The Option Investor Newsletter Thursday 5-18-2000 Copyright 2000, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 5-18-2000 High Low Volume Advance Decline DOW 10777.30 + 7.60 10864.30 10764.30 812,134k 1,271 1,600 Nasdaq 3,538.71 - 106.25 3663.84 3538.71 1,255,062k 1,522 2,463 S&P-100 766.83 - 5.70 778.32 765.95 Totals 2,793 4,063 S&P-500 1437.21 - 10.59 1458.04 1436.59 40.7% 59.3% $RUT 490.95 - 8.71 501.51 490.95 $TRAN 2796.75 - 43.68 2852.40 2796.15 VIX 26.87 - 0.33 27.68 26.54 Put/Call Ratio .57 ****************************************************************** ARGH, The Pain Of Range-Bound Trading! What happened to our post Fed decision rally? I know, I know, we had a pre-announcement rally instead. Unfortunately, many were hoping that a 50-point move would bring closure to the rate issue and the return of volume. Ehh! Wrong answer. Back into the range we go. That's what I get for not remaining market-neutral. Until we see strong volume, these head-fakes can really put a dent into your trading capital. Nevertheless, not everything looks bleak on Wall Street. In searching for new plays today, our short list was as long as ever, both calls and puts, which leads us to a conclusion. Perhaps this range-bound trading has brought the game back to the individual stock pickers, instead of massive sector momentum pulling everything back and forth. What a concept! Individual companies moving based on company fundamentals and performance. The hot list I use showed only two stocks on the double-digit gain list and only five on the double-digit loss list. Most moves were subtle and part of a bigger trend. Trends...remember those. We have even seen an increase in stock splits, especially today. CPN, VSH, TIF, HBAN, HC and TBL all announced today, proceeded by INTC and five others on Wednesday. This is a drastic rise over the past few weeks and is possibly indicative of the feeling from CEOs that the market has stabilized or has an upside bias. On to today's action, the DJIA struggled to hold its gains in the final hour and ended up with a 7.54 to 10777.28. Yes, volume was light once again at 808 million. The financials played a big part in holding up the DJIA as the sector had a better day with J.P. Morgan up $0.94 at $133.56 and Chase Manhattan gaining $1.13 to $75.13. Big Board losers outpaced gainers by a 5 to 4 margin. Here is the chart to show you just what an 0.07% gain looks like... It was the tech shares bearing the brunt of the selling. Names like CSCO, MSFT, IBM, ORCL and SUNW all lost ground. The Nasdaq ended right smack on the low at 3538.71, down 106.25. It looked like most traders just gave up at the end of the day and went home early. The volume finished out at 1.25 billion. You can see the trend since Tuesday's Fed announcement. The 50-point hike could have started a meaningful rally, but the Fed's tough talk in the comments kept the buyers at bay for a little while longer. The "big" bells were ambushed by The Wall Street Journal who reported today that federal antitrust enforcers have recommended blocking WorldCom's $115 billion buyout of Sprint because it would violate antitrust law. The Justice Department's concern is that the two companies would dominate Internet switching services. FON ended down $1.75 to $56.25 and WCOM headed lower to $39.56, down $2.44. This didn't help the rest of the sector either as AT&T dropped $1.25 to $36.88. Today, the Labor Department's weekly jobless claims report showed that new claims for unemployment benefits fell last week for the second week in a row. The weekly initial claims fell 21,000 to 276,000 while the Philadelphia Fed index for May rose to 20.2 from April's 12.8. This news pushed bond prices down for the second day in a row. The next economic report with true potential to move markets is due May 25th, when the Commerce Department issues its preliminary report on first-quarter gross domestic product. Maybe this will spell relief for the markets over the next couple days. No news has been good news of late. After-hours brought on a lot of action today. Companies like CIEN, NTAP and SCMR all reported earnings. CIEN beat estimates by $0.02 with a $0.12 profit. Revenues grew by a healthy 66%. Investors were rewarding CIEN in after-hour trading, pushing the stock up to $139 from a $137.31 regular session close. NTAP also reported a better than expected profit, by a penny. They earned $0.07 versus a First Call estimate of $0.06. There revenues were up an astounding 120% over Q4 of last year. This news didn't do much for the stock price though as it was trading in line with the regular session close. Finally, SCMR beat the street by turning in $0.05 versus an estimate of $0.03. This wasn't good enough apparently as SCMR traded down after the close to $90, down $2.25 in after-hour trading. It is hard to say with certainty what the Fed's next move is, and traders were looking to the minutes from the March 21st meeting, that was released today, for answers. It showed that although it was a unanimous vote for a 25 point hike, some members actually favored a 50 point move. But they also said they saw "little evidence to date of any acceleration in core inflation." Another positive was the committee saw a softer stock market as one of the key drivers behind slowing growth down. I think they got their wish in April. It is possible that they can now take a wait-and-see attitude to the current hikes, but not all traders think they are done quite yet. Some feel the Fed has one more move left in June and this sentiment is holding back the buyers. So interest rate fears continue to reign on Wall Street. I have to believe they are nearing an end though. You almost got the sense that a rally was very possible after the Fed meeting on Tuesday. The strong statements from the Fed held back the buyers though. Some suggest, and I agree, that the strong statements were just aimed to keep buyers off the Street a little longer becuase another 50 point move in June is far from a lock at this point. That is ok though. This has become a stock-pickers market. Use the VIX as your guide and watch for those stocks that are establishing good trends and have some catalysts, such as stock splits. (The VIX is currently sitting middle of the road at 26.50). The Nasdaq will likely test 3500 in the morning tomorrow. A bounce off this level will be encouraging, but watch for light volume on expiration Friday to cause some sizable swings in individual issues. As for me, I have no agenda for trading tomorrow. The typical Friday afternoon sell-off pattern doesn't lend a lot of time for an intraday trade. You are probably more safe just taking the day off. Let's face it, that is what everyone else is doing lately. When in doubt...get out, stay out and enjoy the weekend. Ryan Nelson Asst. Editor *********** IN THE NEWS *********** DOJ Aim To Block Worldcom Sprint Merger By Matt Paolucci The Wall Street Journal reported today that Federal antitrust enforcers have recommended Worldcom's (WCOM) $115 billion buyout of Sprint Corp. (FON) be blocked, stating it would violate antitrust law, lawyers and industry executives said. Sources close to the companies have acknowledged that WorldCom and Sprint had both failed to anticipate the degree to which their dominant market share in long-distance could impact their merger. The companies are exploring concessions to win regulatory approval. Representatives of the companies and lawyers have forwarded a formal recommendation to the Justice Department's antitrust chief, Joel Klein, who has not yet taken a position on the transaction, these people said. Mr. Klein has asked WorldCom and Sprint lawyers to meet with him next week to hear their defense. A combination of the No. 2 and No. 3 long-distance phone companies would create a telecom giant with revenues of more than $50 billion. The company would rank among the largest in the world, with operations in more than 60 countries. The Justice Department argued against the deal, saying the duo would dominate Internet switching services, among other items. Sprint has already said it was willing to sell its Internet backbone business, adding that it recently moved to create a separate division for those assets within the company. Worldcom and Sprint are expected to argue that sweeping changes in the communications industry, advances in technology and bandwidth capacity, along with the barrage of up-and- comers in the industry have basically eliminated barriers to entry. One Sprint official added, "We believe that the market and the technology today are changing so fast that no one company can monopolize the Internet," the official said. In addition to Sprint's wireless network, WorldCom would also add to its arsenal the Kansas-based company's fiber optic network and its consumer and business customers. The company plans to save billions by combining the networks, even if it has to sell many of Sprint's other assets to get the deal past regulators. The two companies said they remain confident the deal will close, but declined to comment on the status of discussions with U.S. and European regulators. "If you look at all the changes that have happened (in the long-distance market), from the regulatory arena, to the way technologies have changed and the way the competitive landscape has changed, all that stuff when taken into account proves in our view that the merger should be approved," a WorldCom spokesman said. A second round of meetings with the companies is planned for the following week, and the department isn't likely to take formal action for another month. Shares of Worldcom were down $1.69 to $40.31 and Sprint shares were lower by $1.81 at $56.19 in afternoon trading. ************** MARKET POSTURE ************** As of Market Close - Thursday, May 18, 2000 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,000 