The Option Investor Newsletter Thursday 5-25-2000 Copyright 2000, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 5-25-2000 High Low Volume Advance Decline DOW 10323.90 - 211.40 10558.60 10266.00 981,372k 1,261 1,607 Nasdaq 3205.35 - 65.26 3967.71 3196.36 1,562,481k 1,729 2,264 S&P-100 736.95 - 10.15 753.89 731.95 Totals 2,990 3,871 S&P-500 1381.52 - 17.53 1411.65 1373.93 43.6% 56.4% $RUT 456.17 - 5.57 469.92 456.16 $TRAN 2717.77 - 111.30 2828.77 2715.68 VIX 28.00 + 0.13 29.12 26.57 Put/Call Ratio .56 ****************************************************************** Brokers, retailers, airlines form partnership to sink market After a strong start for the Nasdaq this morning, the analysts ganged up on the three sectors above and the markets went down for the count. The triple whammy turned into more than the fragile Nasdaq rally could bear and although it was a valiant struggle, the index gave up half of yesterday's gains at the close. To begin, the pain we saw the backlash from the Costco earnings shortfall yesterday. Costco posted lower than expected earnings and warned that rising costs, partly from higher wages, would slow profit growth in the current quarter. COST was hit with a drop in their stock price from $42 to $26 but the damage did not stop there. Other retailers also were hit by customers returning their stock and this caused losses across the sector. Best known stores like Walmart lost -1.88 and Federated lost -1.81. Costco set a new 52 week closing low at $30.06. The dogpile in the transportation sector came in the form of multiple downgrades on the heels of the United/US Air deal. Most analysts fear the combination of the two will cause ripples in the highly competitive space and lead to more and higher offers for the remaining regional carriers. Also, there is a rumor that American will make a higher offer for US Air and spark a bidding war. The regionals all soared with speculation yesterday and then gave back some gains today as cooler heads prevailed. This caused the transports to drop -111.30. The most damaging attack was on the brokerage sector. It started with a Merrill Lynch analyst who made negative comments about Goldman Sachs. The range of earnings estimates was $1.36 to $1.65 with the average of $1.47. The Merrill analyst was already the lowest estimate at $1.36 and all he did was reiterate his number and suggest that the other analysts rethink their numbers in light of the much lower trading volume of late. Immediately two other firms lowered their estimates to $1.30 and $1.33 and expressed concerns about the entire sector. This was like yelling fire in a crowded theater or sell in a weak market. The Dow plunged to a session low of -260 and the farther the Dow dropped the harder it was for the Nasdaq to stay positive. The major brokerages all took losses with MER -5.81, LEH -5.19, MWD -4.25, GS -7. Also helping to drive down both the Dow and Nasdaq was MSFT. One analyst announced that the possibility of a breakup of Microsoft into three companies would actually make the company less valuable instead of more valuable. This outlook was contrary to most which expect a breakup, however unlikely, to release hidden value to stockholders. The analyst felt that as separate companies, the revenue stream would be much less dependable. With major operating system releases only every 2-4 years the huge influx of cash would be very sporadic. Same with the office products. With Office 2000 the first major release since 1997 the cash surge would not occur again for several more years. An Internet browser company would have a tough time since the trend has been free. Add these factors together and the analyst felt the public would not want to pay much for revenue streams that fluctuated over a 3-5 year cycle. Historically companies with this type of cash flow carry low stock values. With the judge currently on the MSFT warpath, it is becoming increasingly more likely that MSFT will win on appeal since any observer can see a clear bias by the judge. Still MSFT set another new 52 week low of 61.50 with a loss of -4.06. The economic reports today were mixed with Existing Home Sales posting a greater than expected -6.2% drop for April but a revised March at a huge +9.2% gain. The revised GDP was unchanged at +5.4% even after several economists expressed lower targets. These results had no impact on the market but Friday we have another chance for disaster with the Personal Income/Spending and Durable Goods Orders. These are not normally market movers. The next big report will be the May Non-farm Payroll Report next Friday. This will be the next major inflation gauge before the June Fed meeting. Until the brokerage downgrades this afternoon, the advancers were actually beating decliners for a change. This was not much of a life preserver on the sinking ship but it did give us cause for hope for several hours. Still, the quick drop by the market on a minor news event shows that there is no strength in the market. While the day traders want to bid everything up each morning in anticipation of a coming rally, the institutions are still selling into rallies or simply standing on the sidelines. There are rumors of several funds with weak results being deluged with redemption requests. The Cendant CEO was on CNBC today and also said fund managers were apologizing to him for selling his stock but blamed gross redemptions for the need to lighten up in all areas. This is not a good sign. The Memorial Day weekend ahead could cause Friday to be a rough day. The strong rebound rally Wednesday afternoon just ran out of steam and lacked any follow through. For four days now the Nasdaq has stopped dead on upper resistance at 3365 which means there are still sellers at that level. The low of almost 3000 on Wednesday could be seen again if there is no good news to power the market on Friday. With a long weekend in front of us there will be a tug of war between the traders who do not want to hold over the holiday as summer begins and those who are looking for an entry point for a possible rally next week. Either way the volume is likely to be very low and part of the drop at the close today was likely a sign of many traders leaving early. At this point, I would like to see a sub 3000 intraday dip and rebound. I think there is a psychological bottom at 3000 and even if we eventually broke it I think it should provide another chance for a current rally. We are only five weeks away from YHOO earnings and the start of the July period. If there is going to be an earnings run then next week would be a good place to start. If you are waiting patiently for 3800 again I think I would take a portion of your risk capital and open a couple positions on any bounce from under 3000. I would wait until the Nasdaq is over 3000 again before opening the positions. These would be speculative and should be exited on any drop under 3000 again. Who knows, we may not see 3000 but if we do I think it would be worth the risk. You saw how fast the leaders rocketed Wednesday afternoon when volume returned and I would expect the same on any sub-3000 bounce. The Nasdaq big caps have given ground recently and some analysts are claiming this to be a sign of a possible rally soon. The Dow traded as low as 10266 today and came close to breaking down. It closed near the bottom range of support and teetering on the cliff. A break under 10250 could put us under 10000 real fast. Good Luck Don't buy too soon! Jim Brown Editor Current long positions include: VOD, NOK, MSFT, VIGN, GLW, MLNM **************** MARKET SENTIMENT **************** Thursday, May 25, 2000 The Shorts are Alive and Well! Weakness in the Dow spilled over to the NASDAQ today, as both indexes were bruised by selling pressure. This lack of follow through from Wednesdays trading is giving many people the perception that we still have not found a bottom. Regardless, the turnaround witnessed Wednesday was proof that there is plenty of cash on the sidelines waiting to be used, should the opportunity arise. This fact will always keep the shorts on the defensive, and will make stocks rise dramatically in the event of a short squeeze. Now despite the fact that the Nasdaq is trading near its lowest level of the year, investors are betting heavily that there is more carnage to come. The level of short sales not yet closed out, known as short interest*, climbed 4.80% to 2,780,161,105 shares. This bodes well for the bulls in the long haul, however, in the short term, with the low levels of volume, the bears will continue to control this market. Now below is a quick list of the most shorted securities for the NASDAQ. *One important gauge of sentiment is the level of short interest on the major exchanges. Investors who sell securities "short" borrow stock and sell it, betting that the stock's price will decline and that they will be able to buy the shares back later at a lower price for return to the lender. Short interest reflects the number of shares that have yet to be repurchased to give back to lenders. In the past, stocks that have heavy short interest, when combined with some sort of positive news, has witnessed very quick and powerful up-moves. At times, short sellers are forced to cover, which only helps the buying pressure, and this is known as a "short squeeze." Largest Short Positions Rank May. 15 Apr. 14 Change 1 Cisco Sys 63,655,639 62,027,225 1,628,414 2 Dell Computer 42,644,945 40,766,605 1,878,340 3 Oracle 35,460,517 35,089,894 370,623 4 Mcleodusa 35,100,321 31,548,093 3,552,228 5 Microsoft 31,818,653 29,269,267 2,549,386 6 E*trade Group 31,279,323 30,260,115 1,019,208 7 Intel 29,227,510 28,503,478 724,032 8 Yahoo 28,804,881 27,682,937 1,121,944 9 JDS Uniphase 28,463,311 30,361,418 -1,898,107 10 Global Crossing 28,169,059 28,946,563 -777,504 11 Veritas Software 28,092,901 24,174,003 3,918,898 12 Worldcom 27,878,269 30,017,217 -2,138,948 13 Globalstar 27,709,114 25,714,478 1,994,636 14 Amazon.Com 25,759,433 28,226,255 -2,466,822 15 At Home 21,009,527 19,389,045 1,620,482 16 Nextel Com 20,063,286 22,401,743 -2,338,457 17 Ameritrade 18,966,839 18,841,422 125,417 18 NTL 18,227,413 18,970,889 -743,476 19 Read-Rite 17,695,722 18,265,059 -569,337 20 Psinet 17,474,457 19,746,515 -2,272,058 21 Ericsson 17,249,711 13,966,876 3,282,835 22 Palm 17,182,481 11,872,767 5,309,714 23 Internet Cap Grp 16,927,298 13,607,574 3,319,724 24 CMGI 16,660,129 18,488,774 -1,828,645 25 Metromedia Fiber 16,562,086 14,368,336 2,193,750 Rank May. 15 Apr. 14 Change 1 Palm 17,182,481 11,872,767 5,309,714 2 Veritas Software 28,092,901 24,174,003 3,918,898 3 Interdigital Com 3,687,359 0 3,687,359 4 Mcleodusa 35,100,321 31,548,093 3,552,228 5 Novell 7,704,193 4,214,307 3,489,886 6 Vignette 5,373,863 1,899,514 3,474,349 7 Internet Cap Grp 16,927,298 13,607,574 3,319,724 8 Ericsson 17,249,711 13,966,876 3,282,835 9 360networks 2,921,354 0 2,921,354 10 ADC Telecommun 12,703,252 9,907,969 2,795,283 11 Conexant Systems 10,415,922 7,741,599 2,674,323 12 Exodus Commun 10,017,392 7,437,231 2,580,161 1 Paging Network 5,091,649 9,085,763 -3,994,114 2 Lernout & Hauspie 5,028,862 8,922,836 -3,893,974 3 Nextlink Comm 11,493,112 15,275,085 -3,781,973 4 Harmonic 2,889,481 6,628,630 -3,739,149 5 Broadvision 6,781,447 10,104,977 -3,323,530 6 Alkermes 4,401,591 7,575,082 -3,173,491 7 BanknorthGrpNew 1,179,301 4,307,174 -3,127,873 8 Amazon.Com 25,759,433 28,226,255 -2,466,822 9 Informix 4,563,142 6,980,728 -2,417,586 10 Flextronics Intl 2,019,509 4,412,977 -2,393,468 11 Nextel Com 20,063,286 22,401,743 -2,338,457 12 Psinet 17,474,457 19,746,515 -2,272,058 BULLISH Signs: NASDAQ Short Interest: As of May 15, the level of short sales not yet closed out, known as short interest, climbed 4.80% to 2,780,161,105 shares. Should this market get any kind of propelling good news, we could see a severe and swift rally as shorts run to cover. Mixed Signs: Volatility Index (28.00): 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 recently broke the 52-week high, so patience is prudent until the VIX establishes a new trading range or gets back to the range. Corporate Earnings: Corporate earnings continue to be solid; however, there has been no upside as most equities have sold off even in the wake of good numbers. BEARISH Signs: Interest Rates (6.097): 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 (775-800) 2.12 3.25 4.43 Overhead Resistance (745-770) 1.91 1.17 1.16 OEX Close 752.95 732.55 736.95 Underlying Support (715-740) 2.90 3.16 2.78 Underlying Support (680-710) n/a 22.70 23.56 What the Pinnacle Index is telling us: Underlying support is starting to pick up more bears, indicating we could be close to a bottom. OTM underlying support is extremely strong, indicating many are betting on a market crash. Direct overhead is light, so if a rally were to occur, it would not be met with great resistance. Put/Call Ratio ***************************************************************** Friday Tues Thurs Strike/Contracts (5/19) (5/23) (5/25) ***************************************************************** CBOE Total P/C Ratio .89 .48 .56 CBOE Equity P/C Ratio .81 .41 .49 OEX P/C Ratio 1.64 .92 .96 Peak Open Interest (OEX) ***************************************************************** Friday Tues Thurs Strike/Contracts (5/19) (5/23) (5/25) ***************************************************************** Puts 740 / 6,368 740 / 7,532 740 / 7,606 Calls 800 / 4,692 800 / 6,084 800 / 6,045 Put/Call Ratio 1.36 1.24 1.26 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 25, 2000 28.00 ************** MARKET POSTURE ************** As of Market Close - Thursday, May 25, 2000 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,000 11,400 10,324 Neutral 5.05 SPX S&P 500 1,400 1,500 1,382 BEARISH 5.23 OEX S&P 100 750 800 737 BEARISH 5.23 RUT Russell 2000 450 550 456 Neutral 5.05 NDX NASD 100 3,200 4,000 3,099 BEARISH 5.23 MSH High Tech 860 1,000 856 BEARISH 5.23 XCI Hardware 1,360 1,600 1,299 BEARISH 5.19 CWX Software 1,100 1,300 1,086 BEARISH 5.23 SOX Semiconductor 960 1,200 902 BEARISH 5.19 NWX Networking 900 1,100 941 Neutral 5.05 INX Internet 550 800 512 BEARISH 5.23 BIX Banking 530 600 583 Neutral 5.11 XBD Brokerage 400 500 414 Neutral 5.05 IUX Insurance 540 620 632 BULLISH 5.16 RLX Retail 900 1,000 864 BEARISH 5.23 DRG Drug 355 400 392 Neutral 4.28 HCX Healthcare 710 800 798 Neutral 4.28 XAL Airline 140 155 158 BULLISH 5.25 ** OIX Oil & Gas 265 300 303 BULLISH 5.11 Posture Alert Thursday's market action was disappointing, as a lack of follow through from Wednesday's gain was what the bulls were looking for. Volume was decent, but will most likely tail off heading into the holiday weekend. Sectors leading today's downdraft were Internet (-4.44%), Airlines (-3.45%), and Brokerage (-3.59%). With this most recent action, we have upped the Airline sector to Bullish from Neutral. *********** IN THE NEWS *********** Tax Planning in May? By S.P. Brown It's never too early to start tax planning. Why wait until the end of the year? By then it's usually too late. Let's face it, with the holiday's, December is probably the worst month to plan anything. So, start looking at your tax liabilities now while your mind is still lucid. To get you started, here's a few strategies and pointers you may find useful. The first strategy is to reduce portfolio turnover. If possible, try to keep it below 25 percent a year. Once turnover breeches the 25 percent level, taxes really start to take a bite out of gains. For example, assuming a 20 percent capital gains tax rate and a 10 percent annual return, a $10,000 porfolio will be worth $11,052 at the end of the year if no taxes are paid, meaning no turnover has taken place. However, the same portfolio that has been churned a 100 percent during the year will be worth only $10,833 because of taxes. But if you can't hold still, a second strategy is to generate tax losses whenever possible and offset the losses by taking on an equal amount of capital gains. However, there are a few common mistakes that need to be avoided here. Don't wait until December to look for losses because the purpose of generating capital losses is so that it's possible to take capital gains on other stocks. What's more, everyone and his mother is taking tax losses in December, so tax-loss candidates are apt to give you a little more loss than you had anticipated. Related to the capital gains tax loss strategy is the wash-sale rule. If you have a stock that you like that you want to take a loss on, you have to wait 30 days after selling the stock before you can buy it back again. This means that selling the stock and then buying it back at the lower cost within 30 days will void the loss. Also, pay attention to the kind of capital gains you occur. Short-term capital gains are taxed at a higher rate than long- term capital gains. A good tax-planning strategy considers selling those securities that qualify for the better long-term rate first. The tax laws require that short-term capital losses be used first to offset short-term capital gains, then long-term capital losses are used to offset long-term gains. Moreover, only $3,000 of net capital losses can be used to offset ordinary income per year, although excess losses can be carried forward to future years indefinitely. Another strategy is to invest or trade in a tax-deferred account, such as 401(K)s, whenever possible. However, you must be sure you won't need the funds before your 59 ½ years old because the tax penalty for early withdrawal will more than negate the advantages