OI= 271 at $6.88 SL=5.00 BUY CALL MAY-50 QFL-EJ OI= 293 at $3.38 SL=1.75 BUY CALL MAY-55 QFL-EK OI= 959 at $1.50 SL=0.75 BUY CALL JUN-50*QFL-FJ OI= 955 at $6.00 SL=4.00 BUY CALL JUN-55 QFL-FK OI=2053 at $3.75 SL=2.00 Picked on May 11th at $51.13 P/E = 49 Change since picked +0.00 52-week high=$79.75 Analysts Ratings 14-5-1-0-0 52-week low =$21.25 Last earnings 04/00 est= 0.29 actual= 0.30 Next earnings 07-17 est= 0.34 versus= 0.17 Average Daily Volume = 2.76 mln /charts/charts.asp?symbol=FLEX AMCC - Applied Micro Circuits $98.81 +12.19 (-14.88 this week) AMCC is a global provider of high-performance, high bandwidth silicon connectivity solutions for the telecommunications, data communications, and military markets. Their products are designed to respond to the growing demand for high-speed networking applications for established WAN standards and Automated Testing Equipment. The company, which began operations in 1979, is extending its reach through acquisitions. Its blue-chip clientele includes Nortel, Raytheon, 3Com, Alcatel, Cisco, and Lucent. Intel, the mother of all chipmakers, may have rocked the NASDAQ today with news it'll be launching an Internet media services business, but AMCC surpassed its lead for total points gained. Coming off lows near $85, AMCC demonstrated just how spunky it could get in a rallying market. The stock advanced $12.19, or 14.1% on better-than-average volume. The Philadelphia Semiconductor Index ($SOX) jumped up 6.3% too, which is always a nice touch. Pay attention to how this index moves in the near- term as it'll give an inkling of AMCC's overall strength in the market. You should be thinking...one day doesn't make a trend so why is AMCC on the OIN call list? Simply put, we're adding AMCC on the probability it'll shoot up with a sustained rally. Since it's also a fast mover there's lots of potential for tremendous profit. Now hold up! This play is HIGH-RISK and certainly not for everyone. Sure big movers are moneymakers as long as they move in the direction your betting! You've got to be prepared for a reversal if the market turns. Today the soft Retail Sales fueled the rally and all went well. If the economic data continues to establish a "buyable" market and the Feds don't do anything too outlandish, then AMCC could power-up in a hurry. But remember, firm support is down near $85 so there's plenty of room to tumble. Now let's take a look at a chart with a daily 5-dma line. You can visually confirm this indicator has served as a formidable line of resistance whenever AMCC attempts a rally. Therefore, a move through the 5-dma, currently at $99.35, would provide reasonable confirmation that AMCC can make a charge towards a full-recovery. On Monday the company announced the addition of a new product to its complete line of AMCC Solutions for DWDM Optical Switch Interface Applications. The S2080 is the industry's first super high-speed Silicon Germanium (SiGe) 34 x 34 differential crosspoint switch with full broadcast switching capability. Earlier in April, Robertson Stephens reiterated a Strong Buy rating and CSFB raised its price target to $200 from $150. Both analysts cited the solid earnings report delivered on April 19th in which AMCC came in at $0.16 p/s beating the consensus estimate by $0.02. BUY CALL JUN- 90*AEX-FR OI= 45 at $21.00 SL=15.25 BUY CALL JUN- 95 AEX-FS OI= 43 at $18.63 SL=13.50 BUY CALL JUN-100 AEX-FT OI= 84 at $16.38 SL=11.75 BUY CALL JUN-105 AEX-FA OI= 44 at $14.13 SL=10.50 BUY CALL JUN-110 AEX-FB OI=226 at $12.00 SL= 9.00 Picked on May 11th at $98.81 P/E = 230 Change since picked +0.00 52-week high=$158.88 Analysts Ratings 10-4-0-0-0 52-week low =$ 12.19 Last earnings 03/00 est= 0.14 actual= 0.16 Next earnings 07-15 est= 0.17 versus= 0.06 Average Daily Volume = 3.53 mln /charts/charts.asp?symbol=AMCC CDWC - CDW Computer Centers $118.75 +8.75 (+9.13 this week) Providing customized computing solutions to its customers, CDWC is a direct marketer of over 80,000 computer products, including hardware, software, peripherals, networking/communication and accessories. The company provides a nearly endless list of products, from companies such as Apple, Canon, Epson, Hewlett-Packard, IBM, Microsoft, Adobe, Cisco, and 3Com. Using catalogs, telesales, and the Internet, the company has over 630,000 customers and receives most of its business online. An anomaly in the pattern seen in the tech sector for the past 5 months, CDWC really didn't start to take off until the NASDAQ began to weaken in early March. Moving strongly until early April, the company saw its share price decline until hitting bottom on April 14th at $64. Since then it has been on a tear, nearly doubling in price in the past month. So what is driving CDWC, you ask? Look no further than the bottom line, as detailed in the company's April 24th press release. Posting its 