11,400 10,777 Neutral 5.05 SPX S&P 500 1,400 1,500 1,437 Neutral 5.05 OEX S&P 100 750 800 767 Neutral 5.05 RUT Russell 2000 450 550 491 Neutral 5.05 NDX NASD 100 3,200 4,000 3,426 Neutral 5.05 MSH High Tech 860 1,000 907 Neutral 5.05 XCI Hardware 1,360 1,600 1,377 Neutral 5.05 CWX Software 1,100 1,300 1,187 Neutral 5.05 SOX Semiconductor 960 1,200 1,002 Neutral 5.05 NWX Networking 900 1,100 1,007 Neutral 5.05 INX Internet 550 800 591 Neutral 5.05 BIX Banking 530 600 569 Neutral 5.11 XBD Brokerage 400 500 474 Neutral 5.05 IUX Insurance 540 620 635 BULLISH 5.16 RLX Retail 900 1,000 914 Neutral 5.11 DRG Drug 355 400 389 Neutral 4.28 HCX Healthcare 710 800 795 Neutral 4.28 XAL Airline 140 155 148 Neutral 3.10 OIX Oil & Gas 265 300 307 BULLISH 5.11 Posture Alert Fears of future rate hikes and a general lack of institutional participation sent the broad market lower Thursday. Sectors leading the decline include Software (-4.46%), Networking (- 3.46%), Internet (-3.37%), and Airlines (-2.41%). Winners were limited, but were led by Banking and Insurance (+1.61). There are no changes in posture. **************** MARKET SENTIMENT **************** Thursday, May 18, 2000 Sentiment on the Downswing! The market continues on its volatile path, as the gains from Monday and Tuesday have now been taken away during the last 2 trading days. Fears of rising rates continue to plague this market, as inflation jitters continue to keep institutional investors at bay; which in turn, keeps volume on all the major indexes at sluggish levels. This complacency in the market then effects the retail investor, as they decide to wait things out until the market looks better. This viscous circle will easily continue in the near term, at least until the "Fed Storm Cloud" start clearing up. The notes from the FOMC meeting on March 21 were released today, and even though it is very dry reading, we included the link below for your convenience. An interesting note is that during this meeting, the Fed made implications that the market was due to correct. Now in the past, there have been many statements from the Fed regarding the overextended market (see Greenspan's irrational exuberance speech), and the markets have always shrugged it off. However, this meeting seemed to be the turning point where the Fed was now ready to take a 50 basis point rate hike, if necessary. Well, several weeks later, and hundreds of points on the NASDAQ and Dow, and we got our rate hike. http://www.bog.frb.fed.us/fomc/MINUTES/20000321.HTM Now the most recent Investor Intelligence Survey came out, and the bears are creeping in slowly but surely. This is what the market needs, but to a larger degree. The amount of Bulls rose this latest week to 49.1% while Bears increased to 33.6%. High bullish readings suggest excessive optimism, which typically occurs when buying strength has been used up. Low sentiment readings usually represent depleted selling strength, and tend to predicate market rallies. Now the current bearish reading isn't near previous levels where the market bottomed out, but it is a good start. What this market needs is more people throwing in the towel, which is usually a good sign of a bottom. With the sentiment in such a downswing, we'll probably be there in a month. Investors Intelligence Survey ***************************************************************** Major Percent Percent Date Turning Point Bullish Bearish ***************************************************************** October 97 Bottom 22.0 48.3 July 20, 1998 Top 52.0 24.0 October 8, 1998 Bottom 38.5 42.7 January 11, 1999 Top 58.3 30.0 March 4, 1999 Bottom 49.1 32.5 Oct. 13, 1999 Bottom 39.2 37.5 April 12, 2000 Top 56.9 26.7 May 10, 2000 48.6 31.2 May 17, 2000 49.1 33.6 BULLISH Signs: Corporate Earnings: Major corporate earnings continue to come out strong and ahead of analyst expectations. Hewlett-Packard and Dell Computer 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 (26.87): 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. The VIX may now be attempting to get back to the old trading range. BEARISH Signs: Interest Rates (6.231): 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 April, 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 9.86 n/a Overhead Resistance (775-800) 2.06 2.40 n/a OEX Close 761.67 784.23 766.83 Underlying Support (745-770) 1.46 1.76 n/a Underlying Support (715-740) 8.74 10.33 n/a 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. *** Due to weather problems in Chicago, we were unable to access the CBOE's database for our updates!!!! Put/Call Ratio ***************************************************************** Friday Tues Thurs Strike/Contracts (5/12) (5/16) (5/18) ***************************************************************** CBOE Total P/C Ratio .53 .63 n/a CBOE Equity P/C Ratio .44 .52 n/a OEX P/C Ratio 1.38 1.10 n/a Peak Open Interest (OEX) ***************************************************************** Friday Tues Thurs Strike/Contracts (5/12) (5/16) (5/18) ***************************************************************** Puts 700 / 7,010 760 / 10,554 n/a Calls 800 / 10,855 800 / 10,319 n/a Put/Call Ratio 0.65 1.02 n/a 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 18, 2000 26.87 ************* DAILY RESULTS ************* Index Last Mon Tue Wed Thu Week Dow 10777.28 198.41 126.79 -164.90 7.54 167.84 Nasdaq 3538.71 78.59 109.92 -72.60 -106.25 9.66 $OEX 766.83 14.86 7.70 -11.70 -5.70 5.16 $SPX 1437.21 31.40 13.68 -18.24 -10.59 16.25 $RUT 490.95 6.87 8.17 -6.32 -8.71 0.01 $TRAN 2796.75 -35.98 27.23 -24.84 -43.68 -77.27 $VIX 26.87 -2.50 -0.74 0.44 -0.33 -3.13 Calls Mon Tue Wed Thu Week PDLI 131.03 8.81 4.38 7.93 -9.53 11.59 New AFFX 151.63 -0.28 15.19 4.81 -8.31 11.40 At support IMCL 101.50 -0.32 2.69 0.25 6.50 9.13 New WLA 123.25 2.13 1.31 0.63 2.13 6.20 Dropped UNH 77.50 3.25 1.00 -1.00 2.88 6.13 New ANDW 34.69 2.00 1.25 1.44 1.00 5.69 New SEPR 106.50 0.75 6.75 -1.75 -1.50 4.25 Uptrend GLW 191.31 -8.44 14.50 1.75 -4.19 3.63 New PLXS 84.19 7.25 1.00 -2.38 -2.69 3.18 Watch this AMCC 103.06 1.69 10.50 -4.13 -6.31 1.75 Recovery SEBL 130.13 8.88 2.94 -3.00 -7.69 1.13 At support JDSU 86.56 3.88 4.38 -1.75 -5.94 0.56 Entry pt MEDI 164.94 -1.88 9.41 -2.03 -5.06 0.44 Dropped FAST 69.50 1.44 0.31 -0.75 -0.88 0.13 Consolidate ALTR 84.06 3.31 5.25 -3.00 -5.56 0.00 Even Steven BVSN 45.75 -0.25 2.88 -1.94 -0.69 0.00 On thin ice FLEX 52.13 4.50 -1.50 -2.13 -2.00 -1.13 Reiterated AMGN 61.19 1.81 0.50 -2.81 -1.72 -2.22 Dropped MSFT 66.19 0.56 0.13 -1.81 -1.50 -2.63 Dropped DNA 126.38 2.38 3.63 -5.50 -3.13 -2.63 Held well RMBS 186.06 12.44 5.63 -8.56 -12.38 -2.87 Refueling CDWC 113.31 1.25 3.50 -3.44 -6.25 -4.94 Treading Puts HLIT 49.13 1.88 -10.88 -2.38 -3.38 -14.75 New NTLI 57.88 -2.19 -3.81 -2.31 -6.19 -14.50 New INCY 61.00 -0.56 -0.81 -0.81 -5.56 -7.75 New OPTV 57.63 -2.00 -3.88 -1.25 0.13 -7.00 Sliding AZPN 23.19 -1.56 -0.75 -0.88 -2.81 -6.00 New CMRC 43.13 2.25 2.63 -3.06 -3.06 -1.25 Gravity SBL 46.94 0.31 0.69 0.06 0.81 1.88 Dropped FDRY 70.00 -0.69 5.69 -2.50 -0.63 1.88 1 more dip AKAM 75.56 4.25 1.31 0.94 -1.44 5.06 Dropped PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** MSFT $66.19 -1.50 (-2.63) No volume equals no profit. While we thought $67 looked like a buying opportunity, we've been more concerned that the 10-minute volume spike at $67 today didn't move the price a smidgen. In short, there are no big buyers, and the investors that are buying are not enough to support the price. The Justice Department's thumbs down on the WCOM/FON merger isn't helping either. That kind of news keeps investors looking for other DOJ snakebite victims, of which MSFT definitely fits the bill. Don't get us wrong. MSFT still has good support at $65 and we could get a bounce if the market decides to cooperate. But as we've said, without volume, MSFT is destined to flat-line. We're letting it go tonight in favor of other plays. WLA $123.25 +2.13 (+5.88) The resurrection of its momentum was encouraging at the beginning of the week. WLA lifted itself off near-term support of $115 and currently has established a higher level at $122 and $123. But despite this achievement, WLA is getting the axe this evening for not giving us a better performance. In the past two sessions, the stock's volume remained only average and it clearly found the $124 mark impregnable. Take today for instance. The drug stocks were rosy across the board and WLA didn't make a charge for its all- time at $126.25! Likely, this is because the merger with Pfizer is coming to a close and the excitement is dwindling. It was announced yesterday that Pfizer (PFE) now expects to complete its $115 bln acquisition of WLA in the first or second week of June. Altogether the stock was a solid performer while it was on our call list. This week alone it made over 5% in gains. Nonetheless it's time to move on to greener pastures. AMGN $61.19 -1.72 (-1.19) Sometimes the best course of action is to recognize that your efforts are better spent elsewhere. We're dropping AMGN not so much because its turned down, but at this time there simply may be better opportunities available. The ongoing court battle may have put a bit of a damper on our play however the lack of any solid buying this week has cause us to turn our attention in another direction. For traders wanting to stick with AMGN a while longer, it did come down to an intraday support level at $61 late in the session. The next solid area of support isn't found until the $58 mark. In the current market environment, we would be a careful about leaving much on the table. If you have a profit don't be afraid to take it, or someone else will. AMGN could return at a moments notice, but for now, we will move on. MEDI $164.94 -5.06 (+0.44) Our play on MEDI is over today as shareholders approved the share increase from 120 to 320 million. This