of tax-deferred growth. Derivatives can also be used to lighten the tax burden. If a taxable investor owns a diversified portfolio with a low cost basis and fears that the market is going to undergo a significant decline, the tendency is to sell the stocks. However, this will often generate large capital gains. As an alternative, the investor can keep the portfolio intact and sell S&P 500 futures contracts or buy put options on the S&P 500. If the market declines, a profit will be generated on the derivative investments that offsets the loss suffered in the value of the portfolio. Keep in mind, though, the portfolio won't be perfectly hedged because a tax will have to be paid on the gain generated by this derivative overlay strategy. On the other hand, if the stock market continued to rise after the overlay strategy was put into place, a loss would be realized on the derivative investments that could be taken against other gains. Finally, keep good records. When stocks are sold, the tax law permits capital gains to be calculated in either the specific lot, first-in, first-out and average cost methods. The specific lot method permits the investor to identify the specific shares that are sold. Thus, if an investor has many shares of the same stock at different periods of time, and some of the shares are sold, the investor can specify which shares were sold. Obviously, it's best to identify the shares that were sold as those that were purchased at the highest price. The first-in, first-out method means the first shares bought, are the first shares sold. Under normal circumstances of a rising market, this will usually produce in the highest capital gains and highest tax. This is also the default method if you didn't log your trades during the year. The last method, average cost, can be used to determine the taxable capital gains when mutual funds are sold. However, it can't be used for other investments. This is because of the special record-keeping problems posed by reinvested dividends and capital gains. Start planning your tax strategy now while time is on your side, instead of waiting until the end of the year when its usually too late. ************* READERS WRITE ************* Questions about Covered-calls with LEAPS... Hello OIN... I need your help! I read with great interest your article and example of applying "covered call" strategy to LEAPS. I am very familiar with covered calls and need some clarification applying this to LEAPS. I infer that the LEAPS effectively act as the underlying security (similar to the stock in a typical covered call)? I think of LEAP as buying discounted stock in this strategy. As the stock price exceeds the strike price of the call, does the LEAPS get called away? How does this differ from a spread? My online broker (ETRADE) was confused about entering this order. I assume I'd buy the LEAP (long) and write the front month calls (sell open) as in a typical covered call play? Perhaps we are just talking differences in nomenclature, i.e same strategy??? Thanks in advance JD ----- Concerning LEAPS with Covered-calls... Most novice traders are unaware that one of the best and most popular strategies associated with LEAPS is the covered call (or calendar spread) with the LEAPS position. Of course, a (call) calendar spread (time spread) consists of the sale of one call and the simultaneous purchase of a call of the same underlying security with the same (or higher/lower - a diagonal) price but with an expiration date further out. Most traders try open a calendar spread when there is EXCESS time value in the sold call or a discounted price for the LEAPS. That gives you a theoretical edge. Of course there are potential adjustments after you open the initial LEAPS/covered-call play. If the stock price rises and your short-term position is ITM on the last day of the strike, you need to buy it back so that you DON'T have to exercise the long-term position; that would defeat the whole purpose of the strategy. The majority of new traders prefer to wait until the last day of the strike period to close out the SHORT position (if necessary). Hopefully the stock won't climb too far above the sold strike because then you lose the edge in the play (because both positions go deeply ITM). At least in that case, your LEAPS are going up in value also and on the last day, the short calls will shrink down to parity (intrinsic value) so you will likely be ahead in the play when you buy them back. Then you can look for a rally to sell the next months' calls. That's the whole strategy; selling the calls when they are overpriced and buying them back (if absolutely necessary) when they return to intrinsic value. You may also have to "roll-up" or "roll-down" if the stock price moves very far away from your "sold " option to keep the play profitable. Many traders also attempt to outguess the stock, buying-back the call at a different time (a dip or slump). Obviously that's a personal decision and not really part of the basic strategy (a trading technique as opposed to spread technique). For more information, read the appropriate chapters in McMillan's "Options as a Strategic Investment" and Natenburg's "Option Volatility and Pricing", these are two of the bibles of floor traders and they may shed some light on the subject of combination and spreads and the appropriate entry/exit/adjustment strategies. Good Luck! ************* DAILY RESULTS ************* Index Last Mon Tue Wed Thu Week Dow 10323.92 -84.30 -120.28 113.08 -211.43 -302.93 Nasdaq 3205.35 -26.19 -199.66 106.06 -65.26 -185.05 $OEX 736.95 -4.91 -15.49 14.55 -10.15 -16.00 $SPX 1381.52 -6.23 -26.86 25.19 -17.53 -25.43 $RUT 456.17 -8.03 -12.66 2.73 -5.57 -23.53 $TRAN 2717.77 -21.84 34.11 74.80 -111.30 -24.23 $VIX 28.00 0.06 0.47 -1.43 0.13 -0.77 Calls Mon Tue Wed Thu Week CDWC 122.31 1.50 -6.38 7.75 4.44 7.31 Dropped P 54.56 1.25 -0.31 0.38 0.06 1.38 Refueling ANDW 34.06 0.00 -1.00 -1.06 3.25 1.19 Strength UNH 76.56 -0.06 -0.88 2.44 -1.31 0.19 New heights ALL 26.81 1.00 0.94 1.31 -3.19 0.06 Undeserved PLXS 79.56 -1.00 -3.00 -4.00 7.06 -0.94 Volatility CHKP 160.25 1.50 -8.38 -0.87 6.63 -1.13 New ABT 42.75 -1.19 0.00 0.69 -0.69 -1.19 Tortoise STT 109.38 2.87 3.25 -0.25 -9.63 -3.75 Dropped SEPR 90.81 -6.63 -3.13 -2.50 3.31 -8.94 Late buying CIEN 104.50 -8.63 -8.13 -2.06 6.81 -12.00 New RMBS 153.75 -2.88 -20.25 17.75 -14.63 -20.00 Dropped SDLI 168.00 -4.00 -21.75 5.06 -7.31 -28.00 Big moves Puts ANAD 27.13 -6.50 -9.06 -1.81 0.25 -17.13 Losing ways OPTV 36.50 -3.34 -3.50 -4.72 -3.75 -15.31 Dark abyss FDRY 54.50 -5.81 -0.81 0.63 -5.00 -11.00 In the mud INCY 47.13 -3.63 -4.13 -1.00 -1.88 -10.63 Raisin EXTR 42.88 3.50 -7.00 -1.25 -5.75 -10.50 New PCLN 36.25 -0.31 -3.94 -4.00 -0.25 -8.50 Falling HLIT 39.75 -2.19 -4.94 -1.38 2.13 -6.38 Full-alert NTOP 27.06 -3.88 -1.19 -1.56 2.56 -4.06 Earn. 5/31 ICIX 27.88 -1.07 -1.63 -1.06 0.75 -3.00 Flat today AZPN 19.63 -1.00 -1.25 0.25 -0.75 -2.75 Sliding NTLI 58.50 3.63 -5.38 2.38 3.13 3.75 Acquirer? PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** CDWC $122.31 +4.44 (+7.31) Just as expected, shareholders approved a share increase at yesterday's Annual Meeting. They were rewarded with a 2-for-1 split announcement, with a payable date of June 21. The continuing NASDAQ weakness yesterday provided a very nice last-minute entry point as the price firmed near $103. Volume came back, driving the tech sector higher and CDWC reaped the reward, tacking on over $14 in the last 2.5 hours of trading. After the split announcement, the stock got one final surge in today's trading, tagging $127.50 before succumbing to a weakening market late this afternoon. With the good news out, and market weakness continuing, CDWC will likely have a hard time moving higher. We'll step aside until the picture improves. STT $109.38 -9.63 (-3.75) Our play in STT ended abruptly Thursday. The decline came on a combination of two negative forces. First, after rallying over 30% in less than a month, traders decided to take profits in STT. Secondly, the losses were extended due to concerns over STT's high multiple. Despite the positive analyst remarks last week, traders began to question the sector's recent move. The heavy profit taking early Thursday morning caused STT to gap down by $2. And the stock kept falling, right through its 10-dma. The decline Thursday came on relatively heavy volume suggesting the "Big Boys" were leaving STT. We don't want to stand in the way of institutional selling to get run over. RMBS $153.75 -14.630 (-20.00) Well, it is time to drop this one. It's been a volatile ride for traders that entered this play. The move the past two days from $144 to $180 provided some traders with a good buying opportunity, while for others it may have brought some much needed