The Option Investor Newsletter Sunday 5-21-2000 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 5-19 WE 5-12 WE 5-5 WE 4-28 DOW 10626.85 + 17.41 10609.37 + 31.51 10577.86 -156.05 -110.14 Nasdaq 3390.40 -138.65 3529.07 -287.75 3816.82 - 43.84 +216.78 S&P-100 752.95 - 8.72 761.67 - 8.12 769.79 - 11.63 + 4.30 S&P-500 1406.95 - 14.01 1420.96 - 11.67 1432.63 - 19.80 + 17.89 RUT 479.70 - 11.24 490.94 - 21.90 512.84 + 6.59 + 24.41 TRAN 2742.00 -132.02 2874.02 - 2.09 2876.11 + 26.10 + 16.76 VIX 28.77 - 1.23 29.95 - 0.44 30.42 + 1.64 + .37 Put/Call .89 .53 .53 .51 ****************************************************************** It's All About Interest Rates Investors who thought last week's early trading action was a precursor of good things to come were sorely disappointed. Stocks began the week rising on cautious optimism ahead of the Federal Reserve FOMC meeting. The rally was extended through Tuesday, as stocks finished near their highs for the day after recovering from a brief sell-off when the Fed's interest rate decision hit the wires. For those traders vacationing on the moon last week, the central bank raised its target short-term interest rate by an expected half of a percentage point to 6.5 percent, the first such increase since 1995 after five 25 basis point increases since June 1999. In a press release that followed, the Fed let it be known in no uncertain terms that more hard hitting rate strikes could be in the cards. Once everyone had time to ponder the Fed's actions, the mood quickly turned from cautious optimism to outright pessimism. Taking the interest rate news hard were the once impervious tech issues. From Tuesday's close, the Nasdaq Composite Index (COMPX) fell nearly 300 points, putting it solidly back below its 200-day moving average and within a whisker of its April 14 low of 3,321.29. Things got especially ugly on Friday when the tech-heavy index tumbled 148.31 points, or 4.2 percent, to 3,390.40. Leading the COMPX's fall from grace were some formerly untouchable big-cap tech issues. Networking equipment king Cisco Systems (CSCO) tumbled $6.50 to $53.44, which followed a nearly eight-point retreat in the prior week. Cisco, once anointed by Wall Street to be the most likely first trillion dollar company, has seen $200 billion of its market value evaporate since reaching its peak of $82.00 per share set back in March. Cisco wasn't the only big-cap tech issue that got roughed up last week. Sun Microsystems (SUNW) got pinched for $4.25 to $77.25, following a nine-point loss in the prior five sessions. Internet B2B come-lately Oracle (ORCL) closed off $4.00 to $70.00. And Microsoft (MSFT) finished the week down $3.75 to $65.06. What's more, the software giant suffered the indignity of hitting a new 52-week low on Friday. Bucking the trend was chip maker Intel (INTC), which managed to eke out a gain for the week of $2.88 to $117.88. However, in Friday trading, Intel lost $6.06 after the company said in a filing with the Securities and Exchange Commission that it reduced its fiscal first-quarter earnings by a penny to $0.77 per share after it had to write down inventory and reverse some sales. Ironically, while many tech stocks, with their pristine balance sheets and "sky-is-the-limit-prospects," were getting routed, many old-economy stocks were holding their ground. For the second straight week, the Dow Jones Industrial Average (INDU) ended slightly higher, reflecting continuing investor rotation into more traditional growth and value sectors. For the week, the INDU added 17 points to 10,626.85, despite getting clocked on Friday with a 150.43 point sell-off. Strong INDU performers for the week include former pariah Philip Morris (MO), which added $3.25 to close at $27.50. Another big winner was Merck (MRk), which rose $4.25 to $72.44, putting the pharmaceutical giant 20 points above its March low. The volatile week left the INDU down 9.4 percent from its January 14 high and off 7.6 percent for the year, while the COMPX is down 32.8 percent from its March 10 high - mired in bear-market territory - and off 16.7 percent for the year. Despite all of the pre-Fed excitement, volume remained extremely light all week, which shows that investors continue to remain non-committal. With that said, on Friday, volume increased 8 percent on the NYSE and 12 percent on the Nasdaq from Thursday's levels, with 853 million shares changing hands on the NYSE and 1.36 billion on the Nasdaq. Overall, though, the trend has been for investors to watch the action from the sidelines. It has been more than two weeks since the last billion-share day on the NYSE. Over on the Nasdaq, the falloff in volume has been even more pronounced; after several days in excess of 2 billion shares, the average volume lately has been around 1.2 billion. As for Friday's actions, market breadth was miserable on both major exchanges, with decliners outnumbering advancers by a 19 to 9 margin on the NYSE and by a 29 to 12 margin on the Nasdaq. Leading the old-economy issues lower were some big-name financials and pseudo-financials. General Electric (GE), whose GE Capital unit is the largest non-bank finance company, fell $1.25 to $51.88. American Express (AXP) slid $1.50 to $50.31 and J.P. Morgan (JPM) tanked $4.25 to $129.31. As for new-economy issues, there was plenty of blame to go around, with Internet and telecommunication stocks shouldering most of it. Leading the downdraft was Internet bellwether Yahoo! (YHOO), which got blistered on Friday, closing down $11.69 to $120.31. Meanwhile, Network Appliance (NTAP) gave back $3.88 to $65.13 after posting fourth-quarter earnings of $0.07 per share late Thursday, which beat the First Call estimate by a penny. On top of that, the company was upgraded by Salomon Smith Barney to a "buy" from an "outperform" rating while A.G. Edwards upped the company to a "buy" from an "accumulate." Que sera sera. Another stock losing ground despite reporting strong earnings was Autodesk (ADSK), which slipped $3.06 to $35.56. The company posted late Thursday first-quarter earnings of $0.48 per share, beating the First Call estimate of $0.46 per share. In the telecom sector, Ciena (CIEN) got crushed, falling $20.81 to $116.50. The maker of equipment to boost fiber-optic network capacity cut new-product sales for fiscal year 2000 to $50 million from $100 million. Shares of WorldCom (WCOM) lost $1.81 to $37.75, extending Thursday's declines, which came on the news that Justice Department investigators are reportedly prepared to recommend against WorldCom's $115 billion purchase of Sprint amid concerns about market concentration in the long-distance and Internet-backbone businesses. Sycamore Networks (SCMR), a maker of fiber-optic equipment, tumbled $11.31 to $80.94 despite reporting third-quarter earnings after the market close on Thursday that beat the First Call estimate by four pennies. Falling in sympathy with the aforementioned telecoms were Nortel Networks (NT), which tumbled $4.00 to $52.44, and Lucent Technologies (LU), which lost $0.81 to $55. To be fair, the news wasn't all bad. There were a few silver linings among the tech black clouds. Kana Communications (KANA) rose $3.75 to $43.25 on news ING Barings upped the company to a "strong buy" rating from a "buy." Portal Software (PRSF) surged $.13 to $47.13. Late Thursday, the company reported quarterly earnings of $0.02 per share compared to the First Call estimate of a loss of a penny per share. In the credit markets, Treasuries closed modestly higher Friday, benefiting from investor concerns with equities. The losses in the stock market prompted a short flight to safety. Prices turned higher in late afternoon trading Friday. The 10- year Treasury note edged up 9/32 to yield 6.51 percent and the 30-year bond inched ahead 3/32 to yield 6.23 percent. On the economic front, Friday saw the release of the March trade numbers, which produced yet another record, with Americans importing $30.18 billion more goods and services than they were exporting. Additionally, the February trade deficit numbers were downwardly revised to $28.71 billion from $29.24 billion. In other news, confirming that the Fed is indeed inflation- phobic, New York Federal Reserve President William McDonough said in a speech in New York on Friday that demand is still too strong and that the increases in interest rates are aimed at restoring a better balance between supply and demand. Looking ahead, the May consumer confidence numbers are due out Tuesday at 10:00 AM ET. Traders will be looking for a cooling of consumer sentiment that may show that the economy might be starting to slow. Then, on Thursday, the Commerce Department will be reporting revived GDP numbers. Don't look for either data sets to have much of an impact on investor sentiment. With little economic news to focus on, many analysts believe that the market will continue to fret about the prospect of more interest rate hikes after the Federal Reserve ratcheted up borrowing costs by a half percentage point last Tuesday. Thus, without a catalyst to give the market the support it needs over the short-term, observers expect a tight trading range to hold over the next week or two, which really isn't all that unusual. Contrary to popular belief, there isn't always a trend to play. Believe it or not, the market trades sideways nearly 70 percent of the time. On a brighter note, one indicator that may portent an abatement in near-term bearishness is the put/call ratio at the CBOE, which finished at a historically high 0.88. This could mean that the wall of worry is finally sufficiently high enough that some investors may want to take a crack at climbing it. Another indicator pointing to a possible rally are individual investors, who apparently haven't lost their appetite for equities. An estimated $13.1 billion flowed into U.S. stock funds in the week ended Wednesday, up from $5.2 billion the previous week, according to TrimTabs. Nevertheless, with the interest rates on the rise and many investors still sitting on their hands, it's going to take a lot of chutzpah to trade this market over the next few weeks. S.P. Brown Senior Writer *************************************************** 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 *****Note: The Nashville seminar has been replaced with an advanced three day seminar in Seattle on the same date***** *********** IN THE NEWS *********** Mandelay Bay Resorts Crushes Estimates By Matt Paolucci With the U.S. economy growing at a breakneck pace, consumers are spending like never before. And with their newfound wealth, folks are apparently heading over to Las Vegas. Well, judging from its earnings report late yesterday, one particular hotel and casino on the Vegas strip is grabbing more than a fair share of consumers' gambling dollars. Mandalay Resort Group (MBG) reported first-quarter earnings obliterating Wall Street estimates by 18 cents per share, due to big crowds at its casinos in Las Vegas and Detroit and an aggressive stock buyback plan. For the first quarter ended April 30, Mandalay reported its highest quarterly profit ever with net income of $48.9 million or 58 cents per diluted share compared with a net loss, after charges, of $4.9 million or 5 cents per share in the year-ago first quarter. Operating earnings were 58 cents per share versus 43 cents per share, excluding charges, in the year-ago period. Analysts had expected MBG to post first quarter earnings of 40 cents per share, according to First Call/Thomson Financial. Revenues were $639.6 million in the first quarter versus $471.3 million a year ago. Company officials, who barred reporters from their investor and analyst conference call, were unavailable to comment on the results. "Given the dramatically different performance of the company's properties over the last two quarters, it is clear that the strength of the company's earnings are dependent on a healthy Las Vegas," Bear Stearns analyst Jason Ader said. Bear Stearns raised its rating from Neutral to Attractive, while Wasserstein and Perella raised MBG shares to Buy from Hold. Mandalay said its major Las Vegas resorts showed strong results, partly driven by an overall increase in visitors to the city. MBG's assets include the Luxor (Egyptian-theme), Circus-Circus Las Vegas, Excalibur (Medieval), the Monte Carlo (jointly-owned with Mirage Resorts Inc. (MIR), and its year- old flagship property, Mandalay Bay resort. The company said its resorts in Illinois, Detroit, Mississippi, Reno, Nev., and Laughlin, Nev., also showed strong results. "This was obviously a very strong quarter, with significant upside surprise driven by higher than expected room prices in Las Vegas and very healthy trends in Detroit," Ader added. "As such, we believe Mandalay Bay will continue to experience solid earnings growth through the second quarter." Mandalay Bay, the company's flagship property which opened a little over a year ago, generated $30.5 million in operating cash flow versus $22.6 million a year ago. In Reno, Nev., the company generated a total of $13.4 million in operating cash flow against $9.2 million in last year's first quarter, an increase of almost 46 percent. In Laughlin, Nev., the company's two properties, Colorado Belle and Edgewater, reached cash flow of $12.4 million compared with $11.4 million in the prior year period. Separately, Mandalay's Board of Directors authorized an additional 15 percent stock repurchase. During the first quarter, the company purchased 11.9 million shares at an average price of $16 per share. Shares of Mandalay Bay Resorts closed down $0.13 at $21.88 per share. *************** ASK THE ANALYST *************** May I ask you a question? By Eric Utley Are we having fun yet? Last Friday afternoon, after the market plummeted on extremely light volume over fears of rising interest rates, I hit rock bottom. For the past two months, the mighty bear has sucked the financial life from me. Not literally, I've managed to buy a few puts here and there, and minimized the damage to my long positions. But figuratively, the growling Ursa has taken away everything I've grown to love about investing and trading, particularly endless profits from rocketing tech stocks. For now, it appears the king of bulls has decided to lie down beside the market trough and try to cool off during the hot Summer months. But, just because the mighty steer has stopped charging higher, it doesn't mean I can't have fun anymore with this market. And for me, if I'm not having fun trading stocks, I might as well be working. So last Friday, I decided to ignore what Mr. Greenspan has to say, hit the mute button on my remote and disregard the market rhetoric spewing from CNBC, and start having fun - again - with my investing and trading. I've found that when I have a positive outlook, my trading profits seem to follow. I just have to be careful not to let my darn ego get in the way. So I suggest to all of you, first and foremost, have fun. And there is no better way to have fun with the market than to make money. So how do we make money given the current market environment? As you'll see below, two of our readers sent in stocks that are actually moving higher. The common theme with the recent market leaders is they all have strong fundamentals. I think this market is favoring companies with accelerating earnings growth selling at reasonable valuations. So if you're a bull, look for stocks with solid fundamentals reaching new highs, or breaking out of basing prices. On behalf of the bears out there, I'd like to thank Mr. Jim Brown and the OIN staff for including puts in the play list. There is plenty of profit potential in buying puts in this market. There is little sign of negotiations from the buyers currently on strike. So as the sellers continue driving prices down, don't forget the puts. Before I ramble on any further, most importantly, have fun! I apologize for not writing my usual column last Wednesday. As you may know I wrote the Market Wrap section that day. But I didn't forget about my loyal readers, so keep sending your requests to asktheanalyst@OptionInvestor.com. Please put the symbol in the subject line of the e-mail. ---------------------------- JDS Uniphase - JDSU What is the analyst long and short-term for JDSU? What can be The low and do you think it will be back to $153 this year? Thanks for your wonderful job. - Ali Well thank you for your nice comments Ali. Unfortunately I don't set price targets on stocks. I think the job of establishing price targets is one of the most difficult and inexact sciences in the financial world. So I don't do it. But, I'd be more than happy to take a look at JDSU and tell you where I think it is headed. As you know, JDSU is one of the leaders in the new fiber-optic technology sector. As Internet users push increasingly higher amounts of voice, video, and data over the Web, the demand for capacity and high-speed networks continues to accelerate. That's where JDSU comes in, the company produces equipment that increases capacity and the speed of fiber-optic networks. The incredible demand for high-speed network products is growing so swiftly that JDSU has considered increasing output by four-fold. And the company is expanding through acquisitions as well. In the past ten months, JDSU has completed a blistering nine acquisitions. You probably heard that the CEO, Kevin Kalkhoven, announced his retirement last week. Don't let that concern you, Kalkhoven is leaving to seek a "slower pace". Analysts see the retirement as a non-event since JDSU has a solid business strategy and a sound management team. From a contrarian perspective, Kalkhoven's retirement may be viewed as a bullish sign because the pace of business at JDSU is so darn fast. The long-term prospects for JDSU look promising. The company is expected to grow earnings by nearly 50% over the next five years. Just last week, the CFO told analysts to expect upwards of 80% year-over growth and said, "Business remains very strong." Clearly, JDSU is a good stock to buy for the long-term if you don't mind the volatility. In the near-term, the stock appears to have settled into a trading range between roughly $80 - 100. Will it get back to $153 this year? Maybe. If Wall Street turns bullish on the stock again it will sail. Although the company is growing at a break-neck speed, the high valuation does present a risk. Six more months of consolidation might provide a good base for a bull-run into 2001. But for now, you could probably trade the stock between its range and take profits. ---------------------------- Trimble Navigation Limited - TRMB Please comment on TRMB. Thanks. - Vishal Thank you for your many e-mails Vishal. I'm happy to finally be able to take a look at one your requests. I'm also happy to take a look at a stock that has managed to move higher in the past month. To be quite honest, I had never heard of TRMB until I read your e-mail. I should know more about the company since I've been known to lose my way while venturing into the great outdoors. TRMB designs and develops products enabled by GPS technology. The company makes electronic products that determine precise geographic location. It turns out that "map making" is a very profitable business for TRMB. Over the past three quarters, TRMB has surpassed analysts' estimates by an average of 68%! And the company is expected to grow earnings at an amazing 48% over the next five years. The company has a strong balance sheet with very little debt. And with a market capitalization of $869 mln, there is room to grow! Fundamentally, TRMB looks great. So let's take a look at how the chart stacks up. And wouldn't you know it, technically TRMB looks great. I'd like to thank you again for requesting this stock Vishal, it solidifies the fact that money can still be made in a bear market. I apologize for the