27th consecutive quarter of sequential sales growth, with 60% growth in net sales, a 155% increase in Internet sales, and a 79% increase in net income is the kind of news that is music to investors' ears. With the strong growth, the company is expanding its management team and investors are taking notice. Since the above-mentioned press release, CDWC has many days of strong gains with volume frequently exceeding double the ADV. Even with the weakness in the NASDAQ, the share price has not closed below the 10-dma since April 17th. After consolidating its most recent gains for the first half of the week, CDWC gave investors one last entry point this morning as it dipped to $103 and then took off on strong volume for the remainder of the day. Closing at the high of the day, CDWC tagged a new 52-week high, and if the momentum continues, consider opening new positions as buyers push through the $120 level. Alternatively, look for an intraday pullback to near-term support ($114, $112, and then $110), and then jump on board as the price heads north again. Keep an eye on the volume; if it starts to weaken, a slowing of the upward momentum will likely not be far behind. Adding to the good news is the Annual Shareholder Meeting on May 24th. There will be a vote to increase the number of outstanding shares, and this could very likely be followed by a split announcement. CDWC is historically a split candidate above $80, and the strong move over the past few weeks puts the stock deep into this territory. ***May contracts expire next Friday*** BUY CALL MAY-110 DWQ-EB OI=62 at $10.88 SL= 8.00 BUY CALL JUN-110 DWQ-FB OI= 1 at $15.88 SL=11.50 low OI BUY CALL JUN-115*DWQ-FC OI=28 at $13.13 SL= 9.75 SELL PUT JUN-105 DWQ-RA OI=10 at $ 6.50 SL= 9.50 (See risks of selling puts in play legend) Picked on May 11th at $118.75 P/E = 43 Change since picked +0.00 52-week high=$118.75 Analysts Ratings 4-2-0-0-0 52-week low =$ 35.25 Last earnings 04/00 est= 0.64 actual= 0.79 Next earnings 07-24 est= 0.76 versus= 0.51 Average Daily Volume = 313 K /charts/charts.asp?symbol=CDWC MSFT - Microsoft $67.88 +1.69 (-3.25 this week) If you are reading this newsletter, you know Microsoft. Founded in 1976, MSFT is the world's largest software company. Their software products include the Windows operating system, Internet Explorer and the MS Office suite of solutions, including Word, Excel, PowerPoint, Access, and Outlook, not to mention Encarta and Money. They also run online services and e-commerce portal, MSN, WebTV, and have substantial holdings in other technology companies, including Vignette, Phone.com, Infospace, Expedia, and yes, even 5% of AT&T. They aren't just for your PC anymore. Bucking gale force winds for the last six months courtesy of an antitrust suit brought on by the Justice Department (egged on by CEO's from SUNW, ORCL, and AOL), MSFT's value has been cut nearly 45% since reaching a high of $120 in December, 1999. Right or wrong, the judge presiding over the case found MSFT to be a monopoly related mostly to issues surrounding its practice of tying the browser to the operating system. The government submitted its remedy of splitting MSFT into two companies to the court for consideration, while MSFT filed its proposed remedy of decoupling the browser from the operating system. At issue really is whether or not MSFT will be broken up by the court - an undertaking that MSFT says will never happen. With the appeals process taking as long as it does, and the possibility of this landing in the Supreme Court following multiple appeals, this thing will be tied up for years. In the meantime, MSFT is free to go about its business and continue earning its 40% margins on software products while providing a return on equity of 31%. So why buy it? No matter what the outcome of the anti-trust case, MSFT has a better than 50/50 chance of winning on appeal, which has investors collectively breathing a sigh of relief. Technical support too is proving to be rock solid at $65. Volumes are declining as the price has stabilized. Once we clear the PPI tomorrow and the FOMC meeting next week, MSFT could be off to the races with its first test of resistance at $70, then $75. The point is we think sentiment is shifting as many investors think the worst is over. Assuming the market cooperates, feel free to take a position at these levels. Don't just take our word for it. ING Barings reiterated their Strong Buy rating and price target of $135. Furthermore, Madison Securities reiterated their Buy rating and price target of $90 and cites that due to tremendous amount of negative news which has been factored into stock price, the stock represents an attractive buying opportunity for investors per comment from briefing.com. ***May contracts expire next Friday*** BUY CALL MAY-60*MSQ-EL OI= 3944 at $8.25 SL=5.50 BUY CALL MAY-65 