The Option Investor Newsletter Sunday 5-28-2000 Copyright 2000, All rights reserved. 1 of 5 Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com Entire newsletter best viewed in COURIER 10 font for alignment ****************************************************************** MARKET STATS FOR LAST WEEK AND PRIOR WEEKS ****************************************************************** WE 5-26 WE 5-19 WE 5-12 WE 5-5 DOW 10299.24 -327.61 10626.85 + 17.41 10609.37 + 31.51 -156.05 Nasdaq 3205.11 -185.29 3390.40 -138.65 3529.07 -287.75 - 43.84 S&P-100 736.08 - 16.87 752.95 - 8.72 761.67 - 8.12 - 11.63 S&P-500 1378.02 - 28.93 1406.95 - 14.01 1420.96 - 11.67 - 19.80 RUT 457.37 - 22.33 479.70 - 11.24 490.94 - 21.90 + 6.59 TRAN 2687.55 - 54.45 2742.00 -132.02 2874.02 - 2.09 + 26.10 VIX 27.49 - 1.28 28.77 - 1.23 29.95 - 0.44 + 1.64 Put/Call .65 .89 .53 .53 ****************************************************************** What if they opened for trading and nobody came? That was the case on Friday. The Dow and Nasdaq both posted the lowest volume for the year and both indexes ended in almost a draw. The Nasdaq and the Dow traded on both sides of positive several times during the day and the outcome was in doubt until several minutes after the closing bell. With the Nasdaq posting only a -.24 loss it would appear on the surface that nothing happened. The Dow, although slightly more negative at -24.68, was also a yawner. Was it as sleepy as it appeared? Not in my mind. The Nasdaq had a really good chance to retest the lows from Wednesday of nearly 3000 but could only muster a drop to 3150. The Dow tried to mount a rally and failed closing below 10300, only 41 points off the low of the day, and the lowest point since April 17th. Not awe inspiring for me. The Nasdaq is looking like it is trying to find a bottom here but the Dow looks like it has other ideas. There was good news on the economic front on Friday. The April Durable Goods Orders dropped a whopping -6.4% when they were expected to increase +.5%. This was the largest drop in over eight years. Durable goods are products expected to last for more than three years and represent a large indicator for economy watchers. If orders are dropping then sales are slowing. The ripple down may be starting as a result of the interest rate increases. The other major release was the Personal Income and Spending report. Income increased only +.7% and spending only +.4% which was inline with estimates. The personal spending increase was the smallest since July of 1999. Is the economy really slowing? We really hope so because that is the quickest way to get Greenspan off everybody's mind. Today there were other indications of a slowing economy as well. Office Depot (ODP) warned that May sales were slowing and would impact earnings. ODP set a new 52-week low. Add this to the CostCo warning of the same thing earlier in the week and you could build a case for a slowing business cycle. Fewer paper clips and staples sold point to a business slowdown? You bet! Could this be a new leading indicator for the Fed. Flush the briefcase indicator on CNBC we now have a new standard. If we can get all the secretaries in the country to count their paper clips once a month and email their answer to the Fed (complete with an email virus please) then the Fed would know immediately if their interest policy was working. Other leading indicators this week included wood and paper stocks that were suffering from reduced orders as well as auto stocks. Sales of new cars reportedly are slowing in May and GM and Ford stock is suffering as a result. GM is a Dow component. Microsoft gapped open on the news that the government was content to only recommend a two company breakup but bled off again as news about the case continued to weigh on the market. The judge, as though he needed another reason, took another verbal shot at Microsoft late in the afternoon as he took the case home alone for the weekend. A final ruling may be out as soon as next week. Most watchers feel he has already made up his mind months ago and is just going through the motions. With every shot the judge takes at MSFT he increases the possibility of the case being reversed on appeal. Time will tell! One of the major factors weighing on the markets is the cash drain. Trimtabs.com reported today that a huge $7.2 billion was withdrawn from equity funds in the week ended on Wednesday. Has the investing public finally gotten fed up with the choppy market and started believing the bears? I think it is worse than that. At the Denver seminar Friday there were many investors who were suffering from a big decline in their stock portfolios and were very interested in repair techniques using options to recover some of the lost money. If the more sophisticated OIN investor is suffering from the bear market, and they are better off than the rest of the investing public because they can learn how to recover this money, then the majority of the public is really hurting. Margin calls are continuing, taxes still need to be paid and would be day traders are deciding to be money market investors instead. Factor into this the normal funds withdrawals for summer vacations and you have a recipe for continued drops. Stir in an aggressive Fed and serve with a bottle of Pepto. Have I turned into a bear? Not hardly. The flip side to this is the cash piled up on the sidelines. Mutual funds do not win investors by stockpiling cash. The Nasdaq has now lost 40% from its March high. If that does not sound bad enough to make a growth investor drool with anticipation then try this fact. The Oct 1999 low was 2632 at the start of the big Nasdaq rally. The Nasdaq high on March 10th was 5132 a cool 2500 point, almost 100% rally. Since March 10th the Nasdaq has given back over 1900 of those 2500 points. In percentage terms this is -77% loss. 77%!!! For everybody that missed the 1999 rally this is the impossible second chance! Of course many of these stocks will never see the glory days of 1999 again but there will still be winners that will replace JDSU, QCOM, CMGI, ICGE, CMRC from 1999 fame with new winners in 2000. Take SDLI for instance. Outstanding and with the China trade pact there will be others as well. Back to the point. Many funds sold out long ago or at least narrowed their positions significantly. These funds have cash and they need to put it to work quick. Once the starters gun fires, and it could be next week, the move could be fierce. Next week is typically a bullish week. According to the Stock Traders Almanac the week of Memorial Day is a bullish week and the best week in June. Also, June is a triple witching month and the two weeks prior to expiration is normally bullish. Thirdly, June in election years is normally a good month. Add all of this to the -77% retracement of the big gains from the last seven months and the prospects are encouraging. Now that I have stated my case I am at the mercy of the market, known as the great humiliator. So be it. I looked at hundreds of charts this weekend and 95% of them showed tentative bottoms and hopeful closing spikes on Friday. Most gave back only 25% of their gains from Wednesday and firmed as the day wore on. It is entirely possible this is just another bear trap rally and we will retest 3000 again next week. If we do I hope it is on Tuesday and I will be waiting with cash in hand. The Dow is the wildcard here. It closed near the low of the day right under support at 10300 and looks like it could go lower. If 10300 breaks then 10000 is not far away and we could get there real quick. I do not see the Nasdaq moving up if the Dow continues to drop. Everything I said in the previous paragraph is still true at 3000 or 2900. The point is, we are real close to a bottom in my humble opinion. We should wait for confirmation before starting new positions. The two determining factors next week are MSFT and the non-farm payrolls. It is a given that the judge will order MSFT broken into two companies. Still the actual order will cause another ripple though the markets and another shock to MSFT stock. Since MSFT is a Dow and Nasdaq component this will cause trouble again. The non-farm payrolls could cause more market stagnation as traders worry about a strong showing causing the Fed to raise another +.50%. But I think the distance between us and the Fed meeting, June 27th, should blunt this apprehension to some extent. Another weight on the Nasdaq is Dell. The once high flyer is suffering and showing no signs of recovering anytime soon. CSCO and INTC are improving and for stock traders CSCO is a definite buying opportunity. This fact is not wasted on fund managers either but most funds already have more CSCO than they can own. If you look at DELL, CSCO, INTC, ORCL, WCOM charts as a proxy for the Nasdaq you would be hard pressed to be bullish yet. I don't think that these leaders are where the profits will be but I think these leaders will keep a cap on the Nasdaq. They will keep the index from making big gains even though selected stocks on the Nasdaq will be big winners. I said Thursday I would be a buyer at 3000 on Friday. We did not even come close. That is both good and bad news. By not selling off again we still have that possibility in our near future, especially if the Dow craters. However, by failing to sell off on the lightest volume day of the year it could indicate there are no sellers left. My ideal scenario would be a morning sell off on Tuesday to something close to 3000 and then a rally for the rest of the week. The odds of that happening are less than 50/50 but I can at least hope for it. If it does happen I will back up the truck. If we get no dip and a positive bounce on Tuesday morning I will probably only open a few positions until we see if 3200 it is going to hold. One position I want to open is YHOO but compared to everyone else there was almost no life in YHOO at the close on Friday. With earnings only five weeks away this is the prime time to open the position. Is this just a gift? Are we just lucky that YHOO calls are so cheap because of the market drop and nobody has caught on to the timing yet? Or has the play changed? Nothing stays the same forever and the YHOO earnings run from the last eight quarters has been just like clockwork. Has it been so choreographed that the play is dead because everyone knows the ending? Who knows but at $112 I have to take a shot and that is my play of the day! Trade smart, don't buy too soon. Jim Brown Editor Disclosure: My current long positions: NOK, VOD, MSFT, VIGN *************** SEMINAR RESULTS *************** The first Regional Option Investor Seminar was held in Denver this week and the results were outstanding. The following are some of the comments from the attendees: "The seminar exceeded my expectations by showing and explaining with more in depth analysis and examples. Having a small group enabled everyone to ask questions and make comments helps immensely. Chris and Steve did an incredible job explaining everything." Michele K. "I enjoyed the great personal insights and rules of thumb they (speakers) use to trade. Their experience is invaluable to me and it has already saved/made me money! I would most definitely recommend this to others." Steve O. "This is one of the best things that has ever happened to me. I would recommend this to anyone even remotely interested in options trading." Jim C. "Very good content, lots of indicators and strategies I knew nothing about. I learned enough to pay for the class." William D. The seminar this week is in Houston Texas and we still have several seats available. If you would like to learn more about technical analysis and powerful option strategies you owe it to yourself to attend. There is a 100% money back guarantee and it is less than the cost of a bad trade. June 1-2 Houston 2 day June 22-24 Los Angeles 3 day June 27-28 Washington DC 2 day July 3-6 London England 3 day July 13-15 New York 3 day July 21-23 Seattle 3 day July 27-29 Atlanta 3 day Aug 11-12 Pittsburg 2 day Aug 17-19 Orlando 3 day Aug 28-29 Detroit 2 day Australia coming soon! Has the market been beating you up? Did you give back your gains from April? Would you like to understand all the technical indicators our writers use? Does the alphabet soup of technical terms like RSI, DMA, MACD, ROC, Stochastics, Bollinger bands, sound like Greek to you? You can learn from the experts how to interpret all these indicators, read charts, pick stocks and which option strategies to use on those stocks for less than the cost of one bad trade. Reserve your seat now for one of our regional seminars. Click here for more info: http://www.OptionInvestor.com/seminar/seminar.asp *************************** OptionInvestor/Optionetics Summer Seminar Series Back by popular