emotions, it's just really nice to see a stock move higher in the face of the growling bear. Enough of the mushy stuff, back to the chart. Heavy volume has confirmed the up-trend. TRMB is cruising higher using its 10-dma as support. I'd view a fall below the 10-day as a bearish sign, but other than that, the chart looks great. I would like to point out the high volume event in conjunction with the gap higher in price. That gap higher came on the heels of TRMB's first quarter earnings report. Such a strong rally combined with massive volume is a good indicator of higher prices. ---------------------------- Vishay Intertechnology - VSH Could you please comment on these two stocks, KEM and VSH? Thanks very much. Faithfully yours. - Q.T. Fang Thank you Q.T., we are faithfully here for you. We have looked at a few of your requests in the past, and I just couldn't pass up VSH. After looking at TRMB above, the idea of keeping with winning stocks sounded better than analyzing fallen leaders. Despite the almighty bear, VSH just keeps going and going. So, what led to VSH's incredible bull-run? One word: earnings. With the chip sector booming, VSH is expected to grow earnings an amazing 293% for fiscal 2000. The only thing that concerns me with VSH is the possibility of a slowdown in the semiconductor sector. Earnings are expected to slow over the next five years, analysts estimate that VSH will grow only 20% next year. But, it seems that every week analysts move their estimates for VSH higher, followed by upgrades and higher price targets. There are a few items in the news recently that are worth noting. First of all, VSH directors declared a 3-for-2 stock split last Thursday. The company said it will distribute split shares on June 9th. Secondly, and more interesting, VSH issued 5.8 mln shares of common stock on May 10th, priced at $73.50. The company plans to pay down its debt with the proceeds from the offering. Which I think is a good move by management for the long-term health of the company. The large offering of stock didn't adversely affect VSH too much. In fact, the new supply of stock was met with high demand. After the offering, VSH quickly rebounded to trace a new 52-week high. As for the chart, as long as VSH stays within its ascending channel we could see higher prices. Every bull loves to see the pattern of higher highs and higher lows. ---------------------------- 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 19, 2000 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,000 11,400 10,626 Neutral 5.05 SPX S&P 500 1,400 1,500 1,407 Neutral 5.05 OEX S&P 100 750 800 753 Neutral 5.05 RUT Russell 2000 450 550 480 Neutral 5.05 NDX NASD 100 3,200 4,000 3,261 Neutral 5.05 MSH High Tech 860 1,000 872 Neutral 5.05 XCI Hardware 1,360 1,600 1,333 BEARISH 5.19 ** CWX Software 1,100 1,300 1,143 Neutral 5.05 SOX Semiconductor 960 1,200 950 BEARISH 5.19 ** NWX Networking 900 1,100 962 Neutral 5.05 INX Internet 550 800 553 Neutral 5.05 BIX Banking 530 600 557 Neutral 5.11 XBD Brokerage 400 500 456 Neutral 5.05 IUX Insurance 540 620 624 BULLISH 5.16 RLX Retail 900 1,000 904 Neutral 5.11 DRG Drug 355 400 392 Neutral 4.28 HCX Healthcare 710 800 795 Neutral 4.28 XAL Airline 140 155 144 Neutral 3.10 OIX Oil & Gas 265 300 309 BULLISH 5.11 Posture Alert Complacency is continuing to kill this market, as investors both large and small watch from the sidelines, while sector after sector breaks down. Winners Friday were limited to the Drug, Healthcare, and Oil & Gas sectors. Losers were abundant, and were led by Internet (-6.37%), Semiconductors (-5.21%), the NDX (- 4.84%), and Networking (-4.47%). With this most recent action, we have lowered the Hardware and Semiconductor sectors to Bearish from Neutral. **************** MARKET SENTIMENT **************** Sunday, May 21, 2000 We are at a Critical Moment! Friday capped off the week on a sour note, as the major indexes closed down significantly, with no end in sight. The NASDAQ suffered a -148 point loss to close the week out below its 10- month moving average. Down volume was almost eight times greater than up volume, and 2,883 decliners eclipsed 1,169 advancers. Technology bellwethers that made new lows Friday include Microsoft and Worldcom, which is an unlikely duo. Cisco Systems was also a poor performer this week, and closed below the lows from April 14th, which is also a very poor sign. Interest rate jitters continue to plague this market and institutional participation is almost non-existent, with the exception of mutual funds that are anticipating redemptions, which is giving extra selling pressure to this already illiquid market. We are nearing a critical moment in this market, as the recent lows in the NASDAQ may be tested this upcoming week. Previously, many of the leading technology stocks were forming higher lows, which is a bullish sign. However, when we start to see some of the leaders breaking down (like the few mentioned above), it may just a matter of time before they drag the rest of the market with them. Monday and Tuesday could be very important, especially for technology shares, because if we can bounce significantly, it will relieve the pressure and tension that is currently building up. This market has been in a pretty consistent trading range the last 6 weeks, which is probably the most optimistic scenario that we could wish for. But if we break the previously established lows set in April, we may see some extremely large selling pressure in a very swift manner, so stay prepared! On Thursday, Pinnacle highlighted the most recent sentiment, which is best portrayed by the Investors Intelligence Survey. Sentiment is on the downswing, but it going to have to get worse before it gets better. What we need now is to flush out all the weak hands, and build up the bear's camp to a more significant level. Once this bearish level builds up to a point that is comparable to market lows in previous years, is when this market is ready to turn to the upside. Until then, it is going to be a trading range market, with an emphasis on the bearish side. With all the complacency in the market, we are still cautious in regards to the April lows, and would not be surprised to see those levels taken out. As of late, this market has been pushed in both directions on very light volume, and with no economic indicators until Thursday, we may rally again to start the week off. A few quick factors that may support this bullish side would be the excessive levels of put buyers the last couple of days. Friday's Put/Call ratio stood at a whopping 0.89, suggesting extreme bearish sentiment. On equities, it stood at 0.81, which is a level we have not seen in a long time. If this trend continues, it may suggest that a bottom may be forming at these current levels. Have a good trading week! 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 (28.77): 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 (6.227): 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 (5/19) (5/23) (5/25) ***************************************************************** Overhead Resistance (805-830) 7.20 Overhead Resistance (775-800) 2.12 OEX Close 752.95 Underlying Support (745-770) 1.91 Underlying Support (715-740) 2.90 What the Pinnacle Index is telling us: Open interest for the June series is extremely low, indicating poor sentiment across the board and less reliable statistics. Regardless, both direct overhead and both underlying support levels are light, indicating this market will most likely continue on its trading range bound ways, with a emphasis on the bearish side. Put/Call Ratio ***************************************************************** Friday Tues Thurs Strike/Contracts (5/19) (5/23) (5/25) ***************************************************************** CBOE Total P/C Ratio .89 CBOE Equity P/C Ratio .81 OEX P/C Ratio 1.64 Peak Open Interest (OEX) ***************************************************************** Friday Tues Thurs Strike/Contracts (5/19) (5/23) (5/25) ***************************************************************** Puts 740 / 6,368 Calls 800 / 4,692 Put/Call Ratio 1.36 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 19, 2000 28.77 ************* COMING EVENTS ************* For the week of May 22, 2000 Monday None Scheduled Tuesday None Scheduled Wednesday None Scheduled Thursday GDP - Revised Q1 Forecast: 5.2% Previous: 5.4% GDP Chain Deflator Q1 Forecast: 2.7% Previous: 2.7% Initial Claims 05/20 Forecast: 278K Previous: 276K Existing Home Sales Apr Forecast: 4.84M Previous: 4.83M Help Wanted Index Apr Forecast: N/A Previous: 87 Friday Durable Orders Apr Forecast: -0.2% Previous: 3.5% Personal Income Apr Forecast: 0.6% Previous: 0.7% PCE Apr Forecast: 0.4% Previous: 0.5% Michigan Sentiment May Forecast: 110.5 Previous: 110.9 Week of May 29th 05/30 Consumer Confidence 05/31 New Home Sales 05/31 Chicago PMI 05/31 Leading Indicators 06/01 Initial Claims 06/01 Auto Sales 06/01 Truck Sales 06/01 NAPM Index 06/01 Construction Spending 06/02 Nonfarm Payrolls 06/02 Unemployment Rate 06/02 Hourly Earnings 06/02 Average Workweek 06/02 Factory Orders ************************Advertisement************************* Tired of waiting on trades to execute? 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To subscribe you may go to our website at http://www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to Contact Support with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 DISCLAIMER *********** This newsletter is a publication dedicated to the education of options traders. The newsletter is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The newsletter picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. 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The Option Investor Newsletter 5-21-2000 Sunday 2 of 5 ************* WOMAN'S WORLD ************* The Money Flow Indicator By Mary Redmond I think the money flow indicator is one of the most important technical indicator to watch these days. This may be partly because there is so much more money around nowadays than in previous markets. In this investing period, the liquidity flows are much more powerful and pronounced. You can look at macro money flow indicators, like cash flow to various sectors of the market as well as money flow to an individual stock. The weekly and monthly cash inflows into equity funds is a fairly reliable indicator of current market sentiment. There are other factors which influence liquidity such as initial public offerings, and cash takeovers. In the last two months, the number of IPOs dropped dramatically, as the market and IPO demand dried up. This can leave additional cash which would have gone to the IPOs to be invested in the market. In addition, the number of cash takeovers (as opposed to stock swap takeovers) increased. Both of these factors may help the liquidity of the market to a certain degree. In addition to looking at the money flow, you can sometimes make a reasonably reliable estimate as to the money flowing to a particular stock. Sometimes this is very easy, you can get an idea of what is going on simply by watching the daily volume and price. If the price is going up dramatically at the same time as the volume is increasing it usually means buyers are outweighing sellers. And a big decrease in stock price with heavy volume can mean selling by institutions or large individual investors. There is also a money flow index which can be used on stocks or indices to give an idea of the strength of money movement in a security over a specified period of time. The typical price of the security or index over a period of time is calculated, then the money flow using the price multiplied by the volume, and finally you get the money flow index. You can use the interactive charts on the OIN web site to look at the money flow in a stock or index. Click on the interactive charts under Tools and pick Money Flow as the lower indicator. For example, using the Nasdaq 100(QQQ) around the third week in March the index hit a high of 117 and the money flow index was way above 10. As the market started to drop, the money flow index grew weaker. On April 14, the index hit a low near 80, and the money flow index was zero. This is one more technical tool you can use when analyzing your stocks. It is also useful to look at which funds are taking in the most money, and what their typical buying patterns are. For example, last December, the Janus fund family took in approximately one third of the total cash flow to all US domestic equity funds, a total of approximately $9.9 bln. Some of the top holdings of this fund family during that period were JDS Uniphase, Nokia, Cisco, Sun Microsystems, Veritas and Texas Instruments, all stocks which performed well during the latter part of 1999 and the first quarter of this year. Mutual funds usually do not have to disclose their stock positions until several months after they make their purchases. For example, when you receive a prospectus from a fund they generally show what their holdings were as of the prior quarter. This rule is in place because of the potential market disruptions which could occur if funds revealed everything they were doing the day the trades were executed. However, if you see that volume is heavy and large block trades are being executed on days when the stock prices are increasing this can mean institutional buying. For the month of April, the Janus and Vanguard fund families were the clear cut leaders, both taking in over $3.3 bln in cash. Janus has a number of different funds, but their top funds tend to invest in large cap high growth technology stocks which are leaders in their industries and have consistent earnings growth. You can believe that I breathed a sigh of relief when I checked the numbers for the week ending May 17. Finally, we got a strong inflow of approximately $7.9 billion in cash to equity funds. Just what the stock market doctor ordered! Over 51% of the money went into growth funds, and over 44% went into international global growth funds. Of course, this is just a start and we need to see it continue, but it is certainly a more optimistic indicator than the wimpy inflows we have been seeing lately. If this only manages to keep up, we could be off to the races again. Contact Support ***** Has the Fat Lady Started To Sing Yet? By Lynda Schuepp On Friday, the Nasdaq, S&P 500 and DJIA all were down on greater volume than the day before. This is one of O'Neil's criteria of a distribution day. It isn't until the generals fall that we can pick ourselves back up and start this bull market going again. Cisco, the darling of Wall Street, was one of the last stocks to fall during the 1998 correction. Cisco on Friday closed at $53.31, which was lower than it's low of April 14th. I did a scan on the S&P 100 and Nasdaq 100 (which includes all the Dow stocks) and found that the following stocks are at their lowest point for the last 50 days: WCOM, T, QCOM, PRD, NOVL, MSFT, MOLX, MCLD, IMNX, NTLI, HD, CSCO, CMCSK, CNXT, BEL and AAPL. CMCSK, MSFT, NOVL, T and WCOM are below their 250-day lows! The infantry is the first to fall, then the generals. Could this now be a signal of the end of the year 2000 correction? Only time and hindsight will tell. I, for one, am tired of the bleeding. I'm sick of discussions on CNBC trying to figure out if we are in a bear market. By the time those clowns do figure it out, we'll have been in a bull market for 3 months. Last week, I got so many emails asking for a system or which indicators I use that I decided to give you some information. I learned this at a seminar that I attended quite some time ago by a gentleman who has done pretty well trading OEX options. One of his criteria is an extreme intra-day tick reading in combination with a bullish candlestick pattern on the S&P 500. His criteria are an intra-day tick reading of -900 on the NYSE or lower and a second day with low readings (within 4 business days). The second day must have a tick reading of at least 70% of the first day AND must coincide with a bullish candlestick pattern. This combination constitutes a bottom. Guess what? This happened on 4/14! See the chart below. On April 14th, a low tick reading of -1229 was reached intra-day. The following business day(4/17), an intra-day tick reading of -1095 was reached. A reading of -860 would be needed (70% of -1229) so the reading of -1095 is even stronger. The candlestick pattern was a tweezer bottom and the candle was a piercing pattern (closed higher than mid-point of previous day). Both of these constitute bullish patterns. As you can now see with proper hindsight this was a bottom. What most people aren't sure of is whether we have to go lower still or not. Another indicator that I follow is the ARMS index. The ARMS index is also called TRIN. The formula for you "gotta know the nitty-gritty" is a simple fraction over a fraction. The top fraction is: Advancing Issues/Declining Issues. The bottom fraction is: Advancing Volume/Declining Volume. Don't worry, these numbers can be obtained from most charting services. Interpretation is as follows: a number less than .5 means that most volume is going into a narrow advancing leadership, which typically signifies a short-term top. An arms reading between 5 and 1.3 is balanced and therefore neutral as an indicator. An arms reading greater than 1.3 signifies a short-term bottom. Friday's TRIN was 1.7! Adding the TRIN (ARMS) readings for the past five days gives us even more insight. Readings near 4.5 or less are usually found near tops. On March 23rd the 5 day reading was 4.4, indicating a major high. On March 24th the reading was 4.5 and now we can see that was a high, confirmed by a Doji candlestick pattern, which is bearish. Readings of 6 or more are usually found near a major bottom. For instance, October '98 and April 14th saw 5-day TRIN readings of 8! The current 5-day reading as of Friday was 5.1! If Monday closes with a 1.4 or more, we would have yet another strong buy signal. Bottoms are typically re-tested and the April 14th bottom has been, only each of the tests is somewhat higher. Note a pennant is being formed, much like the one that was formed during February and March. This could be another good sign. Note on Friday we got an intraday tick reading of -981. I will be looking for a reading of -686 or lower (70% of first day) with a bullish candle to confirm this new bottom and then I think the worst will be over. I think the fat lady is about to sing, so I'm getting ready to leave this bear market behind. Remember, I am an extreme optimist and am probably looking too deeply to find a bottom. If I am right, I will be a heroine, if I'm wrong, call me a misguided analyst. Contact Support *************** TRADERS CORNER *************** Market Psychology, A Book to Read and Bearish Thoughts By Molly Evans In 1904, Ivan Pavlov, a Russian psychologist won the Nobel Prize for his discovery of the conditioned reflex in dogs. At the ringing of a bell, the dog's salivary glands wetted in response to the usual custom of receiving a piece of meat. After awhile, the dog would salivate upon hearing the bell no matter if the meat was coming or not. The dog had been psychologically programmed to expect his dinner at the sound of a bell. As you might imagine, this was quite a breakthrough in psychological science. The experiments have been validated in other ways too. One gives a mouse some cheese when it finds its way through a maze. The mouse memorizes the path to get there efficiently to collect his reward. However, the inquisitive scientist then begins to shock the mouse and still the mouse returns because he remembers that at one time he used to give cheese and maybe that will return. Now you know where I'm leading. We used to go to that great big slot machine known as the Nasdaq market, simply paid