MSQ-EM OI= 8116 at $3.75 SL=2.00 BUY CALL MAY-70 MSQ-EN OI=33128 at $1.00 SL=0.00 High Risk! BUY CALL JUN-65 MSQ-FM OI= 3317 at $5.88 SL=3.75 BUY CALL JUN-70 MSQ-FN OI= 8044 at $3.13 SL=1.50 SELL PUT MAY-65 MSQ-QM OI=12081 at $0.69 SL=1.50 (See risks of selling puts in play legend) Picked on May 11th at $67.88 P/E = 40 Change since picked +0.00 52-week high=$119.94 Analysts Ratings 5-3-0-0-0 52-week low =$ 65.00 Last earnings 04/00 est= 0.41 actual= 0.43 Next earnings 07-19 est= 0.41 versus= 0.40 Average Daily Volume = 40.8 mln /charts/charts.asp?symbol=MSFT JDSU - JDS Uniphase $86.50 +6.31 (-7.31 this week) JDS Uniphase is a high technology company that designs, develops, manufactures and distributes a comprehensive range of products for the growing fiberoptic communications market. These products are deployed by system manufacturers worldwide to develop advanced optical networks for the telecommunications and cable television industries. Their products include semiconductor lasers, high-speed external modulators, transmitters, amplifiers, couplers, multiplexers, circulators, tunable filters, optical switches and isolators for fiberoptic applications. The company also supplies its OEM customers with test instruments for both system production applications and network installation. The world's largest supplier of parts for fiber-optic equipment in phone networks is back on our list. It just goes to show you, can't keep a good company down. JDSU has provided us with many opportunities in the past and we expect more of the same this go around. To start with, a look at the chart shows just how strong the support at the $80 area is. On four different occasions in the last month, $80 has been the point where buyers and sellers have agreed to disagree. Oh yes, the company has definitely penetrated that mark, but on a closing basis has provided great support. With the decline in tech issues this week, JDSU once again visited $80, and again found buyers waiting in the wings. Need further proof of the strength? On Wednesday strong volume of 22.7 million shares were traded JDSU headed south. $79.25 was all the further the bulls would let the fiber- optic equipment company fall. Today Hasan Imam at DLJ initiated coverage of JDSU with a New Buy rating. His 12-month price target came in at $120. JDSU has a large number of analysts that follow the company, most of which have them rated as a Strong Buy or Buy. While that alone won't keep the stock afloat, it does suggest that the company is on track to meet their projections and at the current levels could be considered an attractive buying opportunity, long or short-term. The analysts seem to believe JDSU will emerge in the top three merchant vendors for optical components and modules, in a market that will grow to over $57 billion by 2005. For now we would consider any further strength in JDSU as an opportunity to enter this new play. With the uncertainty in the broad market, conservative traders may prefer to wait until the FED is out of the way. As we've said, the $80 area should provide great support we see selling return. On Monday JDSU said it had bought Fujian Casix Laser Inc. This is their first venture into China. They did not disclose the terms of the deal, but said it intends to use the company's research and development talents in the area of fiber-optic components and optics for telecom networks. ***May contracts expire next Friday*** BUY CALL MAY-80 XXZ-EP OI=1916 at $ 8.50 SL= 6.00 BUY CALL MAY-85*XXZ-EQ OI=1930 at $ 5.63 SL= 3.50 BUY CALL JUN-80 XXZ-FP OI=3131 at $14.00 SL=10.50 BUY CALL JUN-85 XXZ-FQ OI=2437 at $11.13 SL= 8.25 BUY CALL JUN-90 XXZ-FR OI=2637 at $ 9.13 SL= 6.25 SELL PUT MAY-85 XXZ-QQ OI=7591 at $ 1.38 SL=2.63 (See risks of selling puts in play legend) Picked on May 11th at $86.50 PE = N/A Change since picked +0.00 52 week high=$153.42 Analysts Ratings 19-14-2-0-0 52 week low =$ 15.20 Last earnings 04/00 est= 0.10 actual= 0.11 Next earnings 07-25 est= 0.12 versus= 0.06 Average daily volume = 16.3 mln /charts/charts.asp?symbol=JDSU ************* NEW PUT PLAYS ************* FDRY - Foundry Networks Inc. $66.75 -6.06 (-23.38 this week) Foundry Networks Inc. is a leader in high performance end-to-end switching and routing solutions including Internet routers, Layer 3 switches and Layer 4-7 Internet Traffic Management switches. Foundry products are installed in the some of the world's largest ISPs including AOL, EarthLink, AT&T WorldNet, MSN, and Cable and Wireless. Their products are also installed in large enterprise, entertainment, pharmaceutical and manufacturing companies as well as search engines, e-commerce sites, universities and government organizations. Broken support or is their more to the story? That's what investors that owned shares of Foundry Networks were undoubtedly saying as the switching and