cleared the way for the company's previously declared 3-for-1 stock split, payable at the end of trading today. We got a nice jump in price on MEDI with last week's announcement of its forthcoming addition into the S&P 500, and are happy to take our profits and move on. After the dust settles, enthusiasm may very well propel MEDI higher, and we could find it on our play list again - stay tuned. PUTS: ***** SBL $46.94 +0.81 (+1.88) SBL bucked the market trend Thursday in part from positive analyst comments. A technology research firm announced Thursday that growth in high tech and IT industries is expected to top 41% in the next five years. Analysts pointed out the alliance between INTC and SBL to develop advanced wireless products will benefit both companies. SBL also benefited from investors' anticipation of the earnings report from National Computer Systems (NLCS). The SBL competitor reported a one year, 30% increase in earnings, after the bell Thursday. In light of the positive outlook for SBL it's time to checkout. AKAM $75.56 -1.44 (+5.06) Buyers returned to the markets yesterday, but AKAM wasn't on their shopping list. Resistance at the $80 level remained unyielding. And today, $77 developed as overhead opposition after amateur hour passed, which is even better confirmation that AKAM can trend lower. There is concern however that near-term support could be forming at $74, just under the 5-dma ($75.20), and thus AKAM could become range bound. Because of this distinct possibility, we've decided to exit the play this evening. Discretion is advised if you have open positions. In the news Wednesday, Akamai and F5 Networks, a maker of equipment to manage Web-site traffic, are jointly developing a product that routes e-commerce business users to the closest available content on Akamai's network. ******************** PLAY UPDATES - CALLS ******************** BVSN $45.75 -0.69 (0.00) While BVSN announced the opening of an office in China to further develop the Asian market, and while both Southwest Securities and First Union initiated coverage with Buy ratings and price targets of $85 and $60 respectively, it didn't move this play. BVSN is on thin ice, but we're keeping it one more day because it keeps bumping its head on $50 while the rest of the market sinks around it. Still, volume has been cut to half the ADV over the last two trading days. We hate to keep harping on volume, but heavy volume is what it's going to take to push BVSN through the $50 barrier. The good news is that it keeps bouncing off the $46 support level, keeping the string of higher lows intact. Normally, we'd consider this a buying opportunity. But with sentiment for higher interest rates starting to build, the gray cloud over the entire market could have a nasty effect on a volatile issue like BVSN. Nonetheless, the B2B sector is still an investor favorite and should be one of the first to rebound if the NASDAQ bounces back over its 200-dma of 3610. Wait for the bounce in the NASDAQ and BVSN. SEBL $130.13 -7.69 (+1.13) Uh oh. Looks like that Tuesday breakout turned into a Thursday breakdown. Hopefully, you protected those profits with stop orders. First the good news. SEBL held support and bounced at $134-$135 for most of the last two trading days where we thought it would. The bad news is that it broke down through $134 late in afternoon trading on heavy intraday volume, which makes tomorrow's opening prospects pretty ugly. The only saving grace was that it closed right at support of $130 (its former breakout point) and the daily volume was about half the ADV indicating few overall sellers. Going forward, we need to see SEBL hold this level. Barring any sentiment change by tomorrow morning, we may see a dip below $130 to perhaps support of $127 to $128 during amateur hour. If it drops below that, we suggest passing it up in favor of another play. Any bounce though, coupled with a spike in volume and a cooperative market may be a buying opportunity. More conservative? Wait for a move back over $130 before opening any new positions. FAST $69.50 -0.88 (+0.13) FAST has been consolidating its gains in the past two days. Volume has all but disappeared as traders have stepped aside. The light volume in conjunction with the basing price is a clear sign of profit taking. After all, FAST rallied nearly 75% in two months. No small feat considering the market conditions. Perhaps some profit taking was in order. The stock has established major support at $69. Every time FAST has dipped to $69, it has rebounded. If we get cooperation from the broader market we could see FAST move higher. From here, watch for buying interest to return to FAST. Pay special attention to volume, especially on a rally. The trading activity has been indicative of the price direction in FAST. Watch for a bounce off support at $69 for a possible entry point, or wait for FAST to clear congestion in the $71 - 72 range before entering the play. Watch the volume closely to confirm that buyers have returned. FLEX $52.13 -2.00 (-1.13) After the analyst meeting Tuesday, a slew of brokerages reiterated their price targets and ratings on FLEX. Needham & Co reiterated its Strong Buy rating and its $90 price target. CIBC World Market reiterated its Strong Buy rating along with its $86 price target. And finally, Raymond James reiterated its Strong Buy rating and its $78 price target. Despite the host of positive comments from analysts, FLEX has stumbled in the past two trading days. Part of the decline in FLEX can be attributed to the post earnings sell-off in electronics maker HWP on Wednesday. On a positive note, the selling in the last two days came with little conviction as volume was weak. FLEX closed Wednesday just above support at $52, watch for a bounce from current levels for a possible entry point. However, if you're wanting to minimize directional risk wait for the buyers to return to FLEX, and look for an entry point after the stock clears congestion at $56. SEPR $106.50 -1.50 (+4.25) The positive analysts remarks made about the biotechs last Tuesday were soon forgotten Wednesday as the group fell with the broader market. Thursday we saw another day of selling in the sector as the Amex Biotech Index ($BTK) shed 2.8%. Despite the recent consolidation, SEPR remains in its upward trend. The stock is still heading north using its 10-dma as support. The steady climb in shares of SEPR suggests the stock is under accumulation by institutions. Analysts are favoring biotechs with real products and reasonable valuations. With its improving product pipeline and existing products, SEPR is a favorite among money managers. An event that may help SEPR higher is the company's annual meeting. SEPR will hold its shareholder meeting on May 24th, when investors will vote to increase authorized shares. We could get a split announcement that may lift SEPR. From here, consider an entry at current levels or wait for SEPR to clear resistance at $110. PLXS $84.19 -2.69 (+3.19) The substantial run-up on Monday and the new 52-week record on Tuesday ($91.50) provoked a bit of back-filling in the last two trading sessions. Nonetheless, PLXS held firm at a higher near-term support level of $84 and is currently perched a smidgen below the 5-dma ($85.94). A leap off this technical indicator would demonstrate an intensity we like to see in momentum plays. The volume was somewhat lackluster too; so look for an increase in trading activity to substantiate another breakout. If you have open positions, pay attention to the current 10-dma at $81.11 because this price level would be the stock's first stop in a reversal. We're still unsure when to expect a split declaration, but if the uptrend continues there is a chance of an announcement preceding the July 19th earnings release. ALTR $84.06 -5.56 (+0.00) In spite of the late afternoon sell- off today, $87 and $88 should be considered short-term support. Technically, the intersecting 5 and 10 DMAs are in accord with this locale. The good news is that the overall trading volume was below average on the pullback. This is a good indication that the descent is simply natural consolidation after ALTR broke through strong resistance at $90 on Tuesday. And nonetheless, ALTR is still in reasonable split territory. We'll keep looking for a BoD meeting that could potentially signal a split declaration on the heels of last Wednesday's shareholders' vote to increase the number of authorized shares. Look for ALTR to once again rise above $90 backed of course by better volume. AMCC $103.06 -6.31 (+1.75) Yes indeed, AMCC lost a few points, but there's no doubt this recovery play has some pretty good odds stacked in its favor. First of all, it's on the plus side for the week overall. Then consider the fact that after AMCC crashed through resistance of $100 during last Friday's rally it has never closed below that mark. And furthermore, near-term support is now entrenched above the 5-dma ($106.14). But you say, AMCC closed lower at $103.06 today! Yes, the broad market pressure pulled it down to the 10-dma ($102.74) level. However the stocks overall volume level was only at 75% of its ADV and this is a good sign. Conservatively though, we must be patient and wait for the upward moves from here to confirm a revival. News-wise, there's nothing to report that would effect trading. *********************************************** PLAY UPDATES - CALLS - CONTINUED IN SECTION TWO *********************************************** ************************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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You may also fax the information to: 303-797-1333 DISCLAIMER ********** This newsletter is a publication dedicated to the education of options traders. The newsletter is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The newsletter picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. 