the price and then collected a nice monetary reward. But, market gyrations are direct results of human psychology. What made Yahoo worth $250/share on Jan 4, 2000? Now it's worth less than half of that. It didn't split, it didn't miss earnings nor did it have "accounting irregularities". A fifty basis point interest rate raise does affect it but not nearly as much as what the perceived effect does. The herd psychology has changed and the fallout of market sentiment is making us all seasick. We're still seeing the "buy the dip" mentality, hence, sucker rallies and headfakes. The mouse keeps going back for the cheese even though he's being shocked. There will be no bottom or at least no strong uptrend until the economy shows signs of slowing, the Fed is happy and investors feel the stock market is a safe haven for their money again. That's little consolation for traders of the market. We fancy ourselves smart enough to "read" the market by our technical analysis and to pull out fast ones as the market might allow. I'm sure some of you are doing quite well yet many of you have been quite humbled. This market isn't about making hay right now, it's all about surviving to trade another day, limiting losses and learning. The brokerage commercials are starting to ring pretty hollow now whereas they once amused and made us all feel gooey about doing our own financial planning and trading online. Fabulous riches, empowerment, putting fatcat brokers in their place and self destiny are the themes of these advertisements. Somehow that just doesn't seem as wonderful as it did just a couple of months ago. I'm not advocating that you quit trading all together. I'm just warning that it's buyer beware. You all know that. I decided about four or five weeks ago to park some money into far out MSFT calls. MSFT was at about $67 yet holding strong support at $65. Safe place to park some money, right? Ha! What a joke. MSFT is still above 65 but my calls are down 30%. Options are wasting time bombs and nothing is safe or sacred in this market. I was asked just this morning, why, if options are designed to expire worthless to the beholden, do people utilize this method of investment? Ahh! What a terrific question. It's because an option player is the type of person who isn't afraid to risk in anticipation of the higher rewards that options can return to us. It would be interesting to see a group psychological profile of option traders as opposed to mainstream buy and hold investors. We're the ones who embrace the challenge of outwitting the professionals at their own games and strive to master the many complicated aspects of market analysis, money management and trading. You've got to love the idea to make it all work for you. It takes study, discipline and time to be successful at this. No one promised that it was easy. We just had a powerful bull market that lulled many an unsuspecting victim to the trough. Vegas does it too. The house doesn't win every time but it slowly eats at your capital if you're not paying attention. It's psychological warfare out here in the marketplace. You know what the cruelest part of all this is? It's that our rocket ride to higher wealth isn't likely to return anytime soon. Yes, I suppose that until the last person out there stops buying all the dips we'll still have the rallies and bear traps but an 80% gain on the Nasdaq year again? Nah. I picked up a terrific book about all this the other day. Robert Shiller's "Irrational Exuberance" is a must read. Now let me temper my comments here. If you read this book, you'll be loading your portfolio with all put plays and I don't think you should do that exactly. However, Mr. Shiller makes some powerful and convincing arguments about where our markets are headed. Perhaps you should read Harry Dent's "Roaring 2000s" to counter the emotion of reading this opinion. What I found fascinating was Shiller's painstaking research on the history of the American markets. There has been no price escalation of the markets like what we have witnessed in our own markets in the last ten years. There was a runup in prices throughout the 1920s and we all know how that ended in 1929. No, I'm not sounding the foghorn here. I know this is a hot spot for many people to compare the 90s to the 20s. Let me present his evidence though. In the 1920s, a new technological revolution was being born. The radio was developed in 1926, the automobile was on the street for private use, phones were invented, airplanes were in the air and the chain store was conceptualized. There had been no bear market in over eight years and people were crazy about the market. There's a famous story that Joseph Kennedy knew it was time to get out of the market when the boy shining his shoes started talking to him about stocks and which he should buy. According to Shiller, there was a quadrupling of real earnings for companies from 1921 - 1926. The price to earnings ratio (PE)is the objective measurement of a company's ability to produce earnings in relation to the price of their stock. It's a yardstick and throughout 1999 as it presumably was back in the late 1920s, the PE ratio didn't matter. Shiller has a great chart in chapter one detailing the enormous spikes in PE ratio for the market in the last 100 plus years. He was so kind as to grant permission for it's duplication here. I'm scared. How about you? Shiller calmly explains this with these words, "In the latest data on earnings, earnings are quite high in comparison with the Graham and Dodd measure of long-run earnings, but nothing here is startlingly out of the ordinary. What is extraordinary today is the behavior of price, not earnings." For much of the last year, there was the omission of fundamental speak by the media. The "PE doesn't matter" camp is dead wrong. Old economy vs new economy chatter and media hype drove this market to unprecedented levels and deep down, we all know the market is very expensive. The coming months will tell us all just how uncomfortable we are with that fact. What we write here is in no way the conventional thinking of the OIN staff. The views in individual author's commentaries are their own. I still hold longs and shorts but my eyes are wide open. Good luck to you all. Contact Support ************* DAILY RESULTS ************* Index Last Week Dow 10626.85 17.41 Nasdaq 3390.40 -138.65 $OEX 752.95 -8.72 $SPX 1406.95 -14.01 $RUT 479.70 -11.24 $TRAN 2742.00 -132.02 $VIX 28.77 -1.23 Calls Week SDLI 196.00 22.00 New, a rapidly growing market AFFX 154.50 14.28 The big swings continue for Biotechs PDLI 132.63 13.19 Skillful, volatility lovers only UNH 76.38 5.00 New coverage and new interest ABT 41.56 4.56 New, technical breakout over $40 IMCL 96.75 4.38 The Biotech sector may be back ANDW 32.88 3.88 Pulled back, but held support at $32 AMCC 101.63 0.31 Dropped, support is starting to thin PLXS 80.50 -0.50 Split candidate with momentum FLEX 51.19 -2.06 Dropped, weak volume = no movement FAST 66.88 -2.50 Investors turning bullish on Retail SEPR 99.75 -2.50 Annual shareholder meeting this week BVSN 42.75 -3.00 Dropped, breakdown instead of breakout DNA 126.00 -3.00 Held its own late in the week CDWC 115.00 -3.25 We sense a split announcement coming JDSU 82.00 -4.00 Dropped, CIEN ruined the Fiber-optics ALTR 79.81 -4.25 Dropped, head-fake lured us in GLW 182.44 -5.25 Dropped, CIEN's big drop killed this one SEBL 123.25 -5.75 Typically, one of the first to rebound RMBS 173.75 -15.19 Shareholder meeting on Tuesday Puts HLIT 46.13 -17.75 More concerns that qrowth will slow NTLI 54.75 -17.63 Falling with the rest of the Telecom ANAD 44.25 -14.00 New, fundamental issues related to ERICY OPTV 51.81 -12.81 Concerns about the pending merger INCY 57.75 -11.00 Giving away genome research for free?? NTOP 31.13 -9.13 New, trouble brewing with ISP access AZPN 22.38 -6.81 It doesn't get much uglier than this FDRY 65.50 -2.63 Continues to dive to lower levels CMRC 44.00 -0.38 Dropped, been stubborn about falling STOCKS ADDED TO THE PICK LIST ***************************** Calls ABT - Abbott Labs SDLI - SDL Inc. Puts NTOP - Net2phone ANAD - Anadigics *************************** 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 GLW $182.44 (-5.25) We had a short and sad run with GLW. With the sharp early morning sell-off, and broad tech sector weakness Friday, you should have avoided entry into the GLW play. We inaccurately reported that JDSU reported earnings Thursday and guided analysts to a higher growth rate which in turn gave GLW a boost. JDSU did guide analysts to a higher growth Thursday, but did not report earnings. We apologize if this caused any confusion. Though the fiber-optic sector holds great potential and high growth, the current market environment is too harsh to continue to play GLW. When Wall Street wakes up and sees the light, we may revisit GLW, until then we'll wait. Also, CIEN had traded up initially after-hours based on a strong earnings report, but instead of lifting the sector, CIEN lost over $20 on Friday. This killed the GLW play before it even got started. FLEX $51.19 (-2.06) Our rebound play in FLEX ran flat last week, culminating with a gap down Friday morning by $1. What's disconcerting about the sell-off Friday is that it came on extremely heavy volume. Traders exchanged over 1.5 times the ADV during Friday's decline. That is quite concerning considering the light trading in the broader market. The heavy selling suggests that institutions are unloading the stock after the rebound last week. FLEX might have also been hurt by the options expiration Friday. Traders may have sold FLEX lower considering the large amount of open interest in May contracts. Due to the heavy selling its time to leave and flex our capital elsewhere. BVSN $42.75 (-3.00) Once again, no volume equals no breakout. In fact, BVSN suffered a breakdown rather than a breakout by falling below $46, its last higher low that kept the ascending wedge in tact. Not even Thursday's upgrades to Buy by Southwest Securities and First Union could keep BVSN afloat. While solid support at $40 could give BVSN a bounce from here, you may want to exit on that strength since the basis for the play (ascending wedge) has evaporated. ALTR $79.81 (-4.25) ALTR failed to make any attempt to rise at least back to near-term support at $87 and $88. Conversely the share price moved lower along with the Philadelphia semiconductor index, which closed at 950.24. ALTR's current level is well below the intersecting 5 and 10 DMAs and is now sitting on bottom support. Since this play was based purely on a recovery and the future possibility of a split, we've decided to move on in consideration of the market environment. The bright light at the end of the tunnel is for the BoD to announce a stock dividend, but until then time and money can be better used elsewhere. AMCC $101.63 (+0.31) Since we added AMCC, we've seen some nice spikes in the share price with rallying market conditions and positive moves in the sector. Although with the tech sector once again getting sliced and diced, it's time to exit this play. Overall AMCC managed to sustain itself fairly well with the market gyrations. At the moment however it's perched precariously near the 10-dma ($101.58), so if you have open positions set the stops. In a correction AMCC could stumble as low as $85-$90 and you don't want to get hung out to dry. JDSU $82.00 (-4.00) A market with little or no leadership makes for the going a bit rough for investors wanting to participate. The same may be said for JDSU, as the company announced this week that Kevin Kalkhoven, its CEO and co-chairman was leaving. He will be replaced by Jozef Straus, who has been the president and COO. Kalkhoven's departure was termed a "retirement". Whether investors decided to sell on the news or JDSU simply sold off in sympathy with the broad markets, we really aren't sure. As the weekend approached the selling picked up, which not a good sign for our play. For traders wanting to see if JDSU will bounce or if the $80 area will once again provide support feel free to hang on. At this point under the current market conditions we would be a bit suspicious of a bounce that's not accompanied by strong volume and an overall change in sentiment. For now we will put JDSU back on the shelf, and look for other tools to do the job. PUTS CMRC $44.00 (-0.38) In light of the persistent NASDAQ weakness the past 3 days, CMRC has had rock-solid support at $41. Buying interest picked up today, posting the highest volume day (actually above the ADV) since May 10th. Unfortunately, this is a put play and that is not the kind of action we are looking for. CMRC stubbornly refuses to revisit the lows posted in mid-April, and with volume picking up, the stock looks like it is forming a solid bottom. We had a couple opportunities to profit as CMRC rolled over near its 10-dma, but it looks like the action has just about dried up. We'll take this opportunity to pack up our gear and go look for a new fishing hole. STOCKS WITH UPCOMING SPLITS **************************** We don't list all splits available, only those we feel may have play possibilities. Symbol - Stock Splits/Date 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 KEM - KEMET 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 CPN - Calpine Corp. 2:1 06-08-00 ex-date 06-09 CAKE - Cheesecake Fact. 3:2 06-08-00 ex-date 06-09 VSH - Vishay Intertech 3:2 06-09-00 ex-date 06-12 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 HC _ Hanover Comp. 2:1 06-13-00 ex-date 06-14 RHI - Robert Halg Intl 2:1 06-12-00 ex-date 06-13 RMBS - Rambus 4:1 06-14-00 ex-date 06-15 IFIN - Investors Fin. 2:1 06-15-00 ex-date 06-16 CYBE - CyberOptics 3:2 06-15-00 ex-date 06-16 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 RHB - RehabCare Grp. 2:1 06-19-00 ex-date 06-20 MTZ - MasTec Inc. 3:2 06-19-00 ex-date 06-20 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 NVDA - NVIDIA Corp. 2:1 06-26-00 ex-date 06-27 TQNT - TriQuint Semi. 2:1 07-11-00 ex-date 07-12 XETA - Xeta Corp 2:1 07-17-00 ex-date 07-18 TBL - Timberland Comp. 2:1 07-17-00 ex-date 07-18 TIF - Tiffany and Co. 2:1 07-20-00 ex-date 07-21 INTC - Intel Corp. 2:1 07-28-00 ex-date 07-31 AIG - American Intl. 3:2 07-28-00 ex-date 07-31 POS - Catalina Mktg. 3:1 08-17-00 ex-date 08-18 For a complete list of all the coming splits check out the "split calendar" on the side of the online edition newsletter page. ******************** THE PLAYS OF THE DAY ******************** With all the great plays each week we can never decide on just one so take your pick. Call plays of the day: ********************** SEPR - Sepracor Inc. $99.75 (-2.50) See details in sector list Chart = /charts/charts.asp?symbol=SEPR **** RMBS - Rambus Inc. $173.75 (-15.19) See details in sector list Chart = /charts/charts.asp?symbol=RMBS Put play of the day: ******************** AZPN - Aspen Technology $22.38 (-6.81) See details in sector list Chart = /charts/charts.asp?symbol=AZPN ************* 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 5-21-2000 Sunday 3 of 5 ********** CALL PLAYS ********** ******** HARDWARE ******** CDWC - CDW Computer Centers $115.00 (-3.25)(+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. After battling to a virtual standstill for the first half of the week, the bears finally extracted their pound of flesh from the bulls. Beginning in the last 10 minutes of Thursday's session and continuing with Friday's open, CDWC quickly lost as much as $9, giving us a nice entry point as the price solidified near $109. This is a solid support level and buyers ruled the remainder of the day as the stock gradually recovered, closing above the $112-114 support area. In light of the continued sell-off in the broad markets, the resurgence in CDWC is encouraging and is likely due to anticipation of a potential split announcement next Wednesday (see news below). The strong move over recent weeks is likely due to the impressive earnings posted on April 24th. Shining like a beacon in the night, CDWC thrilled investors by posting its 27th consecutive quarter of sequential sales growth, with 60% growth in net sales, and a 79% increase in net income. That news has likely given the stock all the fuel it can, and investors are now focusing on the technical strength and the pending Shareholder meeting. Given the turmoil in the broad markets, CDWC could very well retest support before heading higher. Once volume picks up and confirms the bounce, feel free to jump aboard what has now become a short-term play. The good news is the Annual Shareholder Meeting on May 24th. The bad news is there are only 3 days left to trade CDWC before this event. 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=15 at $12.25 SL=9.00 BUY CALL JUN-115*DWQ-FC OI=35 at $ 9.88 SL=7.00 BUY CALL JUN-120 DWQ-FD OI=15 at $ 7.38 SL=5.00 BUY CALL JUL-120 DWQ-GD OI= 3 at $11.75 SL=8.75 BUY CALL JUL-125 DWQ-GE OI=18 at $ 9.63 SL=6.75 SELL PUT JUN-105 DWQ-RA OI=10 at $ 5.63 SL=7.75 (See risks of selling puts in play legend) Picked on May 11th at $118.75 P/E = 44 Change since picked -3.75 52-week high=$126.00 Analysts Ratings 4-2-0-0-0 52-week low =$ 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 = 337 K /charts/charts.asp?symbol=CDWC ************* SEMICONDUCTOR ************* PLXS - Plexus Corp $80.50 (-0.50)(+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. We initiated coverage on PLXS last week in anticipation of a momentum run coupled with its prospects as a split candidate. After reporting stellar earnings and a solid forecast on April 18th, investors began taking more notice of PLXS. The share price got the boost it needed to climb over the historical split-levels of $50-$55. As it stands now, the company has 60 mln shares authorized and only 17.7 mln issued so there's plenty for a stock dividend. We're not sure when to expect a split declaration, but if the uptrend continues there is a chance of an announcement preceding the July 19th earnings release. If this turns out to be the case, we're in an ideal position for a longer-term play. But getting back to the present, PLXS attention first came to our attention last Friday, May 12th, when it toppled the prevailing resistance at $80. The volume levels had also been building that week with activity at two or three times the ADV. The analysts too were cheering for PLXS. Three leading firms gave PLXS Buy or Strong buy ratings. On Monday it was a "Bulls Eye" with early morning entries off firmer support of $75-$78 followed by heights reaching above the next level of resistance ($90). On Tuesday morning, PLXS set another all-time high peaking at $91.50 on almost double the normal volume. The rest of the week PLXS experienced some back- filling and on Friday, PLXS took a cut with rest of the tech sector. So what's a trader to do in this predicament? Wait! This may be somewhat disheartening for those with itchy trigger fingers, but at this point PLXS is sitting at its old resistance level, which also happens to be in the proximity of the 10-dma ($81.99). If our split-candidate's momentum is going to re- ignite it should bounce up from here and move back through the supportive 5-dma ($85.84). The uptrend should be backed by an intensifying trading volume. Recall that support is firmer at $75-$78, but this would be a more risky entry in light of the anxiety running amongst the tech investors. No company news to report this week. BUY CALL JUN-70 QUA-FN OI=303 at $17.25 SL=12.25 BUY CALL JUN-75*QUA-FO OI= 28 at $13.75 SL=10.25 BUY CALL JUN-80 QUA-FP OI= 35 at $ 7.88 SL= 5.75 BUY CALL JUN-85 QUA-FQ OI= 51 at $ 5.88 SL= 4.00 Picked on May 14th at $81.00 P/E = 59 Change since picked -0.50 52-week high=$91.50 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 = 262 K /charts/charts.asp?symbol=PLXS RMBS - Rambus Inc. $173.75 (-15.19)(-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 the late day selling on Thursday didn't bode well for RMBS going into Friday. Unfortunately we were right. RMBS lost another 6.6% Friday and closed in red ink for the third day in a row. The lack of any solid buy orders keeps exerting pressure on RMBS and the tech stocks. Most of what we see happening is not so much a problem with RMBS, as a lack of any reason to buy in general. The point here is with the overall market sentiment in its present condition, the way we play the markets from the long side changes. Friday afternoon as Rambus approached support near $170, the sellers took a break. Traders brave enough to take a stand, bid the price back up about $8. That move did provide some folks with a decent day trade. We are by no means advocating that as the way to "play" the markets, as trying to catch a falling knife, obviously can prove hazardous. For traders with the time and resolve to approach the markets in that manner, RMBS and others can provide profitable trading opportunities. For others it's a test of patience. It will take either company news, or improved market sentiment to turn things around. Intel was not much help this week, as it met Wednesday with memory chip makers to discuss the Rambus's controversial high-speed memory technology. Intel has been a big proponent of the memory. However others have complained about the cost and the difficulty of implementing the technology. RMBS memory sells for up to three times the cost of traditional memory. Memory makers say they are charging what they need to make a profit. The chance of RMBS technology becoming the standard any time soon, seems to be on hold as well. At this point the next level of support comes into play near $164, followed up at $150. A move back through $180 accompanied by better volume, as well as another bounce off the $170 area may provide a good entry point for new plays. Also, RMBS has a shareholder meeting on Tuesday to approve the 4:1 split. This should keep investors interested this week. Analyst Drew Peck of SG Cowen, said today the Intel problem with faulty chipsets may be just the "tip of the iceberg." Peck said it's likely that Intel will replace the faulty motherboards with new ones containing Rambus memory, boosting the cost to Intel. BUY CALL JUN-160 BYQ-FL OI= 42 at $31.25 SL=22.50 BUY CALL JUN-170 BYQ-FN OI= 48 at $24.50 SL=17.75 BUY CALL JUN-180*BYQ-FP OI=110 at $20.88 SL=15.00 BUY CALL AUG-175 BYQ-HO OI=167 at $40.75 SL=29.50 SELL PUT JUN-170 BYQ-RN OI= 71 at $18.38 SL=25.00 (See risks of selling puts in play legend) Picked on May 14th at $188.94 PE = N/A Change since picked -15.19 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 = 3.64 mln /charts/charts.asp?symbol=RMBS SDLI - SDL Incorporated $196.00 (+22.00) SDL's products power the transmission of data, voice and Internet information over fiber optic networks to meet the needs of telecommunications, DWDM, cable television and satellite communications applications. They enable customers to meet the bandwidth needs of increasing Internet, data, video and voice traffic by expanding their fiber optic communications networks more quickly and efficiently than would be possible using conventional electronic and optical technologies. SDL's optical products also serve a variety of non- communications applications, including materials processing and printing. The long and short-term reasons that make SDLI attractive are certainly in place. The market has had on ongoing love affair with SDLI and many of its peers in the fiber-optics industry. Until Friday, SDL had faired pretty well for the week. Even then it managed a gain of 12.6%. The strong move up the ladder on Wednesday came with over 6.1 million shares traded. So what makes SDL so special? They are fast becoming a leader in their industry, which includes the likes of JDS Uniphase, E-Tek Dynamics and Corning. None of these stocks are cheap by most investors standards. The ever increasing need for bandwidth expansion, along with continued consolidation in the industry seems to have kept SDLI and others at the top of investors lists. Speaking of consolidation, last week SDLI announced it was buying Photonic Integration Research for $1.8 billion in cash and stock. Company Chairman and CEO Don Scifres said, "We view it as a strategic acquisition in a very rapidly growing market, and very complimentary to our present business." SDL plans to use a silicon chip made by Photonic that allows for information to be channeled through a single fiber. The chip would replace several components inside SDL products. The following day no less than six brokerages firms came out with Buy and Strong Buy recommendations or reiterations on SDLI. Since that time SDLI has climbed from the $155 area to a high last Tuesday at $217. Although some technical indicators suggest a continued pullback or consolidation for our new play, we believe this one's worth keeping an eye on. If the sell button continues to be the one most frequently pushed early next week, and SDLI moves lower, support can be found at $190, $185 and $171. We realize that sounds like a broad range for support, however this one can obviously be a bit volatile. A move back through the $200 level with better than average volume could indicate the up trend has resumed. If we do get a bounce early in the week, be prepared to take a profit. Going into a holiday weekend the liquidity will only get worse as the week progresses. The recent strength in SDLI has also come on the heels better than expected earnings and strong top-line growth. This past quarter SDI beat street estimates by 37%. The company has beat the analysts estimates and the so called "whisper" number for some time now. Either the company guidance needs to change or the analysts need to sharpen their pencil, but the bottom line still shows solid growth, which is what Wall Street seems to be looking for. BUY CALL JUN-180*QZL-FP OI=154 at $31.88 SL=23.00 BUY CALL JUN-190 QZL-FR OI= 96 at $26.00 SL=19.00 BUY CALL JUN-200 QZL-FT OI=388 at $21.63 SL=15.75 BUY CALL SEP-205 QZL-IA OI=247 at $43.88 SL=32.00 SELL PUT JUN-190 QZL-RR OI= 43 at $17.75 SL=24.50 (See risks of selling puts in play legend) Picked on May 21st at $196.00 P/E = 390 Change since picked +0.00 52 week high=$244.75 Analysts Ratings 14-9-0-0-0 52 week low =$ 21.63 Last earnings 04/00 est= 0.16 actual= 0.22 Next earnings 07-19 est= 0.22 versus= 0.09 Average daily volume = 2.39 mln /charts/charts.asp?symbol=SDLI ********* SOFTWARE ********* SEBL - Siebel Systems $123.25 (-5.75)(-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. Ouch! That wasn't any fun. Recall that SEBL closed Thursday right at support of $130 from where we expected a rebound. Unfortunately, it fell below the next level of support at $127 and continued down from there on Friday. The technical picture doesn't look so hot since that ascending wedge and breakout pattern for which we'd been playing SEBL was destroyed on Friday. So why keep it? We're expecting a market rebound from the bottom of the trading range on Monday or Tuesday. Since this is a light economic reporting week and SEBL has lately been one of the first to rebound with the market, we think the upside potential is pretty good. Despite Friday's whacking, volume remained low indicating buyers had gone home, but sellers weren't lining up either. The next level of support is $122.50 and we're not far off. $130 is the level of heavy resistance (again). Consider dips to $120 as a buying opportunity, but wait for the bounce. We don't want to be in the position of holding SEBL if it falls to $119, $118, etc. on continued market weakness. For the more conservative, you may want to wait for a move over $127 or even a move back over $130 backed by strong volume before taking a position. Just remember that without volume, moves north of $130 probably aren't as sustainable. On another note, SEBL is also a split candidate since it has greatly exceeded its last August split announcement price of roughly $70. There is a shareholder meeting scheduled for June 7th, from which an announcement could come. Analysts were quiet on SEBL this week, but the Buy and Strong Buy ratings from mid-April still hold along with $185 price targets. In the news, SEBL announced the completion of the purchase of OpenSite Technologies, a web-based pricing solutions provider for roughly $500 mln. BUY CALL JUN-120*SGW-FD OI=751 at $13.13 SL= 9.75 BUY CALL JUN-125 SGW-FE OI=572 at $10.50 SL= 7.50 BUY CALL JUN-130 SGW-FF OI=749 at $ 9.38 SL= 6.50 BUY CALL AUG-125 SGW-HE OI=227 at $19.00 SL=13.75 BUY CALL AUG-130 SGW-HF OI=806 at $17.00 SL=12.25 SELL PUT JUN-120 SGW-RD OI=129 at $ 9.13 SL=12.25 (See risks of selling puts in play legend) Picked on May 14th at $129.00 P/E = 200 Change since picked -5.75 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 = 4.67 mln /charts/charts.asp?symbol=SEBL ******* BIOTECH ******* AFFX - Affymetrix Inc. $154.50 (+14.28)(-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. Range-bound is not normally a word we like to use in reference to a call play, but it is hard to be unhappy with a $30+ range. One look at the weekly change numbers above is all that is necessary to see that opportunities for profit exist, even on a stock that has only tacked on $4.41 since we picked it on May 4th. 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. The most recent quarter saw a 115% year-over-year increase in revenues, largely due to strong sales of the company's GeneChip probe arrays. In this case market volatility is combining with the strength of AFFX to give us a large and eminently tradable range. The mid-week surge to the low $160's expanded the envelope a bit, but $130-160 still describes AFFX's trading range, leaving us with plenty of opportunities for profit. Support firmed near $135 on Monday and then it was off to the top of the range, where volume waned and profit-taking appeared. After pulling back to near-term support at $148, the stock bounced and moved as high as $159 before being pulled down by the broad market weakness near the close. Volume remains weak, as there doesn't seem to be any conviction in either the bull or bear camp. Once volume returns, the move could be explosive, but at this point there is no indication of whether it will be up or down. For now, take advantage of the range we have at hand, and trade smart by taking small profits often. Consider new entries as AFFX bounces at support, and then exit when the sellers reappear near resistance. The newswires have been virtually silent, with the latest news on AFFX dating all the way back to the first of May. Gene Logic Inc., a leading provider of genomic information, announced 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. BUY CALL JUN-150*FIQ-FZ OI=279 at $24.13 SL=18.00 BUY CALL JUN-155 FUE-FK OI= 0 at $21.25 SL=16.00 BUY CALL JUN-165 FUE-FM OI= 15 at $16.13 SL=11.50 BUY CALL AUG-160 FUE-HL OI= 11 at $32.88 SL=24.50 BUY CALL AUG-165 FUE-HM OI= 6 at $31.38 SL=23.50 SELL PUT JUN-130 FIQ-RF OI= 46 at $ 8.00 SL=10.75 (See risks of selling puts in play legend) Picked on May 4th at $150.09 P/E = N/A Change since picked +4.41 52-week high=$327.00 Analysts Ratings 2-6-2-0-0 52-week low =$ 34.00 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 SEPR - Sepracor Inc. $99.75 (-2.50)(-1.00)(+11.25) Sepracor develops and commercializes new, patented forms of existing pharmaceuticals by purging them of nonessential molecules. The company's products can reduce side effects, provide new uses, and improve safety, performance, and dosage. Sepracor focuses its efforts on gastroenterology, neurology, psychiatry, respiratory care, and urology. The company is also developing its own new drugs to treat infectious diseases and conditions of the central nervous system. Oh yes, the allure and luster of the almighty biotechs. From an everyday, main street perspective, the Biotech companies of the 21st century hold great promise. The thought of extending life-spans, the curing of incurable diseases, and the general improvement of everyday life has the public anxiously awaiting new products from the proverbial pipeline. As for Wall Street, the Biotechs have taken a bumpy, roller coaster ride. Biotechs shined brightly earlier in the year when many stocks sailed to unimaginable heights. Now that the volatility has subsided, Wall Street has focused on the companies with a deep line of products, a viable business model, and high potential for profit. It just so happens that SEPR meets the aforementioned criteria. Which could explain the stock's impressive showing over the past month. Furthermore, while the NASDAQ has fallen nearly 35% from its Spring high, the AMEX Biotech Index ($BTK) has managed to hold on to its gains with stocks such as SEPR leading the way. Despite the minimal profit taking seen late last week, SEPR remains within its ascending channel. We're looking for further profit potential from SEPR noting the strong institutional sponsorship and exciting developments in the biotech arena. Within the next month, we can expect to see the first draft of the recently completed human genome. This Biotech breakthrough could provide a catalyst for the sector. Consider an entry into the play at current levels if momentum returns and carries SEPR back above the ever-important $100 level. Or wait for SEPR to clear resistance at $104 before entering the play. An event that may bring momentum back to our SEPR play is the company's upcoming Annual Shareholder Meeting, scheduled for May 24th. Investors will vote on the proposal to increase the number of authorized shares from 140 mln to 240 mln. The announcement of a split could add a little fuel to SEPR's fire. BUY CALL JUN- 95 ERU-FS OI= 35 at $13.50 SL=10.00 BUY CALL JUN-100*ERU-FT OI=211 at $10.88 SL= 8.25 BUY CALL JUN-105 ERU-FA OI=166 at $ 9.13 SL= 6.25 BUY CALL JUL-105 ERU-GA OI=125 at $13.00 SL= 9.75 SELL PUT JUN- 95 ERU-RS OI=160 at $ 7.13 SL=10.00 (See risks of selling puts in play legend) Picked on May 7th at $103.25 P/E = N/A Change since picked -3.50 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 PDLI - Protein Design Labs, Inc. $132.63 (+13.19) 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. Volatile play ahead! For those who saw the introduction of this play on Thursday, please forgive the repeat. However, it's worth noting that 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. That's a lot to remember, so let's make it simple. In the Biotech sector, PDLI is about as volatile as they get, ranging from $52 on the April 4th sell-off to $152 on Thursday, then back as low as $128 yesterday. The play is based on a high volume breakout of the ascending wedge formed by higher lows and resistance at $125 last Tuesday. Even so, closing support at $130 held while PDLI closed just gnat's behind short of the 5-dma of $133. The 10-dma is providing backup support at $125. We think dips below $130 (but not lower than $125) are buyable. We'd like to see volume over the ADV return though. We'll chalk up Friday's volume shortfall to...well, Friday. One thing to be careful of on PDLI is the $2.50-$3.00 spreads in the option prices. Roughly translated, that means the stock needs to move up about $6 just to break even on an ATM strike. It also means that the first $5 loss in the stock will translate to roughly a $5 loss in the option price, so be careful. Again, skillful volatility lovers only. The big news on PDLI this week was their announcement 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. CIBC World Markets also reiterated their Strong Buy rating with a price target of $309. BUY CALL JUN-120*PQI-FU OI=501 at $25.88 SL=17.75 BUY CALL JUN-130 PQI-FW OI= 10 at $20.63 SL=15.00 BUY CALL JUN-140 PQI-FZ OI=346 at $16.88 SL=12.00 BUY CALL AUG-130 PQI-HW OI= 74 at $31.25 SL=21.50 BUY CALL AUG-140 PQI-HZ OI= 36 at $27.50 SL=19.50 SELL PUT JUN-100 PQI-RT OI= 22 at $ 4.13 SL= 6.25 (See risks of selling puts in play legend) Picked on May 18th at $131.03 P/E = N/A Change since picked +1.60 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 = 1.2 mln /charts/charts.asp?symbol=PDLI DNA - Genentech $126.00 (-3.00)(+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. A look at the chart really doesn't tell the whole story about what's going on inside this play. DNA lost 2.3% this week. The lack of liquidity and buyers in the markets have provided a rough road for many stocks at the NYSE and the Nasdaq. Genentech did find a few more bears lurking in the bushes at the opening bell on Friday. After dropping to support near $121 early in the session, buyers re-entered, bidding the price back over $131 late in the day, with strong volume behind the move. The last 15 minutes traders took profits going into the weekend with Genentech closing down $0.38 for the day. The significance here is that very few stocks saw that kind of buying interest at all on Friday. According to traders on the floor not only was there a lack of buy orders, but very few even wanting to bid on stocks. This is a definite plus for our play. Analysts and investors will be paying close attention to Genentech and the biotech stocks, as the Annual meeting of the American Society of Clinical Oncology got underway on Saturday. Genentech will be presenting research on vascular endothelial growth factor. Investors will focus particular attention to Phase II data on DNA's antiangiogenesis antibody anti-VEGF in treating relapsed metatstatic breast cancer patients. Those patients have cancer that has spread in the body. So how do we approach this play? The cancer conference goes through Tuesday. Any positive news to come out of the meeting could ignite a fire under Genentech, even if the broad market sentiment remains negative. If little news is presented, then a pullback may be in order since the recent buying seems to have been spurred by anticipation of an important announcement that could come out of this weekend's conference. DNA closed smack dab on support at $126. Resistance is overhead near $135, however if buyers show up in numbers, that will be the least of our worries. Genentech will also present data on Rituxan, another antibody, that's used to treat non-Hodgkin's lymphoma this weekend. Rituxan was developed by IDEC Pharmaceuticals. Several analysts said they expect no "major breakthroughs" this weekend, however with more therapies than ever before, a number of new approaches may bring more hope for patients suffering from the disease. BUY CALL JUN-120 DNA-FD OI= 54 at $14.88 SL=10.75 BUY CALL JUN-125 DNA-FE OI= 237 at $12.13 SL= 9.00 BUY CALL JUN-130*DNA-FF OI= 321 at $ 9.88 SL= 6.75 BUY CALL JUN-140 DNA-FH OI=2809 at $ 6.38 SL= 4.25 BUY CALL SEP-125 DNA-IE OI= 416 at $24.63 SL=17.75 SELL PUT JUN-120 DNA-RD OI=1017 at $ 7.63 SL=10.50 (See risks of selling puts in play legend) Picked on May 14th at $129.00 PE = N/A Change since picked -3.00 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 IMCL - ImClone Systems $96.75 (+4.38) 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. There's an old adage that says, "Hope Springs Eternal." For cancer patients and investors that is exactly what they "hope" will come out of the 36th Annual Meeting of the American Society of Clinical Oncology. The conference began Saturday and runs through Tuesday in New Orleans. Data on the latest advances in clinical cancer research will be presented at the conference, which is expected to highlight breakthroughs in breast, lung, kidney and stomach cancers. ImClone is expected to present compelling data on human trials of their experimental cancer treatment IMC225. IMC225 could win approval from the Food and Drug Administration as early as next year, according to company officials. Jim McCamant, an analyst with the Medical Technology Stock Letter, said "The ImClone data is a big deal." "If they do the job they are going to try and do, people will see that it is some of the most important work in cancer, treating cancer at the molecular level of the disease." As for our play, IMCL moved through an important technical level on Thursday. Friday, there was no follow-through buying as traders took profits, shaving 4.6% off the price of IMCL stock. The selling picked up in the last half-hour of the day which doesn't bode well for Monday. Although our new play gave back much of Thursday's gain on Friday, IMCL is still above its 10-dma at $93.53, with many of the technical indicators still pointing higher. However, as we said earlier, this play really isn't based on the technical picture, rather the anticipation of positive news, or events coming out of the cancer conference, which may draw attention to IMCL and the biotech sector. If the bears try have their way with Imclone, stand back and be patient. Support sits near $96 and $92. Traders may begin to buy on further advances, however it may take a breakout over $104, with strong volume, to signal a green light. ImClone reported earnings last Monday, and unfortunately the results came in well below analysts estimates. However, traders have a short memory as far as earnings when potential cancer breakthroughs are on the line, which may be the case for IMCL. While we choose to take this and other plays one day at a time, chat rooms and several analyst suggests IMCL could be on track to challenge its old high near $171. BUY CALL JUN- 90 QCI-FR OI=182 at $16.63 SL=12.00 BUY CALL JUN- 95*QCI-FS OI=349 at $14.25 SL=10.25 BUY CALL JUN-100 QCI-FT OI=392 at $12.13 SL= 9.25 BUY CALL AUG-100 QCI-HT OI=327 at $20.75 SL=15.00 SELL PUT JUN- 90 QCI-RR OI=358 at $ 8.38 SL=11.00 (See risks of selling puts in play legend) Picked on May 18th at $101.50 P/E = N/A Change since picked -4.75 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 = 912 K /charts/charts.asp?symbol=IMCL ********************************* 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. 