routing company lost better than 8% in today's trading. Actually the last two months have been tough for shareholders of company's stock. There's been no company specific news to drive the price lower, but the lack of buyers has dropped the price to a level not seen since last October. ArrowPoint Communications a competitor in the industry joined forces with CSCO and has managed to get a boost today, while ATON, FFIV, joined Foundry in making their way lower, on a day there was a bit of renewed optimism in the overall market. FDRY did break the $70 level that had provided decent support in late April. AS FDRY crossed the $70 mark today the volume picked up, which is not a good sign, for those looking for a quick turnaround. Over 2.3 million shares were traded, nearly nearly twice the norm, which is also not a plus for the bulls. Some investors point the CSCO acquisition of ArrowPoint as the reason for the weakness in FDRY, while others suggest it was the company's most recent Quarterly report hitting the Internet that caused traders to shy away. For traders that really follow the company that information has been in the market since mid-April. It could be the technical picture or just a lack of interested buyers, but whatever the reason its not a pretty picture. There is little support for FDRY until the $58 area, with resistance at $68 and $72. The 26% decline so far this week has left the 10-dma in its tracks back at $84.70. If we do see a bounce in FDRY, confirm further weakness with volume prior to entering a new play. BUY PUT MAY-75*OUJ-QO OI=200 at $ 9.88 SL=7.25 BUY PUT MAY-70 OUJ-QN OI= 99 at $ 6.50 SL=4.50 BUY PUT JUN-75 OUJ-RO OI= 18 at $12.63 SL=9.75 Average daily volume = 1.36 mln /charts/charts.asp?symbol=FDRY ********************** PLAY OF THE DAY - CALL ********************** FLEX - Flextronics International $51.13 +4.81 (-3.50 this week) Flextronics is one of the world's leading providers of contract electronics manufacturing services. The company offers design, manufacturing, and distribution services for electronics makers in such industries as networking, telecommunications, computers, consumer electronics, and medical instrumentation. Customers include Philips, Ericsson, and Cisco. Customers outside Asia account for almost 80% of sales. FLEX's recent acquisition of rival The DII Group made it the world's #4 contract manufacturer. We're looking for the recent rebound to flex its muscles. After selling-off sharply in the past two weeks, FLEX found a bottom Wednesday, and rebounded smartly Thursday. The quick reversal stems from a broad rally in the tech sector and an analyst upgrade Wednesday. Raymond James upgraded FLEX from a Buy rating to a Strong Buy. The upgrade comes from analysts' beliefs that the long-term prospects for FLEX remain positive and concerns over component shortages are behind. Analysts feel that FLEX will benefit from the unprecedented growth of the Internet. FLEX is positioned to benefit from the increasing demand for the hardware that runs the Web. Also worth noting, part of the recent decline can be attributed to shortages in electronic components. But, analysts believe that those worries have been fully factored into the stock price, and that business remains booming for FLEX. We're looking for the recent rebound in FLEX to extend its gains as renewed interest in the stock builds. Look for an entry near current levels if Thursday's momentum carries FLEX past resistance at $52. If the stock stumbles Friday morning, watch for a bounce off support at $50. Volume has been an accurate indicator of FLEX's movement lately, confirm any move higher with above average trading activity. FLEX has been on the acquisition trail this year. The company has acquired the operations of Palo Alto Products and The DII Group, and a manufacturing plant in Denmark. FLEX's continued growth by acquisition is helping the company expand into new markets and increase profitability. ***May contracts expire next Friday*** BUY CALL MAY-45 QFL-EI OI= 271 at $6.88 SL=5.00 BUY CALL MAY-50 QFL-EJ OI= 293 at $3.38 SL=1.75 BUY CALL MAY-55 QFL-EK OI= 959 at $1.50 SL=0.75 BUY CALL JUN-50*QFL-FJ OI= 955 at $6.00 SL=4.00 BUY CALL JUN-55 QFL-FK OI=2053 at $3.75 SL=2.00 Picked on May 11th at $51.13 P/E = 49 Change since picked +0.00 52-week high=$79.75 Analysts Ratings 14-5-1-0-0 52-week low =$21.25 Last earnings 04/00 est= 0.29 actual= 0.30 Next earnings 07-17 est= 0.34 versus= 0.17 Average Daily Volume = 2.76 mln /charts/charts.asp?symbol=FLEX ************************ COMBOS/SPREADS/STRADDLES ************************ A Successful Test Of The April Lows? Wednesday, May 10 The markets fell precipitously today as investors dumped stocks amid concerns about rising interest rates and lofty valuations in the tech sector. The Nasdaq Composite Index fell 200 points to 3,385 while the