disaster relief. We held onto RMBS thinking the approval to increase the number of authorized shares and the upcoming 4-for-1 split may have brought buyers to the table. Today's 8% decline came with the volume picking up as the price moved further south, suggesting there's more ahead. RMBS has provided many profitable opportunities in the past, and will do the same in the future, however for now it's time to look elsewhere. PUTS: ***** Still no dropped puts. ******************** PLAY UPDATES - CALLS ******************** UNH $76.56 -1.31 (-0.19) With all the premium ingredients, which included intraday upswings in the market, a sustaining sector, and excellent volume at more than double the ADV, UNH powered higher. Yesterday it sparkled in the limelight with another all-time high at $79.25, easily beating last Thursday's record ($77.50) during amateur hour. Today UNH was a victim of some expected profit taking, but nevertheless it managed to institute a higher near-term support level at $76.50 right in-line with the 5-dma ($76.51). There's no doubt the momentum is in tact as UNH clearly challenged overhead opposition as it flirted within fractions the $79 mark today. At these new heights, of course we need to see conclusive bounces before opening more positions, so be patient for new entries. ABT $42.75 -0.69 (+1.19) The tortoise may not be a show stopper, but without fail it covers ground. This is the case with ABT. After clearing resistance of $42 on Tuesday, it edged higher in recent trading. Unfortunately it found the next line of resistance at the $44 mark, but the volume continues to be robust. This important variable gives us confidence that ABT will make its way towards the 52-week record at $48.50 in the short-term. For the new readers, keep in mind ABT is purely a momentum play initiated by the healthy breakout of the drug stocks last week. So keep an eye on the Amex Pharmaceutical Index ($DRG) and the overall market conditions. Technically this is a favorable play with ABT now past the stubborn resistance at $40 and its continual moves above the trailing 5- dma ($42.65). Look for bounces off this line as entries on the climb. If by chance there's some consolidation, be patient and wait for a clear-cut direction to develop. PLXS $79.56 +7.06 (-0.94) PLXS has a middle name and it's Volatility! What a nerve-wracking slide to $66.88 yesterday before the buyers threw some money towards this potential splitter. Overall PLXS recovered nicely and is once again above firm support at $75 and $78. If all goes well tomorrow, PLXS should spring forward from it current level, which by the way is tightly sandwiched between the 5-dma ($77.71) and the recently more aloof, 10-dma ($81.83). A clean break above $80 would illicit a more inviting setting for technical traders to enter the scene and give the momentum another boost. Be patient and wait for the potential breakout if you're not the risky type. In the news on Tuesday evening, Plexus announced it completed the $53.7 mln cash deal to acquire the turnkey electronic contract manufacturing operations of Elamax, SA de CV (ELAM) in Juarez, Mexico. According to John Nussbaum, President and COO, this addition "should strengthen our relationships with new and potential customers, and establish a strategically important low-cost manufacturing solution outside of the United States". ALL $26.81 -3.19 (+0.06) Insurance stocks have been one of the few safe havens in this turbulent market over the past month. The move began picking up steam early in the week and after six positive days, the sector was due for a bit of a correction. What happened to them today seemed a bit undeserved, but was likely due to continuing negative sentiment with respect to interest rates. On 40% greater volume than the ADV, ALL pulled back to support near $27 before recovering a bit in the last hour of trading. Negative sentiment about brokerage stocks seemed to leak into anything related to the Financials and ALL couldn't get out of the way. Fortunately, support held and, provided the buying interest returns, the current level looks like a good entry point. More conservative investors may want to wait for the stock to push through near-term resistance at $28; if volume confirms the move, take advantage of the strength and jump aboard. ANDW $34.06 +3.25 (+1.19) Looking for strength capable of weathering this persistent market weakness? Look no further than ANDW. The stock confirmed long-term support near $30 on Monday and then again yesterday. The brief rally on the NASDAQ lifted ANDW up to resistance and the stock managed to ignore the late-day market weakness. Closing near the high of the day on nearly double the average daily volume is music to our ears. Today's strong move puts ANDW above its 10-dma ($32.13) and we expect the run to continue. Near-term resistance between $34-35 is the next obstacle to overcome and then we'll be in clearer territory. Continuing market weakness could reward us with another attractive entry point. Look for a bounce at support between $30-32 and then feel free to jump in as buying volume picks up again. If buyers can push ANDW through resistance, buying on strength is a viable entry strategy as well. SEPR $90.81 +3.31 (-8.94) Although we didn't get a split announcement from the Annual Shareholder Meeting Wednesday, SEPR showed impressive relative strength in Thursday's session. The AMEX Biotech Index ($BTK) lost nearly 2%, but SEPR held steady. The stock is now trading back above its major support level of $90, and could bounce from here. We'll want to watch the action in SEPR closely Friday morning. We saw a massive wave of volume cross the tape in the final hour of trading Thursday. Although trading was relatively light for most of the day, the heavy buying late Thursday caught our eye. Watch for a bounce from current levels Friday morning, although we're heading into a holiday weekend, pay close attention to the volume to confirm buying interest has returned to SEPR. If SEPR's strong showing Thursday carries over into Friday's trading, you might consider waiting for the stock to clear resistance at $97 before entering the play. A move above that level might signal a return of momentum, as there's not much resistance above $97. SDLI $168.00 -7.31 (-28.00) All things considered we really are pleased with the rebound yesterday. The move was definitely impressive, while the action today wasn't that bad. We aren't trying to justify the decline today, however with the weakness in the Dow, the fact that the Nasdaq and SDLI held up as well as they did is encouraging. SDLI did dip back below its 100-dma but the selling seen today really didn't come until the final hour of trading, as traders prepared to leave for a long holiday weekend. That said, we obviously would have been more comfortable with a strong follow-through today, but we must play the hand we are dealt. SDLI did get a boost before the bell from Deutsche Banc Alex Brown. Analysts there initiated coverage of the company with a Strong Buy rating. SDLI closed near its low of the day, which is not a good sign, however many view whatever happens tomorrow as a "non-event", going into the weekend. For traders that entered yesterday and didn't take some money off the table, support is once again found at $164 and near $155. P $54.56 +0.06 (+1.38) The consolidation the past two days is really a plus for our new play, considering the weakness seen in the broad markets today. The bounce off $54 late today provided traders with a good entry point, with the volume picking up as well. Very little in the way of news this week. On Wednesday afternoon Brazil's National Petroleum Agency listed Phillips in a group of companies that were approved to compete for the second auction of oil exploration licenses slated for next month. The companies will compete for 23 blocks in an oil licensing round aimed at stepping up activity in one of the world's most promising regions. One thing to remember when considering a new play in this petroleum company, it obviously doesn't move with the speed and volatility of the tech stocks. Gunslingers may choose to alter the size of their positions to achieve desired results. With the holiday weekend approaching, traders looking to enter this play may want to wait for the new week, or to scale into new positions. ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. 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The newsletter picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. The newsletter staff makes every effort to provide timely information to its subscribers but cannot guarantee specific delivery times due to factors beyond our control.
