Option Investor

Daily Newsletter, Monday, 05/22/2000

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The Option Investor Newsletter                  Monday  05-22-2000
Copyright 2000, All rights reserved.
Redistribution in any form strictly prohibited.

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
       5-22-2000           High     Low     Volume Advance Decline
DOW    10542.50 -  84.30 10664.50 10369.50   869,030k 1,164  1,775
Nasdaq  3364.21 -  26.19  3390.95  3172.65 1,615,462k 1,227  2,839
S&P-100  748.04 -   4.91   754.29   730.01    Totals  2,391  4,614
S&P-500 1400.72 -   6.23  1410.55  1368.73            34.1%  65.9%
$RUT     471.67 -   8.03   480.59   458.21
$TRAN   2720.16 -  21.84  2761.90  2703.11
VIX       28.83 +   0.06    32.12    28.24
Put/Call Ratio       .60

Ugly Selling Turns to Technical Rebound

For those just tuning in to see the NASDAQ down 26 points and the 
Dow down 84 points at today's close, you missed the fireworks.  
Investors continue to exercise caution stemming from the belief 
that the Fed will act to raise rates again in June, and belief 
that valuations are still too "high".  Just what is "high"?  We 
don't know for sure.  But apparently the lows hit today convinced 
more than a few bargain hunters to step back to the plate for a 
swing at some of the beaten down former kingpins in the market.  
In short, after testing new lows, the rebound was impressive.  So 
just what happened?

Let's start with the most dramatic first - the NASDAQ.  At the 
opening bell, the index sat at 3390.  Within slightly more than 
one hour, it fell through technical, psychological and historical 
support at 3227, its intraday low set on April 17.  That was a 
big deal.  It didn't stop there and instead continued south below 
3200 all the way to 3172, its low so far this year.  Weak 
attempts to rally back to the 3227 were met with selling 
pressure, again testing the sub-3200 level.  Things did not look 
good with 3227 failing to hold on three intraday tests.  However, 
with plenty of cash on the sidelines (but still in their pockets) 
investors waited for deals too good to pass up and couldn't 
resist the buying opportunities presented.  CSCO for instance was 
down to $50 before springing back on twice the normal volume to 
close at $55, a gain of almost $2 on the day.

Similar patterns could be found in the top 10 most active issues.  
ORCL dipped to $62.75, but closed at $67.75 on volume 50% greater 
than the ADV.  SUNW dropped to $70, nailing its 200-dma before 
moving back to close at $79 on volume 70% greater than the ADV.  
JDSU rebounded nearly $9 from its low of $76.50 on 50% greater 
volume than average.  QCOM close up $11 from its low of $77.75, 
also on 50% greater volume.  AMAT closed up nearly $8 from 
its low on twice the ADV.  The only laggard was MSFT, whose 
volume was 20% shy of average.  Nonetheless, it too closed up 
$1.50 from its low of $62.44.  Most of these issues are at or 
near their 200-dma and represent buying opportunities in a bull 
market.  The point of conveying this to you is to show that a 
perceived bottom was hit on many big issues and many investors 
were willing to step back into the market with conviction, 
sensing that those levels were a buying opportunity.  Volume 
confirms that.  

However, many analysts believe that the market cannot advance 
further without the big caps caving in as the final sign of 
capitulation.  While we saw some of that today on the stocks 
noted above, there are still others which remain far above their 
200-dma and may have further to fall before they find a trading 
bottom.  Note that biotechs were missing from the tech recovery.

What's it all mean?  Don't dive in the pool yet without first 
checking the water temperature.  Internally, things weren't so 
hot.  Declining issues outpaced advancers by a 7 to 3 margin.  
276 new lows (yow!) beat just 19 new highs, while declining 
volume was nearly twice advancing volume.  In the final two hours 
though, the NASDAQ tacked on 189 points to overcome its 220 point 
decline, and closed down just 26 at 3364, well above important 
support at 3227.  We like that and look for a trading rally to 
continue.  We've talked a bunch about volume lately.  While 
today's figure of 1.6 bln shares traded is a bigger number than 
what we've seen of late, it's still well below the 1.8 to 2.0 bln 
we'd like to see to convince us that the worst is over.  

We still think the NASDAQ will remain rangebound between 3300 and 
3800, until we get a breakout to the upside over 3800 (and 
more convincingly, 4000).  Nonetheless, we think today's overall 
action gave us many tradable entries for the week.  We would 
expect to see the rebound continue tomorrow and perhaps through 
Wednesday afternoon when investors will likely pare back holdings 
pending the outcome of the GDP deflator figure, initial jobless 
claims, and existing home sales on Thursday morning.  Don't 
expect the market to rock and roll to new highs; just look for it 
to snap out of its sourpuss mood for a couple of days before 
getting grumpy again.