demand! *************************** We are proud to announce the summer OptionInvestor & Optionetics seminar schedule featuring options guru, money manager and best selling author George Fontanills. We have designed the OptionInvestor/Optionetics Seminar to help you gain the know-how necessary to compete in the marketplace. Over the course of the last 7 years George Fontanills has developed a series of high profit, low risk, low stress trading techniques that will empower you to systematically approach the markets. Learn how to intelligently combine options to maximize profits and minimize risk. Designed to fit the needs of novice and seasoned traders, this workshop and home study course will show you how to use managed risk options strategies in today's highly volatile markets. We have designed a unique continuing educational program with videos, workbooks, live seminars, free partner, FREE follow-up seminars, personal phone coaching both before and after the event. We offer a MONEY BACK, NO RISK guarantee as set out below. The course contains a flexible agenda covering strategies that work in today's market that will be demonstrated live with the markets. The seminar and home study course materials include: Delta neutral non directional trading 28 options strategies including Spread Trading, Straddles, Strangles Condors (low risk trades), Butterflies George Fontanills' "5 Minutes a Day to find a trade" How trade volatile markets 911 Repair Strategies - what to do when a trade goes wrong trade action plan "How to get Started". With our unique tuition package you will receive: Before the event: Home Study Course with 8 digitally mastered video tapes and a 500 page manual "Trading for the 21st Century" plus your personal coach available to answer your questions. Live Seminar: 2 days of live trading with George Fontanills and Tom Gentile plus FREE partner attendance - two people for the price of one. You may bring a friend, spouse and business partner to the event for FREE. Both teachers available for our personal questions. After the Seminar FREE continued Education & Support: Your personal strategy coach will be available by fax, email or telephone after the event to answer your questions. Additionally, you and your partner may attend FREE any future seminars to continue your education and will receive George's newsletter sent to you by mail for 3 months. You can continue your education and learn as the markets evolve. Our Money Back Guarantee: If after you receive and review the materials for any reason you decide that Optionetics is not completely satisfactory to you, return your package to us before noon of the first day of the seminar to receive a full refund of your tuition. No money risk for you to review our package. Our Performance Guarantee: If we don't reveal a trading campaign for you capable of grossing five times your tuition - before the end of the seventh month after your purchase - just send us your six-month trading records. If our strategies were not profitable, we'll refund every penny of your tuition payment. Or, we'll train you personally for up to a year until you have the powerful trading campaign in your pocket. Your choice! If you can not make 5 times your tuition - we'll refund your tuition. Or keep working with you until you do. We can't be possibly be more fair. All we ask is that you exclusively trade our strategies for six months straight, averaging six trades per month. Venues: George Fontanills, together with his chief options strategist Tom Gentile, will personally teach two days live trading delta neutral strategies in the following cities: June 18 & 19 Chicago June 25 & 26 New York July 10 & 11 Atlanta (Tom Gentile only teaching) July 16 & 17 Houston July 23 & 24 San Francisco Our Home Study Course is available for the same price if you can't make these dates and you may attend a later seminar when your schedule allows. Order today as seating is strictly limited to first come first served basis. You will receive a $5,000+ value package, but pay only the special price of $2,400 for your tuition. Please reserve your place now to not be disappointed when we sell out. Click here for more info: http://www.OptionInvestor.com/seminar *********** JIM'S PLAYS *********** This article is a plea to do as I say not as I did. Since two weeks have passed since the last update I don't know where to start. Probably with the losers, the big losers! I have become a long-term investor in VIGN. Not by choice! After writing covered calls twice on VIGN in the last month and being "lucky" enough to not be called out I still owned 3000 shares of VIGN last week when they announced their buyout of OnDisplay. The resulting drop of -$15 was painful. I did not sell for all the wrong reasons. First I did not have a stop loss in place on the stock. Error 1. Always have a stop loss no matter what. Second I did not sell on Monday Afternoon because it looked like it was going to bounce. Surely this great company would have a dead cat bounce on Tuesday after a -30% drop. Error 2. Nothing will ever "surely" happen. Thirdly, and the worst kind of thinking, when it dropped back to $31 on Tuesday, "It can't go any lower than here", "this was support on Monday." Error 3. Stocks can always go lower and will when you can least afford it. So now I am a long term investor in VIGN. Down -$23, writing $3 covered calls it will take a year to recover without help from VIGN. I still have hopes that it will start moving back up on any June rally but that may be a false sense of security. Here is where the main problem lies with this type of get even mentality. First, if I devote 25% of my focus to recovering the money lost on VIGN I will miss larger profits on other plays. It is a fact of life. You spend more time and effort recovering lost money than making new money. Unfortunately the human psyche, (male ego), will not let us just close the play and admit defeat. Even though I know I should, I perceive it as a challenge to recover the lost money. So having admitted why I should not try, here is how I am going to do it. (Remember, do as I say not as I do) I also know that there are many readers who have this problem as well and the exercise will show you how to recover your own disasters. VIGN $27, Sept-$22.50 call = $8.63, Sept-$45 call = $3.00 One solution would be to buy an equal number of Sept-$22 calls as shares of stock owned. In this case 30. Then sell 60 of the Sept $45 calls for $3.00. By selling twice as many calls as you buy you offset the cost of the purchase. The 60 calls I sell are covered by the 3000 shares of stock and the 30 $22 calls I purchased. My total cash outlay in this example would be $2.63 x 30 contracts or $7890. Considering I am down $69,000 already adding $7890 to repair a position is an acceptable risk to me. Here is how it would play out. If VIGN closes at $45 in September the 30 $22 calls would be worth $69,000. Amazing how that works out! My cost in them is $7890 so my profit would be $61110. My 3000 shares of stock would also have recovered all but $5 of its initial value for only a $15,000 loss. Subtract that from $61110 and my total profit would be $46,110 for a busted play. Ahaa yes, I hear you. But if the stock is going back to $45 then why bother? Because it may not go all the way back! In this scenario the stock only needs to get to $38 to break even. If the stock closed at $38, assuming my cost in VIGN was $50 I would lose $12 on the stock portion. The $22.50 calls would be worth $15.50. Subtracting the $2.63 cost leaves $12.87 or a profit of $.87 on the entire transaction. (-$12 on the stock, +15.50 on the calls, -2.63 cost = $.87) Using this strategy VIGN would only need to move $11 to recover my $23 loss. Does that sound like a deal? Anything over $38 is pure profit up to $45 where my profits are capped by the calls I sold. Should I give up any potential upside over $45 to recover my loss with only a $9 move in the stock. You bet! The only risk you have is that VIGN does not move up at all. You should only use this strategy on a stock that you are really comfortable with the long term prospects. Now the problem is time. I am using capital to hold the position with the worst case scenario being September. Now I don't expect it to take that long and I can close the play whenever VIGN reaches $38 which could be soon if the Nasdaq rallies into the July earnings period. The time frame is several months due to available strikes and premiums required to make the deal work. Now that I have explained how to recover the money I am going to do something entirely different. I am going to buy some June calls instead and hope for a $3-$5 bounce before executing the repair strategy. This would lower the breakeven number and allow for more upside if the stock rallies. I can use the proceeds from the June calls to cover the $2.63 cost of the longer term remedy. ********* VIGN was not the only problem I had this week. I was short the JUN-$200 puts on DNA with the stock at $130. When the news broke that six people had died while testing their lung cancer drug the stock got killed dropping from $130 to $110 on Monday at the open and down to a low of $85 from there. Since I was traveling on Monday back from Las Vegas I did not realize the problem until I logged in to my account on Tuesday morning. OOPS! No stop losses, (do as I say, not as I do), and I was now the proud owner of 2000 shares of DNA at $200 - the $70.19 premium received. This was a sizeable amount of money and I immediately sold the stock for $105 and a loss of $50k. I watched it for some time as it continued to drop expecting a dead cat bounce but it did not occur. I deleted the symbol from my current short term watch list and moved to other things. When I came back to it two days later I was sick at seeing the major bounce from $85 back to over $100. Not that I would have held the stock but I would have sold the puts again on the bounce and ridden it back up. ********** Just to add insult to injury I had been playing naked puts on SDLI for the last two weeks. I had sold the puts on May-10th when it was bouncing off $160. I set my stops after the VIGN/DNA disasters at $170 on Thursday morning. SDLI was $185 at the time. I was away from my PC the rest of the day in meetings and did not know about the downward spike until after the close on Thursday. After the Thursday spike I was out of all my positions and away from my PC on Friday morning. When I logged in Friday afternoon I almost died with SDLI up +$29. With the 20 contracts I was playing that would have been a $58,000 profit. Aaaaaa!! ********** To say this was a bad week would be an understatement. The market was not the culprit. Of the dozen or so plays I had going about half stopped out for losses and the other half for profits. A lot of effort for nothing! The two big losers, each news related, soured my whole outlook and took my focus off the plan. The problem here again, and I feel like a broken record, is too many plays. I am the poster child for buying too soon and buying too much. (do as I say not as I do) I am in cash except for the VIGN stock and my leaps on VOD, NOK, MSFT. I am planning to sell June calls against the NOK, VOD leaps next week but I want to make sure there are no surprises on the MSFT case before selling calls against that position. Next week I am going to limit my plays to a few naked puts if we get a rebound and calls on YHOO. I want to see the market actually move upward for more than a day or two before getting aggressive again. Every time I get burned I make the same promises to myself, but I am sure you have never done that. I swear I will never do XYZ again if only I can get out of this problem alive. But, once the escape is made, the vow is forgotten and it is back in the chase again. We are our own worst enemies. Please decide now what you are going to do if the worst occurs in each of your positions next week. If it happens don't cheat! Also, decide now what you will do if the best happens to each position next week. Don't cheat. Cheaters are doomed to follow me down the same instant replay of previous nightmares on Wall Street. Good Luck Jim *********** IN THE NEWS *********** Devon Energy To Buy Santa Fe Snyder By Matt Paolucci Oklahoma City, Okla.