The Option Investor Newsletter Thursday 5-25-2000 Copyright 2000, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. ***********************Advertisement*************************** fnCentral.com frees movers, shakers, decision-makers! No apps to buy or learn. Use the web's first fully integrated personal finance manager on the fly with any PC, Palm, phone, or internet appliance. Manage your money. Consult with CPAs. Estimate taxes. Track investments. All on fnCentral. OPEN A FREE ACCOUNT NOW! http://www.fncentral.com/cgi-bin/ad?from=op511 ***************************************************************** ******************* PLAY UPDATES - PUTS ******************* NTOP $27.06 +2.56 (-4.06) Yesterday NTOP dived deeper into the dark abyss. It came up for air at $22.50 just shy of the next support level at $20. The volume was again only moderate, but the downward progression affirmed that this technical play is treading along the proper course. And to top it off, the NASDAQ was experiencing a sort of relief rally. Yes it's true, NTOP rode the market wave up a couple dollars today, but it wasn't backed by any show in trading activity. In fact, volume was only 60% of the norm; thus indicating buyers weren't lined up to add NTOP to their portfolios. $28 is still proving to a mark of intraday resistance, which is notably under the 10-dma ($32.56) at this time. Currently NTOP is sitting on the descending 5-dma ($27.20), so look for it to move lower off this technical indicator and head back towards the $20 level. You'll want to mark your calendar too. Net2Phone is confirmed to report 1Q earnings next Wednesday, May 31st after the market. ICIX $27.88 +0.75 (-3.00) This new put play performed quite well despite the NASDAQ's inevitable relief rally. There was enough lingering fear and apprehension to keep buyers away from this telecom stock. Think about it. Telecoms are the base clients of many of these high-flying tech stocks, many of which are way below "bargain prices". So on one hand there's the likelihood of a further decline in share price as the economic picture dims or, on the other, a chance of a buyer's spree. But at the moment the bears are winning the battles in the telecom arena. Our first objective for ICIX was for it to stay under the 10-dma (currently at $31.63) and slip under the $25 level on respectable volume. It did just that in yesterday's session. ICIX moved towards its all-time low of $18.13 and tagged $23.88 before rising late afternoon. And in addition, it stayed a significant distance away from the 10-dma line and established a lower intraday resistance level by today. Look now for subsequent lower moves off short-term resistance at $28.63 and the 5-dma at $28.78. A few more negative market sessions would certainly put a shine on this play. HLIT $39.75 +2.13 (-6.38) In the past two trading sessions, volume was at more than double the ADV! There's obviously a tug-of-war going on between buyers and sellers so let's keep our radar on full-alert. There's no company-specific news to effect the trading; therefore it's probably more a result of the low share price and the NASDAQ's attempts to make some ground. One positive attribute for this put play was HLIT's move through Tuesday's intraday low ($38.75). The stock sunk to $35 yesterday and even today, it hit $38.38 before making a feeble charge for $40. That also brings up another technical note. HLIT's overhead resistance is establishing itself lower and lower as time passes. If you look at a chart with a 5-dma line you can see how this indicator is mapping out the pattern and acting as a barrier. In consideration of the market uncertainty, it's still prudent to wait for HLIT to make another definitive lower before adding more positions. AZPN $19.63 -0.75 (-2.75) After a valiant attempt to break out of its downtrend, AZPN got put back in its place today. Lifted by the surge on the NASDAQ this morning, the light volume couldn't sustain the move, and weakness returned. Drifting lower for much of the day, the final blow came in the final 15 minutes. On a surge of selling volume (over 10% of the ADV), AZPN quickly lost $1.44 to close at $19.63. This puts the stock at its lowest price since November of last year, and very close to the $18 support level. The stock is now down over 60% from its February highs, and is still showing no sign of strength. Volume remains near the daily average, and is keeping the stock sliding downhill in deference to the law of gravity. Resistance is consistently being found at the 5-dma (currently at $20.75), and good entries can be had as the stock fails to break through this level and rolls over. Keep an eye on the volume though; as we approach support at $18, declining volume will be an early indication that the selling is drying up. INCY $47.1350.00 -4.13 (-10.63) This once juicy grape looks more like a raisin every day. You'd think Merrill's issuance of a NT Accumulate/LT Buy would have caused INCY to buck the downward trend. While INCY did rally as high as $53.88 in the NASDAQ euphoria yesterday afternoon and this morning, the contrast is that INCY's intraday highs are getting lower while NASDAQ's intraday highs remain flat. That tells us there is relative weakness compared to the rest of the already weak market. In short, Merrill's initiation of coverage did nothing for the stock. It looks like we can continue to count on resistance at $53 - a bounce south from there might make a good entry. The other entry to consider is by waiting for INCY to break support at $43. Once it does that convincingly (a.k.a. with volume), the next stop would be around $36. In this market, that's a real possibility. Just be sure to keep your stops in place in case the recovery is for real next time. Otherwise, this has been an excellent play so far. PCLN $36.25 -0.25 (-8.50) Unless you are William Shattner, who presumably makes a comfortable living as Chief Huckster for PCLN, or Bob Barker of "The Price is Right" fame, the price of PCLN is generally wrong...unless you're in a put play! It's amazing to us how the President and COO, Dan Schulman can get on CNBC to talk about a "great business model" that is NOT in the best interest of consumers. In the long run, hoping your potential customers guess too high on the ticket price (rent a car, hotel, groceries, gas, whatever) while you pocket the difference isn't going to work as consumers demand even more competitive pricing. PCLN isn't profitable by long shot even now. For those reasons, we think the current model is unsustainable and the price should continue to decline. How far? Tough to say. However, PCLN has violated all support by descending below its last support at $45 to its lowest closing price ever at $36.25. Mild intraday support can now be found at $33. While we think the price will have every opportunity to decline going forward, it can still temporarily rally with the general market - keep your stops close. You may want to wait for a bounce south of intraday resistance at $40 to $41 before taking a new position. You can try to get in on a high volume decline under $33, but we'd rather wait for failure at resistance. OPTV $36.50 -3.75 (-15.31) Despite the broad tech sector rally Wednesday, OPTV continued to fall into the abyss, tracing new 52-week lows along the way. The stock hit bottom at $36.25 Wednesday, but managed to erase some of its gains as the broader market lifted OPTV from the mire. But the rally ended early Thursday morning as OPTV headed back down. Traders closed OPTV right at its day low of $36.50, just shy of its newly minted 52-week low. OPTV announced Thursday that it had joined the three-way venture with MOT and ACTV to expand the reach of Interactive Digital TV. The worldwide venture is expected to bring benefits to highly targeted TV viewers and target advertising to consumers. Despite the positive development for the company, OPTV sold-off, revealing the relative weakness in the stock. Watch the stock closely Friday morning for signs of continued weakness. Look for an entry if OPTV falls past $36.25, signaling that the stock is headed to new lows. NTLI $58.50 +3.13 (+3.75) Rumors continue to fly that NTLI is on the acquisition trail. Investors are becoming confused as to what strategy the company pursuing. Recently, it was speculated that NTLI would bid for Freeserve (FREE), the U.K. Internet service provider. Investors are concerned NTLI would have to pay an estimated 4 bln pounds for FREE, about $5.9 bln. What's more, last week NTLI told analysts that the company wants to enter the wireless arena. The problem NTLI faces is that the markets it wants to enter are competitive and expensive. Although NTLI did rally along with the market Wednesday, and hold on to some of its gains Thursday, the uncertainty surrounding the company could lead to further selling. The