The Option Investor Newsletter Sunday 5-14-2000 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 5-12 WE 5-5 WE 4-28 WE 4-20 DOW 10609.37 + 31.51 10577.86 -156.05 10733.91 -110.14 +538.28 Nasdaq 3529.07 -287.75 3816.82 - 43.84 3860.66 +216.78 +322.59 S&P-100 761.67 - 8.12 769.79 - 11.63 781.42 + 4.30 + 45.18 S&P-500 1420.96 - 11.67 1432.63 - 19.80 1452.43 + 17.89 + 77.23 RUT 490.94 - 21.90 512.84 + 6.59 506.25 + 24.41 + 28.12 TRAN 2874.02 - 2.09 2876.11 + 26.10 2850.01 + 16.76 +106.21 VIX 29.95 - 0.44 30.42 + 1.64 28.78 + .37 - 10.92 Put/Call .53 .53 .51 .75 ****************************************************************** Retail Sales Fine, PPI Good...Now Bring On The Fed The numbers are in with a market-friendly bias, so now we are officially on Fed watch. Ok, let's all stop and synchronize our watches. The Fed decision will come Tuesday afternoon at 2:15pm EST, after their one-day May meeting. The big question isn't if they are going to raise rates, but by how much? Out of 10 economists polled by CNBC this last week, eight voted for a 50-basis point tightening. While this is highly likely, the chatter on Wall Street on Friday was about the benign Retail sales numbers on Thursday and an inflation- free PPI on Friday. Oddly enough, traders were disappointed by this turn of events. I know, I know, why can't we live in harmony for just one day! Here is their thinking and it is justified. If these reports had signaled more inflation filtering its way down the pipeline, then the Fed would have had no choice but to move by 50 points. Now that we saw a decline in both the Retail Sales and Producer Price Index, traders are wondering if Greenspan will only make a 25-point move. Although you might initially find that as a positive, all it does is keep the Street fearful of another move by the Fed in June. Thus is the dilemma and we will cover this further below. There was no dilemma on Wall Street Friday though after the PPI was released before the market open. It came in with a decline of 0.3% versus estimates of a 0.1% loss. This was the biggest decline in the index since February of 1999. On the good news, the futures were up big and the market didn't disappoint by rallying for most of the day. We did get the typical Friday afternoon sell-off that we have become accustomed too over the past month or so to wash out some gains, but the major indices still closed on the plus side. The DJIA closed up 63.40 to 10,609.37 on weak volume of 859 million shares. The Nasdaq finished up 29.48 to 3529.06 on volume of 1.2 billion shares. This doesn't paint an accurate picture though as the intraday highs were much higher. The DJIA was up 127 on its high and the Nasdaq was up 119 intraday. Here are the charts for the month of May. The S&P 500 added 13 points to close at 1420. Speaking of the S&P, it was announced Friday morning that MEDI would be added to the prestigious index. They are going to replace Central & South West Corp. Never heard of them? That is why they are being dropped. This news gave MEDI a nice $10 gap up opening on Friday and made us happy since it is on the call list. It's no Big Game prize, but congrats to all who were long calls or short puts. The other S&P 500 whisper was that Agilent (A) is the next in line for such an announcement. Proving that rumors are stronger than the actual event, Agilent was up over $20 intraday before closing with a $14 gain, or 18%. It's hard to say if this will come true or not, but it would be difficult to imagine any further gains based on this news as it seems to now be priced in. What may spur investors this week are some key earning reports. Agilent will report on Tuesday along with HWP, BEAS, HD, JCP, and KSS. On Wednesday will hear about LCOS, ADI, ADCT, and AEOS. Followed by SCMR, PRSF, CIEN, and NTAP on Thursday. We expect the trend of strong earnings to continue. Stocks are so battered in some groups that we are actually seeing prices rise after earnings. DELL is the prime example. They reported decent numbers on Thursday, after the close, and were met with a strong reception by investors on Friday. DELL climbed over $5 on strong volume. We may see more of this affect, but again market sentiment lies in the hands of Greenspan. One aspect of the market that didn't react positively to the tame wholesale inflation news was the bond market. The 30-year sold off ahead of the Fed meeting. It lost 24/32 to yield 6.21%. It has been climbing on a regular basis for a few weeks now and is continuing to hold financial stocks underwater. Oil prices are doing a little creeping up of their own. They are back to nearly $30 a barrel. This is a little disheartening because it will negatively affect the PPI in May and June. How about we ignore this issue because if we focus on it, we will ruin any chance we have for one day of serenity. We need to think happy thoughts to bring the buyers back and kick start this market. The VIX looks pretty good as it is still sitting above 30. The last time it hit 20 was in early December. Can you believe it? The last time it was even below 25 was mid-March. I would love to see a monster post-Fed rally back to 20 to bring buying interest back to the street. You would probably see the stock piles of cash get thrown into the markets in a hurry if that happened. Here are some reasons why I am hopeful of a rally this week. Granted, I have my fingers crossed under the desk because there are equal reasons to stay range-bound, but I see the glass as half full here, not half empty. First, there is the Fed. My guess is they are going to do the right thing, which is to raise by 50 points and step back for awhile to see how this affects the market. Some are calling for a 50-point move in May and June. That would be very irresponsible in my mind. Let's stop and think for a second. Why has Alan been raising rates for nearly a year when we haven't seen signs of inflation until recently? It's because these moves take time to have an impact. If he were to rattle off two 50-pointers in a row, he could have us in a recession in six months. Also, half of the reasoning behind the moves, even though he may not admit it, is to calm the euphoria that was going on in the markets. Fair enough, it was getting out of hand there for awhile, but the market has paid the price. The last thing Greenspan wants is to scare the Nasdaq down to 2500 and be remembered for killing the markets. And if that happened, he would probably be forced to cut rates, which would nil the hikes. He knows this and will continue to be a gradualist like he has all along. There are two other facts to this story. His last move during a series of moves in 94-95 was a 50-pointer. After that move he stood pat for a year and a half. Second, we are entering presidential election time. Greenspan doesn't want to get caught in the cross-fire. Easier to move 50 now, and let the debate and election take their own course. Besides, every presidential election year since 1950, the markets have gone up between May and December. Coincidence or was it premeditated? Maybe a little of both, but it puts the bias on our side. OK, enough with the Fed. You know where I stand, a 50-point move to spark a REAL rally. The evidence will need to come by a volume day of around 2 billion shares and a breakout over the down-trending line in the Nasdaq chart above. If either of those two criteria are not met, then I will turn my computer off and head out for a round of golf. If this last month has taught us anything, it is that you can't fight the tape. I will stick to some covered call strategies, LEAP plays, and possibly some spread plays, but front month call buying will be a dangerous place to play. One final note, we have the April industrial production and capacity utilization on Monday, followed by the April CPI and Fed meeting on Tuesday. But, after that the week is pretty calm in economic data. This helps to set the stage for a rally after Tuesday, barring a Fed or CPI disaster. No news is good news right now. So keep your fingers crossed too, but when in doubt...get out. Ryan Nelson Asst. Editor *************************************************** 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 *********** JIM'S PLAYS *********** What a week! After sitting out most of last week while on a business trip the first three days of this week were exciting. Not wanting to buy in after a three day rally I was glad to buy the dip on Tuesday afternoon. If ever there was a poster boy for buying to soon, I have been it lately! The -200 point Nasdaq drop on Wednesday was actually not too painful. The stocks I bought on Tuesday did not drop much so I was only stopped out of three positions. I was waiting with my finger on the mouse button when the Nasdaq started rebounding from 3360 on Thursday. I backed up the truck in preparation for a post Fed relief rally. The Nasdaq bounce at the open Friday was nice to watch but with the weekend ahead I knew it would probably sell off. Still all but two positions were well over where I bought them on Thursday. I used the Friday afternoon dip to add to several that looked strong. Since I will be at the Money Show in Vegas all week I wanted something I could set stops on and forget. If you have been reading me long then you know I favor selling naked puts on big dips to capture the intrinsic value on the rebound. I Sold June puts where I could but in order to get the deep in the money positions I wanted I had to sell some July/Aug strikes as well. I have set stops based on the stock price at about $5 less than where I bought on the dip so unless Monday produces another sell off before the Fed I should be ok. Several stocks are already way ahead. Like RMBS, SDLI, CIEN, GLW which had great two day runs. I am writing this while waiting for my plane so I am going to be brief. No big list of charts just a list of my positions and you can use whatever charting program you want to do the analysis. Stock Strike Premium Received AMCC Jun-160 70.75 AETH Aug-250 125.63 ARBA Aug-150 80.81 - underwater BRCD Jun-160 50.00 - underwater - bought Friday BRCM Jun-230 83.13 CHKP Jun-200 51.63 CIEN Jun-170 43.69 CREE Jun-160 40.63 DNA Jun-200 70.19 - underwater EBAY Jun-175 53.00 - underwater - bought Friday ETEK Jun-220 51.50 - underwater EXDS Jun-150 72.50 - underwater GLW Jun-220 42.88 ITWO Jun-150 56.63 JNPR Jun-220 68.63 PMCS Jun-220 79.50 PDLI Aug-200 93.13 RMBS Jun-250 85.62 SCMR Jun-150 78.00 SDLI Jun-220 62.88 SNE Jun-300 83.13 YHOO Jun-180 53.25 - underwater Calls SFE Jun-40 YHOO Jul-125 NOK Jan-2002-$40 VOD Jan-2002-$30 MSFT Jan-2002-$65 I closed the open NTAP calls for $1.19 that I had sold for $6.00 and sold the NTAP stock when it dropped below $62 again. Nasdaq 3800 is still the entry point for new long positions for conservative traders. Before the Nasdaq can move to 5000 it has to pass 3800. If you wait for that confirmation you will avoid the "is this just a bounce" problem that the high risk players have to deal with. If you are in Las Vegas stop by our booth at the Ballys and say hi! Sell too soon Jim Brown *********** IN THE NEWS *********** The Gentle Art of Discounting By S.P. Brown The science of investment valuation is, shall we say, a soft science. The truth is, there are as many different ways to value an investment as there are investors. Some folks use charts, some use financial statements, some use mathematical algorithms, heck, some even use astrology. Subjectivity rules. With that said, there is one "academically correct" valuation methodology that stands above the rest--if only because it's drummed into every finance student's head--and that's discounting future cash flows back to the present to arrive at an intrinsic investment value. Theoretically, anyone purchasing an investment is only interested in the investment's future, which intuitively makes sense. After all, if most investors were interested in only the here and now, money-losing enterprises like Red Hat(RHAT) and Amazon.com(AMZN) would never get off the ground. The premise of discounting cash flows is that a company's value can be estimated by forecasting future performance of the business and measuring the surplus cash flows generated by the company. These cash flows are then discounted back to a present value and added together to arrive at a valuation. So, how does this work? The first step is to look at the financial statements. Working from these, an investor will estimate projected cash flows that extend for as far as he plans on holding his investment. Each year's cash flow, which is generally represented by earnings before interest, taxes, depreciation and amortization (EBITDA). Interest income and expense, as well as taxes, are ignored because cash flow is designed to focus on the operating business and not secondary costs or profits. As for depreciation and amortization, these are non-cash charges, as the company is not actually expending any cash. Rather, depreciation is an accounting convention for tax purposes that allows companies to get a break on capital expenditures as plants and equipment age and become less useful. Amortization becomes an issue when a company acquires another company at a premium to its shareholder's equity--a number that's accounted for on its balance sheet as goodwill and is forced to amortize over a set period of time. Once individual yearly cash flows are determined, a terminal value for the company is estimated at the end of the investment horizon. The terminal value is the market value of the company if it were offered for sale at the end of the final year of the holding period. Since it's impractical to project company operations out beyond three to five years in most cases, some assumptions must be made to estimate how much value will be contributed to the company by the cash flows generated after the last year in the projections. One way is to just apply a simple multiple to the final year's cash flow. Another, is to treat the last year's cash flow as perpetuity, which assumes that the cash flow of the last projected year will continue forever. Once the cash flows are projected, a discount rate must be chosen. This discount rate should reflect the business and investment risk involved. The riskier the business, the higher the rate. There is no hard and fast rule to selecting an appropriate discount rate. Generally, the rate is influenced by the extent of risk attributed to the investment, the rates of return for alternative investments, market sentiments, inflation expectations and overall economic conditions. As a guide, many investors will use a firm's weighted average costs of debt and equity capital. If a company's after tax cost of debt is 10 percent and its estimated cost of equity is 20 percent (often represented by its earnings yield) and it plans to raise capital on a 50/50 split between the two, its cost of capital would be 15 percent. An example is in order: ABC Enterprises has projected after tax cash flows of $5 mln, $10 mln and $15 mln over the next three years, respectively. What's more, it's believed that ABC could be sold for 10 times its final year cash flows, or $150 mln (terminal value) at the end of the third year. Assuming investors expect a return of at least 15 percent to compensate for their risk, a 15 percent discount rate is applied to ABC's future cash flows. Here's the equation: ABC value = $5/(1.15) + $10/(1.15)^2 + $165(1.15)^3 = $120,339,441 Now, if ABC had 10 million shares outstanding, then each share should theoretically be worth $12.03. This is ABC's intrinsic value. If ABC is selling at a higher (lower) price, an argument can be made that the company is over (under) valued. It's important to note that with a shorter investment horizon, a higher percentage of the intrinsic value comes from the terminal or sale value. Like any other valuation method, the discounted DCF analysis has its shortcomings. For one, since it focuses only on the generation of cash flow, it ignores outside factors that affect company value, such as price-earnings ratios, asset values and other internal factors that can reduce or increase company value. Additionally, valuations based on the future performance of a company are extremely difficult to do because they require the investor to make numerous assumptions about the future (which is one reason Warren Buffett avoids tech issues). Erroneous cash flow estimates can produce an intrinsic value that's way off base. The biggest weakness of the discounting method, though, is that it ignores simple supply and demand influences. The fact is, any asset is only worth what the market is willing to pay at a given time. At the present, the market is obviously willing to value some stocks outside of the confines of discounted cash flow analysis, which means DCF analysis isn't the greatest short-term trading tool. Nevertheless, for long-term investors, employing discounted cash flow analysis can prove invaluable for estimating a company's value for the reason it incorporates the two most important variables in determining present value - the future and the time value of money. *************** ASK THE ANALYST *************** Will The Bottom Hold? By Eric Utley Will Mr. Greenspan break the mold? Several of our questions will be answered next week. With some of the uncertainty removed, hopefully we'll see volume return to the market. I'd like to see a few of those money managers and institutions commit to positions, and spend their cash they have been stockpiling. Market pundits suggest that removing the Fed ambiguities from the market will fuel a relief rally. Remember what happened with the ECI and the jobs report? The market rallied despite the bad news. Wall Street will be listening closely to Greenspeak for hints of future Fed actions. If Greenspan hints the Fed is far from done raising rates, we may have a whole new set of issues to deal with. For the time being, we can relish the fact that the NASDAQ traced a higher low last week. Albeit on weak volume, but I'll take it. I receive many e-mails from our readers asking me if XYZ is a good buy. Seems appropriate since I write the Ask the Analyst column. Anyway, some of the e-mails I read say something like this, "What do you think of ABC, reported great earnings, good fundamentals, what's wrong." I think one of the biggest mistakes investors make is being reactionary as opposed to anticipatory in making investment decisions. Don't take that wrong, I'm not on a high-horse, and I don't claim to know it all. Believe me, I've discovered this through introspection. But, the market is less concerned with the past, it's focused on the future. I suggest that you develop a forward-looking mindset when making investment choices. Like a mad scientist, the investor needs to gather all facts and make a hypothesis about the direction of a stock. Essentially, what I'm trying to say is work hard. The amount of hard work and research you put into your choices is directly proportional to your success as an investor, no matter the current market environment. I'd like to commend the readers for your persistence. I chose two stocks that two of our readers have sent in more than once. If I haven't analyzed one of your stocks yet, keep sending your requests to asktheanalyst@OptionInvestor.com. Please put the symbol in the subject line of the e-mail. ---------------------------- Commerce One - CMRC I'd like your opinion on Commerce One. I own some of the stock and have been trying to no avail to make some money on options plays. Just when I think it can't possibly go any lower it does! Thank you. - Ken First of all Ken, I'd like to thank you for your persistence in sending in your request. As you well know Ken, B2B is thought to have trillions of dollars of potential. But, investors have shifted away from the "concept" stocks like the B2Bs into stocks that have earnings and a positive cash flow. Along with the unprofitability investors are unclear on which revenue model will actually work for the B2Bs. For example, will the "transaction fee" model be more profitable than the "software licensing" model? Investors were burned by the promise and potential of the business-to-consumer stocks such as ETYS and AMZN. Investor's don't want potential, they want profits. In the long-term, some of the B2Bs will be profitable, until then, there is a lot of uncertainty and risk built into the sector. The uncertainty in CMRC is clearly visible on the chart. The stock has lost nearly 70% of its value since its March peak. That is far more than the average tech stock. Will CMRC ever reach those lofty levels again? Not in the near-term, unless the company starts turning a profit ahead of schedule. But, CMRC isn't expected to be profitable for another two, maybe three