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The Option Investor Newsletter Thursday 5-18-2000 Copyright 2000, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. ***********************Advertisement*************************** fnCentral.com: it's where you are! Be deskbound no more. No software to buy or learn. Use the web's first fully integrated personal finance manager from any PC, PALM, phone, internet appliance! Manage your money. Consult with CPAs. Estimate taxes. Track investments. fnCentral.com. It's where you are! OPEN A FREE ACCOUNT NOW! http://www.fncentral.com/cgi-bin/ad?from=op504 ***************************************************************** ******************************** PLAY UPDATES - CALLS - CONTINUED ******************************** JDSU $86.84 -5.66 (+0.84) With little leadership in the markets our play tried to go it alone. JDSU did mount an assault on the $96 mark late Wednesday, which proved to be a tough nut to crack. The fiber-optics equipment producer pulled back to close near support near $92. This morning investors woke up to news the company's President and CEO was stepping down. Saying he was a "little bit burned out", Kevin Kalkhoven, announced he was retiring and will start a venture-capital fund. Shares of JDSU headed south at the opening bell, finishing the day down more than 6% at $84.75. Analysts at Credit Suisse First Boston attempted to do damage control by reiterating a Buy rating shortly after the open. As for how we continue with our play, we believe the new CEO will do just fine, and that the investment community will probably agree. The decline today may be setting up a chance to buy calls once again. Today's close is above the next level of support near $83 followed by $80. At this point confirm any bounces with volume before entering a new play, as without leadership in the broad market a retest of recent lows may be in the cards. RMBS $186.06 -12.38 (-2.88) It's been a rough couple of days at the office for traders trying to participate in RMBS. On Wednesday, it appeared as though the $195 area we mentioned on Tuesday may hold up. The lack of conviction from buyers drove RMBS lower today. We said Tuesday to be patient as RMBS may need a day or two for refueling. Although we are not dropping RMBS, the sentiment in the broad markets may have changed the way we approach this play. Until either some company news or sector strength returns, we would enter new positions and be prepared to sell too soon. Profits can still be achieved, but may require more monitoring. Technically, support is now found at $180 and $170. The selling the last 15 minutes and close below the 100-dma at $191.68 doesn't bode well for the near term. We may be settling into a pattern of a day or two higher followed by a couple of days lower. If that's the case, pick your entry points carefully and be prepared to pull some money off the table when given the opportunity to do so. DNA $126.38 -3.38 (-2.63) Well, this one certainly seems to be going nowhere fast. Given the action in the markets this week, that isn't necessarily a bad thing. Genentech has actually held up pretty well considering the negative study released earlier this week concerning the clot-busting drug given to heart attack patients. The real problem for this play is the lack of volume. The past two sessions have seen the number of shares traded all but dry up. Today's 437K was about one-third the average daily volume for DNA. While the Genentech is down a bit for the week, we are pleased the damage hasn't been worse. A cancer conference this weekend could give Genentech and some of the biotech stocks a boost. Researchers will convene at a medical meeting of the American Society of Clinical Oncology on Saturday and will run through Tuesday. DNA did close below its 10-dma at $128.17, but has intraday support near $121 with the 200-dma back at $117.50. If we continue in a trading range, look for bounces off intraday support levels as a chance to participate in this play. AFFX $151.63 -8.31 (+11.41) Pressured by weakness in the Biotechnology sector, AFFX gave up a portion of the week's gains. Fortunately, the move came on very weak volume, and has the look of nervous investors taking some profit off the table in light of the negative economic environment. Fears of future interest rate hikes are being kept alive by more Fed rhetoric and as expected, more investors are standing aside waiting for the other guy to start buying first. Yesterday's high of $163.50 was the highest price seen in the Biotech issue since the recovery began in mid-April, enabling AFFX to finally close above the 50-dma (currently $148.75). We'd like to see support at $150 (backed up by the 50-dma) hold, and increased buying volume will be the key. A failure at $150 could open the door to a retest of support at $145, and then $140. Consider new entries as AFFX bounces from support, and remember that in this market environment, taking small profits frequently is the best way to increase the size of your account. CDWC $113.31 -6.25 (-4.94) Nervous investors are keeping the markets range-bound, and could be providing us with yet another attractive entry point. After a mild drop yesterday, it looked like CDWC might find support at $120. Today's trading shot a hole in that theory as investors ran for cover after more hawkish comments from the Fed. CDWC fell through the 5-dma (currently $118.75) and the 10-dma (currently $115) as sellers piled on in the last half-hour, dropping CDWC to support at $113. Closing near the low of the day with increasing volume is not a good sign and we need to see the situation improve before initiating new positions. Recall that CDWC has its Annual Shareholder meeting next Wednesday, and with a pending vote on a share increase, we are looking for a possible split announcement. Further uncertainty in the broad markets could push the stock down for a retest of stronger support at $110 or even $105. Consider new positions as CDWC bounces from support accompanied by increased buying interest. ******************* PLAY UPDATES - PUTS ******************* OPTV $57.63 +0.13 (-7.00) OPTV gapped down by $1 Wednesday morning, falling all the way to $55 before finding support. The decline during Wednesday's trading pulled OPTV lower from the right shoulder of its broken head-and-shoulders pattern. The stock did manage to bounce from support Thursday and edge higher into the close. Despite the slight rally Thursday, uncertainty looms about the merger between OPTV and SPYG. Looking at the volume Thursday solidifies the fact that traders are staying away from OPTV during any rally. Investors exchanged less than half of OPTV's ADV in Thursday's trading. On the flip-side, we've seen volume swell during sell-offs, indicating that institutions want nothing to do with OPTV. The $55 support level is proving to be stronger than we had anticipated. Watch for the sellers to return and look for a fall below support at $55 for a possible entry point. Confirm any sell-off with heavy volume before entering into the play. FDRY $70.00 -0.63 (+1.88) A look at the daily chart and several technical indicators suggests that perhaps our play could be ready for one more move south. We did get the bounce up earlier this week, but the lack of any follow-through suggests the next move may be down. Foundry is like many others has seen the volume drop off to anemic levels with only 569K shares traded and 713K exchanging hands yesterday. Total shares traded the past two days barely matches an average day's volume. The company did come out with a press release this morning announcing it had captured more than 50% market share worldwide in Web switch port shipments according to a new report published by Dell'Oro Group, a leading network market research firm. While FDRY could be attractive at current levels for the long-term investor, we believe it may have a bit more room to go before hitting bottom. For the last three days, FDRY has traded in a narrow $3 range, and has developed a pattern of lower lows and lower highs on an intraday basis. If the bears return breaking the $68 area with conviction, then FDRY may be in for another ride down hill. CMRC $43.13 -3.06 (-1.25) The specter of more interest rate hikes hit the markets today and the B2B sector is continuing to suffer. Volume continues to be very weak, and as the buyers continue to stand aside, gravity is taking its toll. Volume in CMRC is only about two-thirds of the ADV, but investors are selling into each attempted rally. Tuesday's action provided another attractive entry as the price failed to break through the declining 10-dma (then at $49.81) and began rolling over. The downward move accelerated over the past 2 days, with today's $3.06 decline dropping CMRC to the $42-43 support area. A drop through this support area could open the door for a retest of the April lows near $30. New entries can be considered on a failed penetration of the 10-dma (currently just below $46) as selling volume returns and causes the stock to roll over. Alternatively, look to jump on board as CMRC violates its current support level, but confirm the strength of the move with strong volume. ************** NEW CALL PLAYS ************** ANDW - Andrew Corporation $34.69 +1.00 (+5.69 this week) Andrew Corporation is a global supplier of communications systems equipment and services. Major markets are wireless communications which includes cellular, government and military end use, antennas and complete earth stations for satellite communication systems, personal communications services, electronic radar systems, communication reconnaissance systems, connectivity devices for use in communication systems, and related ancillary items and services, and common carrier. It's