In all the excitement, you probably thought we forgot about the 
Dow.  Nope.  But it too mirrored the action of the NASDAQ opening 
at 10,624 then sinking to 10,369 (an intraday loss of 255 points) 
before recovering 173 of those lost points to close at 10,542, a 
loss of just 84 points.  However, volume was a dull 871 mln 
shares.  Decliners beat advancers 3 to 2, while down volume 
exceeded up volume by 80%.  119 new lows beat out just 30 new 
highs in similar fashion.  While starting out negative, by the 
close, IBM, T, KO, MCD, JPM, C, WMT, INTC, and XOM were the only 
issues to struggle back into the green, though investors 
exhibited no tremendous buying pressure on any of them.  GM, 
however, noting that its tender to convert GM shares to GMH 
shares (the satellite division GM and owner of Dish Network) was 
oversubscribed, dropped almost $9 to $78 on four times its ADV.  
In similar fashion, GE lost nearly $2 to close at $50 on twice 
its ADV.  HWP also kicked in for a loss of $3.44 bringing these 
three up for the ball and chain award today in contributing to 70 
of the Dow's 84-point loss.  

One more time on the volume - as long it remains consistently 
under about 900 mln shares, the Dow will likely continue trading 
within the support and resistance ranges of 10,500 to 10,800.  
How'd we figure that?  We merely drew a line connecting the lower 
highs and another line connecting the higher lows to get a 
pennant formation, then estimated the figures if the trend 
continues to hold.  10,800 is also the 200-dma for the index and 
has lately provided resistance.  Thus, don't look for a positive 
breakout anytime soon.  In case you are interested (don't hang 
your hat on this either), the convergence of the lines, which 
would represent the date and level of a breakout is in roughly the 
last week of June at about the 10,500 level.  If you trade 
100% technical, you've undoubtedly noted that the pennant is 
descending, which generally portends a breakout to the downside.  
While it isn't good news, we think there is still trading 
opportunity in the bounce off today's low until the Dow gets back 
to the 10,750 to 10,800 level.  Like the NASDAQ, we'd expect the 
trend to continue until Wednesday afternoon prior to the release 
of Thursday's economic figures before caution possibly overtakes 

Yes, there was news today, but the big story is really today's 
market rebound.  So we'll skip the news tonight and move on to 
our fearless forecast for Tuesday and possibly beyond.  While we 
think today's rebound is a big plus despite the drubbing both 
indexes took most of the day, we're going to be watching for 
further rebounds in the big cap tech issues, which are generally 
less interest rate sensitive.  On the NASDAQ, we'll look for 
support at 3300 if there is any amateur hour profit taking from 
today's recovery - about 10,450+/- on the Dow.  Then we'll make 
our move on individual issues as long as the overall market 
cooperates.  We don't want to be a helium balloon stuck in a 
downward moving elevator, so we'll make sure the market and our 
stocks are moving up.  We'll also be watching for big caps that 
that have bounced off of or near their 200-dma.  Overall, we 
expect a tradable rally for the next couple of days.  Pay 
particular attention to the sectors.  By symbol, we've listed 
some sector issues to watch (the Merrill Lynch HOLDRS in 
particular).  While most of them are not yet optionable, they can 
show you strength of various sectors - use them as a tool.  

BBH     Biotech
PPH     Pharmaceuticals
TTH     Telecom 
IAH     Internet Architecture
IIH     Internet Infrastructure
BBH     B2B
BDH     Broadband 
SMH     Semiconductors 

If the sector doesn't look good, we suggest staying out in favor 
of one that does.  As always, sell too soon (because this isn't a 
major change of market direction) and don't buy too soon either.  
It's a tradable market, but trade where the trading is good.

Buzz Lynn 
Research Analyst


Vignette Acquires OnDisplay in $1.7 Billion Stock Deal
By Cindy Christ

E-business application provider Vignette Corp. said Monday it
would acquire rival OnDisplay in an all-stock deal valued at
$1.7 billion based on Friday's closing prices.

The deal is aimed at helping Vignette, which got its start
helping companies launch business-to-consumer Web sites,
strengthen its position in the market for business-to-business

Under terms of the merger, shareholders will receive 1.58
shares of Vignette for each OnDisplay share, an exchange ratio
valuing OnDisplay at $69.22, a 30 percent premium over
Friday's closing price of $52.31.