years. So what might move CMRC higher in the near-term? We could see consolidation in the industry, considering the low levels at which the B2Bs currently trade. Or, investors could simply rekindle their interests in the sector. But I find that highly unlikely, it never really happened with the B2Cs. Let's take a look at the chart, and see if it reveals anything. ---------------------------- Akamai Technologies - AKAM What is going on with this stock? It went way down. I couldn't find any bad news. - Rauch I'd also like to thank you Rauch, for sending in your request more than once. I wish I had better news for you about AKAM, but I don't. You mentioned that you couldn't find any bad news about AKAM while it was going down. That's because nothing fundamentally changed about the company. The omniscient market decided AKAM was too highly valued, and it was time for a decline. You can see that volume progressively got higher and higher throughout April. That high relative trading in conjunction with a steep sell-off is a sure sign of institutional selling. It's another case of investor sentiment shifting away from the techs such as AKAM. And if you thought it couldn't worse, there is more. AKAM's lockup period was set to expire at the end of April. However, executives decided to postpone the expiration until July. The lockup would have opened the flood gates for an additional 70 mln shares of AKAM to come to market. That's nearly ten times the number of shares that currently trade. The postponing of the lockup was a smart move by AKAM executives, but they still have to unlock the stock. And when they do, it could get worse for AKAM. Unless of course sentiment drastically shifts from now until July. ---------------------------- Knight/Trimark Group - NITE Good fundamentals I think - tripled earnings in Q1 but heading south - is it the market forces? It is down 26% since I bought, expecting it to rise steadily after earnings. Thanks. - Kevin NITE is where the trade gets done. The company is reaping huge rewards from the online trading boom and has established itself as the premier market maker for online brokers. NITE has an incredible propensity to blow away earnings estimates. Look over the last five quarters and you'll find that NITE has surpassed estimates by an average of 35%. Also, the company's forward-looking P/E is in the single digits. Let me say that one more time. NITE is expected to grow earnings by about 25% over the next five years and trades at about nine times next year's earnings. I'll tell you this Kevin, you're not going to find much higher growth at such a cheap price. But, with that high growth comes high risk, namely volatility. NITE's profits are directly linked to the overall direction in the market. As a bull market climbs, more and more people trade and invest. Volume surges and so do profits for NITE. But when the bear starts growling, investors run from their computers and wait for a new bull to emerge. In fact, just last week Charles Schwab (SCH) reported a drastic drop in trading activity in April. SCH executives told analysts that trading activity was even slower in May thus far, compared to the same time in April. However, we have seen this cyclical pattern develop over the past two years, where trading activity comes to a grinding halt during the summer doldrums. If you're looking for a long-term investment, and don't mind the volatility, NITE is worth considering. Be warned though, if we enter into a prolonged bear market, the brokerage stocks will be hit the hardest. ---------------------------- 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 12, 2000 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,000 11,400 10,609 Neutral 5.05 SPX S&P 500 1,400 1,500 1,421 Neutral 5.05 OEX S&P 100 750 800 762 Neutral 5.05 RUT Russell 2000 450 550 491 Neutral 5.05 NDX NASD 100 3,200 4,000 3,406 Neutral 5.05 MSH High Tech 860 1,000 891 Neutral 5.05 XCI Hardware 1,360 1,600 1,390 Neutral 5.05 CWX Software 1,100 1,300 1,171 Neutral 5.05 SOX Semiconductor 960 1,200 982 Neutral 5.05 NWX Networking 900 1,100 1,007 Neutral 5.05 INX Internet 550 800 572 Neutral 5.05 BIX Banking 530 600 560 Neutral 5.11 XBD Brokerage 400 500 458 Neutral 5.05 IUX Insurance 540 620 609 Neutral 3.16 RLX Retail 900 1,000 910 Neutral 5.11 DRG Drug 355 400 379 Neutral 4.28 HCX Healthcare 710 800 771 Neutral 4.28 XAL Airline 140 155 149 Neutral 3.10 OIX Oil & Gas 265 300 307 BULLISH 5.11 Posture Alert This last week was witness to severe volatility on below average volume. Looking ahead, we would expect to see a pick up in volume after the Fed announces the interest rate hike on Tuesday. Regardless, the posture board is entirely neutral; with the exception of Oil & Gas, as this market continues its trading range bound ways. There are no current changes in posture. **************** MARKET SENTIMENT **************** Sunday, May 14, 2000 Lycos, Hewlett-Packard, Agilent, and more! This last week was witness to severe volatility, yet volume on all the major indexes made things quite boring, especially for us hyper-active traders. Regardless, we should see more action this week, as the bond/stock markets prepare for Greenspan and Co. A 50-basis point hike is already priced in, so the only real uncertainty is whether the buyers stop watching from the sidelines and start participating with a vengeance. If we don't get a significant uptick in price and volume, we may be trading range bound for awhile. Below is a small list of equities (that should be reporting their earnings this next week) and our Pinnacle Index for those particular stocks. The Pinnacle Index is a proprietary product that determines current market sentiment and expectations for underlying equities and indexes, which is based upon speculation in the option markets. Also included are their expected earnings, the infamous whisper number (if available), their estimated earnings release date, as well as the put/call ratio if available. What we look for are liquid stocks/options that garner a lot of interest from the investment community. Most of the issues are high tech, and are thus more aggressive. We then filter out many of the equities, only to show stocks with excessive optimism or pessimism. From a contrarian standpoint (a high number is a good indication of extreme optimism, and a low number is a good indication of extreme pessimism) you should buy when its low, and sell when its high. Last quarter, we highlighted some stocks with a Pinnacle Index that were stratospheric (as high as the upper 20's). Needless to say, these stocks had so much pent-up enthusiasm, that after their earnings, they tanked. It is the old adage, buy the rumor - sell the news. There were also numerous companies with a Pinnacle Index less than one. However, once these companies came out with their bad quarter, the stocks rallied due to the oversupply of pessimism. Company* Symbol Pinnacle Expected Whisper#: Put/Call Index(PI): Earnings: Ratio: Agilent A 0.98 .32 .36 1.09 Autodesk ADSK 1.02 .45 .49 1.04 Brocade Comm. BRCD 1.14 .07 .12 0.31 Hewlett Packard HWP 1.00 .82 .84 1.71 Home Depot HD 1.98 .27 .28 0.64 Lycos LCOS 7.28 .04 .06 0.28 Network Appliance NTAP 2.43 .06 .07 0.35 Sycamore Networks SCMR 3.62 .01 .02 N/A Looking at the list above, Lycos is easily the highest expectation stock for the week. Not only is their put/call ratio extremely optimistic, but their Pinnacle Index is indicating heavy bullish activity. Granted, much of this call buying can be attributed to the merger rumors this last week, but regardless, Lycos may be setting up for a fall should anything sound negative in their earnings or conference call. Low expectation stocks this week include Hewlett-Packard, Autodesk, Brocade, and Agilent. All of these issues have a low Pinnacle Index, suggesting bearish sentiment heading into earnings. With the exception of Brocade, they all have a bearish Put/Call Ratio as well. This bodes very well for the contrarian trader. Now the reason Brocade Pinnacle Index greatly differs from the put/call ratio, is the fact that open interest is skewing the put/call ratio. For example, Brocade is trading at 106, yet there are over 9,000 contracts for the May 200 call that expires this week. Now, these (May-200, zero-bid) contracts affect the put/call ratio, but not the Pinnacle Index. Have a good trading week! 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 (29.95): 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 (6.199): 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 (5/12) (5/16) (5/18) ***************************************************************** Overhead Resistance (805-830) 6.65 Overhead Resistance (775-800) 2.06 OEX Close 761.67 Underlying Support (745-770) 1.46 Underlying Support (715-740) 8.74 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. This suggests that this trading bound market may continue in the short term. Put/Call Ratio ***************************************************************** Friday Tues Thurs Strike/Contracts (5/12) (5/16) (5/18) ***************************************************************** CBOE Total P/C Ratio .53 CBOE Equity P/C Ratio .44 OEX P/C Ratio 1.38 Peak Open Interest (OEX) ***************************************************************** Friday Tues Thurs Strike/Contracts (5/12) (5/16) (5/18) ***************************************************************** Puts 700 / 7,010 Calls 800 / 10,855 Put/Call Ratio 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 12, 2000 29.95 ******************************************* Fed Briefing - By Pinnacle Capital Advisors ******************************************* Sunday, May 14, 2000 The Light at the End of the Tunnel! For the last several weeks, investors have been watching from the sidelines, feeling the negative effects of a declining portfolio. These gyrations that has been witnessed in this marketplace continues to amaze all the professionals; however, all focus has been placed on the bond market and the Federal Reserve. Recently, every economic indicator has moved the equity markets in a dramatic fashion either up or down. This trend will most likely continue, as the fear of future hikes continues to prevail. Looking to this FOMC meeting this week, there is about a 90% chance that the Fed will raise rates by 50-basis points. If you look at the chart below, the market seems to be telling us that there will be at least two more rate hikes (25-bp) after this one. This negative sentiment surrounding the bond market is the reason why the equity markets have behaved so poorly. What this market needs now is a continuation from Friday's PPI. We need more economic figures to point towards a slowing economy. When the street finally sees the light at the end of the tunnel (in terms of no more rate hikes), is when we will witness the institutional players spending their cash reserves. We think that light will be coming soon! Federal Funds Rate Discount Rate FOMC Meeting Forecast FOMC Meeting Forecast Current 6.00% Current 5.50% May 16 6.50% May 16 6.00% June 28 6.75% June 28 6.25% Oct. 3 7.00% Oct. 3 6.50% ************* COMING EVENTS ************* For the week of May 15, 2000 Monday Industrial Production Apr Forecast: 0.8% Previous: 0.3% Capacity Utilization Apr Forecast: 81.8% Previous: 81.4% Tuesday FOMC Meeting (9:00 am ET start time) CPI Apr Forecast: 0.1% Previous: 0.7% Core CPI Apr Forecast: 0.2% Previous: 0.4% Housing Starts Apr Forecast: 1.650M Previous: 1.604M Building Permits Apr Forecast: N/A Previous: 1.579M Wednesday None Scheduled Thursday Initial Claims 05/12 Forecast: 285K Previous: 297K Philadelphia Fed May Forecast: 13.3 Previous: 13.8 Treasury Budget Apr Forecast: $160.0B Previous: $113.5B FOMC Minutes 03/21 Forecast: -- Previous: -- Friday Trade Balance Mar Forecast: -$29.7B Previous: -$29.2B Week of May 22nd 05/25 GDP-Revised 05/25 GDP Chain Deflator 05/25 Initial Claims 05/25 Existing Home Sales 05/25 Help-Wanted Index 05/26 Durable Orders 05/26 Personal Income 05/26 PCE 05/26 Michigan Sentiment ************************Advertisement************************* Tired of waiting on trades to execute? 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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. 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The Option Investor Newsletter 5-14-2000 Sunday 2 of 5 ************* WOMAN'S WORLD ************* Liquidity On A Weekly Basis By Mary Redmond If you took a survey of the how many people reading this newsletter that are holding a significant percentage of their investing capital in cash right now, I think it would be over about 75%. That's the problem. If you and your neighbor and your fund managers are all holding cash multiplied by millions of people that means the buying momentum is about half of what it was a few months ago. There is an astonishing correlation between liquidity and market performance in today's market on a monthly basis. Let's take a look at what happened over the last 12 weeks on a weekly basis. Tracking fund flows is one of the most productive ways to do this. Mutual funds are not the only buyers in this market, but there is a close correlation between people sending money into their funds and people putting money in the market. Most people nowadays have several brokerage accounts and mutual funds, and tend to move money in and out of both at the same time. Take a look at the chart of the last three months: Approximate Approx. %change in Cash flows to funds S & P 500 %change in Nasdaq week ending: 2/9/2000 $8 bln 2/14-2/18 -9.6% -1.3% majority to tech 2/16/00 $7.5 bln 2/21-2/25 +5.7% +8.6% $2 bln to tech 2/23/00 $3.8 bln 2/28-3/3 -1.0% +6.7% $2 bln to tech 3/01/2000 $10.9 bln 3/6-3/10 +4.9% +2.2% $2.6 bln to tech 3/8/2000 $5.4 bln 3/13-3/17 +4.3% -0.6% $2.8 bln to tech 3/15/2000 $5 bln 3/20-3/24 +1.8% +9.1% $2.4 bln to tech 3/22/2000 $13.7 bln 3/27-3/31 +1.2% -7.0% $3 bln to tech 03/29/2000 $5 bln 4/3-4/7 -10.0% +3.5% 04/06/2000 Net outflow: 4/10-4/14 +1.6% -17.5% $271 mln 04/19/2000 $6 bln inflow 4/24-4/28 -1.3% +4.7% 4/26/00 $4.5 bln inflow 5/1-5/5 -1.7% -4.3% See how weak the market got when the money started coming out? The week ending April 7 was the first week in the year with net outflows and the following week the Nasdaq dropped 17.5%. While the weekly flows are not precisely correlated to the movement of the market, the four week moving averages of fund flows gives a better picture. 4 week MA of 3/22 4/26 %decline fund inflows (in billions) in flow Equity 11.90 4.80 60 Technology 2.97 0.93 69 (Nasdaq declined 34%) Small Cap 2.10 0.58 58 Aggressive Growth 3.80 1.77 53 Large Cap Growth 2.20 2.14 2 The week of March 22 was when the Nasdaq hits its peak above 5000 and has been on a decline ever since to the low around 3300. This is directly correlated with the decline in fund flows from a weekly average of $2.97 bln to a weekly average of $0.93 bln. The reason the monthly figures are more accurate is that fund managers can sometimes sit on cash for a few days or weeks, but usually not for an entire quarter. If you look at the weekly and monthly inflows you can also see that fund inflows are somewhat like stocks in that they can start out slowly and pick up momentum. Once the momentum gets going and the flows start coming in regularly, the movement feeds on itself. The one clear pattern that I see from the above numbers is that the weeks following net redemptions have been weeks to be extra cautious. This week ending May 10, the reports are that the money is slowly starting to trickle in, but not the levels seen previously. Approximately $1.6 bln went into equity funds last week, and approximately $8.4 bln went into money market funds. People are still scared to buy. As long as there is not a net redemption this should help to buoy the market, but we really need to see that $8.4 bln that went into money market funds go into equity funds. This reminds me of October of last year when people were still concerned that the Y2K computer bug could cause widespread computer disruptions. As a result, they held on to cash. When the money started to come in, it started relatively slowly. As the market continued to rise more and more, money came in until it turned into a flood. Hopefully the "Fed" bug will turn out to be as innocuous as the Y2K bug. Contact Support ***** OEX and Mother's Day By Lynda Schuepp What is the one thing Mom's are noted for? I'll tell you, if you don't realize--it's patience to explain. I got a ton of emails last week asking me questions about OEX and Skybox. The majority of you did not understand what the OEX is and how the Skybox trading system worked. I have to admit, I had a hard time understanding it when I first read about it, but maybe that's because it was not explained by a "Mom". Thursday night I attended the Boston Options club meeting and was also deluged by questions from attendees regarding the Skybox and how I trade the OEX. I guess because I trade the OEX, that's makes me an expert at the Skybox. So in commemoration of Mother's day, I will explain the system from a "mom's perspective" and give you some much needed background on the OEX. First, a little background on the OEX. The index was invented by the CBOE on March 11, 1983 and was composed of 100 large stocks, all which had options listed on the CBOE. Today, the OEX index is known as the Standard and Poor's 100 Index but still trades under the symbol, "OEX". I have not been able to find out what OEX stands for. My guess is Option Exchange IndeX. If anyone knows, please enlighten me. Trading the index allows the individual investor to make a market direction prediction. The risk when trading a single stock is that you can buy a call or Leap on a really great company and lose half of your value overnight after a news announcement. How many of you, besides myself, are holding severely depressed Microsoft Leaps? By trading the index, you are less susceptible to large swings created by news of a given stock. The CBOE site has a listing of the S&P 100 stocks in the OEX and their percentage in the index. The following is the definition of the OEX from their site: The Standard & Poor's 100 Index is a capitalization-weighted index of 100 stocks from a broad range of industries. The component stocks are weighted according to the total market value of their outstanding shares. The impact of a component's price change is proportional to the issue's total market value, which is the share price times the number of shares outstanding. It is important to know what makes up the OEX. First of all, there are only FIVE Nasdaq stocks in the S&P 100. However, they make up 28% of the market cap. These leaders are: Microsoft 8.4%, Cisco 8.1%, Intel 6.7%, Oracle 4% and Amgen at 1%. So even though the OEX is predominately made up of NYSE stocks, it is quite well correlated to the QQQ intra-day because of it's five Nasdaq leaders. The top FIVE NYSE stocks are: GE 7.8%, Exxon Mobil 4.1%, Wal-Mart 3.8%, IBM 3.3%, Citigroup 3.1%. By following just these 10 stocks, you can see that they represents 50% of the S&P 100 and hence where the OEX is trading. Because all email systems do not read charts properly, I can't add my spreadsheet to the newsletter but if you would like a full listing of the stocks, you may email me and I'll send you the excel spreadsheet with all the stocks and their weighting. Now that you understand what makes up the OEX, you will be able to have a better feeling which way the index will go, based on following the prices of it's leaders you will have a better understanding to trade the Skybox. The Skybox is a systematic mechanical trading system using options on the OEX and can be found under strategies at the OIN website. I will try to explain each section of the Skybox for you, just the way dear old Mom would try to explain why the sky is blue. Key Benchmarks: The key benchmarks are merely key support and resistance levels. For instance, by going to the site, on Friday you would see that the OEX closed Thursday at 761.67. The key benchmarks are 760 (resistance) and 740 (support). Since the beginning of March, the OEX has had a daily range from high to low of 20 points. Therefore, you can see the significance of these "key" benchmarks. The OEX also trades more heavily at the even numbered strikes and each 10 points represents some degree of support/resistance. If you look at the volume and open interest of the options you will see 2-3 times the volume at strikes of 760 and 770 than at 765. More volume = more liquidity = smaller spreads. Therefore, when you make a trade, you should buy the even numbered strikes. Triggers: The Bullish triggers are those resistance levels +2 points. When a stock trades through a resistance level, you would be bullish and buy a call. It