hard to find a better looking stock in this apathetic market. While the tech sector languishes amid anemic volume, ANDW has been marching steadily higher over the last week on volume consistently double the daily average. Those of you that have been with us for a while will remember our trading alert on the company back in early March. Continuing to build its own niche in the communications market, ANDW strengthened their broadband capabilities with the acquisition of Conifer Corporation, a leading manufacturer of MMDS (Multichannel Multipoint Distribution Service), back in December of 1999. No stock was entirely immune to the NASDAQ pullback, but ANDW held up pretty well, finding support repeatedly at the 100-dma. After building a strong base near $22, the company ran strongly into its April earnings announcement, until finding formidable resistance at $30, just a touch below its 52-week high at the time. After a brief post-earnings depression where the stock pulled back to the $25 area, investors started taking notice again and we appear to be in the midst of a strong momentum run. Prompted by more good news (see below), buyers returned in force and we have witnessed a 24% move in the past 6 sessions on very strong volume. This has come in the face of continued weakness in tech issues and anemic volume in the broad markets. Closing very near the high of the day on a surge of buying interest, ANDW looks poised to continue its run. As long as the momentum remains strong, consider pullbacks to intraday support between $32-33 as attractive entry points. After such a strong move, some profit taking would be expected, and we could even see a retest of support at $30. The strong move near the close today could very well continue as investors search for strength. It is hard to argue with strong buying volume though and we would consider a push to new highs as a good indication of the strength of the stock and would consider such a move as a good opportunity to jump on board. On May 9th, ANDW received a contract from World Wide Wireless Communication (WLGSE) to supply infrastructure equipment for a broadband, high-speed Internet access network in Lima, Peru. The services offered will be cellular two-way wireless systems for high-speed, broadband access to the Internet and other networked data services. According to WLGSE's CEO, this relationship will enable a quick build-out of the Lima market as the company pursues its aggressive penetration of the Latin American market. In this case, it looks like what is good for WLGSE is good for ANDW. BUY CALL JUN-30*AQN-FF OI= 539 at $5.63 SL=3.50 BUY CALL JUN-35 AQN-FG OI= 97 at $2.25 SL=1.00 BUY CALL JUL-30 AQN-GF OI=2776 at $6.50 SL=4.50 BUY CALL JUL-35 AQN-GG OI=1576 at $3.50 SL=1.75 Picked on May 18th at $34.69 P/E = 44 Change Since Picked +0.00 52-week high=35.06 Analysts Ratings 2-2-3-0-0 52-week low =11.19 Last Earnings 04/00 est= 0.16 actual= 0.21 Next Earnings 07-20 est= 0.23 versus= 0.18 Average Daily Volume = 1.17 mln /charts/charts.asp?symbol=ANDW IMCL - ImClone Systems $101.50 +6.50 (+9.13) ImClone Systems Incorporated is advancing oncology care by developing a portfolio of targeted biologic treatments, which address the medical needs of patients with a variety of cancers. The Company's three programs include growth factor blockers, cancer vaccines and anti-angiogenesis therapeutics. ImClone's strategy is to become a fully integrated biopharmaceutical company, taking its development programs from the research stage to the market. ImClone Systems is headquartered in New York City with manufacturing facilities in Somerville, New Jersey. This company missed analysts' estimates by 30%. So what's it doing on our list of calls? They also announced that they are working very hard to bring their first drug to market, and will present "compelling" data on human trials of their experimental cancer treatment IMC225 this month. Earlier this month, Imclone said they will discuss results of a drug trial in patients with head and neck cancer, and a second study of the drug in patients with colorectal cancer at a medical meeting scheduled for this weekend. To quote ImClone's Chief Executive, Sam Waksal, "It's going to be very compelling data", and "You're going to be very excited". That's all the chief would say, but it was enough to get investors excited about the possibility of things to come. Today's move through the $97 area that had provided resistance on several occasions was impressive. What was also impressive was the volume behind the move as over 1.0 million shares were traded. Today's 6.8% move came on nearly twice what we've seen since the beginning of May. From a technical perspective IMCL has more ahead as stochastics and others point higher. Remember this play is really based on the anticipation of good news from the meeting of the American Society of Clinical Oncology, which begins Saturday and ends next Tuesday. At this time it could be a short, in and out play, or it could be the beginning of quite a run for IMCL. As we said ImClone reported first quarter results on Monday. The company lost $-0.43, compared to Street estimates of $-0.32. Next quarter calls for an improvement to a profit of $0.46 per share. The next few weeks could be crucial for not only the company earnings, but for their biological treatments as well. BUY CALL JUN- 90 QCI-FR OI=177 at $19.25 SL=14.00 BUY CALL JUN- 95*QCI-FS OI=110 at $16.38 SL=11.88 BUY CALL JUN-100 QCI-FT OI=410 at $13.88 SL=10.00 BUY CALL AUG-100 QCI-HT OI=325 at $23.38 SL=16.95 SELL PUT JUN- 90 QCI-RR OI=358 at $ 6.13 SL= 8.50 (See risks of selling puts in play legend) Picked on May 18th at $101.50 P/E = N/A Change since picked +0.00 52-week high=$171.98 Analysts Ratings 2-6-0-0-0 52-week low =$ 16.25 Last earnings 05/00 est=-0.32 actual=-0.43 Next earnings 08-15 est= 0.46 versus=-0.36 Average Daily Volume = 918 K /charts/charts.asp?symbol=IMCL PDLI - Protein Design Labs, Inc. $131.03 -9.53 (+11.59) PDLI develops humanized (part mouse) and human monoclonal antibodies to prevent and treat various disease conditions and gene-based molecule compounds to treat microbial infections. Zenapax, an antibody created by PDLI and licensed exclusively to Hoffmann-La Roche, is approved in many countries including the U.S. and most European nations for the prevention of rejection episodes in kidney transplants. PDLI receives royalties on Roche's Zenapax sales. From fundamental patents, PDL has granted nonexclusive licenses to more than 20 companies that either have independently developed humanized antibodies or have collaborated with PDL to humanize their antibodies. PDLI earns revenues from the issuance of licenses to its patents and currently receives royalties from sales of two independently developed and marketed antibodies: Synagis, an antibody developed by MedImmune, Inc. for the prevention of a specific respiratory virus in infants, and Herceptin, an antibody developed by Genentech for the treatment of breast cancer. Got all that? Great! In the biotech sector, PDLI is about as volatile as they get, ranging from $52 on the April 4th selloff to $152 today. Notice the steep ascent while the rest of the market remained rangebound. Pass this one up if you don't like roller coasters. Today, PDLI was down almost $10 from yesterday and down $20 from today's high. So why play it? For no other reason than the breakout of the ascending wedge over $125 on volume of 50% greater than the ADV. The lows had been getting higher while $125 provided the ceiling. We got the breakout Tuesday and volume has been rising with the trading range moving up since. Even in today's loss, support held at $131, which also happens to be above the 5-dma of $130.38. We consider today's closing price a good entry level unless the market rolls over. Why the volume increase now? We think it's technically driven (old support is usually the next resistance in the recovery of a fallen angel) since $134 was the close in March from which this angel fell from the sky. If the market cooperates and PDLI's volume remains intact, $152 is the next level of resistance. Again, volatility lovers only - the spreads on PDLI are HUGE!!. While products under development include the SMART Anti-CD3 Antibody for transplantation and autoimmune diseases, the SMART M195 Antibody for myeloid leukemias, and the Ostavir antibody for hepatitis B infections, they don't add to revenue just yet. However, today's news that AHP exercised its option to market an existing antibody humanization process in Japan and Asia will provide real revenue (currently at $42.2 mln ttm) to the income stream. From the analysts' perspective, CIBC World Markets reiterated their Strong Buy rating with a price target of $309. In the "olden days", we'd see that by tomorrow's close. Don't bet on it in this market. BUY CALL JUN-120 PQI-FU OI=501 at $25.00 SL=17.50 BUY CALL JUN-130 PQI-FW OI= 10 at $19.88 SL=14.50 BUY CALL JUN-140*PQI-FZ OI=319 at $16.25 SL=11.75 BUY CALL AUG-130 PQI-HW OI= 54 at $30.25 SL=21.00 BUY CALL AUG-140 PQI-HZ OI= 35 at $26.63 SL=18.75 SELL PUT JUN-100 PQI-RT OI= 27 at $ 4.50 SL= 7.00 (See risks of selling puts in play legend) Picked on May 18th at $131.03 P/E = N/A Change since picked +0.00 52-week high=$338.00 Analysts Ratings 4-2-1-0-0 52-week low =$ 17.19 Last earnings 04/00 est=-0.04 actual= 0.04 surprise= 200% Next earnings 07-17 est= 0.02 versus=-0.14 Average Daily Volume = 1.4 mln /charts/charts.asp?symbol=PDLI GLW - Corning Inc. $191.31 -4.19 (+3.63 this week) Corning provides communications technology at light speed. The materials pioneer is one of the world's top makers of fiber-optic cable, which it invented more than 20 years ago. Corning's Telecom unit (about 50% of sales) makes optical fiber and cable and photonic components. The company's Advanced Materials unit makes