Dow Industrials tumbled 168 points to 10,367. The S&P 500 Index fell 29 points to 1383. Volume on the Nasdaq remained fairly light with 1.57 billion shares changing hands. Declines swamped advances by more than 3-to-1. Trading volume on the NYSE was relatively low with 979 million shares exchanged. Declines beat advances by more than 2-to-1. In the bond market, prices rose for the second straight day, assisted by the decline in stocks. The U.S. 30-year Treasury was last up 24/32, bid at 101 7/32, pushing its yield down to 6.15%. Sunday's new plays (positions/opening prices/strategy): Excite@home ATHM JUN15C/JUN17C $1.75 debit bull-call Falcon Drill. FLC JUN17C/JUN22C $3.62 debit bull-call Boston Sci. BSX JAN22C/JUN30C $6.88 debit LEAPS/CC's All three of our plays benefited from the broad decline in stocks during today's session. Unfortunately, a technical market bottom has yet to be found and thus each of these issues may continue to move lower in the short-term. Portfolio plays: Stocks fell across the board in a volatile session Wednesday as investors continued to worry about Friday's economic data and next week's FOMC meeting. The Nasdaq endured the brunt of the selling with today's drop bringing the index's weekly loss to 431 points. The composite index is now approaching its April low and there is no longer a belief that technology stocks are immune to rising inflation and interest rates. The weakness spread to other groups with automotive, drug, finance and transportation issues included in the sell-off. In the broader market; beverage, healthcare, and retail issues advanced while semiconductor, networking and telecom equipment stocks moved lower. Based on the recent trend, traders are shifting money into defensive stocks, those that are likely to perform better in a period of rising interest rates. With May to October a historically weaker period for the market, the question now is how far the Nasdaq will have to fall before buyers return for bargain-priced technology issues. Cisco Systems (CSCO) was a big loser on the Nasdaq, even though the company reported profits which beat the consensus estimates. Motorola (MOT) dropped $17 after Salomon Smith Barney downgraded the wireless phone maker and slashed the company's price target, triggering a sell-off in worldwide telecom equipment companies. Intel (INTC) also fell significantly after saying it would have to replace defective motherboards. Applied Materials (AMAT) slid to $84 ahead of its earnings and then continued another $7 lower in after-hours trading even as the company reported profits of $0.55 per share, meeting consensus estimates. Our position was on the brink of the exit stops during the day's trading and with Cisco's demise there is only a small chance of a post-earnings recovery. For those of you that chose to close the play, a $2.25 debit was available; a $1.25 loss. Holding the long (put) option through the earnings announcement is another possible strategy but we will simply wait for the reaction in tomorrow's market before making a final decision. With the recent technical reversal in the semiconductor sector, Mattson Technology (MTSN) became a target for judicious money management. The issue had previously traded above the recent support area at $43 but today's early slide sent the stock into a bearish trend. There were a number of opportunities to close the position, either simultaneously or with individual trades. Based on the stock's decisive decline through the support level, we decided to let the short option remain open, maximizing the credit for the long position ($4). If there is any indication of a bullish recovery, we will simply purchase a long-term option, converting the original spread into a time-selling strategy. Another position that may have signaled an early exit was SCM Microsystems (SCMM). The issue dropped $4 during the morning session and with the technology group in danger of a significant sell-off, accepting the closing debit of $1.50 may have been the prudent move. Of course SCMM is simply one of a number of stocks that are trading on the edge of technical failure. Once again, tomorrow's trend will likely determine their fate. Our bearish position in Temple Inland (TIN) finally demonstrated the signals we spoke of last week; a close above the resistance at $52 on increasing volume. The move came after International Paper Company (IP) and its Finnish rival, UPM-Kymmene, raised their offers for control of Champion International (CHA). With the new acquisition interest in that sector, many of the lesser known issues are starting to rally. The current closing debit is $1.00, a $0.25 loss, but you can also attempt to profit from the new trend by legging out of the position in two separate trades. Of course the other solution is to wait for expiration, trading only if the issue makes