-based Devon Energy Corp. said is has agreed to purchase Santa Fe Snyder Corp. (SFS) for $2.3 billion in stock, not including roughly $1 billion in debt. The deal would create the country's fourth largest independent oil and gas producer. Santa Fe Snyder shareholders will receive 0.22 Devon common shares for each Santa Fe common share. Upon completion, SFS shareholders will own roughly a third of the combined company, while Devon shareholders will own the remaining two thirds. The offer values Santa Fe Snyder shares at $12.91 a share, based on Thursday's closing price of $11.00, representing a 17.3 percent premium to SFS's stock price. Santa Fe Snyder is the product of a 1999 merger between Santa Fe Energy Resources Inc. and Snyder Oil Corp. The merger is expected to be accounted for as a pooling of interests, and is estimated to close in the third quarter. Both boards have approved the deal. "This is a combination of two strong companies that are that much stronger together," said J. Larry Nichols, Devon's president and chief executive officer. The transaction will create an international oil and gas company with a combined value of approximately $9 billion, with total proved reserves of more than 1 billion barrels of oil equivalent. The deal will be the biggest purchase to date for Devon, which has expanded quickly through acquisition in recent years, in hopes of becoming a true player in the oil industry. James L. Payne, CEO of Santa Fe Snyder, gave his blessing to the deal, saying, "Devon and Santa Fe are uniquely positioned to create additional shareholder value. The combination will be predominately North American but will also offer significant international upside potential." The new company will have a capital structure consisting of approximately 126 million common shares outstanding, $150 million in preferred securities, and roughly $2.1 billion of long-term debt and other liabilities. The combination certainly seems practical. Devon said it expects annual cost savings of $30 million to $35 million, and is expected to be accretive to Devon's earnings in the first full year after the deal closes. About 75 percent of the combined company's reserves will be in North America and equally split between oil and natural gas. The company also would have substantial international reserves, including Azerbaijan, Southeast Asia and South America. One drawback to the deal is that the companies have substantial property overlap in core operating regions including the Permian Basin, the Rocky Mountains and the Gulf of Mexico. The Devon/Santa Fe deal follows recent consolidation in the oil exploration industry. Last month, Anadarko Petroleum Corp. (APC) agreed to acquire Union Pacific Resources Group Inc. (UPR) for $3.91 billion in stock. Shares of Devon Energy were down $3.06 per share to $55.63, while shares of Houston-based Santa Fe Snyder were higher by $0.81 to $11.81 per share in Friday's session. *************** ASK THE ANALYST *************** There is no Ask the Analyst Article this weekend. ************** MARKET POSTURE ************** As of Market Close - Friday, May 26, 2000 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,000 11,400 10,299 Neutral 5.05 SPX S&P 500 1,400 1,500 1,378 BEARISH 5.23 OEX S&P 100 750 800 736 BEARISH 5.23 RUT Russell 2000 450 550 457 Neutral 5.05 NDX NASD 100 3,200 4,000 3,101 BEARISH 5.23 MSH High Tech 860 1,000 853 BEARISH 5.23 XCI Hardware 1,360 1,600 1,299 BEARISH 5.19 CWX Software 1,100 1,300 1,092 BEARISH 5.23 SOX Semiconductor 960 1,200 910 BEARISH 5.19 NWX Networking 900 1,100 953 Neutral 5.05 INX Internet 550 800 508 BEARISH 5.23 BIX Banking 530 600 588 Neutral 5.11 XBD Brokerage 400 500 412 Neutral 5.05 IUX Insurance 540 620 628 BULLISH 5.16 RLX Retail 900 1,000 846 BEARISH 5.23 DRG Drug 355 400 391 Neutral 4.28 HCX Healthcare 710 800 793 Neutral 4.28 XAL Airline 140 155 156 BULLISH 5.25 OIX Oil & Gas 265 300 302 BULLISH 5.11 Posture Alert Friday ended the week on a quiet note, as the major indexes stayed in a narrow trading range throughout the day. However, the volatility witnessed this past week was extreme, but it showed that the bulls are out there waiting for the right time to truly enter this market. Losers for the week include Internet (-8%), Retail (-6.5%), Russell 2000 (-5%), and the NASDAQ 100 (-5%). There are no current changes in posture. **************** MARKET SENTIMENT **************** Sunday, May 28, 2000 A Lack of Conviction! This last week was witness to extreme volatility on below average volume, yet momentarily; the bulls seemed ready to come out of the closet as the indexes surged on Wednesday. This above average action was brief, and was given back the following day. Overall, this past week was a non-event, as a lack of "major" news held institutional investors at bay. Friday's action was brutally slow, but heading into the long holiday weekend, can you blame anyone for not wanting to jump in? Regardless, sentiment continues to be poor as traders and investors sit on the sidelines waiting for an event to propel them back in. Looking ahead to these next several weeks, the market-moving events will be held in the bond market as economic indicators will make or break the short-term outlook. The May employment report, due out next Friday, will be the first major piece of the puzzle to decipher what the central bank may or may not do at the June 27-28 Federal Open Market Committee meeting. Currently, the futures market has priced in a 25 basis-point rate hike, so with the sentiment being so negative in the bond market, upside surprises could be in the works. Now looking at the most recent put/call ratios on the indexes, the sentiment is still too bullish to indicate that we have reached a bottom as of yet. Looking at the NASDAQ 100, the most recent put/call ratios have been hovering around 1.25-1.60. Now during the major gains last year as well as earlier this year, the put/call ratio was in the 2.50-4.00 range. What this market needs is more negative sentiment. We need the throw-in-the-towel capitulation that finally sheds all the weak hands. What we have now is a lack of conviction by both the bulls and bears. As soon as the sentiment sways dramatically in favor of the bears, is when we'll see a bottom in this market. Have a good week! 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 (27.49): 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 (6.052): 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: $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 (5/26) (5/30) (6/1) ***************************************************************** Overhead Resistance (775-800) 4.26 Overhead Resistance (745-770) 1.20 OEX Close 736.08 Underlying Support (715-740) 2.85 Underlying Support (680-710) 22.80 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 (5/26) (5/30) (6/1) ***************************************************************** CBOE Total P/C Ratio .65 CBOE Equity P/C Ratio .61 OEX P/C Ratio 1.20 Peak Open Interest (OEX) ***************************************************************** Friday Tues Thurs Strike/Contracts (5/26) (5/30) (6/1) ***************************************************************** Puts 740 / 7,555 Calls 800 / 6,388 Put/Call Ratio 1.20 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 26, 2000 27.49 ************* COMING EVENTS ************* For the week of May 29, 2000 Monday Markets Closed in Observation of Memorial Day Tuesday Consumer Confidence May Forecast: 137.0 Previous: 136.9 Wednesday New Home Sales Apr Forecast: 940 K Previous: 966 K Chicago PMI May Forecast: 57.0% Previous: 56.4% Leading Indicators Apr Forecast: 0.1% Previous: 0.1% Thursday Initial Claims 05/27 Forecast: 280 K Previous: 284 K Auto Sales May Forecast: 7.4 M Previous: 7.3 M Truck Sales May Forecast: 7.8 M Previous: 7.5 M NAPM Index May Forecast: 55.5% Previous: 54.9% Friday Nonfarm Payrolls May Forecast: 375 K Previous: 340 K Unemployment Rate May Forecast: 3.9% Previous: 3.9% Hourly Earnings May Forecast: 0.4% Previous: 0.4% Average Workweek May Forecast: 34.6 Previous: 34.6 Factory Orders Apr Forecast: -3.0% Previous: 2.8% Week of June 5th 06/05 NAPM Services 06/06 Productivity - Rev. 06/06 Wholesale Inventories 06/07 Consumer Credit 06/08 Initial Claims 06/08 Export Prices ex-ag. 06/08 Import Prices ex-oil 06/09 PPI 06/09 Core PPI ************************Advertisement************************* Tired of waiting on trades to execute? 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To subscribe you may go to our website at http://www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to Contact Support with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 DISCLAIMER *********** This newsletter is a publication dedicated to the education of options traders. The newsletter is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The newsletter picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. 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 5-28-2000 Sunday 2 of 5 ************** TRADERS CORNER ************** Watch the Blocks By Mary Redmond Wednesday of this week was one of the most optimistic days we have experienced in months. We had over 2 billion shares traded on the NASDAQ and over 1.1 billion on the NYSE. When we have high volume on an up day it usually indicates that heavy buying is taking place. Another important statistic is the amount of block trades executed. On Wednesday May 24, there were 24,833 block trades reported on the NYSE. This is a substantial increase from the prior day's report of 10,000 to 18,000 block trades. In addition, the NASDAQ reported 23,483 block trades compared to 16,386 on Tuesday of this week. Block trades are recorded on both the NYSE and the NASDAQ, and are reported in most major newspapers. This is one of the most accurate ways of estimating how much institutional buying or selling is taking place. A block trade is generally a trade of 10,000 or more shares which is purchased by a large fund or institutional investor. The traders on the floor who execute these trades usually try to match an institutional buyer and seller. If you look at the live charts on the OIN web site sometimes you can see large size trades going through. If you do some research you can also determine approximately how many block trades per stock were executed and if this is above or below the daily average. If a lot of block trades occur on an up day in the market it can indicate that institutions may be buying. Since many large mutual funds can receive many millions of dollars a day in cash during active periods it is usually not very realistic for them to buy small lots of stock. They usually buy large blocks of large market capitalization stocks which are highly liquid and can be easily bought and sold on the exchanges without adversely impacting the share price. What we are looking for is a consistent increase in the number of block trades executed on both the NYSE and NASDAQ on up days in the market. The NASD reports the monthly and yearly block trading volume on the NASDAQ, and from 1994 to 2000 there has been a steady, consistent increase in the block volume and number of daily block trades executed on the NASDAQ. In 1994, the block volume total was approximately 28 billion shares, and this constituted 42.8% of the volume on the NASDAQ. In 1999, the total block volume was approximately 62.5 billion shares which comprised 24.6% of the total volume. From January of 2000 to April of 2000, the block trades comprised between 20 and 22.4% of the total NASDAQ volume, or approximately 400 million shares on a strong day. There is also a block index indicator which calculates the number of upticks and downticks of single block trades of 10,000 shares or more. An uptick generally indicates a buyer and a downtick generally indicates a seller. When the ratio of upticks is higher it can indicate that the institutions are buying heavily and using all their cash reserves. When the ratio of downticks is higher it can indicate that the institutions are selling and raising cash. This can be a contrary indicator, as periods of very heavy buying may leave little cash for future buying, and periods of heavy selling increase the cash reserves. It is not always possible to obtain a precise report of exactly how much money went into the U.S. equity funds on a daily basis. The fund flows are generally most reliable and accurate when reported on a weekly or monthly basis. There is too much cash going into thousands of funds nowadays to make daily accounting realistic. The fund families will generally receive investors' checks and deposit them the same day or the following day and invest the money within a few weeks. A weekly or monthly average of the fund flows is a more accurate indicator of market sentiment. According to trimtabs.com, for the week ending May 17 we had record inflows to equity funds of over $15.6 billion, with over $13 billion going to U.S. stock funds. According to AMG Data Services, the week ending May 24 showed a net outflow of $7.6 billion out of equity funds. This is only a weekly report, and we have had weeks following outflow reports when the market rallied, so it is best to use the fund flow indicator over a monthly period. Contact Support ***** Calendar Put Spreads--My New Vacation