is no different for the OEX, because it is made up of stocks that obviously are trading higher. When the OEX trades through 762 (760 resistance level plus 2 points) you would buy a call. Conversely, if the OEX traded below 738 (740 support level less two points) you would interpret this as bearish and would buy a put. The other trigger levels are the 10-point increments above and below "KEY" benchmarks levels. Entry, Target, Stops: I refer to this section as ready, aim, fire. The entry point is what the option should cost (if priced fairly) at the time the OEX trades at that trigger level. These suggested retail prices prevent you from overpaying for an option. Remember, when theoretical value (calculated using historical volatility) equals the market price, the option is fairly priced. The target price is the price that you should sell your option if the OEX goes in the right direction and the Stop is the price you should sell it for if the OEX moves in the wrong direction after buying the option. These guidelines help you to let your profits run and to take your losses early. A lesson we all need to learn and re-learn! Remember a good mechanical system will be wrong most of the time but the wins will be much bigger and the losses will be much smaller. Sell too soon (if you reach your stops) and let your profits run (up to the target). IMPORTANT: Don't forget your Moms this weekend! Contact Support *************** TRADERS CORNER *************** Trade Small, Win, Trade Bigger... By Janar Wasito Marty Schwartz, a former Marine and leading options & futures trader(see his book "Pit Bull"), advocates a money management technique that would help all traders--particularly beginning traders. The technique is to trade small until you start winning, then trade bigger. How does this work? Let's assume that you have your $15,000 options account. That's a limited percentage of your assets to protect you while you learn the ins and outs of options trading. You have the logistical set up--Qcharts, Preferred Trade, a high speed Internet connection, perhaps even a wireless modem. Now, let's say that your last 10 trades weren't so hot--7 losers, 2 winners, and 1 more or less a draw. You dropped $6,000 in capital in the process of those trades. That's a situation that all traders can relate to. The markets have been volatile. Perhaps you held that QCOM play over the weekend after entering at 108 last week. Say you had May contracts, and the stock died under 100. What do you have to do to make sure that you are trading at your peak? First of all, you need to guard against one bad decision leading to another bad decision. I like to think of my opponent as the index. But, at the end of the day, we may be our own worst enemies. If you trade in a state of continual stress, the spring will get pulled too far, too often, and you will begin to lose you ability to make good decisions. So, if holding QCOM was a bad decision, will it lead to holding JDSU too long also? If it begins to look that way, then just sit out for a day or more. As one friend who spent some time on Wall Street before grad school would tell me, "you need to get your psychology straight first." OK, now let's say that you have taken a weekend trip to forget about the market. You've read the newsletter, outlined some trades, loaded them into Qcharts. You're ready to go. Well, as Renee has been writing, not every market was meant to trade. One sure way to end the month with $15,000 in your options account is not to trade. That might not be a bad approach. I would have made more money last year if I did that in 9 of 12 months. But, let's say that you are going to trade. OK. What's the most important factor in your success or failure? Finding the next QCOM (ah, in 1999, please)? No. The most important link in the chain is the face in the mirror every morning. Trade small, get the rhythm, using whatever system works for you. Put in say, $500 or $1000 into each trade. 5% or 10% of your available capital. Step back 3 days later, and ask yourself are you winning? If you nail 3 good trades, good. Think about what you are doing right. Is it because you are consistently scalping 25% profits because you set those limit sells automatically after every buy? Good. Say out of your next 4 trades, 2 are wins too, and the losers are less than 10% because you used good discipline in cutting your losses on the other 2 trades. Say you have increased your grubstake(a Marty Schwartz term) from $15k to $17k. Now is the time to increase your position size while maintaining the discipline. Instead of $1000 per trade, now use $2000 or $2500. Keep taking 25% profits. Keep taking 10% losses. Keep following the entry points closely, follow your way of watching the markets. See if you can compound those returns on $2500 trades for 3 to 5 trades. And then, perhaps after the post-FOMC rally fades, quit. Just quit. Take $500 and buy your child or spouse something nice. Take a longer weekend. Chill out. Relax. That's the idea behind trading small, winning, then trading bigger. Contact Support ***** And the Learning Continues By Molly Evans It's become increasingly difficult for the writers of newsletters and web site commentary to pen intelligent and useful information regarding the market. The message has been the same everyday for a few weeks . . . trading volume is thin and it's unknown what the markets will do in response to the Fed's decision regarding interest rates. Thankfully, this time next week we'll have a lot more direction and something new to talk about. There're so many theories out there postulating what will happen. Suppose they do raise rates 50 basis points; will the markets rally as a response to investor's confidence that the Fed is keeping the economy in check? What if they raise just a quarter point? Do we rally because a half point has already been assumed or do we falter and at least stay "rangebound" as the wall of worry stands solid? I'm going to put my vote in the 25 basis point camp. It's a win/win for both the economy and for the Fed. While there has been certain evidence that inflation has been sneaking in, so too have there been reports (albeit weak) indicating that the raises thus far have already started to tap the brakes of a strong economy. Greenspan and peers don't want to overdo it and be blamed for a recession, not in an election year and not with the world economies depending on us for gradual cooling. With a .25% increase, Greenspan knows the markets will stay in its worried state as it contemplates another hike in June. Wouldn't he love that? I vote quarter point and cautious wording. Maybe they'll go ahead and do the half point AND cautious wording. I don't know! That's what the Fed would like, to keep us guessing. Let that and Barron's corral the bulls. There's very little in the way of good news being printed out there. Well, outside of great earnings for great companies. That just doesn't matter now it seems. AMAT announced record sales, record earnings and it tanked of course. It just doesn't matter. The thing is, while we, the traders and obsessors of the markets guess and speculate and worry and fret, the average Joe Q Investor out there isn't concerned. When I go to work at the hospital, I interface with some very intelligent people, but they don't know squat about the market. They ask me how I'm doing out of respect and casual conversation but they wave off my raised eyebrows with a "Feh! Don't worry about it!" Granted, these doctors and nurses don't follow every news item or even know which channel is CNBC. They tell me that their mutual fund has done very well and there will their money stay. No fear. A well-respected friend and business owner told me that he can gauge the public sentiment by his employees. When they call him and ask for market advice about what to buy, he knows the hysteria and mania is rampant and a sign of topping. When they ask him if their 401K money is ok or express the desire to run, there's a near term bottom right at hand. Neither scenario is happening for him either. So what's that mean? I think it means that we're destined to stay right here. Up, down, big down, big up and right back down. That's supposed to be a trader's dream. Not a nightmare! I said dream. Shoot. The interesting thing that I see is the divergence in sentiment now. It's funny to think back to that day at the Denver OIN conference that Austin Tanner of Pinnacle Advisors asked everyone who was bullish to raise their hands. A sea of hands flew up - I'd guess 90% or more. The other ten percent were bears or "market neutral". Now, market neutral is the vogue posture. Are you playing it that way? It's a tough game. Many people, I know, have never played the downside and are accustomed to simply buying long and waiting. Now, I see a wide range of sentiment out there amongst the message boards and my trading friends. Some are all long and just waiting it out, some are all short and others are just plain cash. I'm doing all three actually. I've as much as admitted that I was roadkill at the turn of the trend, having never been in a bear's path. I'm a quick study though. No, I'm not making gazillions by shorting but I have learned a few things along the way here. First of all, I'd like to think that I now have a healthy dose of respect for the markets. Just when you think it's too easy and fun is when it's going to maul you. Don't trust a screaming market. Furthemore, didn't Jim just say, "never short a dull market?" Yes, I distinctly remember that and that too has gone down in my little book of wisdom. Secondly, when the money is really important to you and you're just not sure, you really do need to get out. I think that THE smartest single move I have made in my trading career occurred on one of those early volatile days. I looked at my screen and was dumbfounded about "why" this was happening and it occurred to me that, "I'm not smart enough to play a market like this . . . and I'll fall on my own sword or fight to the death on my own accounts but this darned market isn't going to hurt one little hair of my kids' heads." Their online brokerage accounts are empty and their checks are sitting in my tax free money market account - completely AWAY from the market. I didn't get their all time highs but I did take their 30% profit and principle off the table to where I can't gamble it away on speculation and rampant fear. I simply didn't trust myself to not see a "can't miss" and then miss and be a very unhappy girl. Lastly, I've learned how to daytrade and to do it on both sides. I had the good fortune to be home most of this week but didn't think I'd be trading much. Then again, I told you that I'd fall on my own sword in my own accounts so I ventured into the quarrel to see what damage I could do. We had yet another horrible Wednesday but if you look hard enough, opportunities do present themselves. Undoubtedly you heard the news or rumor that ATHM was going to be bought, acquired or whatever. The stock just shot up within minutes. I've watched this happen before and I've always thought it ridiculous and have wanted to short it. I wanted to short or buy puts on RMBS when it was doing its rocket shot to the moon late this past winter. Whew. Glad I didn't. But ATHM has been stuck on $17 - $19 since forever. All of the sudden it's $27 - $28? In this market? No way! Too good to be true. Yep, it was. They wouldn't give me the shares to short nor would they sell me the puts at ask. Darn. Oh well. I've never shorted a stock anyway. That is until Agilent Technology (A) exploded yesterday. I keep 5 minute real time charts on my Q charts page, watching my favorite ten to fifteen stocks. I've been watching Agilent lately as I've seen their ads all over my anesthesia journals. I was thinking I needed to get into that one long but then, this opportunity came along and I had the visions of ATHM fresh in my mind. I bought puts AND shorted the stock. Not cowgirl quantities anymore, mind you, but enough to keep my attention here. It was very interesting to see how the volatility pricing came into play as the stock dropped and held support for a bit then dropped. I think I might have done better just shorting more of the stock but it was a great lesson. One other opportunity that I saw and it's a great chart, is JNPR. I'll let the chart explain itself. Enough of me! Hope you all are doing well and we'll talk again next weekend! Good luck! Contact Support ************* DAILY RESULTS ************* Index Last Week Dow 10609.37 31.51 Nasdaq 3529.07 -287.75 $OEX 761.67 -8.12 $SPX 1420.96 -11.67 $RUT 490.94 -21.90 $TRAN 2874.02 -2.09 $VIX 29.95 -0.44 Calls Week PLXS 81.00 9.38 New, solid momentum run in short-term CDWC 118.25 8.62 Possible split candidate at these levels DNA 129.00 5.06 New, on the road to recovery FAST 69.38 3.50 New, institutions "nuts" over this one AMGN 62.38 2.82 New, trends well once established SEPR 102.25 -1.00 Remains in a pattern we love to see FLEX 53.25 -1.25 Business is simply great...and strong WLA 117.25 -1.82 Strong trend in pharmaceutical sales MSFT 68.81 -2.31 The worst appears to be over BSX 24.06 -2.49 Dropped, flat-lined and dead for now BVSN 45.75 -3.88 Analysts like the sector...and the stock SEBL 129.00 -4.44 New, building an ascending wedge MEDI 164.50 -5.75 Into the S&P they go...and a 5/18 split AMD 85.69 -6.88 Dropped, slammed into wall of resistance JDSU 86.00 -7.81 Investors are chomping at the bit AMCC 101.31 -12.37 A fast and furious mover ready to go MERQ 72.25 -12.75 Dropped, selling pressure before weekend AFFX 140.22 -15.84 Big trading range & intraday opportunity KANA 39.00 -16.34 Convincing future outlook and growth RMBS 188.94 -18.69 New, the high-flier is back again!! ABGX 91.00 -21.88 Dropped, momentum has vanished Puts NXTL 92.88 -26.88 New, rolling over w/lack of follow-thru AKAM 70.50 -26.56 New, just can't hold on to any gains FDRY 68.13 -22.01 Questioning their competitiveness EBAY 121.31 -12.69 Dropped, showed signs of recovery CMRC 44.38 -11.51 Declining 5-dma continuing to pressure PLCM 58.38 -9.88 New, technically driven momentum play SBL 45.06 -4.69 Institutional sponsorship fading GCI 61.94 1.19 Dropped, enough is enough STOCKS ADDED TO THE PICK LIST ***************************** Calls SEBL - Seibel Systems PLXS - Plexus Corp FAST - Fastenal Company AMGN - Amgen RMBS - Rambus Inc. DNA - Genetech Puts AKAM - Akamai Inc NXTL - Nextel Communications PLCM - Polycom Inc *************************** 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 BSX $24.06 (-2.50) BSX flat-lined Friday. The sell-off can be attributed to a report issued by Prudential earlier in the day. Analysts said the FDA is seeking more information from BSX about two of the company's products under development. The FDA said that BSX needs to work out the details of Taxol before starting trials. The new product isn't expected to be released for quite some time. Though Prudential didn't change their ratings or earnings estimates for BSX, the report prompted traders to unload the stock. In fact, the entire medical product sector showed weakness Friday, despite the broad market rally. What appeared to be profit taking Thursday turned into a full fledged sell-off Friday. It's time to leave BSX before the stock goes into cardiac arrest. AMD $85.69 (-6.56) After staging a terrific comeback on Thursday, AMD slammed into a wall of resistance at $90 on Friday morning. The backlash was unmistakable and AMD skated down from there. The stock returned to near-term support at the 5-dma ($85.13), a level it may be finding quite comfortable. It's possible AMD could rally again and make a charge for the all-time high at $93. But with such uncertainty in the markets and AMD finding the $90 mark quite formidable, we're dropping it this weekend to make room for more profitable momentum plays. ABGX $91.00 (-21.88) Our hopes and expectations for this momentum play have vanished. Initially we added ABGX to our call list last weekend on promising technicals and its strong breakout. However as the week progressed it eventually slide back to firmer support at $85 and $90. We had put ABGX on a "tight leash" mid-week, but now it's time to cut the yoke. While there were some bright spots in trading where ABGX challenged last Friday's intraday high of $115, the stock seems to have run out of steam. ABGX is officially a drop this weekend. MERQ $72.25 (-12.75) MERQ's chances of staying on our list decreased substantially in the last half hour of trading on Friday along with the price of their stock. As traders prepared to head for the exits going into the weekend, they sold shares of MERQ in better than average numbers. It could have been that many of the players just didn't want to go into the weekend ahead of the Fed meeting "long", and they will take there chances to buy back in next week, or it could be that they are simply going to put their money to work elsewhere. Whatever the reason we are going to concentrate our time and energy in other areas for now. Keep in mind the company votes for an increase in the amount of authorized shares later this month, so a split may be in the works. PUTS EBAY $121.31 (-12.69) Well, that didn't last long. Two up days for the NASDAQ caused EBAY to recover to the level at which we picked it. While it violated a previous level of support which may yet hold until the Fed removes interest rate uncertainty on Tuesday, EBAY has shown signs of recovery. Still, volume remains low, which tells us that hardcore buying has not yet returned to the issue. The point is that there is still weakness with the stock, just not enough to induce us into opening any new plays. Thus, we're dropping it today. Consider closing the play on any weakness, or especially on any new strength over $124.50. GCI $61.94 +1.13 (+1.19) Seems as though the proverbial worm has turned on this play. While the longer term trend is still south, GCI has began to attract a few new buyers and may be in the process of reversing its course. The lack of follow- through selling after Tuesday's low at $58.31 on better than average volume suggests it is probably time to step back. While we were expecting a bounce up to between $62 and $64 the volume behind the move has been a bit more than we would like to have seen, considering the activity in the broad markets. On Thursday, analysts at CIBC World Markets initiated coverage of Gannett with a Buy rating which may have attracted new attention to the beaten down company. While we really didn't get much of a chance to profit from this play, sometimes the best course of action is knowing when to say enough is enough. STOCKS WITH UPCOMING SPLITS **************************** We don't list all splits available, only those we feel may have play possibilities. Symbol - Stock Splits/Date 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 KEI - Keithley Inst. 2:1 06-01-00 ex-date 06-02 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 PWER - Power-One 3:2 06-02-00 ex-date 06-05 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 MXT - Metris Companies 3:2 06-15-00 ex-date 06-16 JNPR - Juniper Networks 2:1 06-15-00 ex-date 06-16 IPAR - Inter Parfums 3:2 06-15-00 ex-date 06-16 NXLK - Nextlink 2:1 06-15-00 ex-date 06-16 SEIC - SEI Investments 3:1 06-19-00 ex-date 06-20 POOL - SCP Pool Corp. 3:2 06-19-00 ex-date 06-20 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 TQNT - TriQuint Semi. 2:1 07-11-00 ex-date 07-12 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 ******************** Call play of the day: ********************* WLA - Warner-Lambert Co $117.25 (-5.00) See details in sector list Chart = /charts/charts.asp?symbol=WLA Put play of the day: ******************** FDRY - Foundry Networks Inc. $68.13 (-22.00) See details in sector list Chart = /charts/charts.asp?symbol=FDRY ************* 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. ************************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 5-14-2000 Sunday 3 of 5 ********** CALL PLAYS ********** ******** HARDWARE ******** FLEX - Flextronics International $53.25 (-1.25) 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. FLEX was a headline presenter at the Merrill Lynch Annual Connector/Passive Components Industry Conference last week. The CEO of FLEX, Michael Marks spoke with analysts and said that business is simply great. Marks went on to say that he believes FLEX has the largest and most efficient electronics manufacturing operations outside the United States. He went on to say that the recent acquisitions of The DII Group and Palo Alto Products have been successfully integrated into FLEX's operations. FLEX's CFO, Robert Dykes also had good news for the analysts. Dykes said the financial fundamentals of the FLEX remain strong. Although component shortages are still affecting business, Dykes said the company remains comfortable with analysts' estimates of 30% earnings growth. As a result of the optimistic views from FLEX executives, Raymond James upgraded the stock last week from a Buy to a Strong Buy. The upgrade sent FLEX into rebound mode then subsequently into rally mode. The stock gapped $2 higher Friday to close the week on a strong note. We're looking for the momentum to build from the recent rebound. After the steep decline in early May, FLEX doesn't have much resistance preventing it from moving higher. The stock will face minor congestion in the $57 - 58 range, but not much thereafter. Look for an entry near current levels if FLEX shows signs of continued momentum. Although FLEX rallied Friday, the gains came on light volume. Make sure to confirm upward movement with heavy volume, a sign that momentum is building. FLEX's solid earnings from operations may receive a boost from the recent sale of investment securities. FLEX announced last week that the company had filed to sell nearly 1 mln shares of Calico Commerce (CLIC). Chase H&Q will handle the transaction. BUY CALL JUN-50 QFL-FJ OI= 950 at $7.50 SL=5.25 BUY CALL JUN-55*QFL-FK OI=2073 at $4.88 SL=3.00 BUY CALL JUN-60 QFL-FL OI= 268 at $3.00 SL=1.50 BUY CALL JUL-55 QFL-GK OI= 347 at $7.00 SL=5.00 Picked on May 11th at $51.13 P/E = 49 Change since picked +2.12 52-week high=$79.75 Analysts Ratings 14-5-1-0-0 52-week low =$21.25 Last earnings 03/00 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 CDWC - CDW Computer Centers $118.25 (+8.63) 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. Investors in CDWC seem to have been ignoring the weakness in the broad markets and with good reason. The drop on April 14th, took the issue down to the 100-dma and that is the last time it has been anywhere near that level. As a matter of fact, CDWC hasn't closed below its 10-dma ($109.25) since April 17th. If you are looking for the catalyst for the strong performance, we've got a double whammy for you. First came earnings on the 24th of April and they were impressive. 