stock bounced off support at $60 for much of Thursday, but fell below that level in the last half-hour of trading. An aggressive trader might look for a quick entry at current levels. While a conservative trader might wait for NTLI to fall through support at $55 before entering the play. ANAD $27.13 +0.25 (-17.13) ANAD continued its losing ways Wednesday, finally finding support at $25.13. We suggested that the stock might enjoy a brief relief rally, and it did. After bottoming Wednesday, ANAD rallied into Thursday's session, trading above $30 for most of the day. But once the broader market turned south, ANAD followed. Sellers returned late Thursday, closing the stock near its day low. The short-lived rally came on the heels of two events. First, SMDI made its debut Thursday, the company designs RF components. The stock rose 25% in its IPO, sending a positive message through the sector. Also, DB Alex Brown made positive comments about the sector that may have added a little lift to ANAD. But the good news soon dissipated and ANAD erased much of its earlier gains. From here, consider entry at current levels for a quick play. Or, wait for ANAD to fall through support at $25, a failure of support would signal that the stock has further downside. FDRY $54.50 -5.00 (-11.00) Yesterday and early this morning it appeared as though our play in FDRY may have come to an end. However, the bears once again took the bulls by the horns and pulled FDRY back down in the mud. The move up came on decent volume, and appeared as though, investors had found some reason to be optimistic. As we've said in previous updates, most bounces since early April have been met by sellers trying to recoup their their loses. The bounce today produced the same results, as the company ran into resistance near $62.75. Traders drove the price back down to $53, and closed in the lower end of the range, which indicates there certainly could be more selling ahead. Yesterday FDRY announced the availability of its version 7.0 IronWare Internet routing software, which contains security enhancements. The press release did little to help prop up the price of the company's stock for more than a day. Foundry is still oversold, and could attract buyers back to the market. However at this point any bounces would probably be viewed as simply technical in nature. Further weakness, would again have to be viewed as an opportunity to buy puts. ************** NEW CALL PLAYS ************** CIEN - Ciena Corp $104.50 +6.81 (-12.00 this week) Ciena makes multiplexing systems that increase the capacity of long-distance fiber-optic telecommunications networks. The company's systems transmit signals simultaneously over the same circuit. Customers such as Sprint, Bell Atlantic, and MCI Worldcom, use its lines for long-distance optical transport and for shorter distances. The company is expanding its product and geographic breadth as it transforms itself from niche market specialist to optical networking supplier. CIEN's products span the globe to connect the world. And now, you can consider China dialed in. The House voted to approve normalized trading relations with China Thursday. While most Americans are split on the issue, (Our OIN reader poll revealed 51% approve and 48% oppose the move) it is expected to benefit telecom equipment makers. China is rapidly expanding its telecommunications systems and is expected to spend heavily on new equipment to upgrade its networks. China is seen as a premier market for the telecoms, and CIEN will benefit by supplying networking equipment to build wireless and wireline networks. CIEN has emerged as one of the leaders in the optical networking sector. Earlier in the week, Morgan Stanley set a price target of $200 for the stock. In their report, analysts told clients that CIEN is a top-tier play in the fiber-optic arena. Despite the praise from analysts, CIEN has fallen sharply recently. The stock was trading in the $150 range just last week, but has since fallen along with the rest of the tech sector. However, with the stock falling so swiftly recently, there is very little resistance preventing CIEN from moving higher. After bouncing from a low of $90 Wednesday, CIEN has since rebounded sharply higher. And with the exciting developments in China, the stock could further rally. CIEN will face minor resistance at $110, but after that we could see smooth sailing. However, CIEN is a volatile stock, so watch the action closely Friday to determine direction. If CIEN does sell-off, watch for momentum to resume after a bounce from support at $100. But, if CIEN extends its gains into Friday, consider an entry as the stock clears congestion at $110. Also worth noting, shareholders approved an increase of authorized shares at CIEN's Annual Meeting in March. Although many companies have delayed stock splits due to the market environment, a declaration by the Board would certainly help our cause. If the market stabilizes a bit we could get an announcement in the coming weeks. BUY CALL JUN-100*EUQ-FT OI= 773 at $14.00 SL=10.50 BUY CALL JUN-105 EUQ-FA OI= 385 at $11.50 SL= 8.50 BUY CALL JUN-110 EUQ-FB OI= 650 at $ 9.38 SL= 6.50 BUY CALL JUL-110 EUQ-GB OI=2673 at $16.13 SL=11.50 Picked on May 25th at $104.50 P/E = 575 Change since picked +0.00 52-week high=$189.00 Analysts Ratings 11-8-1-0-0 52-week low =$ 26.81 Last earnings 04/00 est= 0.10 actual= 0.12 Next earnings 08-17 est= 0.16 versus= 0.01 Average Daily Volume = 6.45 mln /charts/charts.asp?symbol=CIEN CHKP - Check Point Software $160.25 +6.63 (-1.13 this week) Check Point Software Technologies is a worldwide leader in securing the Internet. The company's Secure Virtual Network (SVN) architecture provides the infrastructure that enables secure and reliable Internet communications. SVN secures business-to-business(B2B) communications between networks, systems, applications and users across the Internet, Intranets and extranets. Check Point's Open Platform for Security (OPSEC) provides the framework for integration and interoperability with "best-of-breed" solutions from over 200 leading industry partners. A look the chart definitely shows a stock stuck in a trading range. When comparing the chart with that of the Dow and the Nasdaq ours doesn't look so bad. Actually CHKP has held its own pretty well, since mid April. The recent attack of the "Love Bug" and others seems to help keep Check Point in the "limelight" to some extent. Check Point recently received the Network Computing 2000 Well-Connected Award, in the category of Best Firewall. Part of what drew our attention to CHKP is just how well the stock has managed to hold up the last couple of months. CHKP has formed a wedge pattern with the $145 area providing a good base on several different occasions. Although it can't go it alone, all this one needs a little encouragement and it could be on its way. The company's numbers were good the last quarter, and the analysts that follow CHKP have it heavily rated as a Strong Buy. This morning MER Telecommunications Solutions announced it had joined Checkpoint Software's Open Platform Security alliance. This latest alliance is not a make or break deal, but for those that follow the company, just another in a long list of new business for the company. How do we play CHKP. Heading into the weekend, we would be some what cautious, however would not be afraid to buy calls if given the chance to do so. Check Point has support at $160, $154 and as mentioned near $144. A breakout over the $168 area and CHKP could be on its way. The last major alliance with Check Point came from Ramp Networks(RAMP) middle of April. With the Internet security becoming a huge issue, we would look for more in the coming days. BUY CALL JUN-155*YKE-FK OI=402 at $16.50 SL=12.00 BUY CALL JUN-160 YKE-FL OI= 85 at $14.25 SL=10.25 BUY CALL JUN-165 YKE-FM OI= 77 at $11.63 SL= 8.50 BUY CALL JUN-170 YKE-FN OI=173 at $ 9.63 SL= 6.50 BUY CALL JUL-170 YKE-GN OI=112 at $21.25 SL=15.50 SELL PUT JUN-160 YKE-RL OI= 89 at $12.75 SL=17.75 (See risks of selling puts in play legend) Picked on May 25th at $160.25 PE = 135 Change since picked +0.00 52 week high=$295.00 Analysts Ratings 12-3-0-0-0 52 week low =$ 20.72 Last earnings 04/00 est= 0.35 actual= 0.40 Next earnings 07-12 est= 0.42 versus= 0.26 Average daily volume = 1.65 mln /charts/charts.asp?symbol=CHKP ************* NEW PUT PLAYS ************* EXTR - Extreme Networks $42.88 -5.75 (-10.50 this week) Extreme Networks is engaged in the design, development, manufacture and sale of high performance networking products based on Gigabit Ethernet technology. The company's next- generation (Layer 3) switches transmit more information faster, and enable enterprises such as network service providers and content providers to migrate