Strategy By Lynda Schuepp Summer is approaching and I am now re-evaluating my "poolside" investing strategies. As the smell of the barbecue grill wafts highly in the air and gleeful laughs can be heard from the kids in my pool, I reflect to my own younger days of summers past. I remember the anticipation of waiting for those long sunny days- hiking in the mountains, walks on the beach, and cannonballs off the high diving board. The kid in me says, "I wanna go out and play". I don't really want to spend 8 hours a day staring at this screen while looking out my window at a beautiful day. New England has such short sweet summers. When they come they are spectacular and I, for one, would never want to miss out on them. Time to shift gears on my trading strategies. At our most recent Boston Option Club meeting, we had a speaker whose topic was spreads. Now you all know from my past articles that I do love spreads. I didn't expect to learn much and expected to hear the same old, same old--spreads provide limited return, but have limited downside risk, blah blah blah. Of course during these turbulent times, we "spreaders" lost a lot less money than the naked jaybirds and weren't subject to margin calls. At this meeting, I was introduced to a type of spread that I myself had never done--calendar spreads using leap puts. I have done calendar spreads using calls but never with long term puts. Now could be the time to initiate this strategy. First, a definition and expectations are in order. A "calendar put spread" is constructed by selling a near-term put and buying a longer-term put, with the SAME strike price. Your risk is limited to the cost of the spread. However, there is some assignment risk if the shorter-term option loses all time value. The deeper the option goes "in the money" the less time value it has as it approaches a delta of 1. Some options will trade at parity (no time-value left) or below parity. You do not want to hold a short put with no time-value unless you want to own the stock. The speaker's recommendation was to use deep "in the money" strikes on stocks that are fallen angels. Candidates for this strategy include good quality, strong stocks that are at a support level and have good upward potential. These stocks should have seen highs, which were 25-50% higher than the stock is currently priced. The maximum reward is harder to quantify but would be reached if the stock ran up to the strike price at expiration of the near term option. The near term short option would be worth zero and you would get to keep the premium and the longer-term option would have value and could be sold at that point. Your profit would be the premium you received from the short option, less the cost to enter the spread plus the value of the longer-term option. In order to "guesstimate" the value of the long option you could use current "at the money" prices of the near term option. An example is probably in order here. This is not meant to be taken as a recommendation, merely an example of how the strategy could be implemented. I looked at JDSU, which is a good quality fallen angel with real earnings that has gotten battered in the bear market along with the profitless Internet stocks. Support for JDSU is at 80 and the stock is currently trading a little above this level. Overhead resistance is at 120 and 150. In order to put on a calendar put spread, you would buy the Jan'02 puts and sell the Jan 01 puts, using the same strike price. A strike should be selected based on your projection of what the stock could be worth by January 01 since the maximum profit is obtained if the stock reaches the strike by expiration of the near term option. Assuming your projection was $120 (previous resistance) by January 2001, you could sell the Jan'01 120 put for about $48.50 and buy the Jan'02 put for about $57.63 with the same strike price. The approximate cost of this spread as of Friday's close would be about $9.13. The projected maximum gain if JDSU hits $120 by January would be about 59. That is a 6:1 risk/reward ratio. Not bad for a pretty conservative strategy. Assuming JDSU gets to $120 by January, the projected gain was calculated as follows: ADD +48.50 (premium received for Jan'01 put expiring worthless) LESS - 9.13 (the cost of the spread) PLUS +20.13 (estimated value for Jan'02 put in January 01) The value of the long leg (Jan 02) can be estimated by looking at the January '01 "at the money" option now. Currently JDSU is trading at $80.50 and the Jan'01 80 put is selling at $20.13. I was really excited when I heard about this strategy as were just about everybody else who attended the meeting. So remember, in these depressing times, one can find some great opportunities. Of course, you could just sell the Jan'01 put naked, but some of us have been there and done that. The strategy is elegant and really quite simple. I like to think of this strategy as a naked put with an insurance policy. So if you're like me and would like to find a strategy that doesn't require minute by minute baby-sitting, this one is for you. There are tons of candidates, thanks to the recent market correction. Do your research now and have some fun this summer. Happy Memorial Day to all. Contact Support ************* READERS WRITE ************* Dear OIN; I would like to know more about a calendar or time spread. Does a broker require capital to put on a time spread? If your buying a equal strike price put/call for each put/call that you sell, aren't you covered in case someone were to exercise the put/call? So why would capital be required? If the put/call were exercised, wouldnąt the broker automatically take the bought put/call from your account to cover the transaction? If not, why? I hope that you can give me a straight answer and not just point me to a FAQ site. Thank For Your Help... *** Concerning collateral requirements for calendar spreads: First, the definition of a Calendar (Time) Spread: This spread can be created by selling an option at a specific strike price and buying a longer term option with the same strike price. The investor profits most when the stock price is near the strike price at expiration. The investor can then close the spread for a small profit by selling the long position or continue the play by selling a new (short) option against the current long position. He can also hold the contract until expiration hoping the value of the option will increase. The philosophy for using calendar spreads is that time will erode the value of the short term option at a faster rate than it will the long term option. This type of spread play is one of the most conservative and profitable positions available to novice traders and we offer many candidates for this strategy each month. As far as collateral, a broker should not require any additional funds to secure a pure calendar spread. As you said, buying a longer term, equal strike price option for each option that you sell will "cover" the "short" position's obligation. However, an E-broker (such as Etrade) will not generally exercise the long option for you, in the event of early assigment of the short option. That is your responsibility. In most cases, the broker would simply assign your account a short position in the underlying shares of stock. Of course you should always check with your broker for any specific issues concerning combination positions. Good Luck! ************ DEAR OIN; (Regarding Covered-calls with LEAPS) Ok, buy the leap when it is below intrinsic value and sell the near term call when it has excessive time value in its price. Got it! Now, please explain in english how a poor tyro like myself goes about finding out what leaps are below intrinsic value, and what near term calls have excessive time value! Thanks *** Concerning Option Pricing and Fair Value: The most important factors in option trading are market movement, option volatility, and time decay. The knowledge of these concepts is paramount to profitable trading and without a suitable basis, you will likely enter the market at a theoretical disadvantage. The first requirement is familiarity with option pricing. We have the ability to measure the value of an option through mathematical evaluation and if you aren't prone to formulas, pricing models will help you determine the fair market value of an option. Many of the established tools for pricing options are free and they should be used before opening any position. In volatile issues, the emotional optimism of traders can cause prices to vary widely from their true worth. Without a realistic estimate of the value of an option, you will often pay an excessive amount for the rights inherent in the contract. Remember, in the majority of investment techniques, the end result is a product of what you know, and how well you act upon it. There are option volatility calculators at various sites on the Internet. One of the most popular (free) tools is at: http://www.cboe.com/tools/optcalcu.htm 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 combinations and spreads and the appropriate entry/exit/adjustment strategies. Good Luck! ************* DAILY RESULTS ************* Index Last Week Dow 10299.24 -327.61 Nasdaq 3205.11 -185.29 $OEX 736.08 -16.87 $SPX 1378.02 -28.93 $RUT 457.37 -22.33 $TRAN 2687.55 -54.45 $VIX 27.49 -1.28 Calls Last Week RBAK 72.06 9.13 New, another popular networker with buyers SDLI 197.75 1.75 It's amazing what an upbeat report can do CHKP 162.50 1.13 Some call it the "day traders dream" P 53.63 0.44 Dropped, ran out of gas ALL 26.81 0.25 Dropped, welcome to the world of rotation ABT 41.69 0.13 Momentum play sparked by healthy breakout ANDW 32.81 -0.06 Dropped, momentum waning UNH 75.88 -0.50 Dropped, range bound and time value TQNT 83.16 -0.59 New, the next move should be exciting PLXS 79.50 -1.00 Dropped, volatility but no breakout ITWO 95.50 -2.75 New, ITWO has found its rhythm SCMR 76.50 -4.44 New, back with great earnings on May 18th YHOO 112.06 -8.25 New, could the sleeping giant be waking? SEPR 91.19 -8.56 Institutional ownership has increased EXDS 62.00 -9.19 New, what goes down must come up RMBS 163.00 -10.75 New, giving it another chance AMCC 89.69 -11.94 New, looks like it has reached bottom CIEN 99.69 -16.81 One word that analysts love: growth DNA 102.63 -23.38 New, closed back over 5-dma at $99.88 Puts ANAD 27.81 -16.44 Problems continue to worsen OPTV 39.25 -12.56 Dropped, endured wicked punishment FDRY 55.00 -10.50 Taken to lows below IPO price EXTR 44.06 -9.31 Rough decline with outlook still grim DCLK 41.13 -9.25 New, chart shows traders' nervousness INCY 49.06 -8.69 Shriveling grape in the heat of the market PCLN 36.13 -8.63 Welcome to "The Price Is Wrong!" HLIT 38.00 -8.13 Apocalyptic Fed meeting cost HLIT $26.38 ICIX 24.94 -5.94 Seems to be having "bad hair" days TRW 48.00 -4.81 New, virtually ignoring rest of the market NTOP 26.50 -4.63 Bad news in an already troubled environmt. AZPN 20.19 -2.19 Dropped, at the bottom of the slope NTLI 57.88 3.13 Dropped, stock stabilized STOCKS ADDED TO THE PICK LIST ***************************** Calls ITWO - I2 Technologies AMCC - Applied Micro Circuits Corp. TQNT - Triquint Semiconductor EXDS - Exodus Communications YHOO - Yahoo! Inc. RMBS - Rambus Inc. SCMR - Sycamore Networks RBAK - Redback Networks DNA - Genentech Puts DCLK - DoubleClick TRW - TRW Inc. *************************** PICKS WE DROPPED THIS WEEK *************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS ALL $26.81 (+0.06) Welcome to the world of rotating sector strength. It seems nothing stays in favor for more than a week and the Insurance sector is no exception. Looking impressive all the way until Wednesday, the sector got torpedoed by negative comments about the brokerage sector on Thursday (which consequently put a drag on anything related to Financial stocks), and sank a whopping $3.19. The predictable Friday lethargy couldn't lift ALL out of its stupor, and with volume dropping off again, it looks like the momentum is gone. Enthusiasm for Insurance stocks has fled to other areas, and we will follow suit tonight; putting on our running shoes, we are going out in search of new cheese. ANDW $32.81 (-0.06) A momentum play is only good as long as the momentum remains intact. ANDW looked great for most of last week, as it held major support at $30 in the face of more carnage in the tech sector. Then on Thursday it formed a higher low and it looked like a sure winner as it charged higher Friday morning. Alas, it wasn't to be. The $34 resistance level was too much to bear in the face of the apathy on the broader markets. With its second failure to penetrate this level in as many weeks, it looks like the bears have sapped away the momentum and along with it our enthusiasm. We'll drop ANDW until the bears go