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 gets investors' attention. With the strong growth, the company is expanding its management team and investors are applauding with their wallets. The other half of the story is excitement about a potential split announcement (see below). After testing support near $105 a couple times Thursday morning, it was off to the races as CDWC quickly ran up to tag new 52-week highs on both Thursday and Friday. The slow bleed Friday afternoon sapped away all the day's gains, but this was simply due to a lack of buyers, not a rush for the exit. Weakness ahead of Tuesday's FOMC meeting could provide another nice entry point if prices pull back to near-term support in the $112-114 area. If the buyers are still hungry next week though, consider new positions as the stock pushes through resistance at $122. 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. BUY CALL JUN-110 DWQ-FB OI= 1 at $16.00 SL=11.50 BUY CALL JUN-115*DWQ-FC OI=28 at $13.38 SL=10.00 BUY CALL JUL-110 DWQ-GA OI= 0 at $22.88 SL=17.25 BUY CALL JUL-115 DWQ-GB OI=33 at $19.63 SL=14.25 SELL PUT JUN-105 DWQ-RA OI=10 at $ 4.75 SL= 6.75 (See risks of selling puts in play legend) Picked on May 11th at $118.75 P/E = 46 Change since picked -0.50 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 = 321 K /charts/charts.asp?symbol=CDWC ************* SEMICONDUCTOR ************* AMCC - Applied Micro Circuits $101.31 (-12.38) 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. On Thursday, Intel (INTC) rocked the NASDAQ with news it was launching an Internet media services business. That shot of adrenaline propelled AMCC off its lows ($85). By the end of the session it surpassed the sector leader for total points gained ($12.19) for a 14.1% advance. All in all, AMCC demonstrated just how spunky it could get in a rallying market. On Friday there was more of the same. AMCC shot through the psychological $100 level on better-than-average volume. While the weekend profit taking didn't take AMCC back below $100, the stock did encounter resistance at the 10-dma ($106.48). Currently AMCC is sandwiched between this line and the 5-dma ($96.88). The stock's move through the 5-dma did however provide further validation that AMCC can stretch higher with a sustaining rally. Recall this technical previously served as a formidable line of opposition. Therefore, dips followed by upward bounces off the 5-dma should provide reasonable entries. Keep in mind that firmer support is much lower at $85, so if it there's a reversal look out below! Also pay attention to the Philadelphia Semiconductor Index ($SOX) as it demonstrates how the whole sector is reacting. Of course be aware too of the broad market sentiment. OIN has high expectations for this momentum play. If the economic data continues to establish a "buyable" market and the Feds don't do anything too outlandish on Tuesday, then AMCC should challenge resistance at the $120 mark in the short- term. AMCC can be a fast and furious mover so consider this play HIGH-RISK! 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- 95*AEX-FS OI= 33 at $19.13 SL=13.75 BUY CALL JUN-100 AEX-FT OI=101 at $16.88 SL=12.25 BUY CALL JUN-105 AEX-FA OI= 69 at $14.63 SL=10.75 BUY CALL JUN-110 AEX-FB OI=233 at $12.75 SL= 9.50 Picked on May 11th at $98.81 P/E = 252 Change since picked +2.50 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 = 3.60 mln /charts/charts.asp?symbol=AMCC RMBS - Rambus Inc. $188.94 (-18.69) 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 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. We said Tuesday that we looked forward to its return. Well it didn't take long for RMBS to rejoin our little family. During its brief but volatile hiatus, Rambus fell to $164.50 and has now bounced back, and could be positioning itself to fly. RMBS found itself in hot water on Wednesday. Intel said it had discovered problems with a chip called the memory translation hub, or MTH, inside several Pentium III-based PCs. Technically, the flaw exists in a chip designed by Intel, so how did Rambus get mixed up in the mess? Intel made the chip for computer makers that wanted to adopt Intel's latest chipset, designed to speak Rambus' language, without using the more expensive form of high-speed memory. In the long run while it could cost Intel millions to replace the motherboards, replacing memory could escalate the cost. PCs that contain Rambus memory or other chipsets should be unaffected. Investors don't like controversy surrounding a company. Take the Intel news and a bunch of folks that are already jumpy, and you have all the makings for a trip south. The volume on the way down was fairly substantial, but also wasn't to shabby on the return back up. The economic data on Thursday and Friday brought investors back to the market, if only for a few hours. The action during the past two days suggests that traders are willing to buy stock. The pullback late Friday, still left RMBS with a respectable gain for the day. We believe RMBS may be back on track, although until Fed decision is out of the way, things could be a little choppy. The technicals haven't changed much since Tuesday, with the 100-dma at $186.50 and $177 level providing support, while the 10-dma at $196.72 and the $200 area showing up as a potential stumbling block. Bounces off intraday support levels or a solid move higher could provide a suitable entry point, while more conservative types may prefer to wait for the Fed before entering a new play. Other than the Intel problems, there was little in the way of other news for Rambus this week. Although the 4-for-1 split was announced back in March and is not scheduled until the middle of June. The company does have an upcoming board meeting scheduled for May 23, to vote on the issue. ***May Strikes expire on Friday*** BUY CALL JUN-180 BYQ-FP OI=171 at $33.75 SL=24.75 BUY CALL JUN-190 BYQ-FR OI= 56 at $29.50 SL=21.50 BUY CALL JUN-200*BYQ-FT OI=465 at $25.00 SL=18.00 BUY CALL AUG-195 BYQ-HS OI= 36 at $45.13 SL=33.00 SELL PUT MAY-180 BYQ-QP OI=488 at $ 7.25 SL=10.25 (See risks of selling puts in play legend) Picked on May 14th at $188.94 PE = N/A Change since picked +0.00 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 = 3.80 mln /charts/charts.asp?symbol=RMBS ******** INTERNET ******** KANA - Kana Communications $39.00 (-16.34)(+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. Kana's recovery took a breather this week and is clearly in a consolidation phase. After succumbing to Tuesday sell-off, the stock slithered back to old resistance at $38-$40 and is holding firm. There wasn't any news event or major upset to have caused the pullback. This in itself is a good indication that buyers will likely step back in at these bargain prices. Why? Because the company has a convincing future outlook and is growing rapidly in the area of Web-based software. By the beginning of the millennium, Kana Communications had acquired three other ECRMs (e-customer relationship management) companies to broaden its product line. And on April 25th, it reported a solid earnings report beating consensus estimates by 0.04 cents. The analysts are also upbeat on this infrastructure stock and have given it good reviews recently. Moving forward, KANA should climb back through the $45 mark and bounce off the 10-dma ($46.08) with ease. Recall that in this case, the 10-dma is an important line to monitor. During its March and April downward spiral, KANA never saw the upside of this technical. So for the interim, we need to be patient and watch for a conclusive direction before opening new position. The more aggressive traders may choose to take positions on solid bounces off the 5- dma ($43.11), but be careful and keep the stops in place. This week Kana communications announced that Office Depot(ODP), the global office product leader, is implementing Kana's eBusiness System across all communication channels. The company also reported it inked a co-marketing and e-media product integration deal with Witness Systems, a provider of recording and analysis software. BUY CALL JUN-35 URW-FG OI= 28 at $ 9.38 SL= 6.50 BUY CALL JUN-40*URW-FH OI=169 at $ 6.00 SL= 4.00 BUY CALL JUN-45 URW-FI OI=188 at $ 4.13 SL= 2.50 BUY CALL JUN-50 URW-FJ OI=272 at $ 2.81 SL= 1.50 Picked on April 30th at $42.56 P/E = N/A Change since picked -3.56 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 = 1.20 mln /charts/charts.asp?symbol=KANA BVSN - Broadvision Inc. $45.75 (-0.13)(+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. This play is all about "The Buzz" getting back in the B2B sector following the H&Q tech conference. Ian Morton, H&Q's analyst covering e-business-enabling solutions, is bullish on the online customer loyalty (CRM) market. He further believes that merger and acquisition activity is going to accelerate. Favorites? Among five others, BVSN makes his list. CSFB noted on May 2nd that they believe "the stage is set for BVSN to emerge as one of the top guns in the e-commerce platform industry." Two upgrades helped to keep the technical picture focused on the positive sentiment too (see news below). Support remains rock-solid at $40 following Wednesday's retest of the April lows, and is further bolstered by the 200-dma at $38.17, which is also on the rise. While volume remains slightly below average, intraday support remains at $45. This was Thursday's high (old resistance equals new support theory) and slightly below Friday's open, which held all day. Resistance is at $50 with a near-term breakout occurring at $51.38. Consider taking a position on dips under $45 (wait for the bounce) prior to the FOMC meeting or wait for a move over $50 backed by volume, which would most likely occur after any interest rate announcements from the FOMC meeting on Tuesday. As always, confirm market direction before entering the play In the news, Red Herring has selected BroadVision for the Red Herring 100, the magazine's annual list of the top private and public companies in the technology industry. Not only that, but from the prior week, Goldman upgraded BVSN to its Recommended List based on "its strategic positioning and the ongoing strength of its pipeline and business momentum". Remember too that CSFB upgraded the stock to a Strong Buy with a price target of $70 on May 2nd. 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 CY00 (some in excess of $25 mln). It isn't all good news. Needham and Co. initiated coverage of BVSN to Hold based on valuation only and notes that fundamentals need to catch up - nothing wrong with the company though. ***May Strikes expire on Friday*** BUY CALL JUN-40*BDV-FH OI= 949 at $ 9.75 SL=6.75 BUY CALL JUN-45 BDV-FI OI=1527 at $ 7.25 SL=5.25 BUY CALL JUN-50 BZV-FJ OI=2598 at $ 5.25 SL=3.25 BUY CALL SEP-50 BZV-IJ OI=1177 at $11.75 SL=8.75 SELL PUT MAY-40 BDV-RH OI=1085 at $ 3.00 SL=5.00 (See risks of selling puts in play legend) Picked on May 2nd at $ 49.63 P/E = 433 Change since picked -3.88 52-week high=$93.25 Analysts Ratings 9-12-1-0-0 52-week low =$ 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 = 8.3 mln /charts/charts.asp?symbol=BVSN ********* SOFTWARE ********* MSFT - Microsoft $68.81 (-2.31) 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. MSFT shares have been hammered over the last six months thanks to the anti-trust trial spurred by MSFT's competitors and a willing accomplice, Judge Jackson, on the bench. Recently the Dept. of Justice filed its proposed remedy to break MSFT into two parts - an applications and operating system divisions. In the minds of the legal community, the DOJ has substantially overstepped it boundary. MSFT countered with a remedy of its own to decouple the operating system from the browser, which is what MSFT was judged "guilty" of. The meat to be taken from the situation is that the DOJ, if successful, would lose on the appeal. In short, the worst seems to be over and MSFT is free to resume an improvement in the stock price based on business. How is business? From an Upside Today article, here's e-business infrastructure analyst, Chris Galvin's view from the H & Q conference. "Microsoft is still the center of the universe," he said, adding that he expected strong growth from Windows 2000, which is jump-starting a major server-upgrade cycle. He also believes the company's decision to downgrade earnings expectations for 2001 is an effort to "play possum" so it doesn't look as strong as it really is during the remedy phase of the Department of Justice skirmish. Asked what he thought about Microsoft's recent stock slide, Galvin said it was a good time to buy more shares. We agree. Support is rock-solid at $65. While volume dwindled to less than half the ADV on Friday, the price has been moving up since Wednesday's low of $65.75. Feel free to take a position on any intraday weakness before the Fed meeting as we think the Fed will provide us a nice relief rally and a new leg up for MSFT going forward. Slight resistance should be encountered at $74. Volume will be the key to breaking through. Careful though. Any Fed surprise can squash this play quickly. In case you missed Thursday's write-up, 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. BUY CALL JUN-65 MSQ-FM OI=4723 at $6.38 SL=4.25 BUY CALL JUN-70*MSQ-FN OI=9053 at $3.50 SL=1.50 BUY CALL JUN-75 MSQ-FO OI=7542 at $1.63 SL=0.75 BUY CALL SEP-70 MSQ-GN OI=6543 at $5.25 SL=3.25 BUY CALL SEP-75 MSQ-GO OI=4193 at $3.13 SL=1.50 SELL PUT JUN-65 MSQ-RM OI=5008 at $1.94 SL=3.75 (See risks of selling puts in play legend) Picked on May 11th at $67.88 P/E = 41 Change since picked +$0.94 52-week high=$119.94 Analysts Ratings 0-16-4-0-0 52-week low =$ 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 SEBL - Siebel Systems $129.00 (-4.44) Call it The King of CRM (customer relations management) software. Siebel Systems, Inc. is the world's leading provider of eBusiness applications software. Siebel provides an integrated family of eBusiness applications enabling multi-channel sales, marketing and customer service systems to be deployed over the web, call centers, field, reseller channels, retail and dealer networks. Siebel Systems' sales and service facilities are deployed locally in more than 28 countries. We ran SEBL as a call play in March. It's back thanks to a wedgie of the more pleasant kind - an ascending wedge formed over the last two weeks on the technical chart (actually four weeks if you count the low of April 17 at $75.38). On a longer-term chart, it appears a bit range bound, but notice the lows have been moving up. Notice too that overhead resistance at $130 has been tough to break through. However, we're entering this play by banking on the idea that there will be a relief rally once the Fed acts on interest rates Tuesday. It's a bit risky given that the Fed could raise questions about the future by leaving the door open to more rate hikes, especially if they dish out only a .25% rate hike this time. The point is that if we get a rally, which seems to have the highest probability right now, SEBL could give us that breakout we've been looking for. The good news is that prices haven't gone any lower even as volume has decreased to a trickle, hitting less than 50% of the ADV on Friday. Sellers have all but disappeared. Aggressive traders may want to target shoot mild support levels at $122.50, $124, and $127 and buy any weakness. If you are more conservative, wait for the clean break over $130 with volume. If you get in prior to the FOMC meeting, be sure to have your stops set on Tuesday on the small chance we get a nasty Fed surprise. To be really safe, $134 is your number, as that would clear an intraday spike price of $133.56 from Friday, a week ago. But if you are that conservative, you may want to consider a less volatile play. From the H&Q conference last week, H&Q's own analyst notes that SEBL is working on an interactive sales lead management application that can be combined with other functions of their CRM applications in a package called Sales.com. Helping too to bolster the price is the announcement that SEBL will replace CBS in the S&P 500. That should keep institutions busy buying the issue for their index funds. BUY CALL JUN-125*SGW-FE OI=611 at $16.13 SL=11.50 BUY CALL JUN-130 SGW-FF OI=507 at $13.63 SL=10.25 BUY CALL JUN-135 SGW-FG OI= 80 at $11.50 SL= 8.75 BUY CALL AUG-130 SGW-HF OI=826 at $21.75 SL=15.25 BUY CALL AUG-135 SGW-HG OI=221 at $19.63 SL=14.50 SELL PUT JUN-120 SGW-RA OI= 65 at $ 8.88 SL=11.75 (See risks of selling puts in play legend) Picked on May 14th at $129.00 P/E = 200 Change since picked $0.00 52-week high=$175.13 Analysts Ratings 14-3-0-0-1 52-week low =$ 19.94 Last earnings 04/00 est= 0.14 actual= 0.17 surprise= 21% Next earnings 07-18 est= 0.18 versus= 0.12 Average Daily Volume = 4.78 mln /charts/charts.asp?symbol=SEBL ************** DRUG & BIOTECH ************** WLA - Warner-Lambert Co $117.25 (-5.00) If you've ever experienced heartburn, bad breath, or one of those colds you just can't shake then you're likely familiar with Warner-Lambert. Some of the popular consumer health care products include Zantac, Listerine, Clorets, and Certs, and Sudafed. The company operates three main business segments: consumer healthcare products, confectionery products, and pharmaceuticals. Its Parke-Davis and Goedecke pharmaceuticals divisions make analgesics, anesthetics, and homeostatic agents, as well as cholesterol treatments, which includes best seller Lipitor. This division accounts for more than 60% of sales. Look at a chart and notice how WLA bucked the March-April correction. There was good reason why WLA was swaggering around in the bullpen and reaching newer heights. Let's take a step back in time to February 7th when WLA announced a $93 bln merger with Pfizer (PFE). This arrangement ended a three-month takeover battle that revolved around Lipitor and ultimately, pushed American Home Products (AHP) out of the picture. It also was clearing the way for Pfizer to challenge Merck & Co as the world's #1 drugmaker. Under the terms of the agreement, Warner- Lambert shareholders will receive 2.75 Pfizer (PFE) shares for each share of WLA they own. In the meantime, shares of WLA reached historical split-levels. Unfortunately there wasn't a split announcement alongside the company's earnings' release on April 19th. Although earnings were solid and showed a 35% gain in operating profits, confirming a strong trend in pharmaceutical sales throughout the industry. WLA came in at $0.58 and beat consensus estimate by $0.02 p/s and the whisper number by $0.01. Analysts at Dain Raucher Wessels