industrial and scientific products, including semiconductor materials. Its Information Display segment makes glass products for TVs, VCRs, and flat-panel displays. The company operates 40 plants in 10 countries. GLW is a fiber-optic glow worm, shining brightly. Companies that make fiber-optic equipment have come to light in the past year. The fiber-optic firms have seen earnings explode as demand for high-speed data routing equipment has expanded. Additionally, consolidation in the photon industry has spurred stock prices. CSCO has been swooping up fiber-optic equipment companies, SDLI recently invested in a multiplex technology concern, Photonic Integration Research. And last month, GLW bought 80% of NZ Applied Technology, an optical-components maker. The purchase of NZ Tech will add multiplexing capabilities to GLW's boutique of optic connections. Signs that the growth for the optical equipment makers remains strong came Thursday with the JDSU earnings report. JDSU edged past estimates and guided analysts to an increased 80% year-over-year growth. The CFO of JDSU succinctly said, "The business remains very strong." The earnings report from JDSU helped GLW to edge slightly higher in Thursday's trading despite the broad weakness in the tech sector. The stock has fallen from its high reached in late March along with the rest of the market, but has since rebounded strongly. Thursday's trading places GLW just below the psychologically important $200 level. The stock moved back above its 10-DMA early last week and has since climbed higher using the 10-day as support. An aggressive trader might consider a bounce off the 10-day as a possible entry point. While a more conservative trader might wait for GLW to clear resistance at $200 combined with heavy volume. Though investors have turned cold on the IPO market, traders remain hungry for new optical equipment companies. Fiber optic components maker New Focus (NUFO) shot up 155% in its initial public offering Thursday. GLW is one of NUFO's largest customers. The strong IPO showing by NUFO combined with positive earnings reports may set the tone for the fiber-optic sector. ***May contracts expire tomorrow*** BUY CALL JUN-195*GRJ-FS OI= 509 at $13.63 SL=10.00 BUY CALL JUN-200 GRJ-FT OI= 274 at $11.38 SL= 8.50 BUY CALL JUN-210 GRJ-FB OI= 264 at $ 7.88 SL= 5.75 BUY CALL AUG-210 GRJ-HB OI= 139 at $20.50 SL=14.50 SELL PUT MAY-190 GRJ-QR OI=1171 at $ 2.00 SL= 3.75 (See risks of selling puts in play legend) Picked on May 18th at $196.28 P/E = 105 Change since picked 0.00 52-week high=$226.44 Analysts Ratings 8-5-0-0-0 52-week low =$ 47.69 Last earnings 04/00 est=0.55 actual=0.64 Next earnings 07-24 est=0.67 versus=0.49 Average Daily Volume = 2.97 mln /charts/charts.asp?symbol=GLW UNH - United Healthcare Group $77.50 +2.88 (+6.13) United Healthcare owns and manages a broad spectrum of health care plans and services across in the United States and internationally. This global enterprise provides employers products and resources to plan and administer employee benefit programs. They operate distinct business segments: United Healthcare manages HMO, point-of-service, and preferred provider plans; Ovations is Medicare and Medicaid options provider; Uniprise handles health plans for large companies; and Specialized Care offers the specialized plans. UNH's share price didn't get put in traction or suffer a post- earnings affliction after reporting earlier this month on May 4th. United Healthcare achieved record revenues and came in at $0.95 p/s, up 32% from same quarter last year, easily overshooting the $0.90 consensus estimate. Chairman and CEO William McGuire, M.D. noted that the "strong results reflect the continuing growth and momentum evident in each of our businesses, as well as our attention to continuous productivity improvement and capital structure". His future outlook for UNH was extremely positive. He added that they "now project full year EPS growth will approach 25 percent in 2000". Investors cheered along with Salomon Smith Barney who came out the next day with an upgrade to Buy from Outperform. The positive business prospects and upgrade clearly jump-started the momentum. Coming off the lows of $60, UNH steadily climbed to new heights. During last Friday's broad rally UNH cleared April's formidable resistance of $70. By Tuesday it stepped into the limelight and set an all-time high at $77.50, only to out-do itself in today's market with a peak at $78.56 on increasing volume. What's really amazing is UNH bucked all the market downdrafts of the past couple weeks. With a sustaining market, there's little doubt UNH of powering higher in the coming days. On Tuesday, Chase H&Q initiated new coverage with a Strong Buy rating and issued a $92 price target. Nevertheless, keep trailing stops in place to protect your capital. In these markets, there's never any guarantees! Look for entries at short-term support of $75, which is in-line with the ascending 5-dma ($74.75). More solid support is at old resistance of $70, but a return to this level should raise your radar antennae. Today, UnitedHealth Group, together with Cole Managed Vision, introduced the managed care division of Cole Corporation's new vision care services for AARP members. This will provide significant savings. In other news this week, it crossed the wire that Jeannine Rivet, CEO of UNH, filed to sell 44,430 shares of her company stock, worth approximately $3 mln. BUY CALL JUN-65 UNH-FM OI= 571 at $14.00 SL=10.50 BUY CALL JUN-70*UNH-FN OI=1661 at $ 9.75 SL= 6.75 BUY CALL JUN-75 UNH-FO OI= 847 at $ 6.25 SL= 4.25 BUY CALL JUN-80 UNH-FP OI= 9 at $ 3.63 SL= 1.75 Picked on May 18th at $77.50 P/E = 22 Change since picked +0.00 52-week high=$78.56 Analysts Ratings 13-5-2-0-0 52-week low =$39.38 Last earnings 03/00 est= 0.90 actual= 0.95 Next earnings 08-03 est= 0.98 versus= 0.76 Average Daily Volume = 1.04 mln /charts/charts.asp?symbol=UNH ************* NEW PUT PLAYS ************* HLIT - Harmonic Lightwaves $49.13 -3.38 (-14.75 for the week) Harmonic designs, manufactures and markets digital and fiber optic systems for delivering video, voice and data over cable, satellite and wireless networks. The company is headquartered in Sunnyvale, CA where it also operates an R&D center and a manufacturing facility. It maintains several sales and support centers worldwide including its subsidiaries in Israel and the UK. Investors have big concerns that the recent $1.74 bln acquisition of DiviCom will be a drag on Harmonics revenue growth. DiviCom, formerly a unit of C-Cube Microsystems, makes equipment used for video compression by satellite-TV companies like Hughes Electronics and EchoStar Communications. The deal was completed on May 3rd, although it was day of the Fed meeting and HLIT went through the shredder. On Tuesday, traders unloaded shares of HLIT at a phenomenal rate. The trading volume was more than 10 times the norm. The share price dropped a whopping $10.88, or 16.5% in one session - HLIT closed at $54.88. The following sessions have left HLIT significantly lower. Today it shed another 6% and slithered under its bottom support of $50. In addition, all the DMA indicators are much higher. The 5-dma at $57.44 is the closest technical line, which previously served as overhead resistance on any downdrafts. With all this said and done, what we've have at hand is a technical momentum play driven by investors' fears that relate to the company's bottom-line dollar value. In this uncertain market environment, HLIT's descent could easily continue over the short-term. Look for negative moves off the current level to confirm the downtrend. BUY PUT JUN-55 LOQ-RK OI= 85 at $10.25 SL=7.25 BUY PUT JUN-50*LOQ-RJ OI=517 at $ 6.13 SL=4.00 BUY PUT JUN-45 LOQ-RI OI=184 at $ 4.63 SL=2.75 Average Daily Volume = 1.76 mln /charts/charts.asp?symbol=HLIT INCY - Incyte Pharmaceuticals, Inc. $61.00 -5.56 (-7.75) Quick version: Incyte provides information about genes, related data management software, verified copies of genes and related reagents and services to pharmaceutical and biotechnology researchers. Details: INCY is a leading provider of an integrated platform of genomic technologies designed to aid in the understanding of the molecular basis of disease. Incyte develops and markets genomic databases, genomic data management software, microarray-based gene expression services, and related reagents and services. These products and services assist pharmaceutical and biotechnology researchers with all phases of drug discovery and development including gene discovery, understanding disease pathways, identifying new disease targets and the discovery and correlation of gene sequence variation to disease. Isn't biotech supposed to be a hot sector? Yep, but genomic science is affected by herd instinct...and the herd says run for your life, especially since INCY announced May 9th that they would provide genomic sequencing free to the public. It doesn't mean INCY will give away their research to anyone for the asking, but that they will provide raw data from the National Institute of Health Human Genome Sequencing Project free of charge. That isn't really a big deal, but investors in volatile issues don't like to hear the word "free" (unless they're on the receiving end, of course), which sent INCY shares on their latest tumble. It gets worse from a technical perspective. INCY held $65 closing price support all through March, April and this month too - except today. That's when it fell below support. Today's chart shows a perfect $5 descending staircase into the basement to $61 at the close. Even during the last hour, which accounted for 25% of today's volume (big volume spike), the price came up only $0.88 off the low. Going forward, this spells technical weakness and we could see volume increase if the price moves down, causing further damage