back into hibernation and the momentum returns. UNH $75.88 (-0.50) This week we saw UNH move to the upside and set a new 52-week record ($79.25) on Wednesday on more than double the volume to boot. But overall two words express UNH's performance, range trading. The stock's been channeling primarily between $75 and $79. It's a good sign that near-term support level is higher at the intersection of the 5 and 10 DMAs ($76.41 and $76.08). However, time is wasting. We decided to exit this momentum play instead of wait for UNH to challenge the $80 barrier. PLXS $79.50 (-1.00) Lots of volatility, but no breakout to the upside of $80 this week to hint at short-term future gains. When we first initiated coverage on PLXS, we were rewarded with a promising 10+ point right from the get-go! Although as the days followed, we watched as the negative market pressure play havoc with the share price. It's certainly very disappointing to see a potential money-maker return to firm support ($75-$78) and then find such formidable resistance at the $80 mark. OIN anticipated a much longer momentum run for this split-candidate. Nonetheless, we know it's time to burn the PLXS bridge and find another path to riches. P $53.63 (+0.44) Whoops, looks like our play in Phillips Petroleum may have run out of gas. While the energy sector has proved to be a safe haven for investors over the past few months, we don't believe that P is necessarily going to reverse its current uptrend, however it could be heading for a period of profit taking or at least consolidation. After making a new high for the week, Phillips experienced what is called an outside down day. This typically is viewed as negative for a stock that's heading higher. As we said P moves rather slow, and with other potential new plays coming on board, we will concentrate our efforts elsewhere for now. PUTS NTLI $57.88 (+3.13) Despite the concerns of high valuations and the uncertainty over NTLI's future, the stock has stabilized at its current levels. NTLI has established major support around the $55 level. During Friday's session, NTLI briefly dipped down to $56 only to quickly rebound into the holiday weekend. Although volume was anemic for the entire market Friday, traders exchanged a scant 597 K shares in NTLI. That's compared to an ADV of 1.9 mln! Additionally, the rumors of NTLI acquiring FREE have begun to present risk to our put play. With the lack of action and current consolidation it's time to turn our attention elsewhere. OPTV $39.25 (-12.56) After enduring three weeks of wicked punishment, OPTV finally found support towards the latter-half of last week. The stock has now established solid support near its 52-week low, in the $36 area, and solidified that level during Friday's trading. In fact, OPTV managed to rally higher during Friday's lackluster session. The pending SPYG merger still presents risk for shareholders of OPTV. But for the time being, it appears that OPTV has found bottom. The rally Friday could signal that OPTV has fallen far enough, for now. At this time, we feel good about locking in profits and selling too soon. AZPN $20.19 (-2.19) Like a skier at the bottom of an exciting downhill run, AZPN has run out of momentum. The most recent slide, which began near $36, at the top of the descending channel, was accompanied by strong and increasing volume. The heavy volume (60% over the ADV) continued through Tuesday, and then began tapering off. Recall our cautionary note on Thursday about declining volume; it would likely be our first indication that the downward move was running out of steam. Thursday's late-day plummet on a burst of volume was encouraging, but on Friday, it became clear that AZPN was done, as it saw less than 60% of its ADV and actually posted a gain for the day. The stock has moved within $1.25 of major support at $18, and with today's lack of enthusiasm for more declines, we're dropping it in favor of more lively plays. STOCKS WITH UPCOMING SPLITS **************************** We don't list all splits available, only those we feel may have play possibilities. Symbol - Stock Splits/Date AEG - AEGON N.V. 2:1 05-30-00 ex-date 05-31 SCH - Charles Schwab 3:2 05-30-00 ex-date 05-31 IBI - Intimate Brands 2:1 05-30-00 ex-date 05-31 LTD - The Limited 2:1 05-30-00 ex-date 05-31 KEI - Keithley Inst. 2:1 06-01-00 ex-date 06-02 KEM - KEMET 2:1 06-01-00 ex-date 06-02 AVX - AVX Corp 2:1 06-01-00 ex-date 06-02 AES - AES Corp 2:1 06-01-00 ex-date 06-02 MOT - Motorola 3:1 06-01-00 ex-date 06-02 PWER - Power-One 3:2 06-02-00 ex-date 06-05 EMC - EMC Corp 2:1 06-02-00 ex-date 06-05 KPN - KPN Telecom 2:1 06-02-00 ex-date 06-05 MEDI - Medimmune 3:1 06-02-00 ex-date 06-05 NXTL - Nextel Comm 2:1 06-06-00 ex-date 06-07 FKL - Franklin Capital 3:2 06-07-00 ex-date 06-08 CPN - Calpine Corp. 2:1 06-08-00 ex-date 06-09 CAKE - Cheesecake Fact. 3:2 06-08-00 ex-date 06-09 VSH - Vishay Intertech 3:2 06-09-00 ex-date 06-12 LMGA - Liberty Media Grp2:1 06-09-00 ex-date 06-12 CMB - Chase Manhattan 3:2 06-09-00 ex-date 06-12 ANEN - Anaren Micro 3:2 06-09-00 ex-date 06-12 AA - Alcoa 2:1 06-09-00 ex-date 06-12 HC _ Hanover Comp. 2:1 06-13-00 ex-date 06-14 RHI - Robert Halg Intl 2:1 06-12-00 ex-date 06-13 RMBS - Rambus 4:1 06-14-00 ex-date 06-15 HSP - Hispanic Broad. 2:1 06-15-00 ex-date 06-16 CKH - Seacor Smit Inc. 3:2 06-15-00 ex-date 06-16 IFIN - Investors Fin. 2:1 06-15-00 ex-date 06-16 CYBE - CyberOptics 3:2 06-15-00 ex-date 06-16 MXT - Metris Companies 3:2 06-15-00 ex-date 06-16 JNPR - Juniper Networks 2:1 06-15-00 ex-date 06-16 IPAR - Inter Parfums 3:2 06-15-00 ex-date 06-16 NXLK - Nextlink 2:1 06-15-00 ex-date 06-16 CHP - C&D Technologies 2:1 06-16-00 ex-date 06-19 DLTR - Dollar Tree 3:2 06-19-00 ex-date 06-20 RHB - RehabCare Grp. 2:1 06-19-00 ex-date 06-20 MTZ - MasTec Inc. 3:2 06-19-00 ex-date 06-20 SEIC - SEI Investments 3:1 06-19-00 ex-date 06-20 POOL - SCP Pool Corp. 3:2 06-19-00 ex-date 06-20 MEAD - Meade Inst. 2:1 06-19-00 ex-date 06-20 EXDS - Exodus Comm 2:1 06-20-00 ex-date 06-21 AAPL - Apple Computer 2:1 06-20-00 ex-date 06-21 CDWC - CDW Computer 2:1 06-21-00 ex-date 06-22 NVDA - NVIDIA Corp. 2:1 06-26-00 ex-date 06-27 MRCL - Micrel Inc. 2:1 06-27-00 ex-date 06-28 TQNT - TriQuint Semi. 2:1 07-11-00 ex-date 07-12 XETA - Xeta Corp 2:1 07-17-00 ex-date 07-18 TBL - Timberland Comp. 2:1 07-17-00 ex-date 07-18 TIF - Tiffany and Co. 2:1 07-20-00 ex-date 07-21 INTC - Intel Corp. 2:1 07-28-00 ex-date 07-31 AIG - American Intl. 3:2 07-28-00 ex-date 07-31 POS - Catalina Mktg. 3:1 08-17-00 ex-date 08-18 For a complete list of all the coming splits check out the "split calendar" on the side of the online edition newsletter page. ******************** THE PLAYS OF THE DAY ******************** With all the great plays each week we can never decide on just one so take your pick. Call plays of the day: ********************** CHKP - Check Point Software $162.50 (+1.13) See details in sector list Chart = /charts/charts.asp?symbol=CHKP **** RMBS - Rambus Inc. $163.00 (-10.75) See details in sector list Chart = /charts/charts.asp?symbol=RMBS Put play of the day: ******************** ICIX - Intermedia Communications $24.94 (-5.94) See details in put list Chart = /charts/charts.asp?symbol=ICIX ************* DEFINITIONS ************* SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. TP/P= True premium or Time premium RRR = Risk/Reward/Ratio ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume MTD = Move to double - amount stock must move to double option price in one week. ONE WEEK MOVE ONLY ! Numbers within ( ) are the amount of change for the week. Numbers within ( ) may be designated with PxW, like P3W, prior 3 weeks The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** **************************** SEE DISCLAIMER IN SECTION ONE
The Option Investor Newsletter 5-28-2000 Sunday 3 of 5 ********** CALL PLAYS ********** ************* SEMICONDUCTOR ************* RMBS - Rambus Inc. $163.00 (-10.75) Rambus Inc. develops and licenses high bandwidth chip connection technologies to enhance the performance of computers, consumer electronics and communications products. Current Rambus-based computers supported by Intel chipsets include Dell, Compaq, Hewlett-Packard, and IBM PCs and workstations. Sony's PlayStation video game system uses Rambus memory. Providers of Rambus-based integrated circuits include the world's leading DRAM, ASIC and PC controller manufacturers. Currently, eight of the world's top-10 semiconductor companies license Rambus technology. Perhaps we were a bit hasty in our decision to drop RMBS on Thursday. Actually, given the circumstances it was probably the correct decision, however, with Friday's move we are giving the chip developer another chance. The 6% move up came on light volume, but the interest shown the last thirty minutes of the session was encouraging. What was behind the strength seen on Friday? We aren't exactly sure. As you know RMBS received shareholder approval this week to increase its shares and proceed with its previously announced 4-for-1 split, which may have brought a few folks back to the table. Also, RMBS and the chip stocks have had a tough go of it the last month or so, and with the favorable economic data out today, investors may have began to test the waters for a possible rally after the holiday weekend. There was little in the way of company specific news. Intel said a replacement for its faulty chip would be ready soon, and once the new component is available, they plan to resume making their "820 chipset" available for use with standard memory, not with high-speed Rambus based memory. Our recent attempt to profit from RMBS provided some with a great return, while for others it proved to be a rocky road. While the economic calendar is packed full of reports next week, it appears as though the stage is set for improved sentiment in the broad markets. If that's the case then our new play could once again take flight. Technically, RMBS is coming out of the oversold territory, indicating a continued move higher. Intraday support shows up near $160, $155 and $150. Whether entering on a bounce off support or further upward momentum, confirm the volume and the condition of the chip sector and the NASDAQ prior to placing an order. Given the current market environment, traders entering new positions should be prepared to protect profits as well. Other than the shareholders meeting there was little news for RMBS for this week. The most recent upgrade of note came from analysts at Warburg Dillion Read in mid April, when the company reiterated their Strong Buy rating, with a price target of $350. Since then much water has crossed under the bridge, however, the fundamentals have changed very little and RMBS was trading just over $200 at the time of the brokers comments. BUY CALL JUN-160 BYQ-FL OI=276 at $19.00 SL=13.75 BUY CALL JUN-170*BYQ-FN OI=318 at $15.25 SL=11.00 BUY CALL JUN-180 BYQ-FP OI=617 at $11.00 SL= 8.25 BUY CALL JUL-165 BYQ-GM OI= 22 at $30.50 SL=22.00 BUY CALL AUG-170 BYQ-HN OI=114 at $34.50 SL=25.00 SELL PUT JUN-160 BYQ-RL OI=520 at $14.63 SL=20.00 (See risks of selling puts in play legend) Picked on May 28th at $163.00 PE = N/A Change since picked +0.00 52 week high=$471.00 Analysts Ratings 1-1-2-0-0 52 week low =$ 58.50 Last earnings 04/00 est= 0.14 actual= 0.15 Next earnings 07-12 est= 0.16 versus= 0.08 Average daily volume = 3.82 mln /charts/charts.asp?symbol=RMBS **** AMCC - Applied Micro Circuits Corp. $89.69 (-11.94) Fulfilling the need for speed, AMCC is a global provider of high-performance, high-bandwidth integrated circuits used to control the high-speed flow of transmissions through fiber-optic telephone networks. Communications products, used in LANs and WANs, account for 55% of the company's sales. The company's chips are also used in automated test equipment, high-speed computing, HDTV, and military applications. The company which is growing through acquisitions, has a top-flite client list, including Nortel, Raytheon, Alcatel, Cisco, 3Com and Lucent. Although the recent market decline has not been kind, AMCC looks like it has reached bottom and is preparing to move higher. The stock is nearly 50% off its March highs and has spent the last six weeks forming a descending wedge. After a brief dip below $66 on April 17th, the stock only violated support at $84 once (last Wednesday), and the recovery was swift. Last Wednesday's decline halted right on the 200-dma ($72.38 at the time), which is well above the April 17th low. Descending lows are a bearish sign, and are likely a sign of the overall market sentiment. The market is still jittery about future interest rate hikes, but AMCC's financials look strong and the company continues to provide what investors love; earnings that are consistently above street estimates