liked the numbers enough to tag the stock with a Strong Buy rating. And just a week later on April 27th, Pfizer's shareholders overwhelmingly backed the merger acquisition to ultimately create the US's largest drug firm and the world's second largest. Then on Friday, the shareholders of Warner-Lambert voted on and approved the takeover offer, which currently has $109 bln price tag. The European Commission will rule on the merger on May 22nd. Assuming all goes according to plan, the acquisition could be completed as early as May 24th. Technically, the chart is still very bullish despite the mild pullback of the last few trading sessions. After WLA reached a new high at $126.25 on Monday, profit takers and market pressure effected the share price. However, WLA remains perched near the 5 & 10 DMAs, $119.72 and $118.55 respectively, and is poised for another bounce off near-term support ($115). Keep the rose-colored glasses in your pocket though and confirm solid upward moves before opening new positions. If the Feds gyrate from the expected 50-basis point hike, then all could go to pot very quickly. Besides the merger scuttlebutt surrounding WLA, Japanese drug maker Yamanouchi Pharmaceutical said it would start marketing the blockbuster anti-cholesterol drug Lipitor in Japan this week. Lipitor is currently available in about 70 countries and had global sales of $3.7 bln in 1999. With the introduction into the Japanese market, sales are expected to jump to $5 bln in 2000. BUY CALL JUN-115 WLA-FC OI=162 at $7.00 SL=5.00 BUY CALL JUN-120*WLA-FD OI=246 at $4.50 SL=2.75 BUY CALL JUN-125 WLA-FE OI=617 at $2.81 SL=1.50 BUY CALL JUL-120 WLA-GD OI=370 at $6.88 SL=5.00 BUY CALL JUL-125 WLA-GE OI= 78 at $5.00 SL=3.00 Picked on May 9th at $121.38 P/E = N/A Change since picked -4.13 52-week high=$126.25 Analysts Ratings 13-4-7-0-0 52-week low =$ 60.81 Last earnings 03/00 est= 0.56 actual= 0.58 Next earnings 07-24 est= 0.51 versus= 0.63 Average Daily Volume = 3.31 mln /charts/charts.asp?symbol=WLA SEPR - Sepracor Inc. $102.25 (-1.00)(+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. In April, the Federal Trade Commission (FTC) closed its investigation of the license agreement between Eli Lilly (LLY) and SEPR. The agreement had called for LLY to be the sole developer of a new entity called fluoxetine. The compound is a modified form of an active ingredient found in Prozac. The FTC ruled that SEPR will receive an up-front license fee of $20 mln and also receive up to $70 mln in additional payments based upon the development of fluoxetine. The positive developments revolving around fluoxetine have been reflected in the stock over the past month. SEPR bucked the bear that dragged the broader market lower during the month of April. As a result of the settlement with LLY, the stock climbed from a low of $60 in early April to its current levels. After dipping below $100 early last week, SEPR rallied into the weekend, back above the century mark. Despite the decline earlier in the week, SEPR remains in a pattern we love to see, higher highs and higher lows. We're looking for SEPR to build momentum after crossing the always important $100 level. Before moving higher though, SEPR will need to clear minor resistance at $104 and again at $107. If the stock clears those resistance levels it could very easily retest its recent high of $110, thereafter we could see smooth sailing. From here, there are two possible ways to gain entry into the play. First, watch for a bounce off support at $100. Or, if the momentum from last Friday continues, look for SEPR to clear $104. Either way, target shoot to your risk level and confirm volume with any rally. One event that may help SEPR clear its various resistance levels is the upcoming Annual Shareholder Meeting. Investors will meet on May 24th to vote on the proposal to increase the number of authorized shares. If the market stabilizes, a split announcement could add fuel to SEPR's fire. ***May Strikes expire on Friday*** BUY CALL JUN-100*ERU-FT OI=110 at $14.75 SL=10.75 BUY CALL JUN-105 ERU-FA OI= 74 at $12.50 SL= 9.25 BUY CALL JUN-110 ERU-FB OI= 4 at $10.38 SL= 7.25 BUY CALL JUL-110 ERU-GB OI= 67 at $11.75 SL= 8.50 SELL PUT MAY- 95 ERU-QS OI= 36 at $ 2.31 SL= 4.00 (See risks of selling puts in play legend) Picked on May 7th at $103.25 P/E = N/A Change since picked -1.00 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 ********************************* 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 5-14-2000 Sunday 4 of 5 ***************** CALLS - CONTINUED ***************** AFFX - Affymetrix Inc. $140.22 (-15.84)(+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 waiting game continues as investors refuse to place their bets in advance of the FOMC meeting on Tuesday. The volume is anemic and so AFFX is drifting with the whim of the broader markets, finding support in the high $120's and resistance at the high $150's. If you are thinking "that's a $30 range, it must be tradable", then you are reading my mind. The support and resistance levels have been consistent since the beginning of the month, so all it takes is patience and discipline. The moves are choppy, but as you have heard so many times before, good entries make position management so much easier. That is fine from a technical perspective, but let's recap why we like this play in the first place. Providing the products and information needed by companies involved in genetic research, AFFX is well positioned to profit from the growth in the Biotech sector, much like companies like CSCO and EMC are profiting from the growth of the Internet. AFFX began recovering with the sector after the mid-April lows and has spent the past 2 weeks dueling with the 200-dma (currently $142.56). In order to move through this level with any conviction, we need to see the volume pick up significantly and hopefully the trigger will be the FOMC meeting next week. Everyone seems to be expecting a 50-point hike, but the removal of uncertainty could be the catalyst for buyers to return to neglected issues like AFFX. Aggressive traders can consider a pullback to support to be a good entry point, as long as the price bounces. If you prefer a more cautious approach, wait until after the FOMC meeting, look for improving market sentiment, and then pull the trigger as AFFX shows its intention to participate in what we hope will be a significant recovery in the Biotechs. It is starting to sound like a broken record, but there is very little in the way of recent news on AFFX. The latest goes all the way back to the first of May, and we have repeated it here for reference. Gene Logic 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 Strikes expire on Friday*** BUY CALL JUN-140 FIQ-FH OI= 31 at $22.50 SL=16.75 BUY CALL JUN-145 FIQ-FI OI= 8 at $20.38 SL=14.75 BUY CALL JUN-150*FIQ-FZ OI= 78 at $18.00 SL=13.00 BUY CALL AUG-150 FIQ-HZ OI=409 at $30.50 SL=22.75 BUY CALL AUG-160 FUE-HL OI= 8 at $25.13 SL=18.75 SELL PUT MAY-130 FIQ-QF OI=144 at $ 4.50 SL= 6.50 (See risks of selling puts in play legend) Picked on May 4th at $150.09 P/E = N/A Change since picked -9.88 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 = 1.07 mln /charts/charts.asp?symbol=AFFX MEDI - MedImmune Inc. $164.50 (-5.75)(+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. It was a rough week for MEDI, as well as the Biotech sector, but the week ended on a positive note. The fledgling recovery is still alive, aided on Friday by news that MEDI will be added to the S&P 500 (see below). The lack of volume is still the culprit behind the weakness we are seeing, but hopefully that will come to an end on Tuesday, when the FOMC meeting removes the cloud of uncertainty about interest rates. Another positive factor is the pending 3-for-1 stock split, which is payable on May 18th. The split is contingent on the shareholder approval, which should be forthcoming at the Annual Shareholder Meeting on May 18th. MEDI is having a hard time getting through the 50-dma (currently $165.69), but the good news and pending split along with the return of buyers next week could be just the fuel we need to get our play moving. Vacillating early in the week, the lack of volume got the better of our play as it fell through support at $160 and tagged $150 before finding support and beginning to claw its way higher. Fortunately, the pattern of higher lows is still intact, and once investors start coming back into the market, MEDI should be able to move higher on enthusiasm for their addition into the S&P. Look to initiate new positions as MEDI bounces near the $160 support level, or wait for improving sentiment to push the price through near-term resistance at $170. On Thursday, Standard and Poors announced that MEDI would replace Central & South West Corp. in the S&P 500 Index on a date to be announced. BUY CALL JUN-165 MEQ-FM OI=429 at $17.50 SL=12.75 BUY CALL JUN-170*MEU-FN OI=190 at $14.75 SL=11.00 BUY CALL JUN-175 MEU-FO OI=280 at $13.00 SL= 9.75 BUY CALL JUN-180 MEU-FP OI=209 at $11.13 SL= 8.25 BUY CALL JUN-185 MEU-FQ OI=218 at $ 8.88 SL= 6.25 SELL PUT JUN-150 MEQ-RJ OI=647 at $ 8.75 SL=11.50 (See risks of selling puts in play legend) Picked on May 7th at $170.25 P/E = 108 Change since picked -5.75 52-week high=$228.75 Analysts Ratings 12-1-0-0-0 52-week low =$ 55.00 Last earnings 04/00 est= 0.75 actual= 0.80 Next earnings 07-19 est=-0.07 versus=-0.19 Average Daily Volume = 1.52 mln /charts/charts.asp?symbol=MEDI AMGN - Amgen $62.38 (+2.81) Amgen is a global biotechnology company that discovers, develops, manufactures and markets cost-effective human therapeutics based on advances in cellular and molecular biology. The Company manufactures and markets four human therapeutic products, Epogen, Neupogen, Infergen and Stemgen. All things considered Amgen had a great week. The company gained about 5%, which compared to most of the major indices, isn't a bad performance. Since testing its 200-dma in late April, it has quietly moved from $50 to over $62 on Friday. AMGN does not typically provide the excitement and volatility of many of the tech issues, but is a stock that trends very well once a pattern is established. The activity seen the past couple of weeks in the markets has seemed to have had little effect on AMGN, which is part of what drew our attention to the bio-tech company. The Drug and Bio-tech sectors have done reasonably well lately, but Amgen has again outperformed many of its peers. The recent strength came after a Federal judge ruled that Transkaryotic Therapies(TKTX) infringed on one of Amgen's patents when it developed its own version of their anemia drug Epogen. The ruling was the first, but an important step in the final determination of company's claims against Hoechst and TKT. The next event adding momentum to AMGN, came in the form of favorable first-quarter earnings. Results were in line with analysts estimates as revenues rose 9.2%. The following day three different brokerage firms came out reiterating Buy or Strong Buy ratings on the company. Although the volume continues to be light, on Friday the drug company managed to clear the 100-dma at $61.99 on a closing basis, with strong buying seen the last 15 minutes of the session. Intraday charts show support building between $60 and $61, with followed up at the $58 level. The next resistance comes into play near $66. The momentum appears to be in our favor and any further moves higher could be viewed as a buying opportunity. On Wednesday Amgen received a nice mention from the folks at Janus. Their Global Life Fund closed this week, which is a health care and biotech fund. Although the past 3 months has been rough, it is still up 10% for the year. Amgen topped the list as one of the top holdings in their current portfolio. BUY CALL JUN-55 YAA-FK OI= 478 at $10.00 SL=7.00 BUY CALL JUN-60*YAA-FL OI=8052 at $ 6.25 SL=4.25 BUY CALL JUN-65 YAA-FM OI=1818 at $ 3.75 SL=2.00 BUY CALL JUN-70 YAA-FN OI=2147 at $ 2.06 SL=1.00 BUY CALL JUL-60 YAA-GL OI=4734 at $ 9.00 SL=6.25 SELL PUT JUN-60 YAA-RL OI= 309 at $ 3.63 SL=5.50 (See risks of selling puts in play legend) Picked on May 14th at $62.38 PE = 60 Change since picked +0.00 52 week high=$76.50 Analysts Ratings 11-12-7-0-0 52 week low =$26.06 Last earnings 04/00 est= 0.25 actual= 0.25 Next earnings 07-25 est= 0.27 versus= 0.25 Average daily volume = 11.6 mln /charts/charts.asp?symbol=AMGN DNA - Genentech $129.00 (+5.06) Genentech, is a leading biotechnology company that discovers, develops, manufactures and markets human pharmaceuticals for significant unmet medical needs. Thirteen of the approved products for biotechnology stem from Genentech science. Genentech markets seven products directly in the United States. The company has headquarters in South San Francisco, California. Their stock has been under the weather lately, but may now be on the road to recovery. Since early March, Genentech has suffered like many of the biotech issues, dropping 60% from its recent highs. Besides profit taking and a change of investor sentiment, DNA has attempted to fight off some bad press. Late last week concerns hit the trading floors over the safety of a drug called Herceptin, which is used in the treatment of breast cancer. Genentech warned U.S. doctors about 15 deaths from allergic reactions linked to Herceptin. They went on to say there had been 62 serious reactions reported among the 25,000 patients who had been given the drug. Analysts at SG Cowen rushed to the aid of DNA saying that the Herceptin news was not new, noting that adverse events have occurred in less than 1% of those treated. Besides the obvious, why all the fuss? Herceptin's sales rose 72% in the first quarter helping Genentech achieve better than expected earnings. On Wednesday, DNA got another dose of bad news. A U.S. Appeals Court denied Genentech's motion for an injunction against Bio-Technology General Corp., pending the outcome of its appeal of a court decision earlier this year. It's more in-depth than we will go here, but could be viewed as another stumbling block for the company. Amazingly, with all its had to face in the past six sessions, DNA has managed to gain about 13%. So how do we approach our new play? After putting in a bottom at $97, Genentech has formed good support between its 200-dma at $116.33 and $118. In the midst of recent negative sentiment, DNA has continued to find buyers. Intraday support is also found near $121. With the renewed interest seen in Genetech and the biotech sector, we would view further advances as an opportunity to buy calls. In other news, ImmunoGen Corp. announced a collaboration with Genentech to develop tumor-activated prodrugs. The relationship will give DNA broad access to ImmunoGen's maytansinoid Tumor- Activated Prodrug(TAP) technology for use with proprietary antibodies. BUY CALL JUN-120 DNA-FD OI= 50 at $16.25 SL=11.75 BUY CALL JUN-125*DNA-FE OI=237 at $13.75 SL=10.00 BUY CALL JUN-130 DNA-FF OI=279 at $13.00 SL= 9.75 BUY CALL JUN-135 DNA-FG OI= 33 at $ 9.38 SL= 6.25 BUY CALL SEP-125 DNA-IE OI=416 at $25.38 SL=18.50 SELL PUT JUN-120 DNA-RD OI=700 at $ 9.00 SL=12.00 (See risks of selling puts in play legend) Picked on May 14th at $129.00 PE = N/A Change since picked +0.00 52 week high=$245.00 Analysts Ratings 4-6-4-0-0 52 week low =$ 58.25 Last earnings 04/00 est= 0.26 actual= 0.28 Next earnings 07-12 est= 0.29 versus= 0.28 Average daily volume = 1.37 mln /charts/charts.asp?symbol=DNA **** MISC **** FAST - Fastenal Company $69.38 (+3.50) Fastenal operates nearly 800 stores in 48 states, Puerto Rico, and Canada. Its stores stock over 130,000 products, including treaded fasteners such as screws, nuts, and bolts. Other sales come from power tools, cutting blades, hydraulic and pneumatic parts, electrical, and welding supplies. Its customers usually come from the construction and manufacturing industries. FAST also sells through catalogs and its Web site. Though not a tech stock, our new play is quickly approaching stardom. With its impressive showing in the past month, FAST's relative strength rating has shot through the proverbial roof. In the face of a growling bear market, FAST managed to claw its way higher throughout the month of April and into May thus far. FAST doesn't host Web sites, they don't make fiber optic equipment, nor do they manufacture semiconductors. FAST makes nuts and bolts. From its humble beginning selling nuts and bolts through a vending machine, FAST has emerged as a powerhouse in the industrial supplies market. The company has an enviable annual growth rate of 20%, which has been sustained for the past 18 years. FAST's recent rally stems from the company's positive earnings report late last month and strong institutional interest. It seems that money managers can't buy FAST - fast enough. Volume has soared to record levels in the past month as institutions accumulate the stock. There have also been rumors circulating on trading desks that FAST is a possible takeover target. Though just rumors, the talk could propel the stock higher. FAST closed at a new 52-week high in Friday's trading on nearly three times ADV. The stock had reached as high as $70.50 until succumbing to profit taking in the final hours of trading. From here, look for entry as momentum carries FAST higher, or watch for a bounce off support at $68. Watch the volume carefully to confirm that institutions are still interested in FAST. By reaching new highs in the past month, FAST has entered into split territory. The company last split its stock in 1995, when it was trading at $49. Though the company doesn't yet have enough shares for a split, we'll be watching for an announcement. BUY CALL JUN-65 FQA-FM OI= 55 at $7.13 SL=5.00 BUY CALL JUN-70*FQA-FN OI=114 at $4.38 SL=2.75 BUY CALL JUN-75 FQA-FO OI= 0 at $2.06 SL=1.00 BUY CALL AUG-70 FQA-HN OI= 45 at $7.00 SL=5.00 Picked on May 14th at $69.38 P/E = 36 Change since picked 0.00 52-week high=$71.50 Analysts Ratings 4-2-1-0-0 52-week low =$34.00 Last earnings 03/00 est=0.50 actual=0.53 Next earnings 07-12 est=0.55 versus=0.45 Average Daily Volume = 339 K /charts/charts.asp?symbol=FAST PLXS - Plexus Corp $81.00 (+9.38) Plexus provides product realization services to original equipment manufacturers (OEMs) in the telecommunications, medical, industrial, computer, and transportation electronics industries. Its Plexus Technology and SeaMED subsidiaries provide the product design and engineering, while its Plexus Electronic Assembly subsidiary handles manufacturing. Lucent and GE account for over 25% of sales. All the recent good news, solid business forecasts, and positive analyst coverage finally sunk into investors' minds this week. PLXS continually tackled strong resistance at $79 and $80 then toppled the opposition in Friday's session. The volume was never below the ADV (247 K) and typically reached two or three times the norm during the ensuing battle. This aspect is very encouraging when making trades on a momentum play. Plus if you consider the overall light volume in the broad markets then it's even more of a bullish demonstration. The stellar performance on Friday hinted that intraday support could evolve at $80, but near-term it's stronger at $75 and $78. The 5-dma ($78.14) and 10-dma ($74.24) are in-line with this level. Therefore, at this time, it's practical to use these technical indicators as entry gauges on the climb. There's also a bit of icing to put on the cake. Ever since reporting 1Q earnings, PLXS is once again considered a split-candidate. On April 18th, the company beat analyst expectations by $0.04 and came in at $0.49 versus $0.38 same quarter last year. The good numbers and positive outlook gave PLXS the boost it needed to climb over $50-$55 and establish itself as a split candidate. The last time Plexus split its stock was in the summer of 1997. The company currently has 60 mln shares authorized with 17.7 mln shares issued so there's plenty of shares for a stock dividend. While this isn't the basis of the play, it certainly lends to a favorable opportunity. After watching PLXS spike off its lows of $65 on May 5th, we're anticipating the uptrend will continue especially now that the previous resistance at $80 is shattered. PLXS was propelled upward that day by the new Strong Buy- Aggressive Risk coverage put out by equity analyst David T. Parrish of Dain Rauscher Wessels and his issuance of a $103 price target. Earlier in April, Robertson Stephens reiterated a Buy rating with a price target of $90 and Needham & Co reiterated a Strong Buy rating and upped their price target to $80 from $70. Prudential Securities also has confidence in PLXS and upgrades the stock to a Strong Buy from Accumulate and tagged on a $90 price target. If the market conditions are advantageous for call