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The Option Investor Newsletter 5-21-2000 Sunday 4 of 5 ***************** CALLS - CONTINUED ***************** ********** HEALTHCARE ********** UNH - United Healthcare Group $76.38 (+5.00) 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. Unlike many of its counterparts, UNH didn't get put in traction or suffer the typical post-earnings infirmity 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. Salomon Smith Barney applauded the company's success with an upgrade to Buy from Outperform. 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". The positive business outlook and upgrade clearly jump-started the stock's momentum. Coming off its lows of $60, UNH has steadily and consistently climbed to new heights. Standing alone it's a notable feat that UNH bucked all the market downdrafts of the past couple weeks; especially when you consider the wild gyrations. Yet we didn't consider it a call play until UNH made a move through April's formidable resistance of $70. Definitive confirmation came on Tuesday as UNH stepped into the limelight and set an all-time high at $77.50. By Thursday, it improved the record with a late-day crest to $78.56. UNH is managing to hold these higher share prices and with a sustaining market there's little doubt UNH has the potential to power higher. But as many traders have found out in these turbulent markets, there's never any guarantees. While all arrows point to more profits in the short-term, be patient. Look for upward moves off the current level and 5-dma ($75.75) before opening positions. If you're HIGH-RISK oriented and more aggressive, then dips to the 10-dma ($72.16) may be your entry choice. Keep in mind old resistance is at $70 and a return to this level should raise the red flags. This is purely a momentum play. On Tuesday the analyst firm, Chase H&Q, initiated new coverage on UNH. They started it with a Strong Buy rating and issued a $92 price target. In other news this week, UnitedHealth Group jointly introduced with Cole Managed Vision, the managed care division of Cole Corporation, new vision care services for AARP members that provide significant savings. Also in the company news arena, 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= 570 at $12.38 SL=9.25 BUY CALL JUN-70*UNH-FN OI=1676 at $ 8.38 SL=5.75 BUY CALL JUN-75 UNH-FO OI= 847 at $ 5.00 SL=3.00 BUY CALL JUN-80 UNH-FP OI= 80 at $ 2.75 SL=1.25 Picked on May 18th at $77.50 P/E = 22 Change since picked -1.13 52-week high=$78.56 Analysts Ratings 14-5-2-0-0 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 = 1.03 mln /charts/charts.asp?symbol=UNH ABT - Abbott Laboratories $41.56 (+4.56) Abbott Laboratories is one the leading healthcare products makers in the US. It operates five business segments: Pharmaceuticals, Diagnostics, Hospitals, Ross products, and its International division. More than 40% of sales is derived from the pharmaceuticals and hospital products and includes the drug Norvir, which treats HIV. Some well-known brands like Similac (infant formula) and Ensure (nutrition supplement) can be found on most supermarket shelves. The drug stocks are experiencing a healthy breakout and ABT is a top pick among investors. You can visually confirm this sentiment by taking a look at a one-week chart. The bullish breakout is unmistakable. On Thursday ABT advanced a significant 5.2%, or $2.00 leading the Amex Pharmaceutical Index ($DRG) to its own gain of nearly 1%. The sector's momentum continued to propel ABT higher still on Friday as the appetite for old economy stocks became more voracious. The trading activity was robust too with levels exceeding the ADV by 45% to 70%. ABT's convincing progress through historical resistance of $39 and $40 further promotes a solid outlook over the short- term. While this level may develop as a bouncing platform for entries into this momentum play on a pullback, we should see near-term support establish itself higher. Conservatively the first line of opposition to be tackled is at $42, then it's the 52-week record of $48.50 set in September 1999. For now confirm the trend and pick your entries carefully. It's important to pay attention to the drug sector's overall direction as well as ABT's individual behavior. If you're looking for some added protection, ABT it's a good candidate for stop losses since it doesn't experience wide intraday swings like the high-flying Internets. FDA approval is always good news for the drugmaker and its investors. On Monday Abbott Laboratories and SangStat, a Transplant company, announced the FDA approved Gengraf capsules, an immunosuppressant for the prevention of organ rejection in kidney, liver and heart transplants. The drug was also given an AB rating, which means the product is therapeutically equivalent to or interchangeable with a reference drug. In this case, the competing drug is Neoral marketed by Novartis. Sales of this class of drug are about $480 mln annually. It's expected the lower-cost of Abbott's version should result in a hearty piece of that lucrative pie. In other news, Abbott Laboratories held its Annual Shareholders' Meeting on April 28th. Chairman and CEO Miles D. White took the opportunity to review the company's business environment and future direction, as well as re- emphasize Abbott's commitment to science. BUY CALL JUN-35 ABT-FG OI= 56 at $7.00 SL=5.00 BUY CALL JUN-40*ABT-FH OI=1657 at $2.94 SL=1.50 BUY CALL JUN-45 ABT-FI OI= 659 at $0.75 SL=0.00 High Risk! BUY CALL AUG-40 ABT-HH OI=3260 at $4.50 SL=2.75 BUY CALL AUG-45 ABT-HI OI=1120 at $2.38 SL=1.25 Picked on May 21st at $41.56 P/E = 26 Change since picked +0.00 52-week high=$48.50 Analysts Ratings 10-8-5-0-0 52-week low =$29.25 Last earnings 03/00 est= 0.44 actual= 0.44 Next earnings 07-10 est= 0.44 versus= 0.42 Average Daily Volume = 3.75 mln /charts/charts.asp?symbol=ABT **** MISC **** ANDW - Andrew Corporation $32.88 (+3.88) 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. After last week's strong gains, ANDW was due for some consolidation. To its credit, the stock held support at $32, which is encouraging in light of the continued selling throughout the market. Volume continues to hold near double the daily average and most of the volume is coming on upward price moves. Carving up their own little slice of the broadband pie, ANDW really began getting investors' attention with their December 1999 acquisition of Conifer Corporation, a leading manufacturer of MMDS (Multichannel Multipoint Distribution Service). While the bulk of the tech sector corrected during the month of April, ANDW held up well, repeatedly finding support at the 100-dma. The current move really got under way a week ago when the stock punched through resistance at $30 on strong volume. Since then, strong volume has continued to propel the stock to new highs, and Thursday's intraday peak at $35.06 has defined the next resistance level. Support is coming from the ascending 5-dma ($32.88), which is precisely where the stock closed on Friday. As the NASDAQ continues to search for strength, ANDW could see more selling, and we would look at a pullback to the $30 support level as a great entry point. ANDW's momentum is being fueled by strong buying volume, which will be critical to the stock moving higher from here. Continued buying interest that pushes the price through resistance would be a good trigger for more conservative players to jump into the play. 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= 540 at $4.25 SL=2.50 BUY CALL JUN-35 AQN-FG OI= 136 at $1.69 SL=0.75 BUY CALL JUL-30*AQN-GF OI=2786 at $5.13 SL=3.00 BUY CALL JUL-35 AQN-GG OI=1721 at $2.88 SL=1.50 Picked on May 18th at $34.69 P/E = 46 Change Since Picked -1.81 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 = 1.20 mln /charts/charts.asp?symbol=ANDW FAST - Fastenal Company $66.88 (-2.50)(+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. FAST has one of the highest relative strength ratings in the retail sector. The company has an unparalleled earnings growth history. In fact, FAST is on track to grow earnings over 25% in the next five years. Despite the threat of rising interest rates, the stock has managed to climb higher since early March. All the while, the broader market has headed south. While the long-term outlook remains rosy for FAST, the short-term prospects are still worth considering. As traders continue to rotate from the highly valued tech sector into stocks with strong fundamentals, FAST stands to benefit. But, not even high earnings growth nor impressive relative strength could keep FAST afloat Friday. The last three days we have seen the retail sector take a hit due to fear or rising interest rates. Many stocks in the group slid into the weekend as the S&P Retail Index lost 1.1%. Although FAST did stumble a bit late last week, we're looking for the stock to continue its climb higher. Over the past two months, FAST has dipped below its 10-dma on three occasions, last Friday marks the fourth. What's more, every time FAST has fallen beneath that level it has smartly rebounded to continue climbing higher. We're looking for the same pattern to repeat. Also worth noting, every time FAST edged below its 10-day the volume has all but disappeared. We've seen volume drastically dry-up in the past three trading sessions. In fact, traders exchanged a mere 100 K shares last Friday, versus an ADV of 366 K. Watch for a quick rebound from current levels, or wait for FAST to move back above its 10-dma, currently at $68. Watch the volume closely to confirm that the buyer's have returned from their strike and FAST has resumed its ascent. In the face of fears over rising interest rates, investors have turned bullish on the retail sector in the past month. Several stocks such as KSS, WMT, and RAD, along with our FAST play, have managed substantial gains since the beginning of May. Watch the action in the retail group to confirm a rally in FAST. BUY CALL JUN-65*FQA-FM OI= 18 at $5.50 SL=3.50 BUY CALL JUN-70 FQA-FN OI=180 at $3.13 SL=1.50 BUY CALL JUN-75 FQA-FO OI= 11 at $1.94 SL=1.00 High Risk! BUY CALL AUG-70 FQA-HN OI= 50 at $5.88 SL=4.00 Picked on May 14th at $69.38 P/E = 36 Change since picked -2.50 52-week high=$73.31 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 = 366 K /charts/charts.asp?symbol=FAST ***** LEAPS ***** By Mark Phillips leaps@OptionInvestor.com Seems like we've been here before. With the NASDAQ approaching 3300 for the fourth time in six weeks, we desperately need to see volume pick up. Unfortunately, there doesn't seem to be a catalyst we can point to; April earnings are over, and even getting past the Fed meeting failed to provide an upside bias. Continued inflation/interest rate rhetoric is keeping the buyers in check and as a result, the trading range on all the major indices is getting narrower. The continued pressure is keeping even our strongest plays from moving higher, and we are seeing major support levels being challenged. CSCO is approaching its 200-dma, QCOM violated its 200-dma and is right at major support dating back to November,1999. Selecting the right play is more critical than ever; investors are being rewarded for waiting for the right entry point, and punished for chasing stocks higher. LEAPS are more forgiving of less-than-perfect entries than short-term options, indiscriminately buying and hoping is still a recipe for capital depreciation. Except for Monday, when the markets rallied ahead of the FOMC meeting, the VIX is gradually trending higher, closing the week at 28.77. In last year's stock market, I would say we are approaching a good entry point (based on the VIX), but with the lack of consistent strength, it is becoming increasingly difficult to pick individual entry points based on market-wide indicators. We could very well be range-bound until the next earnings cycle gives the bulls a reason to buy, so pick your plays AND your entry points very carefully. Don't get emotionally attached to your positions, and if they move against you, cut your losses and wait for a better play. Cash is still king, and we want to be able to take advantage of the move when sentiment improves. Administrative Note: Many of you have asked about the addition of 2003 LEAPS and when they will be available. According to CBOE, they should be listed starting on Monday. That's the easy part. As the next year's LEAPS get added, the front year (2001) LEAPS become regular call options and the exchange changes the symbols. Unfortunately, this is not as smooth a process as we might hope. The symbol change began last Monday, and you will see the new symbols reflected in SOME of our Current Plays. Even though trading has ceased on the old symbols, not all of our plays have been issued new symbols yet. As a result, the prices listed for NT, CY, NSM, and VSTR 2001 LEAPS do not reflect Friday's closing price and you will notice some anomalies in the Current Price and Return columns of the Current Plays. This situation should be rectified by early next week and we will correct the Play List by next week. Current Plays SYMBOL SINCE LEAPS SYMBOL PICKED CURRENT RETURN EMC 11/07/99 JAN-2001 $ 80 EMB-AP $15.38 $49.88 224.32% JAN-2002 $ 90 WUE-AR $19.00 $52.00 173.68% IBM 11/07/99 JAN-2001 $100 IBM-AT $13.63 $20.13 47.69% JAN-2002 $110 WIB-AB $16.50 $26.13 58.36% CSCO 11/14/99 JAN-2001 $ 40 CYQ-AH $ 9.56 $19.38 102.72% JAN-2002 $ 45 WIV-AI $11.00 $22.88 108.00% NT 11/28/99 JAN-2001 $37.5 ZOO-AU $11.13 $23.13 107.82% JAN-2002 $37.5 WNT-AU $15.13 $26.25 73.50% VOD 12/05/99 JAN-2001 $ 50 VOD-AJ $10.75 $ 3.63 -66.23% JAN-2002 $ 50 WHV-AJ $15.00 $ 7.75 -48.33% TXN 12/12/99 JAN-2001 $110 TNZ-AB $22.25 $45.50 104.49% JAN-2002 $120 WGZ-AD $28.50 $54.75 92.11% SUNW 12/19/99 JAN-2001 $ 80 SUX-AP $17.63 $15.88 - 9.93% JAN-2002 $ 90 WJX-AR $22.00 $23.13 5.14% CY 01/16/00 JAN-2001 $ 40 ZSY-AH $ 9.13 $18.00 97.15% JAN-2002 $ 40 WSY-AH $12.63 $21.63 71.26% ERICY 01/30/00 JAN-2001 $16.3 RQC-AO $ 4.94 $ 5.75 16.40% JAN-2002 $16.3 WRY-AO $ 6.75 $ 7.88 16.74% NSM 02/27/00 JAN-2001 $ 70 ZUN-AN $18.50 $12.75 -31.08% JAN-2002 $ 70 WUN-AN $24.25 $21.38 -11.84% AOL 03/12/00 JAN-2001 $ 60 AOO-AL $14.00 $ 8.25 -41.07% JAN-2002 $ 65 WAN-AM $18.63 $13.63 -26.84% AXP 03/12/00 JAN-2001 $43.3 AXP-AP $ 7.25 $13.38 84.55% JAN-2002 $46.6 WXP-AQ $ 9.33 $14.75 58.09% WM 03/19/00 JAN-2001 $ 25 WM -AE $ 5.00 $ 5.13 2.60% JAN-2002 $ 30 WWI-AF $ 5.38 $ 5.38 0.00% QCOM 03/26/00 JAN-2001 $150 AUA-AJ $39.25 $ 7.88 -79.92% JAN-2002 $160 XQO-AL $52.88 $18.25 -65.49% AMD 04/16/00 JAN-2001 $ 70 AMD-AN $17.50 $29.00 65.71% JAN-2002 $ 70 WVV-AN $26.00 $40.38 55.31% CMGI 04/16/00 JAN-2001 $ 50 ZB -AJ $21.50 $18.25 -15.12% JAN-2002 $ 55 WCK-AK $27.75 $26.88 - 3.14% JDSU 04/16/00 JAN-2001 $ 80 XJU-AP $27.50 $26.00 - 5.45% JAN-2002 $ 80 YJU-AP $39.63 $39.50 - 0.33% VSTR 04/16/00 JAN-2001 $ 90 ZTB-AR $23.88 $43.50 82.16% JAN-2002 $ 90 WWP-AR $35.00 $49.88 42.51% YHOO 4/30/00 JAN-2001 $140 YMM-AH $32.13 $23.38 -27.23% JAN-2002 $140 WYZ-AH $46.38 $41.50 -10.52% MOT 5/14/00 JAN-2001 $100 MOT-AT $19.75 $15.50 -21.52% JAN-2002 $110 WMA-AB $28.63 $24.13 -15.72% 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 JDSU - JDS Uniphase $82.00 Even industry leaders such as JDSU have been caught in the market downdraft, but the future is bright for our optical hero. Sitting right in the middle of the rapidly growing fiber-optic communications, the company provides many of the components necessary for the construction of the fully optical network. JDSU is well positioned to profit from this area and the broad market weakness is serving up a delicious entry point for vigilant investors. After hitting a low of $73.13 on April 17th, the stock has struggled to break out higher. The $80 level is emerging as very strong support, as buyers continue to buy whenever this level is reached. The 200-dma, down at $73.50 has not been touched, and combined with the pattern of higher lows, JDSU looks strong relative to the rest of the tech sector. The highs are also getting lower and the stock looks like it will break out of the pennant formation within the next week. Consider a bounce from support to be a good entry point, and then look for confirmation of the move as JDSU breaks through its upper trendline. BUY CALL JAN-2001 $90.00 XJU-AR at $22.50 BUY LEAP JAN-2002 $90.00 YJU-AR at $36.75 BUY LEAP JAN-2003 $90.00 ------ at $--.-- **Wait for Strike** New Plays NOK - Nokia $49.88 In this weak and apathetic market, relative strength is the name of the game. NOK is the de-facto leader in wireless handsets, and their market dominance combined with strong growth and fat profit margins are providing the prescription for what ails investors. Even in the face of weakness in the European markets, followed by more carnage in the Telecom sector on Friday (prompted by the Justice Department's opposition to the WCOM/FON merger), NOK is still holding near its 100-dma ($50.31). The stock hasn't spent more than a day below this level since the NASDAQ weakness began in early March. The current bearish sentiment on the sector could serve up a nice entry point if NOK tests long-term support at $45. The volume on Friday's decline is a bit disconcerting, but we think this is due to sector weakness, rather than a reflection of sentiment towards NOK. We don't want to try to catch a falling knife, but a bounce (confirmed by increasing volume, of course) near $45 looks like a good target to set your sights on. This may be a bit optimistic though, and we would also consider new positions if buyers show up on Monday and push our wireless hero back above the 100-dma. At the risk of repeating myself, remember that volume is paramount; if it isn't confirming the price movement, the conviction isn't there. BUY CALL JAN-2001 $50.00 NZY-AJ at $10.25 BUY LEAP JAN-2002 $50.00 IWX-AJ at $17.25 BUY LEAP JAN-2003 $55.00 ------ at $--.