and revenues that grow every quarter. Positioned to benefit as the fully optical network is built, our appetite for the company's products is showing no signs of letting up, and we think the stock is poised for a breakout. Near term resistance is found at $94; more conservative traders may want to wait for the stock to move through this level with convincing volume before initiating new positions. The company continues to release products at a furious pace, many of which are industry firsts. The latest release was the S2009, the company's latest addition to the serial backplane transceiver family, featuring a broad operating range of 1.3-1.6 Gbps per channel. The S2009 utilizes cost-effective CMOS technology that offers the best power and performance combination for high-density designs in the backplane for Local and Wide Area Networks. BUY CALL JUN-85 AEX-FQ OI=134 at $12.63 SL= 9.50 BUY CALL JUN-90 AEX-FR OI=213 at $10.25 SL= 7.25 BUY CALL JUN-95*AEX-FS OI=423 at $ 8.13 SL= 5.75 BUY CALL JUL-90 AEX-GR OI= 56 at $15.63 SL=11.25 BUY CALL AUG-95 AEX-HR OI=192 at $21.38 SL=16.00 SELL PUT JUN-80 AEX-RP OI=460 at $ 5.25 SL= 7.50 (See risks of selling puts in play legend) Picked on May 28th at $89.69 P/E = 213 Change since picked +0.00 52-week high=$158.88 Analysts Ratings 11-3-0-0-0 52-week low =$ 13.06 Last earnings 04/00 est= 0.14 actual= 0.16 Next earnings 07-19 est= 0.17 versus= 0.06 Average Daily Volume = 3.96 mln /charts/charts.asp?symbol=AMCC **** TQNT - Triquint Semiconductor $83.16 (-0.59) A leading global supplier of a broad range of high performance integrated circuits, TQNT offers standard and customer specific products as well as foundry services. The company uses gallium arsenide (GaAs) instead of silicon as the substrate (base) for its analog, digital, and mixed-signal integrated circuits (ICs). GaAs ICs operate at greater speeds than silicon chips, or at the same speeds with less power consumption, making them ideal for all sorts of gadgets, such as cell phones, pagers, fiber-optic and satellite telecom equipment, and data networking devices. Playing with the big boys, its clientele includes Nortel, Alcatel, Ericsson, Lucent, and Raytheon. Semiconductor stocks look like they are getting ready to break out. Chart after chart shows descending wedges forming over the past 4-6 weeks, with support levels holding rock solid. TQNT is no exception; with support at $71, the descending trendline will cross this level within the next 2 weeks. The spring is coiled and all we need is a catalyst to drive the price higher; when the move comes, it could be very exciting. Investors are starved for any kind of news that will help to pull the market out of the abyss, and the Semiconductor sector is a good candidate to lead the charge. TQNT has now challenged the 200-dma ($63.56) a total of three times over the past 2 months and it continues to provide strong support. Volume is strong one day and weak the next, but the recovery last Wednesday was encouraging, as it came on volume exceeding the ADV by 50%. This just adds to our conviction that buyers are waiting to step in at current support levels, and all we need is a catalyst to power the recovery out of this declining trend. Although it is still a ways off, the upcoming split could be just what this stock needs to power forward through the summer. On May 11th, the company announced a 2-for-1 split, payable on July 11th. Use intraday dips to support as opportunities to acquire a better entry point, but wait for the bounce. In this jittery market, it doesn't pay to try to catch a falling knife. Volume will drive this stock higher, so if it doesn't accompany the rally, you know the conviction just isn't there. In a rush of techno-speak on Wednesday, TQNT released a radio frequency (RF) transmit solution for dual band CDMA handsets. The company also announced last Wednesday that it has entered into an agreement to purchase Micron Technology's Richardson, Texas, wafer fabrication facility. BUY CALL JUN-80 TNN-FP OI= 80 at $ 8.88 SL=6.25 BUY CALL JUN-85*TNN-FQ OI=143 at $ 6.63 SL=4.50 BUY CALL JUN-90 TNN-FR OI=211 at $ 4.50 SL=2.75 BUY CALL JUL-90 TNN-GR OI= 11 at $ 9.50 SL=6.75 BUY CALL AUG-90 TNN-HR OI=233 at $12.13 SL=9.00 SELL PUT JUN-75 TNN-RO OI=155 at $ 3.50 SL=5.50 (See risks of selling puts in play legend) Picked on May 28th at $83.16 P/E = 101 Change since picked +0.00 52-week high=$135.50 Analysts Ratings 7-2-4-0-0 52-week low =$ 11.38 Last earnings 04/00 est= 0.19 actual= 0.25 Next earnings 07-19 est= 0.27 versus= 0.13 Average Daily Volume = 1.63 mln /charts/charts.asp?symbol=TQNT ******** BIO-TECH ******** DNA - Genentech $102.63 (-23.38) Headquartered in South San Francisco, Genentech, Inc., is a leading biotechnology company that discovers, develops, manufactures and markets human pharmaceuticals to treat life- threatening medical conditions such as heart attack, stroke, and breast cancer. Genentech markets seven products directly in the United States. They also manufacture and market seven protein- based pharmaceuticals, and licenses several others to other companies. They are the Big Kahuna of the biotech industry. Primarily driven by bad news manifesting itself in the stock price early Monday morning and Tuesday, DNA struggled before bouncing hard intraday at $84.50 in Ugly Wednesday's trading and managed a close at firm historical support of $92. Thursday and Friday, this biotech powerhouse staged a nice recovery, moving back over its 5-dma of $99.88 for a close back over its former support of $100. Why? Perhaps it has something to do with its drug, Herceptin, being approved for launch by Roche Pharmaceuticals as a breast cancer treatment in Europe. It should be a blockbuster. (Roche owns 58% of DNA.) Technically, DNA looks strong going forward. The next resistance hurdle is $108, then again at $114, its gap down opening price on Monday. Then comes the tough part - filling the gap from $114 to $120 from which it fell. $120 also happens to be the 200-dma, which may provide a psychological resistance level by inducing investors that held through the downdraft to unload with the intent of "breaking even". Even so, $102 to $114 leaves plenty of room for upside. We think given the oversold condition of the stock that one could make a case for getting in at this level. However, if you want to wring the last dollar from the trade, you can consider targeting $100. Ready for the science that might have helped with the reversal? According to briefing.com, DNA "announced preliminary positive results from two Phase II clinical trials evaluating the company's investigational recombinant humanized monoclonal antibody to vascular endothelial cell growth factor (rhuMAb- VEGF), or anti-VEGF. DNA has clinical evidence that anti-VEGF monoclonal antibody may inhibit certain solid-tumor growth and says that Phase III trials in larger patient populations are needed to better understand the potential of anti-VEGF to improve patient outcomes." For those without a medical background, note that the news prompted Salomon Smith Barney to reiterate their Buy rating with a price target of $200. BUY CALL JUN- 95 DNA-FS OI= 12 at $11.00 SL= 8.25 BUY CALL JUN-100*DNA-FT OI=1175 at $ 9.25 SL= 6.25 BUY CALL JUN-105 DNA-FA OI= 53 at $ 7.00 SL= 5.00 BUY CALL JUL-100 DNA-GT OI= 802 at $12.75 SL= 9.50 BUY CALL SEP-105 DNA-IA OI= 0 at $16.25 SL=11.75 SELL PUT JUN- 90 DNA-RR OI= 150 at $ 3.63 SL= 5.75 (See risks of selling puts in play legend) Picked on May 28th at $102.63 P/E = N/A Change since picked +0.00 52-week high=$245.00 Analysts Ratings 4-6-3-0-0 52-week low =$ 58.25 Last earnings 04/00 est=-0.04 actual= 0.04 surprise = 200% Next earnings 07-12 est= 0.29 versus= 0.28 Average Daily Volume = 1.2 mln /charts/charts.asp?symbol=DNA **** ABT - Abbott Laboratories $41.69 (+0.13)(+4.56) Abbott Laboratories is one the leading healthcare products makers in the US. It operates five business segments: Pharmaceuticals, Diagnostics, Hospitals, Ross products, and its International division. More than 40% of sales is derived from the pharmaceuticals and hospital products and includes the drug Norvir, which treats HIV. Some well-known brands like Similac (infant formula) and Ensure (nutrition supplement) can be found on most supermarket shelves. There's nothing fancy about this call play. ABT is purely a momentum play sparked by the healthy breakout of the drug stocks last week. ABT isn't a fast and furious mover, but there's no question it's covering ground as it heads toward the 52-week high. When ABT was first added to our list, the 52-week high stood at $48.50. Because time is not stagnant and prices continually change, that number is now a lower figure, $45.94, which consequently brings ABT closer to its short-term goal. All in all, ABT was quite the performer this week. Early on it bucked the cynical sentiment of the Street and maintained a convincing position above the stanch resistance of $39 and $40. Without wavering from its course, ABT pressed on through $42. The volume was respectable throughout the week's sessions, however, $44 proved to be a bit too much for ABT. The downdraft in Friday's "before the long weekend" sell-off needn't put UNH out to pasture though. The current share price is in the proximity of the now converged 5 and 10 DMAs at $42.68 and $41.16, respectively. This level should provide a solid launching point for entries next week. Wait for clear-cut direction, confirm the market sentiment, and keep an eye on the Amex Pharmaceutical Index ($DRG) before taking your positions. On Thursday, ABN Amro began new coverage on UNH. Analyst Bruce Cranna started the stock with an Outperform and issued a $50 price target. No other comments were available. BUY CALL JUN-35 ABT-FG OI= 60 at $8.13 SL=5.75 BUY CALL JUN-40*ABT-FH OI=2040 at $2.69 SL=1.50 BUY CALL JUN-45 ABT-FI OI=1765 at $0.50 SL=0.00 BUY CALL JUL-40 ABT-GH OI= 244 at $3.63 SL=1.75 BUY CALL AUG-45 ABT-HI OI=1537 at $2.00 SL=1.00 Picked on May 21st at $41.56 P/E = 26 Change since picked +0.13 52-week high=$45.94 Analysts Ratings 10-9-5-0-0 52-week low =$29.25 Last earnings 03/00 est= 0.44 actual= 0.44 Next earnings 07-10 est= 0.44 versus= 0.42 Average Daily Volume = 3.80 mln /charts/charts.asp?symbol=ABT **** SEPR - Sepracor Inc. $91.19 (-8.56)(-2.50)(-1.00)(+11.25) Sepracor develops and commercializes new, patented forms of existing pharmaceuticals by purging them of nonessential molecules. The company's products can reduce side effects, provide new uses, and improve safety, performance, and dosage. Sepracor focuses its efforts on gastroenterology, neurology, psychiatry, respiratory care, and urology. The company is also developing its own new drugs to treat infectious diseases and conditions of the central nervous system. SEPR's institutional ownership has increased from 61% a year ago to 84% in the latest quarter. And Wall Street analysts have made their adoration of SEPR known. They describe SEPR as an "old story just coming to fruition" because the company develops second generation drugs and markets them through the first generation maker. Throughout May, many analysts have praised the company. For example, Prudential Securities reiterated its Strong Buy rating on the stock, and raised its target price to $150 based upon strong sales of its new drug, Xopenix. DB Alex Brown endorsed the company by reiterating its Strong Buy rating based upon the improved outlook for several of SEPR's products under development. While Wall Street has turned bullish on SEPR, and the biotech sector in general, analysts realize that the company faces many hurdles down the road to profitability. However, in the near-term, we see further upside potential in the stock. Most significantly, we're looking for the upward momentum in the biotech sector to carry SEPR higher. While the NASDAQ, and particularly the tech sector languishes, the biotech sector has managed to hold onto its gains and show impressive relative strength. And with the solid base formed last week in SEPR, we may see the upward momentum return very soon. Similar to our CIEN play, SEPR traced a head-and-shoulders bottom over the course of last week's trading. The stock found solid support at $90 Friday, the location of its right shoulder. Watch the stock closely next week, view a breakout above $96 as a bullish sign and consider an entry near that level. We saw an institution step in late Friday as a block trade of 200 K shares crossed the tape late in the day, yet another bullish indicator. A few upcoming events may act as catalysts for SEPR, and further our cause. In two weeks, SEPR is scheduled to present at the PaineWebber Life Sciences Conference, and again at the Goldman Sachs Healthcare Conference a week later. If executives from SEPR deliver bullish comments, we could