plays and the analyst's projections are correct, then PLXS could experience a solid momentum run over the short-term. As was initially mentioned, Plexus was bestowed with good news recently. On May 1st, it completed its acquisition of Agility Inc., a privately-held Boston-area electronic manufacturing services provider. The immediate benefit to the company is the ability to provide existing and future customers in the New England market with a full range of manufacturing services. The following day, Plexus announced it was presented with two prestigious Service Excellence Awards at the Nepcon West 2000 show by Technology Forecasters and Circuits Assembly Magazine. BUY CALL JUN-70 QUA-FN OI=303 at $13.38 SL=10.00 BUY CALL JUN-75 QUA-FO OI= 8 at $10.38 SL= 7.25 BUY CALL JUN-80*QUA-FP OI= 80 at $ 8.13 SL= 5.75 BUY CALL JUN-85 QUA-FQ OI= 10 at $ 6.38 SL= 4.50 Picked on May 14th at $81.00 P/E = 60 Change since picked +0.00 52-week high=$81.75 Analysts Ratings 10-5-0-0-0 52-week low =$24.44 Last earnings 03/00 est= 0.36 actual= 0.38 Next earnings 07-17 est= 0.52 versus= 0.39 Average Daily Volume = 247 K /charts/charts.asp?symbol=PLXS ********** NETWORKING ********** JDSU - JDS Uniphase $86.00 (-7.81) 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. If you entered our new play on Friday, you at least had the chance for a day-trading opportunity. If not, then just hang in there as this one could be just be getting warmed up. As we said Thursday, the recent bounce off the $80 level of support has given us confidence that JDSU may have put in a bottom and be gearing up to had north. After moving up to $91.13 on Friday, the Fed clouds came rolling back in. The last 90 minutes of trading, saw JDSU loose its momentum, pulling back to close down $0.50 for the session. Normally that kind of action late in day would be viewed as a negative, especially closing at or near the low of the day. In this case, going into a weekend, two days ahead of the Fed meeting, we believe traders were simply pulling their money off the table and going home for the weekend. If they come back after the weekend feeling a little blue, and we get a dip, we would again look for the $80 area to attract buyers. We really believe investors are just chomping at the bit to buy shares of this company. The Fed is keeping the skies overhead just clouded enough for the long term investors to think that perhaps they may be able to load the boat at a better price. The short-term folks are in and out in a day or so, just like normal. Once the skies clear we would look for JDSU to take flight again. The analysts overwhelmingly back the company with Strong Buy and Buy ratings, and the public seems to have its own love affair going on with JDSU. As for our play, a successful retest of the $83 area or the $80 level could certainly provide a suitable entry point. Until the Fed decision is out on Tuesday, further advances could also be a good entry point, but be prepared to sell in the event of surprise. Not much company specific news this week, but on Thursday, an analyst at DLJ initiated coverage of JDSU with a Buy rating. Hasan Imam also said he projected a 12-month price target of $120 for the company. Imam joins thirty-three other analysts that have JDSU currently listed as a Buy or Strong Buy. They believe JDSU will emerge in the top three merchant vendors for optical components and modules. BUY CALL JUN-75 XXZ-FO OI=2909 at $17.50 SL=12.75 BUY CALL JUN-80*XXZ-FP OI=3126 at $14.38 SL=10.75 BUY CALL JUN-85 XXZ-FQ OI=2623 at $11.75 SL= 8.50 BUY CALL JUN-90 XXZ-FR OI=2739 at $ 9.13 SL= 6.25 BUY CALL SEP-80 XXZ-UP OI=2064 at $14.25 SL=10.75 SELL PUT MAY-85 XXZ-QQ OI=7591 at $ 3.38 SL=5.50 (See risks of selling puts in play legend) Picked on May 11th at $86.50 PE = N/A Change since picked -0.50 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 = 16.6 mln /charts/charts.asp?symbol=JDSU ***** LEAPS ***** May 14th - LEAPS By Mark Phillips leaps@OptionInvestor.com Investors are holding their breath (and their cash) in anticipation of Tuesday's FOMC meeting and the lack of volume is serving to gradually reduce the volatility to more palatable levels. Since hitting a high of 41.53 on April 14th, the peaks on the VIX are getting lower, increasing our conviction that the worst may be over. The VIX actually managed to close out the week just below 30 (29.95), and once the Fed announces their decision on interest rates, we could be in for a decent recovery. The NASDAQ is still flirting with its 200-dma (3590), which is right near the 3600 support level. The drop in volatility is bringing option premiums down from the stratosphere, while the market sorts out its future direction. This is exactly what we like to see as LEAPS investors, because we can pick our targets carefully and profit from the recovery whether it is slow or quick. Many of our favorite tech names like TXN, CSCO, EMC, QCOM and JDSU are holding near major support levels, which is encouraging in the face of the current market conditions. The longer these support levels hold, the stronger they become, and the lower the likelihood they will be violated. The return of volume will be a prerequisite to any significant rally, so keep a sharp lookout for an increase in buying activity. Pick your targets ahead of time, so that when the conditions are right, you can pounce on the opportunity. One note about the playlist; several of our plays have had recent splits, so the strikes have changed and the "Picked" prices have been changed accordingly. Current Plays SYMBOL SINCE LEAPS SYMBOL PICKED CURRENT RETURN EMC 11/07/99 JAN-2001 $ 80 ZOH-AP $15.38 $57.13 271.46% JAN-2002 $ 90 WUE-AR $19.00 $61.63 224.37% IBM 11/07/99 JAN-2001 $100 ZIB-AT $13.63 $18.88 38.52% JAN-2002 $110 WIB-AB $16.50 $24.50 48.48% CSCO 11/14/99 JAN-2001 $ 40 ZCY-AH $ 9.56 $25.38 165.48% JAN-2002 $ 45 WIV-AI $11.00 $28.25 156.82% GE 11/21/99 JAN-2001 $ 50 ZGR-AJ $ 5.42 $ 8.75 61.44% JAN-2002 $ 50 WGE-AJ $ 8.50 $12.75 50.00% NT 11/28/99 JAN-2001 $37.5 ZOO-AU $11.13 $19.88 78.62% JAN-2002 $37.5 WNT-AU $15.13 $24.50 61.93% VOD 12/05/99 JAN-2001 $ 50 ZAT-AJ $10.75 $ 6.13 -42.98% JAN-2002 $ 50 WHV-AJ $15.00 $11.00 -26.67% TXN 12/12/99 JAN-2001 $110 ZTN-AB $22.25 $47.13 111.82% JAN-2002 $120 WGZ-AD $28.50 $57.50 101.75% NXTL 12/19/99 JAN-2001 $ 90 ZFU-AR $23.50 $24.88 5.87% JAN-2002 $100 WFU-AT $27.25 $31.25 14.68% SUNW 12/19/99 JAN-2001 $ 80 ZJX-AP $17.63 $19.00 7.77% JAN-2002 $ 90 WJX-AR $22.00 $26.13 18.77% CY 01/16/00 JAN-2001 $ 40 ZSY-AH $ 9.13 $18.88 106.79% JAN-2002 $ 40 WSY-AH $12.63 $24.13 91.05% ERICY 01/30/00 JAN-2001 $16.3 ZYD-AO $ 4.94 $ 5.88 19.03% JAN-2002 $16.3 WRY-AO $ 6.75 $ 8.13 20.44% NSM 02/27/00 JAN-2001 $ 70 ZUN-AN $18.50 $10.63 -42.54% JAN-2002 $ 70 WUN-AN $24.25 $18.00 -25.77% AOL 03/12/00 JAN-2001 $ 60 ZKS-AL $14.00 $ 8.88 -36.57% JAN-2002 $ 65 WAN-AM $18.63 $14.75 -20.83% AXP 03/12/00 JAN-2001 $43.3 ZXP-AP $ 7.25 $12.13 67.31% JAN-2002 $46.6 WXP-AQ $ 9.33 $14.63 56.81% WM 03/19/00 JAN-2001 $ 25 ZWI-AE $ 5.00 $ 5.25 5.00% JAN-2002 $ 30 WWI-AF $ 5.38 $ 5.50 2.23% QCOM 03/26/00 JAN-2001 $150 YQO-AJ $39.25 $12.13 -69.10% JAN-2002 $160 XQO-AL $52.88 $23.13 -56.26% AMD 04/16/00 JAN-2001 $ 70 ZVV-AN $17.50 $30.63 75.03% JAN-2002 $ 70 WVV-AN $26.00 $42.00 61.54% CMGI 04/16/00 JAN-2001 $ 50 ZB -AJ $21.50 $19.50 - 9.30% JAN-2002 $ 55 WCK-AK $27.75 $27.00 - 2.70% JDSU 04/16/00 JAN-2001 $ 80 XJU-AP $27.50 $29.38 6.84% JAN-2002 $ 80 YJU-AP $39.63 $43.00 8.50% VSTR 04/16/00 JAN-2001 $ 90 ZTB-AR $23.88 $37.75 58.08% JAN-2002 $ 90 WWP-AR $35.00 $50.38 43.94% YHOO 4/30/00 JAN-2001 $140 ZYM-AH $32.13 $26.50 -17.52% JAN-2002 $140 WYZ-AH $46.38 $44.25 - 4.59% 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 VOD - Vodaphone $42.06 It has been a rocky road for our play on VOD since early March. Declining steadily in sympathy with the NASDAQ, the Telecom giant is finally showing signs of life. The company has a strong global presence in the Wireless market and the demand for their services is anticipated to have strong growth going forward. Adding to the positive sentiment is the recent rollout of the Verizon joint venture. VOD and Bel Atlantic recently joined their wireless businesses to create Verizon Wireless, a behemoth organization that provides wireless services in 96 of the nation's top 100 markets. By year's end, the two companies are expected to take Verizon to the market in what is anticipated to be the biggest IPO ever. With the positive outlook for the future, VOD looks like a bargain at current prices. Any market weakness that produces a dip to support near $40-41 looks like a very attractive entry point. If the recovery continues, look to step into the play as buyers push the price through resistance at $43. BUY LEAP JAN-2001 $45.00 ZAT-AI at $ 7.75 BUY LEAP JAN-2002 $50.00 WHV-AJ at $11.00 New Plays MOT - Motorola $95.69 There's nothing like a notable downgrade on a great stock to clear out the last of the sellers. On Wednesday, Alex Cena at Salomon Smith Barney lowered his rating from Buy to Outperform and his price target from $200 to $120. He cited the loss of Nortel as a customer and an aggressive product rollout in mobile phones as major obstacles to a continuation of the recent growth rate. The carnage was quick and decisive as MOT dropped as low as $86 on nearly 4 times the average daily volume. This represents a major support level and investors spent the balance of the week taking advantage of the rare bargain. The stock is now almost $10 above its low, and the buying volume has been strong, indicating that the selloff was likely overdone. Friday's strong move pushed shares of the company into the lower end of the gap that was created on Wednesday and the price held up rather well in light of the deterioration seen in many tech stocks. Any further weakness ahead of the FOMC meeting on Tuesday could produce some attractive entry points if MOT pulls back to support near $92. Otherwise, the stock looks attractive at current prices and this seems a good place to jump on board as MOT continues its recovery. BUY LEAP JAN-2001 $100.00 ZMA-AT at $19.75 BUY LEAP JAN-2002 $110.00 WMA-AB at $28.63 Drops NXTL $119.75 Having reported strong earnings and revenues at the end of April, it looked like our play on NXTL was ready to soar. Unfortunately, the 100-dma proved to be too large an obstacle in this uncertain market and the stock spent the past week falling back to earth. Even the 200-dma (currently $99.56) wasn't enough to arrest the decline, and this violation really paints our play in a negative light. Wireless demand isn't going away and NXTL will likely recover, but for now we have to let it go in favor of stocks that have a more positive outlook. GE $50.94 We got a nice ride out of GE since picking it as our Leap of the Week in late February. After bouncing repeatedly just above the 200-dma, the corporate giant took off in anticipation of the 3-for-1 split which occurred a week ago. After moving above $165 (pre-split)in anticipation of the split, the broad market weakness took its toll and the price has been dropping ever since. In light of the split being over and future interest rate hikes looming on the horizon, we'll take our profits and move on to other plays. ********* 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. **** SBL - Symbol Technologies Inc. $45.06 (-4.69) Symbol Technologies is the world leader in portable data terminals (50% of sales) and bar code scanners (40%). Its products retrieve data, such as product and price information, everywhere from the grocery store to the stock market. The company serves customers in such industries as warehousing and distribution, postal service, retail, and health care. The company has recently attempted to increase its distribution, reseller, and manufacturing channels. SBL has lost much of its institutional sponsorship in the past two months. After hitting a high of $69 in early March, SBL followed the broader market southward. But SBL's decline came on much higher volume than the average tech stock. Professional money managers began to liquidate their positions in SBL during early March, and continue to do so. After reporting earnings in late April, Merrill Lynch downgraded SBL from a Buy to an Accumulate rating. The downgrade stemmed from concerns over slowing growth and only reinforced the heavy selling. The downward momentum pushed SBL to a critical support level of $40. That level was the breakout point when SBL began to run last February. Traders feel that failure of support at $40 may prove to be detrimental for SBL. After slipping through that level last Wednesday, SBL rebounded into the weekend. But the recent rally came on light volume relative to the past two months of selling. In fact, Friday's ascent came on 490 K shares, well below the stock's ADV. From here, we're looking for the recent rally to fail as institutions continue to leave SBL. However, if SBL continues higher, it will most likely find resistance at $48, Friday's high. You might consider an entry if SBL bumps against resistance, then turns downward. But if you want to minimize directional risk, wait for SBL to fall past $40 before entering the play. Watch the volume for confirmation that the sellers have returned, pay special attention to trading activity on any move downward. BUY PUT JUN-50*SBL-RJ OI= 59 at $7.13 SL=5.00 BUY PUT JUN-45 SBL-RI OI= 0 at $4.00 SL=2.50 BUY PUT JUN-40 SBL-RH OI=170 at $1.88 SL=1.00 Average Daily Volume = 724 K /charts/charts.asp?symbol=SBL CMRC - Commerce One $44.38 (-11.50) Providing global e-commerce solutions for businesses, CMRC is endeavoring to create a network of interoperable marketplaces, trading communities and commerce portals called the Global Trading Web. The company has developed the Commerce One Solution to automate the procurement cycle between multiple buyers and sellers. The company also provides services including content management, order availability information, status tracking and transaction support. How many different ways can you say "buyer's strike"? Although that doesn't entirely describe the problems with CMRC, it is a big part of it. More to the point though, is investors' shift in sentiment towards the B2B sector as a whole. Although the potential is huge, that potential (which is greater now than during the huge run up a few months ago) isn't enough in the market anymore. Investors want tangible results, but the youth of the sector means that companies like CMRC are unable to produce those results in the near term. Industry groups are venturing into the B2B marketplace on their own and this is creating uncertainty about the potential for companies that are building their business on the delivery of B2B services. The net result is a declining share price as buyers refuse to play. The declining 5-dma (currently $46.94) is continuing to pressure the share price, and in the event of a brief rally, the 10 and 30 day moving averages are looming above at $52.50 and $53.63 respectively. Consider opening new positions as CMRC fails to break through overhead resistance near $52. Support may be building near $42, so conservative traders will want to wait for prices to drop through this level before playing. As always, keep your eye on the volume as it continues to be a good barometer of the strength of price movement. BUY PUT JUN-50*RJC-RJ OI=202 at $10.13 SL=7.00 BUY PUT JUN-45 RJC-RI OI=123 at $ 7.00 SL=5.00 BUY PUT JUN-40 RJC-RH OI= 26 at $ 4.38 SL=2.75 Average Daily Volume = 4.84 mln /charts/charts.asp?symbol=CMRC FDRY - Foundry Networks Inc. $68.13 (-22.00) 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. So what's the story with FDRY? Apparently, it's lack of buyers and selling that got a bit out of hand. Most of the analysts that follow the company have them rated as either a Buy or Strong Buy. PMG recently initiated coverage of FDRY with a LT Buy rating and a price target of $100. They said solid sequential revenue growth and an operating margin in excess of 40% made the company attractive. At that time, FDRY was trading near the $80 level. Well, if that's the case it should be a screaming Buy at current levels. FDRY had its IPO in late September last year and traded as high as $212 in early March. The stock has run out of gas as investors seem to be questioning their ability to compete in the market place. One of its competitors in the industry, ArrowPoint Communications joined forces with CSCO. Some of the chat rooms question FDRY's ability to continue to compete head-to-head, while others point to recent insider selling as a potential reason for the decline. Technically, FDRY has become somewhat oversold, with divergence beginning to appear in several indicators, suggesting a near term bottom could be be near. However, remember technical indicators don't buy and sell stock, people do. People with real dollars and real emotions. Until the emotions and sentiment changes, FDRY could continue to struggle. A check of the volume shows most bounces since then end of March have come on average or lighter volume, while the down days have seen much stronger numbers. The 5-dma and 10-dma are back at $75.09 and $82.35 respectively, so a continuation of Friday's bounce may not be out of line. However, this bounce will probably be met with another round of selling. Intraday resistance is also seen near $72, $75 and again at $77. BUY PUT JUN-80 OUJ-RP OI=62 at $17.88 SL=12.88 BUY PUT JUN-75 OUJ-RO OI=12 at $14.50 SL= 9.75 BUY PUT JUN-70*OUJ-RN OI=48 at $11.38 SL= 8.50 Average daily volume = 1.39 mln /charts/charts.asp?symbol=FDRY NXTL - Nextel Communications $92.88 (-26.88) Nextel has come a long ways since its humble beginnings as a radio dispatch company. Providing mobile phone service, two-way radio dispatch, and paging services to business users; all through one Motorola handset, the company is growing into a major digital wireless services provider. NXTL's digital network (Digital Mobile Network) constitutes one of the country's largest integrated wireless communications systems utilizing a single transmission technology. NXTL has specialized mobile radio spectrum holdings in and around every major business and population center in the U.S., including all of the top 50 metropolitan areas. Reporting record first quarter results normally would be the catalyst for an increasing stock price, but that isn't the case with NXTL. The conference call pointed to an increasing subscriber base, good customer retention, and strongly growing revenues. With the current market climate, this was only enough to push NXTL up to its 100-dma (currently $121.63), and the past week was really ugly. Giving up over $26 in share price is bad enough, but the latter half of the week saw increasing volume as the wireless service provider watched its stock plummet through the 200-dma (currently $99.56). Buyers attempted to rally the stock on Friday, but the lack of follow-though paints a bleak picture. As NXTL rolled over near $104, the volume increased, and the decline accelerated for the remainder of the day. Closing near the low of the day, NXTL is sitting right on support that dates back to early January. If support at $92 fails to hold, the next level to watch is $83. Use failed rallies up to resistance near $100 as opportunities to open new positions, as long as increasing volume confirms the decline. In light of the pending FOMC meeting on Tuesday, continuing weakness could serve to continue Friday's decline. If NXTL moves down through support at $92 on strong volume, consider it a sign of further weakness and a good point to jump on board. BUY PUT JUN-95 FQC-RS OI=18 at $10.50 SL=7.50 BUY PUT JUN-90*FQC-RR OI=63 at $ 7.88 SL=5.50 BUY PUT JUN-85 FQC-RQ OI=72 at $ 5.63 SL=3.50 Average Daily Volume = 4.40 mln /charts/charts.asp?symbol=NXTL PLCM - Polycom Inc $58.38 (-9.88) Polycom develops, manufactures and markets network solutions and communication tools such as tele-conferencing products that facilitate communication over long distances. Its Web-based products offer business users a full range of high quality conferencing choices that provide immediate interactive communication. Polycom recently entered the DSL access market and has acquired the NetEngine line of DSL integrated access devices. It's obvious PLCM is not on the "buyer's list" this month. Since experiencing a freefall on May 3rd, the downward momentum continues to grow. On Tuesday, PLCM violated the 200-dma ($62.47), a line that acted as bottom support during April. And even with a sharp upswing in Friday's session, the share price couldn't penetrate the 5-dma ($58.42). The spike was likely a response to the Strong Buy reiteration issued by analyst Doug Van Dorsten of Thomas Weisel Partners the previous day. This is purely a technically driven