But after the agreement was announced, shares in Austin,
Texas-based Vignette plunged more than 20 percent, slashing
the total value of the deal and erasing the hefty premium for
OnDisplay shares.

Analysts said investors were turned off by the high price
Vignette paid for OnDisplay, whose early stage technology is
far from turning a profit. The merger also is expected to
delay Vignette's first quarterly profit by about six months.

The companies said the combination of Vignette's V/5 suite of
applications software and OnDisplay's XML-based products will
create the industry's most comprehensive offering for building
businesses online.

XML, or Extensible Markup Language, is an easy-to-use set of
codes put into documents and programs that can help speed up
Internet commerce.

Based in San Ramon, Calif., OnDisplay makes software allowing
sellers, buyers and vendors to access and exchange in real
time critical information such as purchase orders, inventory
status checks, invoices and product catalog data.

"Our eMarektplace customers have told us how important a
complete and integrated solution is -- one that both reaches
out to customers and back to suppliers, vendors and the back-
office. Together with Vignette we now provide the industry's
only true end-to-end solution," said Mark Pine, OnDisplay
chairman and CEO.

The combined company will have about 2,000 employees, 870
customers and global operations in the U.S., South America,
Europe, Asia and Australia.

Vignette said it would account for the transaction, which is
expected to close in third quarter 2000, using purchase

Shares in Vignette (VIGN) closed down $8.94, or 20.4 percent,
at $34.88 after trading as low as $30.75 intraday.

OnDisplay (ONDS) rose $0.88, or 1.6 percent, to $54.12.

Over the last 52 weeks, OnDisplay, which went public in
December 1999 at $28 per share, has traded as high as $132.50
and as low as $20.50.


SDLI - SDL Incorporated $192.00 -4.00 (-4.00 this week)

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.
Most Recent Write-Up

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

Today was a rocky day on the NASDAQ.  SDLI traded as low as 
$169 and it certainly looked bleak.  Selling volume was strong
as traders took the stock to its 200-dma.  The bounce that 
followed on the NASDAQ and SDLI was quite impressive.  SDLI's 
$22 rise from the ashes was also on strong volume.  This appears
to have been a capitulation in this particular stock and may be
poised to go higher.  Watch the NASDAQ for direction tomorrow 
before entering as another round of NASDAQ selling could be an 
overall drag on techs.  A little help from NASDAQ buyers could 
take SDLI higher.  Targetshoot at your own risk levels and look 
for support at the 50-dma of $184.

BUY CALL JUN-180 QZL-FP OI=196 at $28.75 SL=22.50
BUY CALL JUN-190*QZL-FR OI=270 at $23.88 SL=18.50
BUY CALL JUN-200 QZL-FT OI=531 at $19.63 SL=15.25
BUY CALL JUN-210 QZL-FB OI=302 at $15.75 SL=12.25

Picked on May 21st at   $196.00    P/E = 390
Change since picked       -4.00    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


Debit Spreads & The OEX: Is It For You?
By Austin Passamonte

When it comes to spread trading options, thoughts usually
run to long-term, watching grass grow type of action. That's
partially true, but profits from 50% to 500% return on capital
within days is possible as well. Are you interested in hearing

Before I begin, let me mention that some of the terms and
actual market examples we'll discuss here may not be 100%
familiar to everyone. Fortunately, OIN has an archive full 
of spread trading articles by real experts. You can also 
learn a great deal from most of the books listed in the OIN
library section as well. One I highly recommend is a copy of 
"Trade Options Online" by George Fontanills. Between the 
archives and this book all of the basics and many advanced
techniques are explained in great detail. Trust me, I will 
keep my part very simple in here!

Much of this article will discuss ideas and facts before we
lay the groundwork. Don't worry if it all doesn't make sense
right off. I want to share some thoughts before we hit the 
meat & potatoes where it will all come together nicely. By the 
time we're through kicking some math around over the next couple 
sessions the market will only then start to ripen for our 
strategy anyway.

Why even bother trading spreads? What advantages do they 
offer? Very good questions if you were about to ask, and I
often wondered the same things myself.

Spread trading gives a trader several key advantages over
straight calls and puts during certain times and specific
conditions. We will stick to debit spreads and the OEX for 
awhile, and there are certainly times when these tactics blow
away linear plays. 

One main feature spread trading offers us is staying power.
If you haven't noticed, OEX option premiums have a burn rate
just below lit kerosene. It's hard to take a directional
position on the index and wait longer than a few days for it 
to happen. With front-month options it can be impossible to 
hold beyond one week and have any hope for profit at all. This 
is fine for intraday traders, but many don't enjoy that luxury.