see some analysts flex their muscles and lift the stock. BUY CALL JUN- 90 ERU-FR OI= 66 at $ 8.50 SL= 6.00 BUY CALL JUN- 95 ERU-FS OI= 77 at $ 6.50 SL= 4.50 BUY CALL JUN-100*ERU-FT OI=251 at $ 4.63 SL= 2.75 BUY CALL JUL-100 ERU-GT OI=279 at $ 8.75 SL= 6.00 BUY CALL OCT-100 ERU-JT OI=130 at $17.00 SL=12.25 Picked on May 7th at $103.25 P/E = N/A Change since picked -12.06 52-week high=$126.81 Analysts Ratings 5-4-2-0-0 52-week low =$ 27.50 Last earnings 03/00 est=-0.96 actual=-0.76 Next earnings 07-24 est=-0.55 versus=-0.56 Average Daily Volume = 1.09 mln /charts/charts.asp?symbol=SEPR ******** INTERNET ******** EXDS - Exodus Communications $62.00 (-9.19) Exodus provides Internet system and network management solutions for enterprises with mission-critical Internet operations. They have pioneered the Internet Data Center (IDC) market and is one of the leading providers of Internet server hosting to the growing number of companies using the Internet. At present, Exodus also has twenty Internet Data Centers where clients store their servers in secure vaults. Clients include CBS Sports, eBay, Lycos, Yahoo!, MSNBC, and Hewlett-Packard. Could the inverse of the proverbial theory of what goes up must come down prove true for EXDS? This is the fundamental question and something we're betting is going to happen quite soon. Just recently on March 23rd, EXDS put in a 52 week high of $179.63 only to lose it legs following the market top. There really hasn't even been much of a bounce; and if you look at a daily chart you can see the undeviating down trendline. Wednesday's trading session however gave us a hint that there's a bright light at the end of the tunnel. EXDS snapped back off light support at $52.50 with the rallying market and followed through with a 16.8% spike to $67.75 on Thursday. The volume was exceptional both days at nearly twice the norm and good news was also in the air. The American Petroleum Exchange, a business- to-business trading exchange for the refined petroleum industry, announced it's teaming up with Exodus to provide a secure data center for transactions and data hosting. From a technical viewpoint, the Stochastic took direction from the neutral zero band and is now pointing up, up, up and EXDS is poised to take a leap off the 5-dma ($62.30) indicator. EXDS is bumping into a wall of opposition at $69 and the 10-dma line ($69.34). Therefore, it'd be more prudent to wait for moves through $70 before opening new plays. Although, the more aggressive may want to use a solid bounce off the current share price to get an early jump on the impending momentum. Remember EXDS can take you for a wild ride and is not for the more cautious traders. On a reversal this stock can easily take a 10 to 15 point dive! So put as many chips in the corner and plan your strategy carefully. Trailing stops may be a good idea if you're willing to take the chance of not getting stopped out on a wide intraday swing. Exodus announced plans to expand its data centers to 36 from 20 by the end of the year to keep up with demand for its services. According to Chief Executive, Ellen Hancock, the California- based company plans on adding data centers in Asia and Europe and will expand capacity at some of its current sites too. BUY CALL JUN-60*DUB-FL OI=2964 at $ 7.63 SL= 5.25 BUY CALL JUN-65 DUB-FM OI= 668 at $ 5.25 SL= 3.25 BUY CALL JUN-70 DUB-FN OI=1113 at $ 3.50 SL= 1.75 BUY CALL JUL-65 DUB-GM OI= 137 at $10.50 SL= 7.50 BUY CALL SEP-70 DUB-IN OI= 321 at $13.13 SL=10.50 Picked on May 28th at $62.00 P/E = N/A Change since picked +0.00 52-week high=$179.63 Analysts Ratings 22-10-0-0-0 52-week low =$ 16.72 Last earnings 03/00 est=-0.26 actual=-0.23 Next earnings 07-21 est=-0.24 versus=-0.14 Average Daily Volume = 7.63 mln /charts/charts.asp?symbol=EXDS **** YHOO - Yahoo! Inc. $112.06 (-8.25) Yahoo! Inc. is a global Internet communications, commerce and media company that offers a comprehensive branded network of services to more than 145 million individuals each month worldwide. As the first online navigational guide to the Web, www.yahoo.com is the leading guide in terms of traffic, advertising, household and business user reach, and is one of the most recognized brands associated with the Internet. The company also provides online business services designed to enhance the Web presence of Yahoo!'s clients, including audio and video streaming, store hosting and management, and Web site tools and services. The company's global Web network includes 22 local World properties outside the United States. Could it be that this sleeping giant is about to wake up?. It's certainly possible and that's why we're welcoming this favorite back to our little family. For the ardent tech investor, its hard to believe that just two months ago Yahoo was trading over $200 a share, helping lead the NASDAQ to an all-time high. For others, what's even harder to comprehend is the decline from a pre-split high of over $500 in early January. No sector has been hit harder than the Internets during the correction. Investors' sudden renewed interest in fundamentals, valuation and "common sense investing" has taken a toll on Yahoo and the dotcom sector. Interestingly, little has really changed for YHOO, and a few of the Internet stalwarts. Actually, they have hit the mark with better than expected earnings and sales, which many other companies can't say. So what makes YHOO so special now? Several things. First, we are just over a month away from the next round of earnings reports and our new play could begin to attract attention from traders expecting a move up into earnings. Technically, YHOO is approaching oversold territory according to several different indicators. Friday's 2.5% decline shows the Internet company definitely in an oversold condition when checking intraday charts. YHOO is sitting near a support level last visited in mid April, and in early December, prior to exploding to its all time high in early January. Until the current "correction" is over we aren't expecting any sustainable gains to come from YHOO or the Internet Sector. However, analysts are quick to point out that at current levels, the Internet giant could be attractive to short and long-term investors alike. If investors return from the holiday weekend with buy orders in hand, we would look to establish long positions on moves higher. For more conservative types a move through $116 supported by strong volume, may be just what the doctor ordered. If traders returnin a negative mood, bounces off the $107-108 could also provide attractive entry point. Again, confirm any bounce with volume prior to placing an order. The company held its annual stockholders meeting on May 12th. On the agenda was a request to increase the number of authorized shares from 900 million to 5 billion. The company's last split came on February 14th. Although the price of their stock has certainly changed, so have the market conditions and investor sentiment. With earnings scheduled to be reported on July 11th, some are anticipating a split announcement may be in the works as well. BUY CALL JUN-110 YMM-FB OI= 574 at $ 9.50 SL= 6.50 BUY CALL JUN-115*YMM-FC OI=1691 at $ 7.00 SL= 5.00 BUY CALL JUN-120 YMM-FD OI=7490 at $ 5.13 SL= 3.00 BUY CALL JUL-115 YMM-GC OI= 407 at $13.38 SL=10.00 BUY CALL OCT-120 YMM-JD OI= 307 at $18.75 SL=13.50 SELL PUT JUN-110 YMM-RB OI=7169 at $ 6.50 SL= 9.50 (See risks of selling puts in play legend) Picked on May 28th at $112.06 PE = 516 Change since picked +0.00 52 week high=$250.06 Analysts Ratings 16-13-3-0-0 52 week low =$ 55.00 Last earnings 04/00 est= 0.09 actual= 0.10 Next earnings 07-11 est= 0.10 versus= 0.05 Average daily volume = 9.84 mln /charts/charts.asp?symbol=YHOO ********* SOFTWARE ********* CHKP - Check Point Software $162.50 (+1.13) 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. Our play in CHKP got off to a reasonable start on Friday with a small gain. Considering the fact that most of the traders that stuck around for the session showed little interest in buying or selling, we'll take what we can get. A check of the volume the past month has shown that while Check Point has definitely been range bound, the up days have had far better participation than the down days. Since early April most of the action has taken place between $150 and $190, which some have termed a "day traders dream." We are beginning to see higher lows as the formation has begin to tighten, which could be considered a plus for our play. CHKP has two major influences tugging at each end. First, the negative tone in the broad markets has kept a lid on any rallies. As with many of the tech stocks, rallies are met by sellers, trying to recoup earlier losses. The other side of the coin has those that believe CHKP is a great buy at the lower end of the range, supported by the recent rash of cyber attacks. Let's take that argument a step further. To say the popularity of the Internet has exploded in recent years is a gross understatement. But, in looking at DSL connections to the Internet, Matt Davis, a senior analyst at the Yankee Group recently estimated the number of DSL subscribers to grow from 100,000 in 1999 to over 9.5 million in 2004. Granted this kind of information may be geared more for the long-term, buy-and-hold investor. However, it is this kind of speculation that keeps Check Point and other security companies in the spotlight. So how do we proceed our play? For CHKP to sustain a breakout move to the upside, we would like to see a close over $180, accompanied by strong volume for added confidence. If the bears return, bounces off $155 or $145 may provide a good entry point for short-term plays. The explosive growth of "always on" broadband connections has expanded the scope of business for Check Point. The need for security is no longer an option, it's a must, according to CHKP's Vice President of business development and product management. BUY CALL JUN-155 YKE-FK OI=403 at $17.13 SL=12.50 BUY CALL JUN-160 YKE-FL OI=104 at $14.25 SL=10.25 BUY CALL JUN-170*YKE-FN OI=274 at $ 9.25 SL= 6.75 BUY CALL JUL-180 YKE-GP OI=100 at $18.00 SL=14.00 BUY CALL OCT-180 YKE-JP OI=142 at $33.75 SL=26.25 SELL PUT JUN-160 YKE-RL OI= 96 at $10.63 SL=14.00 (See risks of selling puts in play legend) Picked on May 25th at $160.25 PE = 140 Change since picked +2.25 52 week high=$295.00 Analysts Ratings 12-3-0-0-0 52 week low =$ 21.34 Last earnings 04/00 est= 0.35 actual= 0.40 Next earnings 07-12 est= 0.42 versus= 0.26 Average daily volume = 1.68 mln /charts/charts.asp?symbol=CHKP ******* TELECOM ******* SCMR - Sycamore Networks $76.50 (-4.44) Sycamore Networks develops and markets intelligent optical networking products that transport voice and data traffic over wavelengths of light. The Company combines significant experience in data networking with expertise in optics to develop intelligent optical networking solutions for network service providers. Sycamore's products are based on a common software foundation, enabling concentration on the delivery of services and end-to-end optical networking. Sycamore's products and product plans include optical transport, access and switching systems and end-to-end optical network management solutions. That was fast! Recall we dropped SCMR from the play list on May 16th, thanks to earnings on May 18th. Way to go, SCMR! It was a blowout at $0.05 vs. estimates of just $0.02. While revenue increased sequentially by 104% to over $59 mln, true to form, that didn't stop SCMR from digging a post-earnings hole to crawl into. Now, it's back to that ascending wedge pattern of higher lows moving toward resistance of $90. First, it needs to get through mild resistance at $80. Despite an intraday low of $66 on Thursday, most recent support is at $70. If you can read tea leaves, you could also make a case for $72.50. Another technical plus is that SCMR finished a smidgen over its 5-dma of $75.01 for the first time since reporting earnings. Going forward, aggressive traders may want to consider buying any dip under the 5-dma. However, we think target shooting in the $70 to $72.50 range will yield the best entry. With SDLI also blowing away earnings estimates last week, we know that the optical component business is still brisk, and thus customer demand for the finished networking products is too. It doesn't hurt either that Fidelity Magellan disclosed that SCMR was one of three networkers responsible for its profits last quarter. Analysts' upgrades will help create the buzz going forward. Wit Soundview reiterated their Strong Buy rating and upped their price target to $150 on May 19th from $130. DLJ started coverage with a Buy rating on May 11 and a price target of $95. BUY CALL JUN-70*SMZ-FN OI=199 at $12.13 SL= 9.00 BUY CALL JUN-75 SMZ-FO OI=406 at $ 9.50 SL= 6.50 BUY CALL