a significant attempt at the sold strike of $55. Thursday, May 11 The stock market staged a broad-based rally today as new economic data eased investor's recent interest rate fears. The Dow rallied 178 points to close at 10,545 while the Nasdaq Composite advanced 114 points to end at 3,499. The S&P 500 Index and the Russell 2000 Index of small-cap stocks also participated in the rally. Trading volume was very light with 954 million shares traded on the NYSE and 1.37 billion shares exchanged on the Nasdaq. Market breadth improved with advances beating declines 19 to 10 on the NYSE and 25 to 15 on the Nasdaq. Bond prices ended mixed, erasing the brunt of their earlier losses with the 30-year bond down 1/32 to yield 6.15%. Portfolio plays: The majority of stocks in our portfolio moved higher today after a report of the slowdown in retail sales comforted worried traders. Both the Dow and the Nasdaq made significant recoveries and the broader stock indicators were also higher. The bullish economic data was welcome news and the announcement that retail sales fell 0.2% sent a wave of optimism through the market. Of course many analysts were quick to point out that additional factors may have biased the report but the decline raised hopes that recent interest rate increases are slowing the economy. Unfortunately, the FOMC is still expected to raise the federal funds rate by at least 50 basis points at their meeting on Tuesday. Bargain prices in the technology group helped the Nasdaq recover from recent lows as the majority of these companies have been sold to yearly lows in the past few weeks. Our primary concern for the session was Applied Materials. After the close Wednesday, AMAT reported operating earnings of $0.55 a share, in line with most analyst's estimates but the stock fell considerably in after-hours trading. This morning the sell-off continued but eventually the stock rallied with the market. Now the question is whether it can hold above our sold strike at $80 until expiration. We will watch this one closely! SCM Microsystems (SCMM) also came roaring back but with the recent volatility, the recovery may be short-lived. The closing debit is now slightly higher than we would normally accept but the market has experienced some extreme gyrations in the last few days and with any luck the FOMC's announcement next week will generate a small relief rally. One of the most surprising issues in our portfolio was Dean Foods (DF). Our new calendar spread has performed exactly as expected and the position is trading at a $0.50 profit in just one week. That's a 28% return, well above our target and the long position has an August expiration date. Some of you may choose to close the spread for the current credit but there is an opportunity for additional (time-selling) premium at the $30 strike in June. Of course you must evaluate the technical outlook for the issue and the market before adjusting the position. Computer Associates (CA) provided another unexpected move with a $7 rally to close at $51.50. The jump came after the company said its fourth-quarter results would be in line with Wall Street expectations, seeking to dispel fears that a previously announced delay in its reports signaled accounting issues. Computer Associates also said that in response to investor and analyst requests, it would report its fourth quarter and fiscal year-end results after the market closes on Monday, May 15. The consensus for the fourth quarter is for the company to report earnings of $1.13 per share, compared with $0.90 per share in the year-ago period. This announcement will certainly affect our bullish position and with a cost basis near $48, we may attempt to exit the play prior to the report date. Questions & comments on spreads/combos to Click here to email Ray Cummins ****************************************************************** - NEW PLAYS - ****************************************************************** TX - Texaco $55.00 *** New Options Activity *** Texaco is engaged in the worldwide exploration for and production, transportation, refining and marketing of crude oil, natural gas liquids, natural gas and petroleum products, power generation and gasification. The company's worldwide operations encompass three main businesses: Exploration and Production; Refining, Marketing and Distribution; and Global Gas and Power (marketing of natural gas and natural gas products). A number of leading energy companies rallied today as crude oil prices approached $30 a barrel on expectations of strong summer demand. The bullish outlook moved through the entire sector with all major energy indices posting significant gains. The rise in these groups comes after a long-awaited period in which soaring crude oil and natural gas prices have made for handsome earnings but have done little to bring the