momentum play. Be careful before starting new plays. PLCM should show definitive signs in the next few sessions that it's heading lower. For instance, moves through $53 and $52 would provide the very conservative with solid confirmation. At these lower price levels you never know when bargain hunters will start nibbling. From a different angle, the more aggressive traders may use downward bounces off the 5-dma as entries to play the current range. Just be sure PLCM is maintaining this lower trading channel. There's really no news to report that could have effected trading recently. However, this Thursday the company is holding a Shareholders' Meeting and will vote to increase the number of authorized shares from 50 mln to 175 mln. ***Wait for OI*** BUY PUT JUN-65 QHD-RM OI= 0 at $16.63 SL=12.00 BUY PUT JUN-60 QHD-RL OI= 0 at $13.13 SL= 9.75 BUY PUT JUN-55*QHD-RK OI= 0 at $ 9.75 SL= 6.75 BUY PUT JUN-50 QHD-RJ OI= 0 at $ 6.88 SL= 5.00 Average Daily Volume = 504 K /charts/charts.asp?symbol=PLCM AKAM - Akamai Technologies $70.50 (-26.56) Akamai Technologies provides a global Internet content delivery service that improves Website speed and reliability and enables richer, more engaging Website content. Its FreeFlow technology analyzes Web traffic and transmits the content via the most efficient route. Currently Akamai has over 2000 servers deployed in 40 countries across 55 telecommunications networks. Akamai (pronounced AH kuh my) is Hawaiian for intelligent, clever and cool. Our loyal readers know we're back where we started in the case of AKAM. But it's now crystal-clear, AKAM can't hold onto any gains. After a very sweet, but short two-day spectacle on 4/28 & 5/1 where it pinnacled at $113.38, AKAM relinquished its leadership position in the Internet infrastructure sector. The stock is once again below its IPO prices. The next stop on the way down is $60, with a bottom at $56.63. Of course you know the disclaimer, there are no guarantees! And if you followed AKAM previously you know how its direction can turn on a dime. So its absolutely imperative you know your portfolio's risk tolerance before considering this VOLATILE Internet play. The descending 5-dma (currently at $78.19) appears to be a good entry guideline if have the stomach to jump back into this play. Take a look a one-month chart for visual confirmation. Please stack as many odds in your favor and pay close attention to the overall market. In the news this week, Intel announced it will spend $200 mln this year on services to help companies put audio and video on the Internet at faster speeds and with fewer glitches. This is rivaling companies like Akamai Technologies and Digital Island. BUY PUT JUN-75 RUG-RO OI= 53 at $12.88 SL=9.75 BUY PUT JUN-70*RUG-RN OI=110 at $ 7.25 SL=5.00 BUY PUT JUN-65 RUG-RM OI= 25 at $ 5.13 SL=3.25 BUY PUT JUN-60 RUG-RL OI= 20 at $ 4.75 SL=3.00 Average Daily Volume = 1.11 mln /charts/charts.asp?symbol=AKAM ************************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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The Option Investor Newsletter 5-14-2000 Sunday 5 of 5 ************* COVERED CALLS ************* Candlestick Charting Basics: Reversal Patterns... The majority of technicians use historical price charts to reflect the daily movement and volume action in a specific instrument. A chart is simply a representation of the conditions that exist in the underlying instrument. Technicians watch for price clues that alert them to changes in the market psychology and primary trend. Unfortunately, while they can be helpful in projecting potential movement and character, chart patterns cannot predict the future. A reversal signal implies that a prior trend or its character is likely to change in the near future. Common bar-chart reversal indicators include "double top" (or bottom), "head-n-shoulder," and "island" formations. Although the term "reversal pattern" is commonly used to identify a relatively abrupt change in direction, most trend reversals occur over a slightly longer period, often days or even weeks. Primary trends usually transition to sideways price actions or consolidation patterns before continuing with a definitive directional movement and for this reason, it is more accurate to think of reversals as simply changes in the current trend. Recognizing the emergence of reversal patterns is a valuable tool that will help increase profits in all of your trading positions. With timely knowledge of a prospective change in character, you can adjust your trading style to reflect the new outlook for the issue. There is one important fact to remember. When a potential change is underway, new positions should be opened only when the reversal pattern signals a move towards the direction of the major trend. The majority of candlestick patterns are trend-change or reversal indicators. Two of the most common formations are the "hammer" and "hanging-man." These candlesticks have long lower shadows and small real bodies that are near the top of the daily range. The color of the body is not as important but it is slightly more bullish if the body of the hammer is white, and in contrasts, more bearish if the body of the hanging man is black. The long lower shadow should be twice the height of the real body and it ideally it will have almost no upper shadow. The longer the lower shadow and the smaller the real body the more meaningful the indication. These candlestick lines can be bullish or bearish depending on when they appear in a trend. When this candlestick emerges in a downtrend, it is a signal that a bullish change in character may soon occur. If this line appears after a rally, the bullish move may be at an end. It may seem strange that the same candlestick can identify both bullish and bearish reversals but the outlook is based on results similar to those that follow "Island" formations in standard bar charts. In recent weeks, the hanging man has been an important tool for timing profitable exits. As with any technical indication, it is important to confirm the bearish trend with this type of signal. The difficulty is determining when the actual reversal will occur as a hanging man generally appears while the market is inundated with bullish optimism. In most cases, the issue opens near the daily highs, then declines sharply, and finally rallies to close back at the high. How do you know if the recovery will continue or falter? If the stock opens significantly lower the next day, investors who purchased shares at the open (or close) will be in a losing position and may decide to cut their losses quickly. The potential for a new downtrend is based on the distance between the real body of the hanging-man and the opening price the next day. The greater the distance, the higher the probability for a bearish change in character. This unique pattern is just one of the ways in which candlesticks measure the emotional element of a specific issue. The names are simply a colorful mechanism used to describe the character of the market at the time these patterns are formed. After hearing the phrase "hanging man", what trader wouldn't go running for cover? Next week, we will review another group of technical indicators and as we progress to more advanced formations, you will discover which patterns work best for your style of trading and the market in which you participate. 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 7.63 MAY 7.50 1.19 *$ 0.88 14.4% PETC 13.31 13.06 MAY 12.50 1.44 *$ 0.63 11.5% CEGE 18.69 18.81 MAY 15.00 4.50 *$ 0.81 8.3% CEGE 21.50 18.81 MAY 17.50 4.63 *$ 0.63 8.1% PLCE 21.00 18.31 MAY 17.50 4.13 *$ 0.63 8.1% WGR 18.75 20.63 MAY 17.50 1.88 *$ 0.63 8.1% ANET 12.38 12.94 MAY 10.00 2.88 *$ 0.50 7.6% GENE 20.13 17.50 MAY 15.00 5.63 *$ 0.50 7.5% SPLH 12.06 12.13 MAY 10.00 2.69 *$ 0.63 7.3% MATK 15.50 16.75 MAY 12.50 4.13 *$ 1.13 7.2% PSIX 23.19 25.00 MAY 15.00 8.88 *$ 0.69 7.0% WWFE 15.63 18.00 MAY 12.50 3.88 *$ 0.75 6.9% MXTR 11.94 11.69 MAY 10.00 2.38 *$ 0.44 6.7% WLV 16.06 16.94 MAY 15.00 1.50 *$ 0.44 6.6% UGLY 7.50 7.94 MAY 7.50 0.50 *$ 0.50 6.2% BBBY 39.06 38.94 MAY 32.50 8.25 *$ 1.69 6.0% ANET 10.56 12.94 MAY 7.50 3.63 *$ 0.57 6.0% PSSI 9.13 9.09 MAY 7.50 2.19 *$ 0.56 5.8% IM 18.88 19.63 MAY 17.50 2.25 *$ 0.87 5.7% MATK 16.63 16.75 MAY 12.50 4.75 *$ 0.62 5.7% BWEB 23.44 18.13 MAY 15.00 9.00 *$ 0.56 5.6% APC 35.81 50.44 MAY 35.00 2.88 *$ 2.07 5.5% LPNT 16.38 20.31 MAY 15.00 2.25 *$ 0.87 5.4% NUHC 22.13 18.75 MAY 17.50 6.00 *$ 1.37 5.3% CAR 20.81 21.56 MAY 20.00 1.94 *$ 1.13 5.2% PIR 10.50 11.13 MAY 10.00 1.00 *$ 0.50 4.6% MRL 26.88 29.00 MAY 25.00 3.25 *$ 1.37 4.2% ACF 17.63 18.75 MAY 15.00 3.13 *$ 0.50 3.7% BSX 21.75 24.06 MAY 20.00 2.50 *$ 0.75 3.4% DGX 44.50 67.00 MAY 40.00 6.00 *$ 1.50 3.4% ALSC 20.38 16.88 MAY 17.50 3.63 $ 0.13 1.1% NCNT 17.00 11.44 MAY 12.50 5.13 $ -0.43 0.0% *$ = Stock price is above the sold striking price. Comments: Spiegel (SPGLA) is holding up well though the technicals indicate heavy selling pressure. Closing the position now would offer a profitable exit (May $7.50 call is $0.25 x $0.50) though there is only one week until option expiration. Children's Place (PLCE) is testing support after moving back under its 150 dma - monitor the position closely as the technical picture has weakened. Maxtor (MXTR) appears ready to end its consolidation phase and resume the uptrend. Backweb Technology (BWEB) is testing the April low but the technicals remain positive. Anadarko Petroleum (APC) is off to the races! We should have just bought calls! The same can be said for Quest Diagnostics (DGX). Alliance Semiconductor (ALSC) has broken below its 150 dma and is at a key moment - monitor the position closely. Netcentives (NCNT) is testing the April low, another key moment! 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 ADEX 19.56 MAY 17.50 QDE EW 2.44 40 17.12 7 9.6% ANET 12.94 JUN 12.50 QTE FV 1.13 68 11.81 35 5.1% BEAM 12.44 JUN 10.00 BAQ FB 3.00 2448 9.44 35 5.2% CAIR 22.88 JUN 17.50 HHU FW 6.38 78 16.50 35 5.3% CENT 11.81 JUN 10.00 EQH FB 2.50 120 9.31 35 6.4% DRIV 18.81 JUN 15.00 DQI FC 4.75 64 14.06 35 5.8% SMRT 8.53 JUN 7.50 STQ FU 1.50 384 7.03 35 5.8% Sequenced by Return ***** Stock Last Call Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return ADEX 19.56 MAY 17.50 QDE EW 2.44 40 17.12 7 9.6% CENT 11.81 JUN 10.00 EQH FB 2.50 120 9.31 35 6.4% DRIV 18.81 JUN 15.00 DQI FC 4.75 64 14.06 35 5.8% SMRT 8.53 JUN 7.50 STQ FU 1.50 384 7.03 35 5.8% CAIR 22.88 JUN 17.50 HHU FW 6.38 78 16.50 35 5.3% BEAM 12.44 JUN 10.00 BAQ FB 3.00 2448 9.44 35 5.2% ANET 12.94 JUN 12.50 QTE FV 1.13 68 11.81 35 5.1% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MR-Monthly Return. ***** ADEX - ADE Corporation $19.56 *** One Week 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. Ade's systems are designed to deliver the throughput, reliability and information and analysis necessary to meet the demands of complex and time-sensitive manufacturing processes. Ade officials recently announced that Daniel F. Harrington resigned (VP and CEO) 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 since the move. The change in technical character is favorable and the position offers an excellent risk/reward outlook. MAY 17.50 QDE EW LB=2.44 OI=40 CB=17.12 DE=7 MR=9.6% Chart = /charts/charts.asp?symbol=ADEX ***** ANET - ACT Networks $12.94 *** Clarent Buys ANET! *** ACT Networks develops, manufactures, and markets multi-services access products that enable the convergence of voice, video and data onto one managed network. Service providers and enterprise customers use their products to build converged networks that are bandwidth efficient, cost-effective and easy to manage. ANET has agreed to by acquired by Clarent (CLRN) under terms that are subject to a "collar" which values ACT Networks' shares between $14 and $18. The deal is expected to close in the third quarter of 2000, pending shareholder approval. This should cause ACT Networks to trade in a very narrow range near $14. We favor a conservative entry point with a reasonable return. JUN 12.50 QTE FV LB=1.13 OI=68 CB=11.81 DE=35 MR=5.1% Chart = /charts/charts.asp?symbol=ANET ***** BEAM - Summit Technology $12.44 *** Break-out! *** Summit Technology is in the business of vision correction and sales of contact lenses and related products. They also service laser systems and related products to correct vision disorders and collect per procedure license fees from users of their systems. In 1999, they became the first commercial excimer laser manufacturer to receive FDA approval for the popular LASIK procedure. The recent upgrades after reporting favorable earnings suggest a brighter future for Summit. Last week, Summit received FDA approval to expand its studies of vision improvement using its CustomCornea Wavefront System and its LADARVision System. The technicals reflect a bullish break-out on heavy volume and the previous resistance at $10 should now become support. JUN 10.00 BAQ FB LB=3.00 OI=2448 CB=9.44 DE=35 MR=5.2% Chart = /charts/charts.asp?symbol=BEAM ***** CAIR - Corsair Communications $22.88 *** Pre-paid Wireless *** Corsair Communications is a leading provider of software and system solutions for the wireless industry. Their PhonePrint system provides highly effective cloning fraud prevention to wireless telecommunications carriers by using proprietary radio frequency (RF) signal analysis technology. Corsair's PrePay solution has an advantage over most other competitive offerings since it enables carriers to use existing switch infrastructure equipment rather than requiring costly additional adjunct switches and voice trunk resources. Corsair attributed its strong first quarter earnings to the growth and acceptance of their PrePay product. The technicals remained bullish during Corsair's recent pullback and a resumption of the up-trend appears forthcoming. JUN 17.50 HHU FW LB=6.38 OI=78 CB=16.50 DE=35 MR=5.3% Chart = /charts/charts.asp?symbol=CAIR ***** CENT - Central Garden & Pet Company $11.81 *** 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. JUN 10.00 EQH FB LB=2.50 OI=120 CB=9.31 DE=35 MR=6.4% Chart = /charts/charts.asp?symbol=CENT ***** DRIV - Digital River $18.81 *** B2B Speculation *** Digital River is a provider of comprehensive electronic commerce outsourcing solutions. It is an application service provider that enables its clients to access its proprietary electronic commerce system over the Internet. They provide a suite of electronic commerce services to its clients, including Web store development and hosting, transaction processing, electronic software delivery, and other similar services. Last quarter's earnings were favorable with sequential growth in sales and gross margin. Digital River anticipates their Software Division will reach profitability by December of this year. With over $50 million in cash and investments and no debt at quarters end, they expect to have the capital to reach their profitability targets without needing to raise additional funds. Investors have taken notice, pushing the stock off its April low. The hammer bottom (weekly chart) a couple weeks ago suggests the downtrend has ended. JUN 15.00 DQI FC LB=4.75 OI=64 CB=14.06 DE=35 MR=5.8% Chart = /charts/charts.asp?symbol=DRIV ***** SMRT - Stein Mart $8.53 *** Retail Sector (Hedge) Play *** Stein Mart is a 182-store retail chain that offers fashionable, current-season, primarily branded merchandise comparable in quality and presentation to that of traditional department and fine specialty stores at prices typically 25% to 60% below those regularly charged by such stores. Their assortment of merchandise features moderate to designer brand-name apparel for women, men and children, as well as accessories, gifts, linens, shoes and fragrances. Stein Mart appears to be on the right track and has reversed its downtrend after reporting a favorable fourth quarter at the end of February. An extension of its share repurchase plan also has helped. In April, Stein Mart reported net sales increased 15% for the first quarter of 2000. Several new stores have already opened which bode well for the second quarter. We favor the technical support above our cost basis as Stein Mart nears a new 52 week high. JUN 7.50 STQ FU LB=1.50 OI=384 CB=7.03 DE=35 MR=5.8% Chart = /charts/charts.asp?symbol=SMRT ****************** BIG CAP NAKED PUTS ****************** This section will return next week. *********************** CONSERVATIVE NAKED PUTS *********************** Trading Strategies: This Market Takes No Prisoners! In times like these, it's important to review your goals, your limitations and the basic methods of successful trading. As with any speculative endeavor, before you participate in the options market it is essential to realize that no system or technique offers a pathway to easy money. Investing involves hard work and mental discipline and the market has a remarkable ability to return a proportionate amount of profit, based on the sum total of personal effort and commitment. Trading options requires even greater resolve as it is both an art and a science. The science is knowing how an option works; its time decay and volatility characteristics. The art is gained by experience, including how to achieve the best prices for option orders in different markets; how to use disparity in option pricing; and which strategies work the best in specific market conditions. The market is plagued with limitless methods for achieving success but unfortunately, no one can say exactly what strategies are right for you. Many techniques are unsuited to the majority of traders and to build a profitable portfolio, you must define each objective carefully and select those strategies best suited for your level of experience and risk/reward attitude. Every person has a different risk tolerance, based on fundamental issues such as income, age and net worth along with specific factors such as trading capital and collateral holdings. Both short and long-term goals are important aspects in determining how you participate in the market, what type of positions you buy and sell and at what point you will exit a trade for profit or loss. If your goals are short-term, it may be prudent to utilize conservative techniques with limited risk and high liquidity. Strategies that take longer to evolve, with corresponding higher potential rewards may not be suitable for those traders who require access to their assets on a frequent basis. Regardless of your approach and trading style, it is important to understand the fundamental relationship between risk and reward. Lower risk usually translates into lower reward. The average investor will normally do well with a position that has limited risk and the potential for large rewards because one successful trade can easily overcome a series of limited losses. Obviously, the investment objectives are more essential than the merits of the technique itself. If the strategy is not suitable for the investor, then it should not be utilized, no matter how attractive it appears. At the same time, it's important to match the strategy to the technical pattern and character of the market. Buying options is often the simplest and most effective technique for instruments with low volatility in the beginning stages of a new trend. However, as conditions change there are other methods that provide a better risk/reward ratio with a higher probability of profit. Trends will range from flat to vertical and as option volatility varies, disparities will occur between strike prices of the same group or series. A successful trader must be able to adjust his approach to the market using the appropriate strategies to exploit the occasions that provide the most favorable profit opportunities. In all cases, you must let the market determine the trend and trade with it, not against it. The reason is quite simple: One can make many errors of judgment when establishing positions in concurrence with the basic direction of the market. In the beginning, we are all overwhelmed with the vast complexity of this type of investing and the mental willpower that it takes to be successful. Those who apply dedication, courage, honesty and patience find that all things are possible. The key is to evaluate the roles of these virtues in your daily trading and decide how they contribute to a portfolio with suitable risk levels that produces consistent returns. In short, the manner in which you develop and implement proven techniques will have the most impact on your success in building wealth and prosperity. 