How many times has your market analysis suggested to you a
substantial move was about to take place? Have you ever bought
the OEX and been painfully stopped out only to watch the market
reverse course and speed off in the direction you knew it 
wanted to go? We may have a cure for that!

The second feature spread trading has is the ability to buy
options when they are overpriced without getting burned by
volatility. I use the Skybox price suggestion as an important
tool in my arsenal, and many times options are priced heavily 
to the seller's advantage. Usually this happens when the market
is enjoying a big day of 25 - 40 point range. Wouldn't it be 
nice to tag along for the ride?

We can often buy & sell overpriced options within the same
day and capture the fleeting volatility but too many times
I've bought in after a swift move in one direction only to 
have the action stall moments after my fill confirm hits the 
screen. I swear those market makers know I'm in! Do my 5 -
20 contract plays really stall the market? There are times 
when I'd be easy to convince of that. You should see the 
bid/ask spread melt a point or two below where I just bought
when the action dies. On second thought, no you shouldn't!

The good news is that buying one option while selling another
at the same point in time limits the volatility effect
regardless of the relative value these options are fetching
on the market. Isn't that nice? 

Without complicating things or getting ahead of ourselves, 
this means if the ASK price of an option we want is a bit
higher than suggested entry, all of the other strike prices
should be more or less equally overpriced as well. This only
matters when the bid/ask spread isn't too wide, but let's
shelve that for now and revisit such talk later.

The third important feature spread trading offers us is an
ability to play the index with small amounts of capital while
offering returns of 25%, 50%, 100% - even 500% or more is 
possible and I've got actual market data to prove it! We 
can buy spreads at certain times for 1.25 to 4.50 points each
with the possibility of a 10 point maximum profit if the 
market moves in our favor. Of course, the smaller our premium
paid the bigger a move has to occur but have you kept track of
the OEX weekly range over the past five months? I've watched
and taken trades like this since last November and I'm sure
they ain't done yet. 

Let's talk about risk/reward first. I like to buy spreads in
the 2.50 - 3 point purchase range that have a 10 point potential
profit. That means I have to be correct 1 out of 3 or 1 out of
every 4 trades to at least break even except for commissions. 
Folks, even I can at least hope to do that. In mathematical 
theory if we managed our account properly and stuck around 
long enough, just playing one direction or the other each month
would eventually win 50% of the time. With 3 to 1 odds on a 
50 - 50 actuarial, it is impossible to lose over time. I'm 
not saying the drawdowns couldn't get ugly or boredom wouldn't
be enough to die from, this is just an example of how nice the 
risk/reward ratio can be trading spreads. Remember, math 
doesn't lie - it's an exact science.

Sadly, these trades aren't possible every day. As a matter 
of fact they aren't available most days. Only the last
two weeks before option expiration do the markets stage
themselves for pricing skews in our favor.

Prior to this period options carry too much extrinsic
value for us to buy spreads near the action cheaply enough.
I personally never want to pay more than 3.50 points for any
OEX spread 10 points wide. Why bother? If I pay too much 
four weeks away from expiration and the market doesn't move
deep in our direction the spread value will melt to 3.50 or
less anyway. Remember Jim Brown's mantra - patience & entry
points are everything!

The good news is we have two weeks every month, especially 
the week of expiration to really swell our accounts. The 
bad news is we have two or three weeks where such won't 
work. Let me say this about that: if you were able to trade
one week per month with 25% of your capital and hit a 400%
return on that, what would your new account balance be? My
math says double if I'm right. If you could do that one out 
of every two or three months at least, what would your 
balance tally by year's end? Something to be said for less 
is more.   

By now I bet you're wondering when I'm just going to shut up
and dive into the heart of things. Ding - ding - ding...I've 
hit the maximum space allotment for today. I promise we'll 
open up tomorrow's visit and lay it all out in one fell swoop. 
See you then!

Trade the right direction with staying power!

Contact Support

P.S.  For those learning the Skybox methodology, did you
follow its winning trade from May 18th - 19th? The OEX index 
opened near 774 and traded up to 778 when the bearish trigger
was hit as the market MOVED UP! For those who had the guts
to take that trade (not me L) the June 770 puts were bought
@ 15.50 and the market eroded all day from there. The play
was sold at gap-down open next day @ 27.50. See the method
to madness of buying at the trigger opposite current market 
direction if price conditions are met? I sure wish I'd pulled
the trigger on that $1,200 per option trade!

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Anything else is too slow!



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