by inducing more sellers to get out while the getting is good. Though, note from the chart that $60 could become support also. The danger is that INCY finds its land legs and moves up on any market strength from here. How to work it? Consider waiting for a breakdown under $60 and for the volume to increase, or look for a rollover from a dead cat bounce say at previous support at $65. While founded in sentiment, this play is now purely technical. BUY PUT JUN-65 IPQ-RM OI= 7 at $11.75 SL= 8.75 Low OI! BUY PUT JUN-60*IPQ-RL OI=166 at $ 8.69 SL= 6.00 BUY PUT JUN-55 IPQ-RK OI= 0 at $ 6.13 SL= 4.00 Wait for OI! Average Daily Volume = 1.4 mln /charts/charts.asp?symbol=INCY NTLI - NTL Inc. $57.88 -6.19 (-15.50 this week) NTL is the UK's #3 cable and TV operator. The company recently purchased the residential cable business of Cable & Wireless Communications. The acquisition is expected to challenge phone giant British Telecom by using cable and fiber-optic networks to provide local and long-distance telephone service and Internet access. The company also offers leased lines, frame relay, and other corporate data services. NTL will expand in Europe with the purchase of Cablecom, a Switzerland cable provider. There is no room for widening losses in this market. Last Monday, NTLI reported a larger first quarter loss than a year ago and said it will incur losses in England, Ireland, and France well into fiscal year 2001. The losses stem from costs incurred with upgrading its network, and acquisitions. And the spending spree continues for NTLI, the company announced Thursday that it will buy Swiss Guide, operator of Switzerland's largest Internet directory. Additionally, there's an issue with component shortages in Europe that NTLI has had to contend with. In an attempt to gain market share, NTLI offered free Internet access. The company ran into a shortage of modems. Consequently, many of NTLI customer's are unable to access the Web and questions have been raised about the company's service. Because of NTLI's acquisition of Cable & Wireless Communications, the company was forced to restructure its operations. NTLI announced Thursday that they had created a holding company, of which NTLI became a subsidiary. The merger is expected to be completed by the end of May. And that merger has weighed heavily on the stock. Since the acquisition, traders have sold NTLI sharply lower. And it appears the selling is not over. Thursday's sell-off marks a failure of NTLI's major support at $60. Volume has swelled recently as traders have taken NTLI lower. From here, feel free to look for an entry near current levels. If the stock does enjoy a dead-cat-bounce, watch for NTLI to bump against resistance at $60, which might provide a secondary entry into the play. BUY PUT JUN-60*USO-RL OI=52 at $6.38 SL=4.50 BUY PUT JUN-56 USO-RC OI=40 at $4.25 SL=2.50 BUY PUT JUN-52 USO-RB OI= 1 at $2.50 SL=1.25 Low OI! Average Daily Volume = 1.88 mln /charts/charts.asp?symbol=NTLI AZPN - Aspen Technology $23.19 -2.81 (-6.00 this week) Aspen Technology builds computer systems that assist process manufacturers in designing and automating their plant operations. Among the companies using AZPN's software are Chevron, Dow Chemical, and Proctor & Gamble. Not only does the company's software find more efficient methods of production and management, but it also lets manufacturers explore "what if" scenarios without reassembling their facility. Receiving nearly 60% of its revenues from consulting and other services, AZPN has operations in more than 20 countries and more than half of all sales come from outside the U.S. After posting very strong earnings in late January, it has been a long painful slide for AZPN shareholders. Moving as high as $55.38 by early February, the excitement faded and along with it went the buying volume. The company was just one more victim of the weakness seen across the broad markets and its stock has been caught in a downtrending channel ever since. Even April earnings (where the company surprised the street by 25%) were only sufficient to push the price to the upper end of the channel. Despite a continuous stream of alliances and accolades in the news, AZPN has continued to suffer at the hands of an increasingly fickle market. The last attempted rally failed at the 30-dma (then at $35.94), and it has been a rapid decline since then. As volume picked up, the price continued to fall and the past 2 days saw the 200-dma ($26.25) fail as support. This was a fairly solid support level and the sellers cut through it like a hot knife through butter. Unless the situation improves soon, AZPN looks poised for a trip down to its long-term support near $18. AZPN now has resistance near $27, solidified by the 200-dma and a failure to penetrate this level looks like an excellent entry point. Wait for the rollover and then enjoy the ride down as the sellers pile back on. Near-term support is found at today's low of $21.88, and a penetration of this level on continued strong volume will be a good indication of more weakness to come. BUY PUT JUN-30 ZQP-RF OI= 0 at $6.00 SL=4.00 Wait for OI! BUY PUT JUN-25*ZQP-RE OI= 0 at $4.63 SL=2.75 Today's vol=73 BUY PUT AUG-30 ZQP-TF OI=30 at $8.50 SL=6.00 BUY PUT AUG-25 ZQP-TE OI=72 at $5.25 SL=3.25 Average Daily Volume = 296 K /charts/charts.asp?symbol=AZPN ********************** PLAY OF THE DAY - CALL ********************** FAST - Fastenal Company $69.50 -0.88 (+0.13 this week) 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. Most Recent Write-Up FAST has been consolidating its gains in the past two days. Volume has all but disappeared as traders have stepped aside. The light volume in conjunction with the basing price is a clear sign of profit taking. After all, FAST rallied nearly 75% in two months. No small feat considering the market conditions. Perhaps some profit taking was in order. The stock has established major support at $69. Every time FAST has dipped to $69, it has rebounded. If we get cooperation from the broader market we could see FAST move higher. From here, watch for buying interest to return to FAST. Pay special attention to volume, especially on a rally. The trading activity has been indicative of the price direction in FAST. Watch for a bounce off support at $69 for a possible entry point, or wait for FAST to clear congestion in the $71 - 72 range before entering the play. Watch the volume closely to confirm that buyers have returned. Comments FAST has held up well the past two days. The 10-dma is quickly gaining and FAST typically bounces off this support level. Look for a market rebound first, but as long as FAST continues to close above the 10-dma support, we see profit potential. BUY CALL JUN-65 FQA-FM OI= 18 at $8.00 SL=5.25 BUY CALL JUN-70*FQA-FN OI=181 at $4.13 SL=2.50 BUY CALL JUN-75 FQA-FO OI= 5 at $3.13 SL=1.50 low OI BUY CALL AUG-70 FQA-HN OI= 50 at $7.88 SL=5.00 Picked on May 14th at $69.38 P/E = 36 Change since picked +0.13 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 ************************ COMBOS/SPREADS/STRADDLES ************************ Fear And Loathing In The Markets... Wednesday, May 17 The markets moved lower a day after a 50-basis-point rate hike by the Federal Reserve. The Dow ended down 164 points at 10,769 and the Nasdaq closed 72 points lower at 3644. The S&P 500 slid 18 points to 1447. Trading volume on the NYSE was light at 820 million shares exchanged with declines beating advances 1,886 to 1,003. Volume on the Nasdaq was also very thin with just 1.22 billion shares changing hands. Declines beat advances 2,519 to 1,470. In the bond market, prices fell after the U.S. Treasury said it would buy back up to $2 billion of outstanding 30-year bonds. The 30-year Treasury fell 31/32, bid at 100 29/32, where it yielded 6.17%. Tuesday's new plays (positions/opening prices/strategy): AM-FM AFM MAY55P/MAY60P $0.56 credit bull-put Ditech DITC MAY65P/MAY75P $1.18 credit bull-put Allstate ALL JUN20C/JUN22C $2.12 debit bull-call Our new candidate in the media-merger group, CCU/AM-FM offered two choices and based on the lower risk/reward, we chose the conservative position in AM-FM. The credit for the aggressive CCU position ranged from $0.93 to $1.06 on a simultaneous order basis. Ditech dropped over $5 in the first few minutes of the session and the suggested entry was easily achieved. Allstate slid $0.50 in early trading and the target debit was observed near 9:45 A.M. Portfolio plays: The markets moved lower today as investors began to discuss the affects of the recent hike in interest-rates and the potential for future increases. On Tuesday, the central bank raised the federal funds rate to a nine-year high of 6.50% but said it remains concerned about possible inflationary imbalances. Some analysts were expecting a neutral bias but in its commentary, the Fed made it clear that this week's increase does not mark the end of the tightening cycle. The question now is when the FOMC will again raise the federal funds rate and already there is speculation of a 50-basis-point move at the next meeting in June. Concerns over the accumulation of rate hikes hampered blue-chip issues and shares of Hewlett-Packard (HWP) led the Dow lower in today's session. General Motors (GM) and Exxon-Mobil (XOM) were also big losers while Intel (INTC) rallied after announcing a 2-for-1 stock split. The Nasdaq faltered on weakness in biotech and Internet stocks. Bellwether issues such as Cisco (CSCO), Microsoft (MMSFT), Dell (DELL), and Sun Microsystems (SUNW) all moved lower. In the broad market; integrated oil, agriculture and leisure products stocks advanced while footwear, retail and gold mining issues consolidated. Our portfolio offered mixed success with many of the basic industry stocks moving higher while technology, energy and banking shares slumped. Trading volume was