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 CENT 11.50 11.81 MAY 10.00 0.50 *$ 0.50 30.2% VRTL 19.13 17.00 MAY 12.50 0.44 *$ 0.44 22.4% BBSW 16.94 14.00 MAY 12.50 0.31 *$ 0.31 18.2% ACF 17.63 18.75 MAY 15.00 0.75 *$ 0.75 15.8% HYSL 29.13 23.81 MAY 22.50 0.44 *$ 0.44 15.2% TSEM 22.06 19.50 MAY 15.00 0.50 *$ 0.50 14.7% TBI 19.00 20.81 MAY 17.50 0.44 *$ 0.44 14.6% CCCG 13.88 12.38 MAY 10.00 0.31 *$ 0.31 14.5% DRTE 22.88 25.25 MAY 17.50 0.50 *$ 0.50 14.3% ANLY 9.81 10.38 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 20.06 MAY 15.00 0.38 *$ 0.38 12.6% OCR 14.31 16.06 MAY 12.50 0.50 *$ 0.50 12.3% EXCA 35.50 33.25 MAY 25.00 0.63 *$ 0.63 11.8% LPNT 16.38 20.31 MAY 15.00 0.81 *$ 0.81 11.8% LYNX 20.88 25.38 MAY 12.50 0.50 *$ 0.50 11.6% PAIR 21.69 25.88 MAY 17.50 0.50 *$ 0.50 10.9% ELNT 40.50 38.00 MAY 32.50 0.63 *$ 0.63 10.3% KR 19.06 20.03 MAY 17.50 0.75 *$ 0.75 9.6% CLPA 34.00 29.38 MAY 22.50 0.31 *$ 0.31 9.5% NTPA 41.75 31.31 MAY 30.00 0.56 *$ 0.56 9.1% RDC 26.69 30.63 MAY 22.50 0.63 *$ 0.63 7.7% CQ 19.75 25.25 MAY 15.00 0.38 *$ 0.38 7.6% VANS 17.06 15.00 MAY 15.00 0.56 $ 0.56 7.6% SUPX 30.06 34.00 MAY 17.50 0.69 *$ 0.69 7.5% TOS 32.06 32.13 MAY 30.00 0.75 *$ 0.75 7.1% CYBX 23.81 18.00 MAY 17.50 0.50 *$ 0.50 6.9% VTS 28.06 27.56 MAY 20.00 0.56 *$ 0.56 6.6% BBBY 39.06 38.94 MAY 27.50 0.50 *$ 0.50 6.5% AFWY 20.06 17.25 MAY 17.50 0.38 $ 0.13 1.9% *$ = Stock price is above the sold striking price. Comments: Keep an eye on Broadbase Software (BBSW) as it approaches the April low - a quick exit may be needed. Hyperion Solutions (HYSL) is testing the April low near the sold strike though the technicals remain positive. With the semiconductor sector under some pressure, Elantec (ELNT) is now consolidating and may test the April low, hopefully after next week. Netopia (NTPA) appears to have successfully tested the April low. Look for a follow through next week or consider exiting the position. VANS is under selling pressure and remains at a key moment; also a candidate for an early exit. It appears Tosco (TOS) my have successfully tested its 30 dma. Cyberonics broke through its 150 dma - a bearish move, and is on the verge of breaking a long term trendline (2yr weekly chart). Even with one week to go, an early exit may be prudent. American Freightways (AFWY) appears to have successfully tested its 50 dma though it isn't out of the woods yet - monitor closely. In the case of Omnicare (OCR), we suggested a "target shooting" entry price of $0.50 for the JUN-$12.50 Put, providing an initial cost basis of $12.00. The highest bid observed during the week was $0.43, and thus the position, although positive, will not be listed in the monthly summary. 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 ADEX 19.56 JUN 15.00 QDE RC 0.69 0 14.31 35 13.0% CLPA 29.38 JUN 15.00 QJC RC 0.63 45 14.38 35 8.4% TBI 20.81 JUN 17.50 TBI RW 0.38 0 17.12 35 6.1% TRMB 36.00 JUN 25.00 TRQ RE 0.44 22 24.56 35 5.0% VRTL 17.00 JUN 10.00 TUJ RB 0.31 0 9.69 35 7.3% WLV 16.94 JUN 15.00 WLV RC 0.50 10 14.50 35 8.1% XTO 17.69 JUN 15.00 XTO RC 0.38 1000 14.62 35 6.9% Sequenced by Return ****** Stock Last Put Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return ADEX 19.56 JUN 15.00 QDE RC 0.69 0 14.31 35 13.0% CLPA 29.38 JUN 15.00 QJC RC 0.63 45 14.38 35 8.4% WLV 16.94 JUN 15.00 WLV RC 0.50 10 14.50 35 8.1% VRTL 17.00 JUN 10.00 TUJ RB 0.31 0 9.69 35 7.3% XTO 17.69 JUN 15.00 XTO RC 0.38 1000 14.62 35 6.9% TBI 20.81 JUN 17.50 TBI RW 0.38 0 17.12 35 6.1% TRMB 36.00 JUN 25.00 TRQ RE 0.44 22 24.56 35 5.0% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MR-Monthly Return. ***** ADEX - ADE Corporation $19.56 *** Own This One! *** 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. Ade's systems are designed to deliver the throughput, reliability and information and analysis necessary to meet the demands of complex and time-sensitive manufacturing processes. Ade officials recently announced that Daniel F. Harrington resigned (VP and CEO) 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 since the move. The change in technical character is favorable and the position offers an excellent risk/reward outlook. JUN 15.00 QDE RC LB=0.69 OI=0 CB=14.31 DE=35 MR=13.0% Chart = /charts/charts.asp?symbol=ADEX ***** CLPA - Cell Pathways $29.38 *** Drug Speculation! *** 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. JUN 15.00 QJC RC LB=0.63 OI=45 CB=14.38 DE=35 MR=8.4% Chart = /charts/charts.asp?symbol=CLPA ***** TBI - Tuboscope $20.81 *** 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. JUN 17.50 TBI RW LB=0.38 OI=0 CB=17.12 DE=35 MR=6.1% Chart = /charts/charts.asp?symbol=TBI ***** TRMB - Trimble Navigation $36.00 *** X Marks The Spot! *** Trimble Navigation Limited designs and develops innovative products enabled by GPS technology. Trimble designs, produces, and markets electronic products that determine precise geographic location. Their principal products, which utilize substantial amounts of proprietary software and firmware, are integrated systems for collecting, analyzing and displaying position data in forms customized for specific end-user applications. In late April, Trimble trounced the consensus estimates for quarterly earnings and their forecasts for future revenues are excellent. In addition, the recent removal of sensitivity limitations on satellite resolution is likely to bring billions of dollars in productivity gains. The GPS industry's sales this year are projected to double to $16 billion by 2003 and new acquisitions suggest Trimble is prepared to become one of the industry leaders. JUN 25.00 TRQ RE LB=0.44 OI=22 CB=24.56 DE=35 MR=5.0% Chart = /charts/charts.asp?symbol=TRMB ***** VRTL - Vertel $17.00 *** B2B Speculation! *** 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 recently on rumors that the company is likely to win orders from Ericsson and Nortel Networks. Now we will speculate on the resumption of the bullish trend. JUN 10.00 TUJ RB LB=0.31 OI=0 CB=9.69 DE=35 MR=7.3% Chart = ***** WLV - Wolverine Tube $16.94 *** Oil Sector *** 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 rallied above the November - January consolidation area which should now provide technical support. A favorable cost basis for those who would like to own the issue. JUN 15.00 WLV RC LB=0.50 OI=10 CB=14.50 DE=35 MR=8.1% Chart = /charts/charts.asp?symbol=WLV ***** XTO - Cross Timbers Oil $17.69 *** Technicals Only! *** Cross Timbers and its subsidiaries are engaged in the acquisition, development, exploitation, and exploration of oil & gas producing properties, and in the production, processing, marketing, and transportation of oil and natural gas. The Company's proved reserves are principally located in relatively long-lived fields with well-established production histories in the United States. In late April, the company announced record production levels, earnings, and cash flow. Upgrades from Solomon Smith Barney and Merrill Lynch followed the news and now the issue is headed to a test of the all-time high near $20. The recent bullish departure from a long-term "W" pattern suggests the outcome will likely be favorable. JUN 15.00 XTO RC LB=0.38 OI=1000 CB=14.62 DE=35 MR=6.9% Chart = /charts/charts.asp?symbol=XTO ************************ SPREADS/STRADDLES/COMBOS ************************ Next Stop: Super Tuesday! Friday, May 12 Stocks ended higher for the second consecutive day after benign economic data eased investors concerns over rising interest rates. The Dow closed up 63 points at 10,609 and the Nasdaq climbed 29 points to 3529. The S&P 500 Index added 13 points to end at 1420. Volume on the NYSE remained light Friday with just 861 million shares exchanged. NYSE advances beat declines 1,605 to 1,316. Trading on the Nasdaq was light with just 1.22 billion shares changing hands. Advances beat declines 2,122 to 1,907. The 30 year Treasury was last down 25/32, bid at 100 19/32, pushing its yield up to 6.17%. Sunday's new plays (positions/opening prices/strategy): ADE Corp. ADEX MAY15C/MAY17C $0.00 debit bull-call Texaco TX OCT40C/MAY55C $15.00 debit diagonal Apache APA JUN40P/JUN45P $0.62 credit bull-put The morning rally in equity markets did little to help our new spread positions. ADE opened higher and within ten minutes, the issue was trading up almost $1. The target entry was unavailable. Texaco moved in much the same manner but with the long-term time frame, we decided to open the position at a slightly higher debit. The current spread has little potential for profit but at next Friday's expiration, we will adjust the play to a more favorable position. Apache dipped just a few minutes after the open and the target credit was easily achieved. Portfolio plays: The market posted modest gains today as investors cheered tame inflation news. The producer price index fell 0.3% in April, marking the first decline since February 1999 and matching the consensus forecast. The core PPI also met the forecast gain of 0.1% as car, aircraft and drug prices all rose. The report was greeted favorably by market analysts and experts now believe next Tuesday's rate hike may be the last one until after the election. Strong earnings from Dell Computer (DELL) gave the tech sector an added boost and shares of General Motors (GM), J.P. Morgan (JPM) and AT&T (T) led the Dow higher. In the broad market, industrial power, tobacco and computer hardware stocks advanced while retail, household and telecom issues consolidated. A number of large-cap technology companies advanced during the session and our portfolio was led by Teradyne (TER) which moved up $5 to close near $87. The majority of stocks in the hi-tech group also participated in the rally. Andrew Corporation (ANDW), Arrow Electronics (ARW), Cabletron (CS), SCM Microsystems (SCMM), and Vodaphone (VOD) all enjoyed bullish activity. Issues in the Major Drug sector performed well with Sepracor (SEPR) and Warner Lambert (WLA) leading the way and our top conglomerate, General Electric (GE) appears to be finding support near the $50 range. Oil industry issues continued to advance and Smith International (SII), Nabors (NBR) and Tuboscope (TBI) were the leaders in that group. The standout small-cap issues were Ocular Sciences (OCLR) with a $1.38 move to $17 and Oxford Health (OXHP) which rallied $1 to a recent high near $20. Overall, it was a great way to end the week and with luck, the FOMC meeting will dispel the current attitude of interest-rate uncertainty. Only then will we be able to focus on the best companies and their fundamental merits as opposed to daily concerns over inflation and other economic data. Questions & comments on spreads/combos to Click here to email Ray Cummins ****************************************************************** - NEW PLAYS - ****************************************************************** NGH - RJR Nabisco Holdings $19.69 *** Merger Speculation *** RJR Nabisco Holdings is a company whose subsidiaries are engaged principally in the manufacture, distribution and sale of cookies, crackers, and other food products. NGH is organized in three operating segments: Nabisco Biscuit, the U.S. Foods Group and the International Food Group, which are segregated by both product and geographic location. The food business is conducted by the operating subsidiaries of Nabisco Holdings. Their businesses in the United States are comprised of Biscuit and the U.S. Foods Group. Business outside the United States is conducted by their International group. On Friday, Nabisco's share value jumped $2 after mogul Carl Icahn sweetened his offer for the company to $6.5 billion, an increase of 37% in the bidding for the nation's largest maker of cookies and crackers. The financier said he was increasing his offer for the Nabisco Group shares he doesn't already own to $22 per share. That's well above the current value but analysts predict the price will go higher, with the company fetching at least $25 per share before the deal is done. Analysts also said the deadline for first round bids in the current auction is May 15. They believe a firm pact may emerge in late June or July. Our position is based on favorable premium disparities and the recent increased activity in the stock and its underlying options. The increase in options volume has provided a number of favorable positions and in this case, we are going to open with a short-term bullish outlook and hope for a brief consolidation prior to next week's expiration, when we will roll forward to June positions. PLAY (conservative - bullish/diagonal spread): BUY CALL SEP-15 NGH-IC OI=1388 A=$5.38 SELL CALL MAY-20 NGH-ED OI=33 B=$0.62 INITIAL NET DEBIT TARGET=$4.62 TARGET ROI=50% Chart = /charts/charts.asp?symbol=NGH ***** BFO - Best Foods $64.75 *** Food Group Mergers II *** 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. The world's second largest consumer products group, Unilever says it is still trying to get Bestfoods management to the table to negotiate a deal after the U.S. firm rejected its initial $18.41 billion bid. BFO is currently the merger target of Anglo-Dutch Unilever and 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 favor Unilever's cash offer 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 $75 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 position. The downside risk for this position is relatively small as there is little chance the issue will trade much below its current price in the next few weeks. PLAY (conservative - bullish/credit spread): BUY PUT JUN-50 BFO-RJ OI=1745 A=$0.68 SELL PUT JUN-55 BFO-RK OI=1203 B=$1.12 INITIAL NET CREDIT TARGET=$0.56-$0.62 ROI(max)=14% B/E=$54.38 Chart = /charts/charts.asp?symbol=BFO ***** ASH - Ashland Oil $35.38 *** A Second Try! *** Ashland is a specialty chemical and crude oil refining firm. The company's businesses are divided into numerous industry segments. These include APAC, which performs contract construction work; Ashland Distribution, which distributes industrial chemicals, solvents, ingredients, thermoplastics and resins, fiberglass materials and fine ingredients in North America and plastics in Europe; Ashland Specialty Chemical, which manufactures and sells performance chemicals, resins, products and services and certain petrochemicals; Valvoline, a marketer of branded, packaged motor oil and automotive chemicals, automotive appearance products, antifreeze, filters, rust preventives and coolants; Refining and Marketing, which involves the operation of seven refineries; and Arch Coal, a coal producer in the United States. Additionally, Ashland recently formed the Service Businesses Division. This new division will be responsible for managing businesses that provide a wide range of unique services to their customers. Ashland reported earnings last month and although second quarter income rose sharply, the results were still shy of Wall Street expectations. The company reported net income of $25 million, or $0.35 a share compared with net income of $0.08 a share, for the same quarter a year ago. Analysts were forecasting $0.36 per share, slightly above the actual earnings, but investors appeared to focus on the outlook rather than past performance. With the industry's profit margins expected to increase during the next few months, revenues for the top companies in this group should continue to improve. Our position is based on the recent bullish trend and last week's move above the previous trading range. When the broad market falters, investors generally pour money into the hedge sectors and oil stocks are currently one of the leaders in that group. PLAY (aggressive - bullish/debit spread): BUY CALL JUN-30 ASH-FF OI=2 A=$6.00 SELL CALL JUN-35 ASH-FG OI=107 B=$2.38 INITIAL NET DEBIT TARGET=$3.38 ROI(max)=47% B/E=$33.38 Our plan is to open the position with a repeat of our recent diagonal approach. In this manner we can benefit from the one-week premium at the MAY-$35 call before moving into the conservative call-debit spread. PLAY (aggressive - bullish/diagonal spread): BUY CALL JUN-30 ASH-FF OI=2 A=$6.00 SELL CALL MAY-35 ASH-EG OI=726 B=$1.25 INITIAL NET DEBIT TARGET=$4.62 INITIAL TARGET ROI (monthly)=32% Chart = /charts/charts.asp?symbol=ASH ***** CIEN - Ciena $137.25 *** Earnings Rally? *** CIENA operates in the optical networking equipment market. They offer products for telecommunications service providers worldwide. CIENA's customers include long distance carriers, competitive local exchange carriers, Internet service providers and wholesale carriers. CIENA's LightWorks architecture enables next-generation optical services and increases the efficiency of service-provider networks by simplifying the network and reducing the cost to operate it. Cienna rallied big to end the week after announcing the company has agreed to a multi-year contract with Qwest. Ciena officials said Qwest will buy equipment that improves the capacity and management of its network, including an optical transport system and optical core switch. A spokesman for the company said the new contract could be worth hundreds of millions of dollars over the next 18 to 24 months. Of course investors are focusing more on earnings recently and CIEN's report is scheduled for May 18, a day before this months expiration. The company is expected to report first-quarter results of $0.10 per share, according to the consensus estimates. Analysts at Donaldson, Lufkin & Jenrette are bullish on the issue and they recently recommended the optical networking company with a "top pick" rating. We agree with the outlook but the earnings report can have a significant effect on the share value so we are going to participate in a very conservative manner. With any luck, the expected FOMC rate decision will propel the market into a recovery rally and the stock will finish far above our sold strike at the June expiration. PLAY (conservative - bullish/credit spread): BUY PUT JUN-85 EUQ-RQ OI=38 A=$1.43 SELL PUT JUN-90 EUQ-RR OI=97 B=$2.06 INITIAL NET CREDIT TARGET=$0.75 ROI(max)=17% B/E=$89.25 Chart = /charts/charts.asp?symbol=CIEN ****************************************************************** - INDEX OPTION SPREADS - ****************************************************************** As a trader, you may be familiar with options on individual stocks where you have the right to buy (call option) or the right to sell (put option) a particular stock at some predetermined price within some predetermined time. The buyer has the rights and the seller the obligations. With index options the basic ideas are the same. Index options allow you to make investment decisions on a specific market industry or on the market as a whole. Spread strategies can be made with index options similar to those made with individual stock options. Many professional traders employ index spreads as a hedge strategy. We favor debit positions on the SPX for momentum and hedge or longer-term plays and OTM credit spreads on the OEX when the risk/reward is favorable. Low ROI disparity spreads will be listed (when available) for the conservative index trader. ***** OEX - S&P 100 Index $761.67 OTM Credit-Spreads The Standard & Poor's 100 Index is a capitalization-weighted index of 100 stocks from a broad range of industries. The component stocks are weighted according to the total market value of their outstanding shares. The impact of a component's price change is proportional to the issue's total market value, which is the share price times the number of shares outstanding. OBSERVATIONS: For OTM credit spread trades, we like to use the actively-traded S&P 100 Index options because they contain much more premium than options on individual stocks and provide an underlying instrument less prone to huge, gapping moves. Review the 'Market Sentiment' section for specific technical information on the S&P 100 Index. Note: The quoted prices between the Bid and Ask (spread) appear to be extremely wide for OEX options but when trading begins on Monday morning, they will return to the normal range. Aggressive... PLAY (Bearish): BUY CALL JUN-805 OEX-FT OI=358 A=$7.75 SELL CALL JUN-800 OEX-FA OI=3548 B=$8.75 NET CREDIT TARGET=$1.25-$1.50 ROI=33% PLAY (Bullish): BUY PUT JUN-710 OEZ-RB OI=434 A=$7.75 SELL PUT JUN-720 OEZ-RD OI=1926 B=$9.00 NET CREDIT TARGET=$1.50-$1.75 ROI=17% By combining two credit spread positions, you can participate in a popular neutral strategy known as the Long Iron Condor. It is often used with range-bound positions and is a limited risk, limited profit strategy that gives you a wide range for success. The play is based solely on the current price and trading range of the S&P-100 Index and the recent technical trend. Current news and market sentiment will have an effect on this position. Review the market outlook thoroughly and make your own decision about the future outcome of this position. Chart = /charts/charts.asp?symbol=OEX ************************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 *****************************
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