from older networks to current technologies. The company's Summit and BlackDiamond switches share a common hardware, software, and management architecture that facilitates a relatively short product design and development cycle, reducing the time-to-market for new products and features. Posting its 4th consecutive quarter of stronger earnings should be helping EXTR to move higher, but the real scoop is found in the revenue numbers. Revenue growth has slowed each quarter, and then last week, the company committed the cardinal sin for a high-valuation tech stock. In their May 16th quarterly report, the company said, "We expect to experience rapid erosion of average selling prices of our products due to a number of factors, including competitive pricing pressures, promotional pricing and rapid technological change." The report goes on to state that this will affect gross margins. This is not the kind of news investors want to hear, especially on a company with a P/E ratio over 100. The selloff in the NASDAQ that commenced in early March had already taken its toll, dropping the price from a high of $121.38 to a low of $50.75. With the release of the negative forward-looking comments listed above, bearish sentiment returned and EXTR has been subjected to continued abuse over the past six sessions. The 5-dma (currently $50.31) is creating downward pressure and the stock is now solidly below what had been good support at $50-51. Not only is today's close the lowest price since last June, but it is not far above the 52-week low at $37.13. Volume is sitting north of the ADV and as long as sellers remain in control, a run at new yearly lows looks likely. Failed rallies near resistance will present the best entry points; climb aboard and enjoy the ride as selling volume picks up. BUY PUT JUN-50*EUT-RJ OI=254 at $9.88 SL=7.00 BUY PUT JUN-45 EUT-RI OI= 70 at $6.38 SL=4.25 Average Daily Volume = 1.59 mln /charts/charts.asp?symbol=EXTR ********************* PLAY OF THE DAY - PUT ********************* AZPN - Aspen Technology $19.63 -0.75 (-2.75 this week) Aspen Technology builds computer systems that assist process manufacturers in designing and automating their plant operations. Among the companies using AZPN's software are Chevron, Dow Chemical, and Proctor & Gamble. Not only does the company's software find more efficient methods of production and management, but it also lets manufacturers explore "what if" scenarios without reassembling their facility. Receiving nearly 60% of its revenues from consulting and other services, AZPN has operations in more than 20 countries and more than half of all sales come from outside the U.S. Most Recent Write-Up After a valiant attempt to break out of its downtrend, AZPN was put back in its place today. Lifted by the surge on the NASDAQ this morning, the light volume couldn't sustain the move, and weakness returned. Drifting lower for much of the day, the final blow came in the final 15 minutes. On a surge of selling volume (over 10% of the ADV), AZPN quickly lost $1.44 to close at $19.63. This puts the stock at its lowest price since November of last year, and very close to the $18 support level. The stock is now down over 60% from its February highs, and is still showing no sign of strength. Volume remains near the daily average, and is keeping the stock sliding downhill in deference to the law of gravity. Resistance is consistently being found at the 5-dma (currently at $20.75), and good entries can be had as the stock fails to break through this level and rolls over. Keep an eye on the volume though; as we approach support at $18, declining volume will be an early indication that the selling is drying up. Comments The NASDAQ broke down in the last hour and a half. Along with it came most tech stocks, including AZPN. The $20 level represented a base on Tuesday and Wednesday, but today's close breached that. Look for market direction tomorrow from the NASDAQ and enter on intraday spikes up. Remember, with a three-day holiday weekend coming up, don't expect a lot of buying. Note key technical levels mentioned above. BUY PUT JUN-25*ZQP-RE OI=80 at $6.00 SL=6.00 BUY PUT JUN-20 ZQP-RD OI= 5 at $2.69 SL=3.00 Average Daily Volume = 294 K /charts/charts.asp?symbol=AZPN ************************ COMBOS/SPREADS/STRADDLES ************************ A One-Day Wonder! Wednesday, May 24 The markets rallied today as investors returned to scene of the recent battlefield where the Nasdaq was pummeled to a new yearly low. The Dow Jones Industrial Average rebounded 113 points to 10,535 and the Nasdaq Composite bounced back 106 points to 3270. The S&P 500 Index recovered 25 points to close at 1399. Volumes were the heaviest this month with 1.14 billion shares exchanged on the Big Board. Breadth was relatively neutral with declines and advances almost even. Volume on the Nasdaq climbed to 2.08 billion shares but declines outpaced advances 2,493 to 1,620. Treasury prices weakened a little as stocks improved. The U.S. 30-year bond fell 14/32 to 100 21/32, lifting its yield to 6.19%. Sunday's new plays (positions/opening prices/strategy): Best Foods BFO JUN50P/JUN55P $0.75 credit bull-put Southdown SDW JUN50P/JUN55P $0.50 credit bull-put U.S. Bancorp USB DEC20C/JUN27C $5.88 debit diagonal The volatile market provided favorable entry opportunities for each of our new positions. The U.S. Bancorp diagonal spread opened at a slightly lower than expected debit and the Southdown credit spread was based on a (9 contract) trade observed during the session. Portfolio plays: All of the major indices finished the session positive today in a dramatic rally that marked the end of a week-long slump. The Nasdaq's turnaround was surprising after the index reached a new low for year in the morning session. Trading volume increased during the recovery leading a number of analysts to suggest the move was a reliable technical rebound. Internet shares led the way with online auctioneer eBay (EBAY) rallying $14 and software provider Inktomi (INKT) up almost $10 at $111. Intel (INTC) was a top performer among both market gauges while Minnesota Mining & Manufacturing (MMM) and Johnson & Johnson (JNJ) bolstered the Dow. In the broad market, weakness in retail stocks offset gains in airline issues. Costco Wholesale (COST), the #1 U.S. wholesaler missed analyst's estimates and forecast lower future earnings but the friendly skies were active following news of a mega-merger in the industry. United Airlines (UAL) agreed to acquire US Airways Group (U) for $4.3 billion, or $60 per share in cash. Among the popular sectors; computer, networking, agricultural products and biotechnology issues gained ground while investment banking and industrial power producer issues consolidated. Our portfolio enjoyed gains in a number of slumping issues and the majority of positions benefited from the bullish session. Johnson & Johnson (JNJ) was a big mover in the Major Drug group, up almost $3 to a recent high near $90. Our long-term position is at maximum profit with the stock in this price range. Finance and Insurance stocks also participated in the rally. Allstate was the top performer in that sector rising $1.31 to $30. The issue is almost $8 above our break-even price. Bank One (ONE), Mattel, (MAT), Nabisco (NGH), National Service (NSI), and Summit Bancorp, (SUB) also moved higher during the day. In the technology group, Covad Communications (COVD) recovered some of its recent losses. The share value rose $1.68 to close just below $25. Excite@home (ATHM) was also on the move, rebounding off technical support to close at $19. Sunday's new diagonal spread candidate, Pep Boys (PBY) traded in a wide range during the session. The volatile activity provided a previously unavailable entry at the suggested target debit of $2.12. It appears that we should revise our optimistic outlook on SCM Microsystems (SCMM). The issue showed little upside potential today and did not participate in the technical recovery rally. In fact, the issue actually closed down another $4. Looking back, we should have made an adjustment during Tuesday's session when the issue broke below a recent trading range. Regrettably, we cannot track every issue as well as we should and thus excessive losses occasionally occur when they might normally have been prevented. To reduce the closing debit, we are going to buy-back the short option first and hope for a continued downward trend. When the issue begins to recover, we will sell the long option to end the play. Our current debit is $10.38 and the initial target will be a break-even exit. Thursday, May 25 The market retreated today with the Dow leading the way amid a sell-off in financial issues. The industrial average tumbled 211 points to close at 10,323 while the Nasdaq