light, extending a pattern of slow sessions for most issues, and the day was relatively meaningless as the majority of positions are expected to remain profitable through Friday. Temple Inland (TIN) provided some new excitement during today's session. The issue dropped to lows near $52 before rallying at the close to a recent high near $54. During the morning slump, our bearish credit spread traded as low as $0.50, a profit of $0.25 on the position. Unfortunately, we were too confident to take the easy money and later in the session, we paid the price. Temple climbed back above $54 in the closing hour, in opposition to a 165 point Dow drop and that was the final straw. Our exit was much less favorable at $0.93 but the potential for loss is eliminated and we may be able to sell the long position for a small closing credit. Murphy's Law almost guarantees the play will close profitable for OIN readers and the saving grace in this situation is our new covered-call play (MAY-$50 strike). Ocular Sciences (OCLR) managed a reasonable recovery today and with resistance building near $17, we decided to close the long position for the current credit of $1.50. There is no loss (or gain) in the play if the stock closes below $17.50 on Friday. Thursday, May 17 Investors retreated to the sidelines today amid concerns over rising interest rates. The Dow closed up 7 points at 10,777 and the Nasdaq was down 106 points at 3538. The S&P 500 Index slid 10 points to 1437. Volume on the NYSE reached just 810 million shares, with declines beating advances 1,597 to 1,281. Market breadth was very poor in technology issues with declines beating advances 2,466 to 1,524 on Nasdaq volume of 1.25 billion shares. The 30-year Treasury fell 19/32, bid at 100 7/32, where it yielded 6.22%. Portfolio plays: The market ended mixed today as investors remained unconvinced of any bullish potential in the face of rising interest rates. Buyers and sellers both moved to the sidelines with a "wait and see" attitude amid the rising costs of borrowed funds. The Fed's most recent hike was the sixth since last June, pushing the rate that banks charge each other to the highest level in almost ten years. Higher interest rates reduce corporate profits and most economists expect more hikes later this year. Analysts say the the market will likely be range-bound prior to the next economic report with little news to indicate whether the rate increases are having a beneficial effect. Additional information may come on May 25 when the Commerce Department issues its initial report on first-quarter gross domestic product. Until then, there is little data from which to gauge future inflation. The Labor Department's weekly jobless claims data showed that requests for unemployment benefits fell for the second week in a row. That suggests that companies are having difficulty finding qualified workers and many industries remain vulnerable to increasing wage costs. Overall, it's not a pretty picture going forward. Our portfolio enjoyed some bullish activity during the session. Safety stocks are once again attractive and a few of the Major Drug issues made favorable moves. Johnson & Johnson (JNJ) and Warner Lambert (WLA) led the group and both of these positions are performing better than expected. WLA has moved up $20 since we opened the bullish debit spread last month and the JNJ play is at maximum profit with the stock at $90 (JNJ closed near $89). Small-cap Health Industry stocks have performed well and our newest winner is Oxford Health (OXHP). The issue rallied $1.12 today to close near $22.50, $5 above our maximum profit range. Finance stocks edged higher during the session and our entries in the sector; Bank One (ONE) and Summit Bancorp (SUB) climbed with the group. Both of these long-term positions are trading near maximum profit. The recent bullish play in Allstate (ALL) also benefited from the upside activity with the stock closing near $27, almost $5 above the break-even price. Andrew (ANDW) continues to rally after a recent break-out and now it appears the play will be closed early. The bullish diagonal spread is trading at almost 75% profit ($4.25 returned on $5.75 invested in just 3 months). Our new calendar spreads have been standout performers this month. Dean Foods (DF) ended the day near $30, our sold strike and maximum profit price. Magna International (MGA) is trading near $49.75, up $4 since we initiated the play and above the target closing price for the bullish position at $55. Our credit (strangle) positions in Best Foods (BFO) and Abgenix (ABGX) are trading within the target ranges and we expect both plays to expire at maximum profit. Last on the list is National Computer Systems (NLCS), a debit straddle issue that broke above previous resistance today with a $3.88 jump to $56. The neutral position is near break-even and will soon be profitable but you may consider closing the bearish portion of the straddle, based on the new technical character. Questions & comments on spreads/combos to Click here to email Ray Cummins ****************************************************************** - NEW PLAYS - This week I received a request for some conservative positions on small-cap issues. Here are two new candidates that may fit the bill. Both positions are based on recent increased activity in the stock and underlying options. Each of these plays offer favorable risk/reward potential but they should also be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. ****************************************************************** MAT - Mattel $13.06 *** A New CEO! *** Mattel designs, manufactures, and markets a broad variety of family products on a worldwide basis through both sales to retailers and direct to consumers. Mattel's segments are separately managed business units and include Toy Marketing, Consumer Software and Operations. The Toy Marketing division is divided on a geographic basis; domestic and international. The domestic Toy Marketing segment is divided into USA Toys and US Fisher-Price/Tyco Preschool. The Consumer Software group consists of educational, productivity and entertainment software products developed and sold by the Learning Company division on a worldwide basis. Mattel's Operations segment manufactures toy products, which are sold to the other Toy Marketing segments. Mattel has been on the move since the company announced that Robert A. Eckert quit as president and CEO of Kraft Foods to accept the top job at Mattel. The new chief says one of his main priorities is to reassure employees that the company is getting back on track. The world's biggest toy-maker has been hurt by financial woes, layoffs, and the departure of a number of key executives. Now the outlook is cautiously optimistic and a group of brokerages are backing the change. Merrill Lynch was the first to offer a new outlook, raising its rating on Mattel to a long-term "buy." Implied volatility and volume in Mattel options is at a recent high and we are going to use the new interest to open this low cost, bullish position. PLAY (conservative - bullish/diagonal spread): BUY CALL JUL-10.00 MAT-GB OI=4952 A=$3.25 SELL CALL JUN-12.50 MAT-FV OI=4721 B=$1.06 INITIAL NET DEBIT TARGET=$2.00 ROI(max)=25% B/E=$12.00 Chart = /charts/charts.asp?symbol=MAT ***** COVD - Covad Communications $26.88 *** On The Rebound! *** Covad is a provider of broadband communications services to Internet service providers, enterprises, telecommunications carriers and other customers. These services include a range of high-speed, high capacity Internet and network access services using digital subscriber line technology, and related value-added services. Internet service providers purchase the company's services to provide high-speed Internet access to their business and consumer end-users. Enterprise customers purchase Covad's services directly or indirectly to provide employees with high-speed remote access to the enterprise's local area network, which improves employee productivity and reduces network connection cost. Telecommunications carrier customers purchase the company's services for resale to their Internet service provider affiliates, Internet users and other enterprise customers. The Covad recovery rally began Wednesday as rumors resurfaced that it could be a buyout target. Analysts say the takeover speculation may not make much sense but the rumored buyers are Northpoint (NPNT) and Rhythms NetConnections (RTHM). Covad is seen as one of the more unlikely targets in the DSL industry but there are other possible reasons for the rally. The company recently bought LaserLink.net, a provider of branded Internet access in a deal to deliver broadband Internet services to its customers through company-branded access. In addition, Covad said today it had expanded its digital subscriber line service into the Columbus and Dayton, Ohio, markets. This followed Wednesday's announcement that the company had extended its broadband network to Las Vegas. Covad is also part of a new 13-company consortium that agreed last month with Baby Bell phone company US West (USW) to share phone lines regionally. The company has entered into line-sharing agreements with two other Baby Bells, Bell Atlantic (BEL) and BellSouth (BLS). So there is hope for this beleaguered issue and with target prices as high as $90, the share value is due for a rebound. The recent increase in option interest has produced a number of favorable positions. Our play offers the simplest approach. PLAY (conservative - bullish/debit spread): BUY CALL JUN-20.00 COU-FD OI= A=$8.62 SELL CALL JUN-22.50 COU-FX OI= B=$6.50 INITIAL NET DEBIT TARGET=$1.88-$2.00 ROI(max)=25% B/E=$22.00 Chart = /charts/charts.asp?symbol=CVD ************************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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