-- **Wait for Strike** Drops VOD $36.31 What was looking like a great entry point for our VOD play last week, turned into an ugly head fake as the Telecom sector took a beating. Downward revenue revisions by AT&T and the Justice Department's stated intention to block the WCOM/FON merger served to sour investor sentiment towards the whole sector. A week ago, VOD seemed to have good support near $40, but continued weakness (both here and in Europe) caused the stock to plunge through this level with barely a whimper. Nothing fundamental has changed with the company and the Verizon venture looks as bright as ever. There is no sense arguing with market sentiment though, so we are hanging up on VOD this weekend. ********* 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. **** AZPN - Aspen Technology $22.38 (-6.81) 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. The downward slide continues with every attempted rally swatted down by the bears. AZPN shareholders haven't had much good news to crow about since the company posted strong earnings in late January. After a push to $55.38 in early February, the volume faded and so did the share price, thrusting AZPN into a descending channel from which it seems unable to escape. Strong April earnings drove the last visit to the top of the channel, but the excitement faded quickly, renewing the decline as AZPN failed to penetrate the declining 30-dma (then at $35.94). The broad market weakness persisted on Friday, without a hint of the upward bias normally afforded by options expiration, and AZPN went along for the ride. The Fed continues to rattle the inflation/interest rate saber, and investor indecision is the result. Friday's action produced a Long-legged Doji candlestick pattern, graphically showing the indecision as AZPN lost $0.81. The bulls played their hand early, pushing the price right up to the first level of resistance at $24.75. Their inability to challenge even the 200-dma ($26.31) gave us our entry point and allowed sellers to dominate the remainder of the day. The late-day bounce from $21.75 couldn't hide the fact that there was no conviction in the early mini-rally, and we were rewarded with a low of $21.38. As long as volume remains robust, consider a violation of Friday's low as an opportunity to enter the play. With the broad market likely to remain range-bound in the near term, use any failed intraday rallies as your signal to grab an even better entry point. BUY PUT JUN-30 ZQP-RF OI= 0 at $ 8.63 SL=6.00 Wait for OI! BUY PUT JUN-25*ZQP-RE OI=40 at $ 5.13 SL=3.00 Average Daily Volume = 294 K /charts/charts.asp?symbol=AZPN OPTV - OpenTV Corp. $51.81 (-12.81) OpenTV develops software for interactive digital television systems. With its software, one can use a remote control to surf TV channels, access interactive services (such as shopping, banking, and e-mail), and even control camera angles and instant replays during sporting events. The company offers integration, application development, and other services. Corporate investors include Sun Microsystems, America Online, News Corp, Motorola, and Time Warner. OpenTV plans to buy Internet software pioneer Spyglass (SPYG). After breaking away from its top head-and-shoulders formation early last week, shares of OPTV have taken a turn for the worse. The stock has sharply sold-off amid cynical views by investors over the pending SPYG merger. Many investors feel that SPYG will drain cash from the operations of OPTV. Essentially, SPYG is seen as a cash drain opposed to a cash cow for shareholders of OPTV. Investors have called on management of OPTV to call off the merger. But it appears that OPTV has no plans of canceling the merger, so we're looking for the selling to go on. And individual traders may not be the only people selling OPTV. Insiders are now allowed to sell their recently unlocked shares. OPTV's IPO lock-up period recently expired which may pave the way for further downside. With few bids meeting the supply of new stock, OPTV does not yet appear to have stabilized from its recent sell-off. As a result of the insider selling, we see further downside from here. Turning our attention to the chart, after enjoying a dead-cat bounce in mid-April, OPTV has fallen into a descending channel that has carried the stock lower for nearly a month now. After Friday's 10% drop, OPTV is sitting just above its last major support level at $50. Ironically, that level was the intra-day low during OPTV's IPO last Winter. If the stock falls below support at $50, OPTV could very well retest its 52-week low of $41.25, traced in mid-April. OPTV has very little support below its current levels. You can consider an entry at current levels, or wait for support to fail as a sign that the selling is in full swing. You might also watch for heavy volume to return to confirm a failure of support. BUY PUT JUN-55*OUZ-RK OI=45 at $10.75 SL=7.50 BUY PUT JUN-50 OUZ-RJ OI= 0 at $ 7.63 SL=5.25 Wait for OI! BUY PUT JUN-45 OUZ-RI OI=22 at $ 5.25 SL=3.25 Average Daily Volume = 534 K /charts/charts.asp?symbol=OPTV NTLI - NTL Inc. $54.75 (-18.63) 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. What happens when a company can't meet customer demand? Those customers find a firm that can meet their needs. Oh yea mighty capitalism, and its ability to differentiate between winners and losers. Unfortunately, NTLI is approaching the latter group. But fortunately for us, the masters of the investing universe invented puts. NTLI faces the economic quandary of supply versus demand. The explosive growth of the Internet in Europe has customers signing up for Web access at a furious pace. NTLI is facing capacity issues as the company underestimated the demand for Internet access. The problem that NTLI is presented with is similar to what AOL faced several years ago. But, unlike AOL, NTLI has competition in the European market, aka - alternatives for unhappy customers. There are infinite ISPs in Europe that are offering a far superior service to what NTLI brings to the table. For example, an ISP like Comet offers a competitive service that is far more reliable than what NTLI offers. As if the capacity concerns weren't enough, investors have had to digest a slew of acquisitions recently made by NTLI. Last week NTLI announced it had acquired Swisscom, and Internet directory firm. In a wicked twist of fate, Swisscom announced earnings last Friday, and told analysts to expect widening losses. The news, combined with a weak market, sent NTLI plummeting past support at $55 Friday. NTLI is now set to retest its 52-week low of $51.06. Below that level is nothing but empty space. Feel free to enter the play at current levels as volume remains healthy. Otherwise, wait for NTLI to fall past its 52-week low and into darkness. BUY PUT JUN-60*IQS-RL OI=110 at $6.63 SL=4.00 BUY PUT JUN-55 IQS-RK OI=100 at $4.00 SL=2.25 Average Daily Volume = 1.88 mln /charts/charts.asp?symbol=NTLI INCY - Incyte Pharmaceuticals, Inc. $57.75 (-11.00) 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. While Biotech remains generally a hot sector, herd instinct gives it momentum in both directions. In the case of INCY, the direction is down and the play has become technical since INCY violated what was previously solid support at $65, then again at $60. It doesn't help that 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. We noted on Thursday to "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." The breakdown happened right from the open taking INCY all the way to $56, which really didn't provide us an entry. However the rollover following its weakness once it had moved back to $60 would likely have made a good entry. Further weakness in the last 15 minutes makes the Monday picture not so rosy either. What to do? Consider an entry if INCY fails at $60 again or wait for a clear descent below $57, its April 4th low. It could find support there, but if it doesn't the next mild support is at $52, then (gulp!) $43. Here's the land mine. If the market reverses course with solid gains on big volume this week, biotech is going to heat up and INCY will likely rise in sympathy at best, or catch fire with daytraders at worst. Either will be bad news for this play, so keep your stops in place if you can't watch. BUY PUT JUN-65 IPQ-RM OI= 17 at $13.25 SL=10.00 low OI BUY PUT JUN-60*IPQ-RL OI=171 at $10.00 SL= 7.00 BUY PUT JUN-55 IPQ-RK OI= 3 at $ 7.13 SL= 5.00 low OI Average Daily Volume = 1.40 mln /charts/charts.asp?symbol=INCY FDRY - Foundry Networks Inc. $65.50 (-2.63)(-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. Friday, the bears woke up and continued selling shares of FDRY. Compared to what we've seen recently, they came back in pretty substantial numbers as well. FDRY fell another 6% with over 1.1 mln shares changing hands. While our play did make a low of $61.31 during the day, buyers bid the price back up to close at $65.50. Friday's move definitely suggests the downtrend is intact, however, the closing area was support for Foundry from mid-October, shortly after its IPO. Are we giving up on our play? Nope, just trying to make you aware of an important support level in the past. FDRY is obviously facing the same thing as many other issues at the Nasdaq and NYSE, a lack of buyers. Unless you're a long-term investor and feel like FDRY is a great buy a current levels, there really is no reason to jump head first into the company's stock. For now, that's the scenario FDRY must deal with. After the selling began in early March, every bounce since the first part of April has been met by more sellers, attempting to recoup part of their losses. The company press release on Thursday did little to bring buyers back to the market. FDRY announced that a report published by the Dell'Oro Group, a "leading network market research firm," said the company has captured a 53.5% market share worldwide based on the total number of Web switch ports shipped. The company CEO said "the report clearly establishes Foundry as the market leader in the Web switching market." That may be true, but for now it didn't bring buyers to the table. Until the company can come up with something for investors to hang their hat on, or the overall market sentiment changes, our put play will continue to flourish. Although its over seven months back, support shows up at $65 and near $59. A bounce back up to the 5 or 10-dma at $69.19 and $72.16 respectively, followed by more weakness could provide good entry into a new play. BUY PUT JUN-75 OUJ-RO OI=12 at $12.63 SL=9.50 BUY PUT JUN-70*OUJ-RN OI=60 at $11.00 SL=8.25 BUY PUT JUN-65 OUJ-RM OI=54 at $ 8.13 SL=5.88 Average daily volume = 1.35 mln /charts/charts.asp?symbol=FDRY HLIT - Harmonic Lightwaves $46.13 (-17.75) 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 that 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 and HLIT closed at $54.88. The following sessions have left HLIT significantly lower. By Thursday it shed another $3.38 and slithered under a bottom support of $50. The falling NASDAQ has helped out this play tremendously. The additional 6.1% drop in Friday's trading placed HLIT in a price range dating back to the summer of 1999. While this isn't the stock's 52-week low, which is much further down at $23.25, we must pay heed to the ever-looming question of "where is the bottom?" Essentially this play is being driven by the investors' fears and concerns of Harmonic's future value. The uncertainty in the market is also factor that could help pressure HLIT lower in the near-term. It'll be important to look for more negative moves off Friday's close to confirm the trend. BUY PUT JUN-50*LOQ-RJ OI=565 at $ 9.00 SL=6.25 BUY PUT JUN-45 LOQ-RI OI=212 at $ 5.63 SL=3.50 Average Daily Volume = 1.83 mln /charts/charts.asp?symbol=HLIT ANAD - Anadigics Inc. $44.25 (-14.00) Anadigics produces radio-frequency (RF) integrated circuits that allow more functions on a single circuit. The company's products are used to transmit signals in a variety of high-volume communications applications, including wireless and fiber-optic telecommunications, cable television, and satellite TV systems. The company sells direct to customers such as Ericsson, Motorola, and Palm. Most of its sales come from customers outside North America. After Friday's sell-off, ANAD is teetering on the brink. That is, the brink of collapse. Like most tech stocks, ANAD peaked in late March and subsequently slid into the abyss. However, unlike most tech stocks, ANAD's sell-off is a little more disconcerting, and the outlook for the company is turning dim. The uncertainty in ANAD can be linked to ERICY. The Swiss cell phone giant is ANAD's largest customer. ERICY held their analyst meeting last Thursday and lowered expectations for revenues and earnings. ERICY told analysts that the handset business will fall short of expectations. This is relevant to our play since ANAD supplies ERICY with RF circuit solutions, to be implemented into handsets. Another major problem hindering ANAD is the weakening of the Euro versus the good old American Greenback. Most of ANAD's sales come from European customers, as their buying power decreases, ANAD's revenues potentially suffer. So, ANAD not only faces a harsh environment for highly valued tech stocks, it also faces fundamental issues with operations. The uncertainty surrounding ANAD is clearly seen in the chart. Ahead of the ERICY analyst meeting last Thursday, ANAD fell sharply lower on above average volume. And the selling spilled over into Friday's trading as ANAD sank lower on nearly double its ADV. The stock now teeters above critical support at $40. Feel free to enter the play if ANAD continues to fall from its current levels. If you're looking to minimize risk, wait for ANAD to fall past $40 on heavy volume. We should see a new series of contracts added to ANAD's option chain in the coming days. Wait for OI to build in the newly minted JUN options before entering the play. BUY PUT JUN-50 DQA-RJ OI= 0 at $9.13 SL=6.25 Wait for OI! BUY PUT JUL-45*DQA-SI OI=13 at $7.88 SL=5.75 BUY PUT JUL-40 UAU-SH OI=30 at $5.00 SL=3.00 Average Daily Volume = 593 K /charts/charts.asp?symbol=ANAD NTOP - Net2Phone $31.13 (-9.13) Net2Phone provides its 325,000+ customers with the ability to make phones call through the Internet using personal computers, faxes or telephones at a much lower cost than wireless or hard- line calling. The company is the #1 Internet telephone carrier and is expanding internationally through an alliance with AT&T and Sprint. The long-distance company, IDT, still retains 48% of NTOP. Does Internet access really have protection from taxation? That's the big question buzzing around the Street. From one viewpoint, The House of Representatives did pass a bill on Tuesday to permanently ban the Federal Communications Commission from taxing Internet service providers on a per-minute basis. However, the bill failed to bar the FCC from imposing so-called access fees on ISPs, which in the long run means consumers could still pay a tax on Internet access someday. This is bad news for Internet Telecoms like NTOP. So far these Internet Telecoms have avoided charging customers these fees, and thus, have a big competitive advantage over traditional and local phone companies. As a result, NTOP is no longer riding high on the hog. Investors swiftly cut the share price down this week. The selling pressure pushed NTOP below $40! The significance of this price level is simple. Since the IPO in July 1999 and its rapid rise from the record low of $15 to the all-time high of $92.38 in August, NTOP has never seen a close on the underside of $40 until this week. This technical breakdown is not comforting to investors who are already jittery from the recent tech lashings. Look for downward moves off the 5 and 10-dmas at $36.08 and $38.58, respectively, as potential entry points. BUY PUT JUN-45*UPT-RI OI=503 at $11.00 SL=8.25 BUY PUT JUN-40 UPT-RH OI= 45 at $10.00 SL=7.00 Average Daily Volume = 575 K /charts/charts.asp?symbol=NTOP ************************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 5-21-2000 Sunday 5 of 5 ************* COVERED CALLS ************* Trading Tactics: Things that seem easy rarely are... The primary goal for most option traders is correctly timing the future movement of an underlying stock or index. Unfortunately, the majority of new participants fail to realize there is also a need for accurate position analysis. Once the decision to buy an option has been made, the average investor will have difficulty determining which series to buy or sell. The ability to choose the correct option is one skill that many traders are completely lacking. The general public buys options without paying much attention to Risk/Reward, Fair Value and Implied Volatility. As a result, they purchase overpriced options with little potential for profit and often lose money even when they are correct about the underlying issue's price direction. To be a successful trader, you must be able to select favorable option positions based on option pricing components and the time horizon of your particular market opinion. Using call options as an example, a seasoned speculator might purchase positions with only days or hours remaining until expiration. In contrast, an investor that uses fundamental analysis to make decisions would generally buy longer-term options or LEAPS. The majority of traders fall somewhere in between, using technical analysis and market trends to generate entry and exit signals for the purchase of intermediate-term option positions. After determining the correct time frame, you must still decide which option to purchase. In most cases, your results will be much better overall if you buy in or at-the-money options. If the stock moves up at all, you will most likely profit whereas an out-of-the money option might fall in value if that movement is only moderate or takes some time to occur. Another concern is the cost of time. It's important to know that the highest theoretical time value occurs in the at-the-money option and it decreases substantially the farther in the money we go. With an in-the-money option, you simply spend less for time. Another advantage of using an in-the-money option is that it has a high delta. Delta measures the rate of change in an option's price compared to a one point movement in the underlying stock. That means an in-the-money option will closely follow the movement of the underlying issue, so even a small favorable change in the stock price will produce a profit. Some traders try to a avoid in-the-money options because they are expensive but the truth is, the risk/reward ratio is better than most other positions. One of the most difficult concepts in option pricing is Implied Volatility. Many traders are completely unaware of the effects of this pricing component on their position. They continually overpay for options that are in demand only to watch and wonder as the premiums quickly fade. The inflated prices are usually based on short-term potential such as mergers and acquisitions, earnings reports or split announcements. Buying options in this environment can be quite difficult to master and should be left only to the most experienced traders. Market-makers actually thrive on the disparities created by this effect, selling-off volatility for low risk, short-term gains. The technique they focus on is quite simple, selling an option for more than it is worth during the anticipation of an event and buying it back at a much cheaper price after the hype subsides. The great thing about option trading is that most concepts are mathematical and we have plenty of software and pricing models to help us choose the right positions. Next week we will review some of the techniques that experienced traders use to select the correct option positions. 