industry leaders back to their historical share values. Now it appears that a fundamental change is underway and energy stocks have been on an upswing in anticipation that business will flourish in the high-demand summer months. Texaco has been the focus of increased option trading interest and implied volatility moved higher today as the share value rallied. There were both large institutional buyers and retail participants. The activity left us with some favorable positions and in this case, we are going to begin with a short-term bullish outlook and hope for a small consolidation prior to next week's expiration, when we will roll forward to June positions. This position is based on recent increased activity in the stock and underlying options. The position offers favorable risk/reward potential for those who are bullish on the issue but as with any speculative play, it should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. PLAY (conservative - bullish/diagonal spread): BUY CALL OCT-40 TX-JH OI=119 A=$16.38 SELL CALL MAY-55 TX-EK OI=2051 B=$1.50 INITIAL NET DEBIT TARGET=$14.62-$14.75 TARGET ROI=25% Chart = /charts/charts.asp?symbol=TX ***** APA - Apache Corporation $57.69 *** New All-Time High! *** Apache Corporation explores for, develops and produces natural gas, crude oil and natural gas liquids. Apache's average daily production in 1998 was 75,000 barrels of oil and natural gas liquids and 590 million cubic feet of natural gas. The company's exploration and production interests are focused on the Gulf of Mexico, the Anadarko Basin, the Permian Basin, the Gulf Coast and the Western Sedimentary Basin of Canada in North America. Apache also has exploration and production interests offshore Western Australia and in Egypt, and exploration interests in Poland and offshore The People's Republic of China. Apache holds interests in many of its U.S., Canadian and international properties through operating subsidiaries such as Apache Canada, DEKEnergy Company, Apache Energy Limited, Apache International and Apache Overseas. Rising oil prices are benefiting several energy stocks today and the rally in the industry helped APA achieve a new, all-time high during the bullish session. Crude oil is up near $30 a barrel on the New York Mercantile, continuing an upward trend that has gained new momentum over the past few weeks. The effects of this trend are evident in the price performance of this stock and its industry group and we think the trend will continue into the Summer months. PLAY (conservative - bullish/credit spread): BUY PUT JUN-45 APA-RI OI=17 A=$0.43 SELL PUT JUN-50 APA-RJ OI=124 B=$1.00 INITIAL NET CREDIT TARGET=$0.62-$0.68 ROI(max)=14% B/E=$49.38 Chart = /charts/charts.asp?symbol=APA ***** ADEX - Ade Corporation $18.69 *** Short-term Play! *** ADEX designs, manufactures, markets and services metrology and inspection systems for the semiconductor wafer manufacturing industry. The Company is also a supplier of metrology systems to the semiconductor device, data storage and optics industries. Its systems analyze and report product quality at manufacturing process steps, sort wafers and disks and provide manufacturers with quality certification data. Semiconductor wafer and device and data storage manufacturers use its systems to improve yield and capital productivity. Ade's products have evolved from single instruments used in off-line engineering analysis to multi-function systems for automated in-line monitoring of process-induced defects throughout the wafer/disk manufacturing processes. Its systems are designed to deliver the throughput, reliability and information and analysis necessary to meet the demands of increasingly complex and time-sensitive manufacturing processes. "Out with the old and in with the new" defines the recent activity at the company's headquarters. On May 1, Ade officials announced that Daniel F. Harrington resigned as vice president, treasurer and chief financial officer of the company to accept a position with a privately held technology firm. The news appears to be a positive move for the company as the share value has rebounded in recent sessions. Ade has initiated an aggressive search for a new chief financial officer who will help them capitalize on future growth opportunities and it appears that investors agree with the change. We simply favor the change in character and the current technical trend. If you also believe the issue will continue to rise during the next week, this play offers an excellent risk/reward outlook. PLAY (aggressive - bullish/debit spread): BUY CALL MAY-15.00 QDE-EC OI=0 A=$4.25 SELL CALL MAY-17.50 QDE-EW OI=12 B=$2.12 INITIAL NET DEBIT TARGET=$2.00 ROI(max)=25% B/E=$17.00 Chart = /charts/charts.asp?symbol=ADEX ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. 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