Composite dropped 65 points to end at 3205. The S&P 500 Index fell 17 points to 1381. Breadth ended in negative territory on the Big Board as declines led advances 1,602 to 1,273 on volume of 979 million shares. The Nasdaq was only slightly better in breadth with volume reaching 1.57 billion shares. Bond prices soared as funds departed the equity market. The 30-year bond strengthened 1-5/32, with the yield down to 6.11%. Portfolio plays: The market retreated today after the small recovery in technology stocks resulted in a sell-off in the industrial groups. During the morning session, hi-tech companies rebounded as investors rotated into issues that have tumbled in the past few weeks. The recovery was short lived however, as interest rate worries overcame the new optimistic outlook. The market was negatively affected by today's Commerce Department report that the economy grew vigorously at an annual rate of 5.4% during the first quarter. Analysts were also concerned with the results of an inflation gauge tied to the gross domestic product, which rose at an annual rate of 3.1% in the first quarter. Most experts anticipated a slightly larger increase but the news did little to help slumping equities. Now the consensus expectation is a period of choppy trading with no clear leadership from any one sector. Our portfolio actually performed quite well considering the bearish activity. Ciena (CIEN) and Ditech (DITC) led the technology group with substantial rallies. Both issues ended almost $7 higher with bargain-hunting retail investors supporting the recovery. Sepracor (SEPR) led the Major Drug sector, up $3.31 on strength in a small group of biotechnology stocks. Media companies also recovered from the recent drought. Clear Channel (CCU) rose $1.88 to $72.75 and AM-FM (AFM) ended $1.75 higher at 66.50. Our selection in the this pair was the more-conservative spread in AFM (JUN-$55P/$60P) but it appears both positions have a favorable probability of a profitable outcome. The big mover in the small-cap category was Andrew (ANDW). The stock rallied over $3, continuing last week's bullish break-out and moving to within a few cents of a new all-time high. Vodaphone (VOD) was also on the move, rising $1.62 in the fourth consecutive day of gains. The stock is trading at $41.40 and our long-term position achieves maximum profit at $45. Boston Scientific (BSX) deserves honorable mention. After suffering through two weeks of selling, the issue rebounded today after the company announced that it has received U.S. Food and Drug Administration (FDA) approval to market the NIROYAL Advance Coronary Monorail Stent System. Today's approval paves the way for global acceptance of BSX's gold-coated technologies and other competitive products, specifically the NIROYAL Elite stent system. We had an unfortunate surprise in one of our new calendar spread positions. National Service Industries (NSI) announced that it expects diluted earnings per share for the third quarter to be lower than anticipated. EPS is expected to be $0.50 to $0.55 in the third quarter compared to $0.75 for the same period last year. This revised forecast is primarily due to lower-than-anticipated operating profits in the company's lighting equipment segment. The envelope segment is also contributing to this shortfall. Our initial reaction was to close the long position for a small loss and wait for the expiration of the (short) $25 call. The company plans to report quarterly results on June 27, after this month's expiration. There is little chance the issue will regain it's previous momentum in the short-term. Questions & comments on spreads/combos to Click here to email Ray Cummins ****************************************************************** - NEW PLAYS - This week I received two new requests for conservative positions utilizing time-selling strategies. The simplest way to profit from the erosion of time is a horizontal (calendar) spread. The basic premise in a horizontal spread is simple; time erodes the value of the near-term option at a faster rate than it will the far-term option. In most cases, it is best to establish this type of spread at least 2 - 3 months before the long position expires, capitalizing on the ability to sell another option against the longer-term position. With an extended time frame, the probability of a successful outcome increases substantially. ****************************************************************** CPB - Campbell's Soup $31.00 *** Mmmm, Mmmm, Good! *** Campbell Soup Company together with its consolidated subsidiaries is a global manufacturer and marketer of high quality, branded convenience food products. Campbell's operates in three business segments: Soup and Sauces, Biscuits and Confectionery, and Away From Home. The Soup and Sauces segment includes the worldwide soup businesses, Prego spaghetti sauce, Franco-American pastas and gravies, Pace Mexican foods, Swanson broths, Home Pride sauces in the United Kingdom and the V8 and V8 Splash beverage business. The Biscuits and Confectionery segment includes the Pepperidge Farm, Godiva and Arnotts Limited businesses. The Away From Home segment represents products, including Campbell's soups, Pace Tabletop picante and Campbell's Specialty Kitchens entrees, that are distributed to the food service and home meal replacement markets. The recent activity in the Food & Beverage Group has created new interest in a number of well-known issues. The option premiums and the recent technical history are favorable for a neutral to slightly bullish time-selling position. With current resistance near $33, a break-out appears unlikely but in the event it occurs, the indications will be obvious and there should be little difficulty in making the adjustment to a bullish position. PLAY (conservative - bullish/calendar spread): BUY CALL AUG-32.50 CPB-HZ OI=1027 A=$2.00 SELL CALL JUN-32.50 CPB-FZ OI=651 B=$0.88 INITIAL NET DEBIT TARGET=$$0.88-$1.00 TARGET ROI=25% Chart = /charts/charts.asp?symbol=CPB ****************************************************************** BEAM - Summit Technology $12.44 *** New FDA Approval! *** Summit Technology is engaged in the business of vision correction, and in the selling of contact lenses and related products. BEAM is a leading developer, manufacturer and marketer of ophthalmic laser systems and related products designed to correct common vision disorders such as nearsightedness, farsightedness and astigmatism. In the vision correction segment, the company develops, manufactures, sells and services ophthalmic laser systems, or Excimer Systems, and related products designed to correct common refractive vision disorders with a procedure known as Laser Vision Correction. BEAM also services laser systems and related products to correct vision disorders and collects per procedure license fees from users of its systems. Through Lens Express, the company fulfills new orders of contact lenses and reorders of contact lenses, and is engaged in program sales, sales of eye care solutions, lens case sales, sunglass sales, membership and vitamin sales. Autonomous, a wholly owned subsidiary, is engaged in the development of next-generation excimer laser instruments for laser refractive surgery. The company has enjoyed a number of positive announcements in the past week and yesterday the issue rallied to a recent high after receiving approval to market the LADARVision system in the European Economic Area. The EEA is formed by a group of fifteen Member States and encompasses much of the Western portion of the continent. The approval will help the company establish a strong international presence and is the first step to implementing their European marketing strategy. This announcement follows the recent news of the U.S. Food and Drug Administration permitting BEAM to market its CustomCornea Measurement Device in the United States. The CustomCornea Measurement Device is designed to measure, record, analyze and display visual aberrations in a patient's eye. Traders applauded the news and implied volatility in options remained high as the stock rallied Wednesday. The volume in call options has also increased and the small disparity in front-month premium will allow us to speculate on the future of the issue with a favorable, long-term position. Last year's consolidation area near $15-$17 should provide ample resistance for a position adjustment in the event of a short-term rally. PLAY (aggressive - bullish/calendar spread): BUY CALL SEP-15 BAQ-IC OI=2358 A=$2.62 SELL CALL JUN-15 BAQ-FC OI=5703 B=$0.68 INITIAL NET DEBIT TARGET=$1.75 TARGET ROI=25% Chart = /charts/charts.asp?symbol=BEAM ************************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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