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 7.47 MAY 7.50 1.19 $ 0.85 13.9% PETC 13.31 19.25 MAY 12.50 1.44 *$ 0.63 11.5% CEGE 18.69 19.88 MAY 15.00 4.50 *$ 0.81 8.3% CEGE 21.50 19.88 MAY 17.50 4.63 *$ 0.63 8.1% PLCE 21.00 17.63 MAY 17.50 4.13 *$ 0.63 8.1% WGR 18.75 21.00 MAY 17.50 1.88 *$ 0.63 8.1% ANET 12.38 11.50 MAY 10.00 2.88 *$ 0.50 7.6% GENE 20.13 16.13 MAY 15.00 5.63 *$ 0.50 7.5% SPLH 12.06 12.00 MAY 10.00 2.69 *$ 0.63 7.3% MATK 15.50 18.81 MAY 12.50 4.13 *$ 1.13 7.2% PSIX 23.19 26.22 MAY 15.00 8.88 *$ 0.69 7.0% WWFE 15.63 16.88 MAY 12.50 3.88 *$ 0.75 6.9% MXTR 11.94 11.25 MAY 10.00 2.38 *$ 0.44 6.7% WLV 16.06 17.06 MAY 15.00 1.50 *$ 0.44 6.6% ALSC 20.38 20.00 MAY 17.50 3.63 *$ 0.75 6.5% UGLY 7.50 7.69 MAY 7.50 0.50 *$ 0.50 6.2% BBBY 39.06 36.00 MAY 32.50 8.25 *$ 1.69 6.0% ANET 10.56 11.50 MAY 7.50 3.63 *$ 0.57 6.0% NCNT 17.00 12.19 MAY 12.50 5.13 $ 0.32 5.9% PSSI 9.13 9.50 MAY 7.50 2.19 *$ 0.56 5.8% IM 18.88 19.94 MAY 17.50 2.25 *$ 0.87 5.7% MATK 16.63 18.81 MAY 12.50 4.75 *$ 0.62 5.7% BWEB 23.44 17.31 MAY 15.00 9.00 *$ 0.56 5.6% APC 35.81 51.25 MAY 35.00 2.88 *$ 2.07 5.5% LPNT 16.38 20.63 MAY 15.00 2.25 *$ 0.87 5.4% CAR 20.81 19.88 MAY 20.00 1.94 $ 1.01 4.7% MRL 26.88 27.50 MAY 25.00 3.25 *$ 1.37 4.2% ACF 17.63 17.63 MAY 15.00 3.13 *$ 0.50 3.7% PIR 10.50 9.88 MAY 10.00 1.00 $ 0.38 3.5% BSX 21.75 25.94 MAY 20.00 2.50 *$ 0.75 3.4% DGX 44.50 61.63 MAY 40.00 6.00 *$ 1.50 3.4% NUHC 22.13 16.88 MAY 17.50 6.00 $ 0.75 2.9% ADEX 19.56 16.38 MAY 17.50 2.44 $ -0.74 0.0% CENT 11.81 10.88 JUN 10.00 2.50 *$ 0.69 6.4% DRIV 18.81 16.00 JUN 15.00 4.75 *$ 0.94 5.8% SMRT 8.53 8.25 JUN 7.50 1.50 *$ 0.47 5.8% CAIR 22.88 21.94 JUN 17.50 6.38 *$ 1.00 5.3% BEAM 12.44 12.13 JUN 10.00 3.00 *$ 0.56 5.2% ANET 12.94 11.50 JUN 12.50 1.13 $ -0.31 0.0% *$ = Stock price is above the sold striking price. Comments: Spiegel (SPGLA) closed just below the sold strike but with the current bearish technical picture, selling the stock on any rally may be prudent. Netcentives (NCNT) appeared to test the April low successfully, but the overall market conditions are not helping the recovery. Rolling down to the June $10 (or even the $7.50) strike may be a viable alternative for investors that wish to own the stock at a lower cost basis. Carter-Wallace (CAR) has given back almost all of its recent gains. Strong support exists at $18.00 and the July $17.50 strike closed on Friday with a bid of $3.00. The lowest available strike in June is at $20. Pier 1 Imports (PIR) is moving towards technical support and its 150 dma but unfortunately, there isn't much reward for rolling down to the June $7.50 strike. Nu Horizons Electronics (NUHC) is also a candidate for an early exit next week. If it breaks through the neckline of the forming head-n-shoulders top, the next support level would be near $12. Ade Corp. (ADEX) broke through its 150 dma, suggesting a test of the April low is likely. No news on the reason for Act Networks' (ANET) drop on Friday...any ideas? 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 AAS 22.00 JUN 20.00 AAS FD 2.88 20 19.13 28 5.0% BCC 36.44 JUN 35.00 BCC FG 3.38 611 33.06 28 6.4% CCCG 13.50 JUN 10.00 KDQ FB 4.00 0 9.50 28 5.7% FHS 11.38 JUN 10.00 FHS FB 2.13 1785 9.25 28 8.8% LPNT 20.63 JUN 17.50 PUN FW 3.75 0 16.88 28 4.0% PSSI 9.50 JUN 7.50 PYQ FU 2.63 326 6.87 28 10.0% WGR 21.00 JUN 17.50 WGR FW 4.13 144 16.87 28 4.1% Sequenced by Return ***** Stock Last Call Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return PSSI 9.50 JUN 7.50 PYQ FU 2.63 326 6.87 28 10.0% FHS 11.38 JUN 10.00 FHS FB 2.13 1785 9.25 28 8.8% BCC 36.44 JUN 35.00 BCC FG 3.38 611 33.06 28 6.4% CCCG 13.50 JUN 10.00 KDQ FB 4.00 0 9.50 28 5.7% AAS 22.00 JUN 20.00 AAS FD 2.88 20 19.13 28 5.0% WGR 21.00 JUN 17.50 WGR FW 4.13 144 16.87 28 4.1% LPNT 20.63 JUN 17.50 PUN FW 3.75 0 16.88 28 4.0% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MR-Monthly Return. ***** AAS - AmeriSource $22.00 *** Bullish Technicals! *** AmeriSource, with over $10 billion in operating revenue, is one of the nation's leading, full-service wholesale distributors of pharmaceutical products and related healthcare services. The Company serves its base of 21,000 customers accounts through a national network of 24 strategically located distribution facilities. AmeriSource is the industry's largest provider of pharmaceuticals to the acute care/institutional market. Last quarter, AmeriSource reported record results with revenue, net income, and EPS rising 20% on average. The company appears to operate in a solid industry with good fundamentals, and is well-positioned in the healthcare supply channel. AAS plans on forming an Internet initiative with for other companies and is expanding its buying group alliances. This week, Banc of America upgraded AmeriSource to a "strong buy" rating. The resulting bullish move has almost taken out the January high. JUN 20.00 AAS FD LB=2.88 OI=20 CB=19.13 DE=28 MR=5.0% Chart = /charts/charts.asp?symbol=AAS ***** BCC - Boise Cascade $36.44 *** Merger Speculation *** Boise Cascade is a distributor of office products and building materials, and an integrated manufacturer and distributor of paper and wood products with domestic and overseas operations. They produce and market office and computer supplies, various products that are used for construction, packaging papers, newsprint, and many other products. What we have here is a great recipe: add positive earnings, an upgrade by Paine Webber, a completed acquisition, a touch of positive comments from analysts, and a pinch of merger speculation in the Paper Industry. The result is a favorable entry point with a cost basis below recent technical support. JUN 35.00 BCC FG LB=3.38 OI=611 CB=33.06 DE=28 MR=6.4% Chart = /charts/charts.asp?symbol=BCC ***** CCCG - CCC Information Services $13.50 *** Hammer Bottom! *** CCC Information Services Group, formerly InfoVest Corporation, is a supplier of automobile claims, information and processing services and claims management software and other communication products. CCC Information's services enable automobile insurance companies, automobile dealers and repair facilities to improve efficiency, manage costs and increase consumer satisfaction in the management of automobile claims and restorations. CCCG is organized into three divisions: Insurance Services, Automotive Services and Consumer Processing Services. Earnings are in and the reports were favorable with record revenues and a bullish forecast. CCC is one of three companies creating an independent auto parts marketplace called ChoiceParts - a virtual auto parts warehouse that will allow auto repair and body shops to locate and order car parts via the Internet. CCC's weekly chart shows a hammer, suggesting a bottom is in place, and the strong support near $10 makes this a favorable speculation play. JUN 10.00 KDQ FB LB=4.00 OI=0 CB=9.50 DE=28 MR=5.7% Chart = /charts/charts.asp?symbol=CCCG ***** FHS - Foundation Health Systems $11.38 *** Break-out! *** Foundation Health is a managed health care company. FHS offers a wide range of healthcare services. They also own six health and life insurance companies, and provide health benefits to over 5.8 million individuals through group, individual, Medicare risk, Medicaid and CHAMPUS programs. Early this month, Foundation reported that its first-quarter operating profits rose 22 percent, meeting Wall Street estimates, driven by higher pricing for health plans and lower costs. The health care sector is showing signs of strength and gaining attention. This week, Foundation had coverage initiated at a "buy" rating by Chase H&Q. The stock has now closed above the January high and has completed a bullish "double-bottom" formation. JUN 10.00 FHS FB LB=2.13 OI=1785 CB=9.25 DE=28 MR=8.8% Chart = /charts/charts.asp?symbol=FHS ***** LPNT - LifePoint Hospitals $20.63 *** Still Climbing! *** LifePoint Hospitals is comprised of 23 general, acute care hospitals and related health care entities. In 21 of its 23 markets, LifePoint's hospital is the only hospital in the community. All but seven of LifePoint's hospitals are located in states that have certificate of need laws, which laws may have the effect of limiting the development of competing facilities. With increasing revenue, LifePoint is drawing the attention of several analysts resulting in upgrades and new coverage. The Rural Hospital sector is strong and LifePoint's chart is a case in point. LifePoint continues its uptrend on strong volume and the weakness of the last few days may offer an entry point. We remain conservative and favor a cost basis closer to support. JUN 17.50 PUN FW LB=3.75 OI=0 CB=16.88 DE=28 MR=4.0% Chart = /charts/charts.asp?symbol=LPNT ***** PSSI - PSS World Medical $9.50 *** Buyout Candidate? *** PSS World Medical is a specialty marketer and distributor of medical products to physicians, alternate-site imaging centers, long-term care providers, home care providers, and hospitals through 111 service centers to customers in all 50 states and three European countries. Back in January, PSS announced that it has engaged DLJ Securities to advise its Board in considering various strategic alternatives to maximize shareholder value, including alternatives which may involve the entire Company or its separate operating divisions. This was after PSS missed earnings and was subsequently downgraded. The stock dropped nearly a third and had been languishing around $6.75. Until April. No news and a 50% rise in price? PSS said they wouldn't comment further on the strategic alternative process "until it is completed." Is the tape telling us something that the company isn't saying? The message boards are alive with rumors and speculation...and the price keeps climbing. JUN 7.50 PYQ FU LB=2.63 OI=326 CB=6.87 DE=28 MR=10.0% Chart = /charts/charts.asp?symbol=PSSI ***** WGR - Western Gas Resources $21.00 *** Still a Natural Gas *** Western Gas Resources is an independent gas gatherer and processor, producer, transporter and energy marketer providing a full range of services to its customers from the wellhead to the sales delivery point. The Company designs, constructs, owns and operates natural gas gathering, processing and treating facilities in the major gas producing basins of the United States. The company is in position to reap a rich bounty as the fundamentals for natural gas prices strengthen. This quarter's earnings were quite favorable with revenues increasing 32% over the first quarter last year as the company posted an EPS of $0.32 vs. a loss of $0.15. There was no technical pause after earnings as WGR continued its uptrend and closed at a new 52-week high. We favor a cost basis near technical support. JUN 17.50 WGR FW LB=4.13 OI=144 CB=16.87 DE=28 MR=4.1% Chart = /charts/charts.asp?symbol=WGR ***** ****************** BIG CAP NAKED PUTS ****************** By Matt Russ Stock Stock Strike Option Option Margin Percent Support Symbol Price Price Symbol Price At 25% Return Level ADBE 109.56 100 AEQ-RT 6.38 2739 23% 105 AFFX 154.50 140 FIQ-RH 11.63 3863 30% 145 AMCC 101.63 90 AEX-RR 7.63 2541 30% 95 BRCD 110.19 100 UBF-RT 7.50 2755 27% 100 BRCM 139.63 125 RDW-RE 7.13 3491 20% 125 CHKP 161.38 145 YKE-RI 9.63 4035 24% 150 CIEN 116.50 105 EUQ-RA 7.63 2913 26% 110 CMTN 76.00 70 KUA-RN 4.88 1900 26% 75 CREE 122.13 115 CQR-RC 8.13 3053 27% 115 DITC 98.38 90 DUI-RR 6.88 2460 28% 95 EBAY 118.50 110 QXB-RB 8.38 2963 28% 110 ETEK 171.50 160 FNY-RL 10.13 4288 24% 160 GLW 182.44 180 GRJ-RP 10.88 4561 24% 180 HGSI 85.75 75 HHA-RO 6.00 2144 28% 78 HWP 126.19 120 HWP-RD 5.50 3155 17% 120 IMCL 96.75 90 QCI-RR 8.38 2419 35% 91 INKT 116.13 110 KYQ-RB 8.00 2903 28% 113 ITWO 98.06 85 QYJ-RQ 5.75 2452 23% 85 JDSU 82.44 80 XXZ-RP 7.13 2061 35% 80 NEWP 128.63 120 QNW-RZ 11.00 3216 34% 120 NSOL 131.63 125 JNV-RE 8.38 3291 25% 125 PDLI 132.63 120 PQI-RU 10.25 3316 31% 125 PMCS 147.00 135 SZI-RG 9.13 3675 25% 137 RFMD 102.50 90 RFZ-RR 5.38 2563 21% 90 RMBS 173.75 155 BYQ-RK 11.63 4344 27% 155 SCMR 80.88 70 SMZ-RN 4.88 2022 24% 70 SDLI 196.00 185 QZL-RQ 15.50 4900 32% 185 SEBL 123.25 120 SGW-RD 8.88 3081 29% 120 SSTI 89.00 85 SSU-RQ 6.13 2225 28% 84 TER 84.75 80 TER-RP 5.38 2119 25% 82 VRSN 125.00 125 XVR-RE 12.50 3125 40% 125 VRTS 102.13 95 VUQ-RW 6.00 2553 23% 97 VSTR 103.31 100 UVT-RT 5.25 2583 20% 99 PDLI AGGRESSIVE SELL PUT JUN-125 PQI-RV at $13.63 = 41% MODERATE SELL PUT JUN-120 PQI-RU at $10.25 = 31% CONSERVATIVE SELL PUT JUN-115 PQI-RC at $ 8.50 = 26% SDLI AGGRESSIVE SELL PUT JUN-190 QZL-RR at $17.75 = 36% MODERATE SELL PUT JUN-185 QZL-RQ at $15.50 = 32% CONSERVATIVE SELL PUT JUN-180 QZL-RP at $13.25 = 27% IMCL AGGRESSIVE SELL PUT JUN-95 QCI-RS at $10.88 = 45% MODERATE SELL PUT JUN-90 QCI-RR at $ 8.38 = 35% CONSERVATIVE SELL PUT JUN-85 QCI-RQ at $ 6.13 = 25% DISCLAIMER: Before entering any of the positions listed above, you need to understand your risk tolerance. Selling puts can be a High-Risk endeavor depending on the strike you choose to sell. For a greater return, you run a higher risk of being exercised. Therefore, please consider other strikes than the ones listed below if you aren't comfortable with the one we choose. We are gearing these towards higher-risk players. In any case, you can always select a lower strike with a lower return if it better meets your suitability. *********************** CONSERVATIVE NAKED PUTS *********************** Success Basics: Form With Flexibility... One of the most common obstacles to developing an objective stance occurs when we adopt a preconceived idea for market direction and character. This approach is quite different from evaluating several scenarios for future outcomes based on a specific set of circumstances. The latter practice implies a more flexible method of analysis and almost always produces better results. The crucial fallacy with any preconceived opinion is that we are apt to block out of the evidence that leads to a different or conflicting conclusion. Unfortunately, by the time we begin to question our original (often erroneous) belief the market has usually moved against us, inflicting a considerable dose of financial suffering. As such, a trader who holds to an inflexible viewpoint; a bias inconsistent with the desired state of impartiality is likely doomed to failure. The nature of humans is such that we dislike uncertainty. Stocks are a unique test of that concept because their market values can generally be viewed as the sum total of the attitudes, hopes and fears of each shareholder. Investors attempt to justify their opinion of an issue's future movement through a number of various means but it is difficult to eliminate the original bias because we are all influenced by the events of the market and the media that reports its daily activities. The best way to approach an investment is to study proven indicators that react in a known fashion to technical or fundamental changes in the instrument or its underlying market. Careful review of its historical patterns will help establish a set of objective criteria, making it less likely for a trader to try to conform the market to his opinion. As an example, value investors may base their decisions on a specific set of fundamental earnings and revenue criteria that have proven to be profitable. In contrast, technicians might use a specific buy or sell system based on historical price, character and volume activity. Obviously there are a plethora of favorable techniques but the underlying goal is to utilize a well established philosophy or trading approach to view the position on an objective basis. Only then can one make an unbiased decision free of impulses based more on external criteria rather than key impartial evidence. 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 10.88 MAY 10.00 0.50 *$ 0.50 30.2% VRTL 19.13 15.38 MAY 12.50 0.44 *$ 0.44 22.4% BBSW 16.94 17.38 MAY 12.50 0.31 *$ 0.31 18.2% ACF 17.63 17.63 MAY 15.00 0.75 *$ 0.75 15.8% HYSL 29.13 25.25 MAY 22.50 0.44 *$ 0.44 15.2% TSEM 22.06 19.69 MAY 15.00 0.50 *$ 0.50 14.7% TBI 19.00 21.00 MAY 17.50 0.44 *$ 0.44 14.6% CCCG 13.88 13.50 MAY 10.00 0.31 *$ 0.31 14.5% DRTE 22.88 25.69 MAY 17.50 0.50 *$ 0.50 14.3% ANLY 9.81 9.63 MAY 7.50 0.38 *$ 0.38 14.1% PPDI 15.56 18.50 MAY 12.50 0.56 *$ 0.56 13.1% RAMP 20.00 17.88 MAY 15.00 0.38 *$ 0.38 12.6% OCR 14.31 17.19 MAY 12.50 0.50 *$ 0.50 12.3% EXCA 35.50 32.75 MAY 25.00 0.63 *$ 0.63 11.8% LPNT 16.38 20.63 MAY 15.00 0.81 *$ 0.81 11.8% LYNX 20.88 22.00 MAY 12.50 0.50 *$ 0.50 11.6% PAIR 21.69 24.63 MAY 17.50 0.50 *$ 0.50 10.9% ELNT 40.50 40.00 MAY 32.50 0.63 *$ 0.63 10.3% KR 19.06 20.06 MAY 17.50 0.75 *$ 0.75 9.6% CLPA 34.00 27.19 MAY 22.50 0.31 *$ 0.31 9.5% NTPA 41.75 36.88 MAY 30.00 0.56 *$ 0.56 9.1% RDC 26.69 30.50 MAY 22.50 0.63 *$ 0.63 7.7% CQ 19.75 23.63 MAY 15.00 0.38 *$ 0.38 7.6% SUPX 30.06 35.13 MAY 17.50 0.69 *$ 0.69 7.5% TOS 32.06 32.50 MAY 30.00 0.75 *$ 0.75 7.1% CYBX 23.81 18.69 MAY 17.50 0.50 *$ 0.50 6.9% VTS 28.06 27.63 MAY 20.00 0.56 *$ 0.56 6.6% BBBY 39.06 36.00 MAY 27.50 0.50 *$ 0.50 6.5% VANS 17.06 13.88 MAY 15.00 0.56 $ -0.56 0.0% AFWY 20.06 15.50 MAY 17.50 0.38 $ -1.62 0.0% ADEX 19.56 16.38 JUN 15.00 0.69 *$ 0.69 13.0% CLPA 29.38 27.19 JUN 15.00 0.63 *$ 0.63 8.4% WLV 16.94 17.06 JUN 15.00 0.50 *$ 0.50 8.1% VRTL 17.00 15.38 JUN 10.00 0.31 *$ 0.31 7.3% XTO 17.69 18.06 JUN 15.00 0.38 *$ 0.38 6.9% TBI 20.81 21.00 JUN 17.50 0.38 *$ 0.38 6.1% TRMB 36.00 37.81 JUN 25.00 0.44 *$ 0.44 5.0% *$ = Stock price is above the sold striking price. Comments: VANS offered a small-loss exit on Wednesday after failing to move above the late April high. American Freightways (AFWY) weakened immediately with the general market and Friday's bearish move below its 150 dma on heavy volume should have signaled an immediate exit. Keep an eye on Ade Corp. (ADEX) as the stock price has moved below its 150 dma. A test of the April low may be forthcoming. 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 ADVP 17.13 JUN 12.50 QVD RV 0.31 81 12.19 28 9.0% ALL 26.75 JUN 22.50 ALL RX 0.44 290 22.06 28 6.9% CLPA 27.19 JUN 15.00 QJC RC 0.44 47 14.56 28 8.1% GZMO 17.19 JUN 10.00 QGG RB 0.31 0 9.69 28 9.0% NGH 20.88 JUN 17.50 NGH RW 0.38 1654 17.13 28 7.6% TMAR 9.25 JUN 7.50 MUQ RU 0.25 34 7.25 28 12.3% UNM 20.19 JUN 17.50 UNM RW 0.56 219 16.94 28 10.3% Sequenced by Return ****** Stock Last Put Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return TMAR 9.25 JUN 7.50 MUQ RU 0.25 34 7.25 28 12.3% UNM 20.19 JUN 17.50 UNM RW 0.56 219 16.94 28 10.3% ADVP 17.13 JUN 12.50 QVD RV 0.31 81 12.19 28 9.0% GZMO 17.19 JUN 10.00 QGG RB 0.31 0 9.69 28 9.0% CLPA 27.19 JUN 15.00 QJC RC 0.44 47 14.56 28 8.1% NGH 20.88 JUN 17.50 NGH RW 0.38 1654 17.13 28 7.6% ALL 26.75 JUN 22.50 ALL RX 0.44 290 22.06 28 6.9% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MR-Monthly Return. ***** ADVP - Advance Paradigm $17.13 *** On The Rebound! *** Advance Paradigm is a leading independent provider of health benefit management services, providing pharmacy benefit management, disease management and clinical research programs to two primary customer groups: health plan sponsors and pharmaceutical manufacturers. ADVP supports a broad range of health plan sponsors its pharmacy benefit management and disease management services. They also provide clinical research services and work closely with pharmaceutical manufacturers in negotiating lower drug costs for its health plan sponsor customers. Last week, ADVP said revenues rose to $564 million, up from $229 million a year ago. Earnings were slightly ahead of expectations at $0.24 a share, up from $0.15 the previous year. The bullish technical character suggests a new trend is beginning. JUN 12.50 QVD RV LB=0.31 OI=81 CB=12.19 DE=28 MR=9.0% Chart = /charts/charts.asp?symbol=ADVP ***** ALL - Allstate $26.75 *** Takeover Candidate? *** The Allstate Corporation is engaged in the property-liability insurance and life insurance and savings businesses. Allstate's Property-Liability insurance business consists of the PP&C and Discontinued Lines and Coverages segments. PP&C covers private passenger auto and homeowners insurance while Discontinued Lines and Coverages consists of business no longer written. ALL's Life insurance products include whole life and term life insurance as well as universal life, variable life and other life products. Savings products include annuities and group pension products include guaranteed investment contracts and retirement plans. The recent merger and acquisition speculation has found its way to Allstate and the stock has rallied on the news. Rumors have surfaced of potential acquisitions in the financial services group and investors say ALL may be a candidate. With the recent change in technical character, this play offers an excellent way to participate in the bullish, merger speculation. Target shoot the entry at $0.50. JUN 22.50 ALL RX LB=0.44 OI=290 CB=22.06 DE=28 MR=6.9% Chart = /charts/charts.asp?symbol=ALL ***** CLPA - Cell Pathways $27.19 *** 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=0.44 OI=47 CB=14.56 DE=28 MR=8.1% Chart = /charts/charts.asp?symbol=CLPA ***** GZMO - Genzyme Molecular $17.19 *** Drug Speculation *** Genzyme Molecular Oncology, a division of Genzyme Corporation, is developing cancer products, with a focus on cancer vaccines and angiogenesis inhibitors. It has 3 products under development: vaccines to stimulate the immune system to fight cancer, various inhibitors that work on the blood vessels that tumors require for growth, and pathway regulators that treat cancer by regulating metabolic processes observed in the development of cancer cells. Biotechs have been on the move lately and GZMO rallied last week after an influential upgrade from SG Cowen. The analyst offered a "strong buy" recommendation and placed a $25 target on GZMO's share value based on recent technology integration. The outlook is favorable and owning the issue near $10 appears to be a fair proposition. JUN 10.00 QGG RB LB=0.31 OI=0 CB=9.69 DE=28 MR=9.0% Chart = /charts/charts.asp?symbol=GZMO ***** NGH - RJR Nabisco Holdings $20.88 *** 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. Their businesses in the United States are comprised of Biscuit and the U.S. Foods Group. Outside the United States, business is conducted by their International group. Nabisco's share value has rallied since mogul Carl Icahn raised his offer for the company to $6.5 billion, an increase of 37% in the price for the nation's largest maker of cookies and crackers. That's well above the current value but analysts say the offers will go higher, based on interest from other companies, with the company fetching at least $25 per share before the deal is done. Analysts believe a firm pact may emerge in late June or July. JUN 17.50 NGH RW LB=0.38 OI=1654 CB=17.13 DE=28 MR=7.6% Chart = /charts/charts.asp?symbol=NGH ***** TMAR - Trico-Marine $9.25 *** Own This One! *** Trico Marine Services is a leading provider of marine support vessels to the oil and gas industry in the U.S. Gulf of Mexico, the North Sea and offshore Brazil. Due to various acquisitions, Trico is now the second largest owner and operator of supply boats in the Gulf and a leading operator in the North Sea. The Oil Services industry has rallied in the last few weeks as crude prices approached $30 a barrel on expectations of strong summer demand. The rise in this group comes after a long awaited period in which soaring crude oil and natural gas prices have made for handsome earnings but have done little to bring the industry leaders back to their historical share values. With the profit margins expected to increase during the next few months, revenues for the top companies in this group should continue to improve, bolstering their share value to higher levels. JUN 7.50 MUQ RU LB=0.25 OI=34 CB=7.25 DE=28 MR=12.3% Chart = /charts/charts.asp?symbol=TMAR ***** UNM - Unumprovident $20.19 *** Booming Health Sector! *** UNUMProvident is the parent holding company for a group of insurance companies that collectively operate throughout North America and in the United Kingdom, Japan, and Argentina. This group is the largest provider of group and individual disability insurance in North America, the United Kingdom, and Japan. They additionally provide a complementary portfolio of insurance products, including long-term care and term life insurance. Earlier this month, UNM's recovery rally was tested after the leading disability insurer said its quarterly operating profit fell 22%, in line with expectations, as its group disability insurance unit suffered a higher loss ratio. The company said profits fell to $134 million or $0.56 per share, down from $172 million in the same quarter a year ago. Now the CEO says they are back on track and the bullish fundamental outlook is based on several positive trends; strong investment performance, disciplined expense management, improving claims management effectiveness, and solid results from their Voluntary Benefits segment. For now, it appears investors agree with the CEO's optimistic forecast. JUN 17.50 UNM RW LB=0.56 OI=219 CB=16.94 DE=28 MR=10.3% Chart = /charts/charts.asp?symbol=UNM ************************ SPREADS/STRADDLES/COMBOS ************************ Stocks Tumble On Inflation Woes... Friday, May 19 The week ended on a sour note as inflation-fearing investors fled the equity markets. The Dow closed down 150 points at 10,626 and the Nasdaq finished 148 points lower at 3390. The S&P 500 Index slipped 30 points to 1406. Volume on the NYSE remained very thin with just 855 million shares exchanged. Declines beat advances 1,932 to 950. Trading volume on the Nasdaq hit just 1.36 billion shares, with declines swamping advances 2,884 to 1,169. The U.S. 30-year Treasury rose 7/32, bid at 100 15/32, where it yielded 6.21%. Sunday's new plays (positions/opening prices/strategy): Mattel MAT JUL10C/JUN12C $2.00 debit diagonal Covad COVD JUN20C/JUN22C $1.88 debit bull-call The sharp market decline allowed entries at the target prices in both of our new positions. Unfortunately, the recent decline in technology issues has once again gained momentum and it will be difficult to oppose the trend. Monitor Covad for a successful test of the May low and in the event the issue breaks below that support range, consider an early exit. Portfolio plays: Stocks moved lower today on concerns that the Federal Reserve would continue to raise interest rates to slow the expanding economy. Revised estimates for growth and inflation created additional anxiety of another 50 basis-point rate hike before the end of the year. Analysts say the market is beginning to reflect that outlook and worries about overvaluation in the technology sector also produced downward pressure during the session. The majority of sectors slumped with shares of Intel (INTC), Hewlett-Packard (HWP), and J.P. Morgan (JPM) leading the Dow lower. Continued weakness in computer hardware issues tugged the Nasdaq down and semiconductor stocks finished with significant losses. In the broad market; tobacco, steel and healthcare stocks advanced while telecom and defense issues retreated. On the bright side, drug and oil stocks managed to post slim gains and those are heavily weighted groups in our current portfolio. The final day of the expiration period was relatively kind to the Spreads/Combos section. Almost 90% of our May positions closed profitably and the losses were minimal. Some of the most exciting activity occurred in the Credit Spreads group. Applied Materials (AMAT) finished just above the sold strike at $80 and as we suggested on Thursday, Temple Inland (TIN) succumbed to Murphy's Law, falling to $54.06 at the close (the position was profitable below $55). Scm Microsystems (SCMM) was the only losing issue in that section, and the position was rolled down and forward to the JUN-$70 options to attempt a break-even exit. The bullish, Debit Spread portfolio enjoyed similar success. The losing position in that group was Mattson Technology (MTSN). Many of our best performers have been in the Oil industry and Ashland (ASH) topped the Diagonal Spreads category with a 28% return in just three weeks. The remaining positions in that group are all profitable. Calendar Spreads were difficult to find with the recent volatility but two of the three plays in that section have far exceeded expectations. Dean Foods (DF) and Magna International (MGA) both provided profits well above the original targets. The outcome of the Landry's Restaurants (LDY) spread has yet to be decided. Our long-term plays suffered the most with LEAPS/CC's issues Boston Scientific (BSX), Cabletron (CS), and Network Associates (NETA) all falling in the recent technology slump. Fortunately, the highest loss in this time-selling portfolio is $0.75. The Delta-neutral category produced mild success. Both of the credit strangles; Abgenix (ABGX) and Best Foods (BFO) expired at maximum profit but based on that market character, many of the debit straddles remained mired in range-bound trends. The top performers were Applex (APLX) with $2.50 returned on $6.50 invested and Mastec (MTZ) with a 45% profit in just one week. The most surprising issue was National Computer Systems (NLCS). Today the stock dropped 18% to $46.25 after reporting that the firm's chairman, president and CEO, Russ Gullotti, will retire. DLJ analysts downgraded the stock to "market perform" even as the company reported a first-quarter profit of $0.26 per share, inline with the consensus estimates. Yesterday it was on the verge of a break-out into a new trading range and now it is right back where it started. Such is life in the stock market! Questions & comments on spreads/combos to Click here to email Ray Cummins ****************************************************************** - NEW PLAYS - ****************************************************************** NSI - National Service $23.00 *** Conglomerate Hedge Play *** National Service is a diversified service and manufacturing company that, through its subsidiaries, is engaged in four markets, lighting equipment, chemicals, textile rental and envelopes. The diversified company derives about half of its sales from lighting fixtures for commercial markets (new construction) and consumers. Its brand names include Lithonia and Holophane. NSI's chemicals unit makes specialty products that include cleaners, sanitizers, and disinfectants. The company's National Linen Service subsidiary rents linens, towels, mops, and other related products to the restaurant, lodging, and health care industries. NSI also makes office products for the banking and other industries. NSI provides products and services throughout North America, as well as Western Europe and Australia. NSI is a solid fundamental company that achieved excellent results in the second quarter, including double-digit revenue growth and an increase in operating profit. The CEO expects improved performance in the second half of fiscal year 2000 with 8-10% growth in earnings. Their success is based on diverse interests in industries with increased productivity, new product development, technological advances, and cost synergies. We simply favor the bullish technical outlook and the low cost opportunity for a favorable profit. PLAY (conservative - bullish/calendar spread): BUY CALL SEP-25 NSI-IE OI=149 A=$1.56 SELL CALL JUN-25 NSI-FE OI=724 B=$0.31 INITIAL NET DEBIT TARGET=$1.00-$1.12 TARGET ROI=50% The basic premise in a calendar spread is simple; time erodes the value of the near-term option at a faster rate than it will the far-term option. A less neutral and more bullish type of calendar spread is when the underlying issue is some distance below the strike price of the options. This position is speculative with low initial cost and large potential profits. Two favorable outcomes can occur: the stock rallies in the short-term and the position is closed for a profit as time value erosion in the short option produces a net gain or; the underlying stock consolidates, allowing the sold option to expire and then eventually rallies above the long option strike price. It is generally best to establish this type of spread at least 2 - 3 months before the long option expires, capitalizing on the ability to sell another option against the longer-term position. That is the basic idea in this spread play; selling time value in the options when they are overpriced (high implied volatility) and buying it back (if necessary) when they return to intrinsic value. Ideally, we would prefer to have the stock finish just below the sold strike when the near-term option expires. If the short options are in-the-money at expiration, you will have to buy them back to preserve the long-term position. Chart = /charts/charts.asp?symbol=NSI ****************************************************************** MATK - Martek Biosciences $18.80 *** Upcoming FDA Approval? *** Martek Biosciences Corporation is engaged in the development and commercialization of high value products derived from microalgae. Martek's products are nutritional oils used as ingredients in infant formula and foods, and as ingredients in, and encapsulated for use as, dietary supplements. Martek has licensed its nutritional oils to six infant formula manufacturers. Four of these licensees are marketing term infant formula products containing Martek's oils in seven countries and pre-term infant formula products containing their oils in over 60 countries. Additional applications of the Company's platform technology include currently marketed products and technologies to assist in drug discovery and diagnostics. Martek rallied last week after a report in Barron's stated that its share value could rise if the FDA approves its infant formula containing DHA and AA fatty acids; supplements that could make infant formula superior to mother's milk. The report also said that Martek could earn $2 to $3 a share if formula supplemented with DHA becomes popular in the U.S. Martek has licenses with more than half of all formula producers, including the two biggest U.S. firms, Mead Johnson and Abbot Laboratories. The Federal Drug Administration is now reviewing the issue and is expected to rule by fall. Based on the technical change in character, investors think the outcome will be favorable. PLAY (aggressive - bullish/credit spread): BUY PUT JUN-12.50 KQT-RV OI=30 A=$1.25 SELL PUT JUN-15.00 KQT-RC OI=5 B=$2.12 INITIAL NET CREDIT TARGET=$1.00 ROI(max)=66% B/E=$14.00 Chart = /charts/charts.asp?symbol=MATK ****************************************************************** PBY - The Pep Boys $7.50 *** Manny, Moe and Jack! *** The Pep Boys is an automotive retail and service chain. Pep Boys is involved in the retail sale of automotive parts, accessories, automotive maintenance, service and the installation of parts. The company is comprised of Pep Boys' Supercenters and Pep Boys Express. Pep Boys' automotive product line includes tires, batteries, new and rebuilt parts for domestic and imported cars, chemicals, car accessories and hand tools, as well as a large selection of truck, van and sport utility vehicle accessories. In addition to selling branded products, they also offer an array of products under the Pep Boys name and other private labels names such as Prostart, Procool, Prostop, Elite, Pro Ryder, Varsity, Cornell and Futura. Pep Boys' services include engine diagnosis, tune-ups, wheel alignments, installation and balancing of tires, oil and lubrication, air conditioning, and electrical services. Pep Boys' stores also offer repair services and the installation of parts and accessories. The recent rebound in Pep Boys began last week and now it appears that investors are starting to take notice. A reasonable bottom has formed after a long period of declines and based on positive divergences in technical indicators, the issue may try to make a a substantial rally from this point. Our position offers plenty of time for the bullish recovery to occur. This position is based on the current price or trading range of the underlying issue and the recent technical history or trend. Current news and market sentiment will have an effect on this issue. Review the play thoroughly and make your own decision about the future outcome of the position. PLAY (conservative - bullish/diagonal spread): BUY CALL OCT-5.00 PBY-JA OI=226 A=$3.00 SELL CALL JUN-7.50 PBY-FU OI=160 B=$0.88 INITIAL NET DEBIT TARGET=$2.00 INITIAL TARGET ROI=25% Chart = /charts/charts.asp?symbol=PBY ****************************************************************** - STRADDLES - ****************************************************************** These positions meet our criteria for favorable straddles; cheap option premiums, a history of adequate price movement and future events or activities that may generate volatility in the issue or its industry. This selection process provides the foremost combination of low risk and potentially high reward. As with any strategy, it should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. ****************************************************************** LII - Lennox $11.38 *** On The Move! *** Lennox International is a global designer, manufacturer, and marketer of a range of products for the heating, ventilation, air conditioning, and refrigeration (HVACR) markets. Lennox participates in four business segments of the HVACR industry. The first is North American residential heating, conditioning and hearth products, in which the company manufactures and markets a full line of products for the residential replacement and new construction markets in North America. The second is the global commercial air conditioning market, in which the company manufactures and sells rooftop products and applied systems for commercial applications. The third is the global commercial refrigeration market, which consists of unit coolers, condensing units and other commercial refrigeration products. The fourth is heat transfer products, in which the company designs, manufactures and sells evaporator and condenser coils, copper tubing, and related equipment. Note: In this position we are using two out-of-the money options; a "strangle," to open the position with a delta-neutral outlook. PLAY (conservative - neutral/debit strangle): BUY CALL SEP-12.50 LII-IV OI=171 A=$0.81 BUY PUT SEP-10.00 LII-UB OI=20 A=$0.62 INITIAL NET DEBIT TARGET=$1.25 TARGET ROI=50% Chart = /charts/charts.asp?symbol=LII ****************************************************************** ICCI - Insight Comm. $15.00 *** Looking For A Bottom! *** Insight Communications is the eighth largest cable television system operator in the United States based on customers served after previously announced industry acquisitions. The company provides cable television services to approximately 935,000 customers, passing over 1.5 million. ICCI has tightly grouped clusters of cable television systems with approximately 98% of its customers concentrated in the four contiguous states of Indiana, Kentucky, Ohio and Illinois. The company's systems have a very high concentration of customers served by each headend or technical center of the network allowing it to more economically deliver an array of entertainment, information and telecommunication services, including interactive digital video, high-speed data access and telephone service products. Note: The low open interest in the position may be a problem for the initial entry but as time passes, the volume in options will increase to an acceptable level. PLAY (conservative - neutral/debit straddle): BUY CALL AUG-15 SCU-HC OI=20 A=$2.06 BUY PUT AUG-15 SCU-TC OI=0 A=$2.06 INITIAL NET DEBIT TARGET=$3.88 TARGET ROI=50% Chart = /charts/charts.asp?symbol=ICCI ************************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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