JUN-80 SMZ-FP OI=555 at $ 7.13 SL= 5.00 BUY CALL JUL-75 SMZ-GO OI= 12 at $13.75 SL=10.25 BUY CALL SEP-80 SMZ-IP OI=445 at $16.38 SL=11.75 SELL PUT JUN-60 SMZ-RL OI=228 at $ 2.31 SL= 3.75 (See risks of selling puts in play legend) Picked on May 28th at $76.50 P/E = 78 Change since picked +0.00 52-week high=$199.50 Analysts Ratings 7-4-0-0-0 52-week low =$ 47.25 Last earnings 05/00 est= 0.02 actual= 0.05 surprise = 150% Next earnings 08-17 est= 0.06 versus= N/A Average Daily Volume = 3.6 mln /charts/charts.asp?symbol=SCMR **** RBAK - Redback Networks $72.06 (+9.13) Founded in 1996 and headquartered in Sunnyvale, Calif., Redback Networks is a leading provider of advanced networking solutions that enable carriers, cable operators, and service providers to rapidly deploy broadband access and services. The company's market-leading Subscriber Management Systems (SMSs) connect and manage large numbers of subscribers using any of the major broadband access technologies such as Digital Subscriber Line (DSL), cable, and wireless. To deliver integrated transport solutions for metropolitan optical networks, Redback's SmartEdge multi-service platforms leverage powerful advances in application-specific integrated circuit (ASIC), IP, and optical technology. With this product portfolio, Redback Networks is the first equipment supplier focused exclusively on developing integrated solutions for the New Access Network. Another popular networker makes it back on the play list this week. RBAK too was named as being partially responsible for Fidelity Magellan's most recent results. But, the real story here is the technical picture where we once again (you guessed it) have an ascending wedge. The lows keep getting higher ($55, $57, $60 and $67). Friday's blast off from $68 to $72 in the last hour of trade on substantially increased volume was the kicker. About 150k shares traded then on an otherwise sleepy Friday. Somebody is interested and we expect the trend to continue next week. Resistance at the top of the wedge is about $74. Conservative traders can play it safe by waiting for the breakout over $74 with strong volume. But we think target shooting at support to match your risk tolerance can get you a better entry. We favor a pullback to $67. However, if you can stomach a tad more risk, there is mild intraday support at $70. According to briefing.com, RBAK announced an agreement with PrimusDSL, the digital subscriber line (DSL) business unit in the United States of PRIMUS Telecommunications to expand its existing relationship and provide its Subscriber Management System support PrimusDSL's plans to expand in 12 markets nationwide by the end of 2000. Similar deals with ArrayComm were also struck to support their wireless products. BUY CALL JUN-65*BUK-FM OI=2540 at $12.50 SL= 9.50 BUY CALL JUN-70 BUK-FN OI= 292 at $ 9.75 SL= 6.75 BUY CALL JUN-75 BUK-FO OI= 347 at $ 7.50 SL= 5.25 BUY CALL JUL-75 BUK-GO OI= 99 at $12.00 SL= 9.00 BUY CALL SEP-80 BUK-JP OI= 114 at $ 6.50 SL= 4.50 SELL PUT JUN-60 BUK-RL OI=1139 at $ 2.50 SL= 4.00 (See risks of selling puts in play legend) Picked on May 18th at $72.06 P/E = N/A Change since picked +0.00 52-week high=$198.50 Analysts Ratings 4-2-1-0-0 52-week low =$ 16.31 Last earnings 04/00 est= 0.03 actual= 0.05 surprise= 33% Next earnings 07-12 est=-0.06 versus=-0.05 Average Daily Volume = 2.5 mln /charts/charts.asp?symbol=RBAK **** SDLI - Spectra Diode Laboratories Inc. $197.75 (+1.75)(+22.00) SDL's products power the transmission of data, voice and Internet information over fiber optic networks to meet the needs of telecommunications, DWDM, cable television and satellite communications applications. They enable customers to meet the bandwidth needs of increasing Internet, data, video and voice traffic by expanding their fiber optic communications networks more quickly and efficiently than would be possible using conventional electronic and optical technologies. SDL's optical products also serve a variety of non- communications applications, including materials processing and printing. We said Thursday, heading into a holiday weekend, many analysts would view whatever happened Friday as a "non-event", due to the lack of traders. Well, it's amazing what a little thing like an earnings warning or an upbeat earnings forecast can do to the price of a company's stock. That's exactly what occurred for our play in SDLI. Before the open, the company said it expects to beat Wall Street estimates by at least 24%. Analysts had expected the fiber-optics products maker to earn about $0.25 a share for the fiscal second quarter. Company officials said profits were propelled by strong bookings and the purchase of Photonic Integration Research Inc. The Photonic purchase is a cash and stock deal said to be worth $1.8 billion. SDL's Chief Executive Don Scifres said the acquisition of Photonic, due to close next month, will add $5 million in sales this quarter, and SDL's broader line of products is drawing in more big customers. Jeff Lipton, Chase H&Q analyst said "the acquisitions are going well, but most of the upside here is due to strength in their main business." On Friday, our play gapped up over $9 and after an initial pullback, climbed all the way to resistance near $200 before settling for an 18% gain. The volume, especially in the last half-hour of trading, was impressive for a day before a holiday. Over 1.6 millions shares changed hands the last thirty minutes of the session as SDLI climbed to its high at $199.00. How do we play this one? Support now is found at $185 and $180, with the 10-dma sitting at $192.95. With the strength of Friday's move, we would expect the momentum to carry through. Overhead resistance comes into play near $216. We would be careful about trying to jump in during the first hour on Tuesday, as whatever way SDLI moves during that time frame, is likely to be exaggerated. The company is challenging JDS Uniphase Corp, the biggest maker of fiber-optic parts, by making acquisitions like the purchase of Photonic. According to SDL's CEO, "It's going to be a great second half of the year, in terms of earnings...we're seeing really good demand." At the company's stockholders meeting on May 18th, shareholders were asked to vote for an increase in the number of authorized shares from 141 million to 281 million. BUY CALL JUN-190*QZL-FR OI=439 at $23.38 SL=17.00 BUY CALL JUN-200 QZL-FT OI=753 at $19.00 SL=13.75 BUY CALL JUN-210 QZL-FB OI=700 at $15.13 SL=11.00 BUY CALL JUL-190 QZL-GR OI=424 at $37.38 SL=29.00 BUY CALL SEP-205 QZL-IT OI=197 at $48.00 SL=37.50 SELL PUT JUN-195 QZL-RS OI= 28 at $17.88 SL=24.50 (See risks of selling puts in play legend) Picked on May 21st at $196.00 PE = 394 Change since picked +1.75 52 week high=$244.75 Analysts Ratings 14-8-0-0-0 52 week low =$ 21.63 Last earnings 04/00 est= 0.16 actual= 0.22 Next earnings 07-19 est= 0.23 versus= 0.09 Average daily volume = 2.89 mln /charts/charts.asp?symbol=SDLI **** CIEN - Ciena Corp $99.69 (-16.81) 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. With a P/E ratio somewhere north of 500, growth doesn't come cheap for shareholders of CIEN. But growing is exactly what CIEN is doing. Analysts figure that the company will grow its bottom line by an amazing 1700% this year. Analysts concede that CIEN is in a field with giant competitors such as LU and NT. However, at the same time, they confess that CIEN's products have tremendous potential and the company has room to grow, considering its relatively small market cap of $14 bln. And with the announcement that China will be allowed into the WTO late last week, CIEN's boundaries for growth further expanded. As we described in Thursday's write-up, CIEN will supply optical networking equipment to China as the country expands its ailing wireless and wireline networks. Despite the explosive growth of CIEN's bottom line, the stock has been on a roller coaster ride over the past two months. But, through the course of last week's trading, CIEN formed a bullish chart pattern. Friday's trading completed a picturesque head-and-shoulders bottom formation, with the $100 level providing the right shoulder. With the strong technical position of CIEN, and the developments in China hashed-over during the three-day weekend, we could get an exciting rally next week, provided the NASDAQ cooperates. Given the bottom head-and-shoulders formation, an aggressive trader might play a bounce from current levels. On the other hand, a solid move above the right shoulder at $110 could lead to a strong and swift rally as CIEN has very little resistance above that level. Watch CIEN closely early next week for a break-away from its right shoulder. Be cautious though, if CIEN falls below near-term support of $95 it might not find bottom again until $80. CIEN's popularity among Wall Street pros is growing by the week. Last Thursday, DB Alex Brown initiated coverage on the stock with a Buy rating. Analysts said that CIEN represents one of the best investments in the optical sector. And early last week, DLJ reiterated CIEN as a top pick, setting a target price of $190. BUY CALL JUN- 95 EUQ-FS OI=260 at $12.88 SL= 9.75 BUY CALL JUN-100 EUQ-FT OI=880 at $10.25 SL= 7.25 BUY CALL JUN-105*EUQ-FA OI=449 at $ 8.25 SL= 5.75 BUY CALL JUL-105 EUQ-GA OI=162 at $15.00 SL=11.00 BUY CALL OCT-110 EUQ-JB OI=332 at $21.63 SL=15.00 Picked on May 25th at $104.50 P/E = 586 Change since picked -4.81 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 ********************************* CALLS - CONTINUED IN SECTION FOUR ********************************* ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. 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The Option Investor Newsletter 5-28-2000 Sunday 4 of 5 ***************** CALLS - CONTINUED ***************** **** MISC **** ITWO - I2 Technologies $95.50 (-2.75) I2's RHYTHM supply chain management software helps manufacturers plan and schedule production and related operations such as raw materials procurement and product delivery. Companies that use RHYTHM include: 3M, Dell, Ford, and Motorola. Maintenance, training, and other services account for more than a third of sales. I2 is using acquisitions of complementary technologies and companies to position itself as a leader in the market for Internet-based production process applications. ITWO has found its rhythm, despite the bust in the B-2-B sector. While Wall Street argues over what B-2-B business model will win, and companies in the sector struggle, ITWO is positioning itself to emerge as a market leader. The company has been around for quite awhile, and has operated profitably for over a year now. And Wall Street expects ITWO to grow earnings by 43% annually over the next five years. As the Internet grows, companies are using the Web to decrease costs and increase efficiency. That's where ITWO comes in. The company is an outsourcing concern that provides services to a broad spectrum of major manufacturers. And ITWO's signature software known as RHYTHM has emerged as the industry standard. ITWO's market dominance is seen through the array of contracts it continues to line up. Most recently Sunbeam (SOC) licensed ITWO's suite of transportation solutions to manage and optimize its transportation resources. While ITWO's long-term prospects remain rosy, we're more concerned with the short-term performance of the stock. The fundamentals are in place, and now the chart is showing profit potential. The stock has been range bound for the past two months between $80 - 120. Last Wednesday marked the third time ITWO retested support at $80. The stock since rebounded, extending its gains Friday despite the overall weak market. ITWO will face resistance at $100 and a bit of congestion at $105, but after that it's pretty clear to $120. Consider an entry at current levels if you don't mind more risk, otherwise, target shoot for entry points as ITWO clears its various resistance levels. If you want to minimize risk, wait for ITWO to clear resistance at $105 as confirmation that its relative strength is here to stay. Despite the bleak volume going into the holiday weekend and the generally weak market conditions, the software and e-services sector held up relatively well. Stocks such as VRTS, BMCS, and of course ITWO all had substantial gains Friday. Pay close attention to the direction in the sector and don't forget to set your stops! BUY CALL JUN- 90 QYJ-FR OI=544 at $14.13 SL=10.50 BUY CALL JUN- 95 QYJ-FS OI=378 at $11.00 SL= 8.25 BUY CALL JUN-100*QYJ-FT OI=487 at $ 9.00 SL= 6.25 BUY CALL JUL-100 QYJ-GT OI= 34 at $16.50 SL=11.75 BUY CALL AUG-100 QYJ-HT OI=195 at $19.75 SL=14.00 Picked on May 28th at $95.50 P/E = 429 Change since picked 0.00 52-week high=$223.50 Analysts Ratings 8-17-2-0-0 52-week low =$ 13.06 Last earnings 03/00 est=0.05 actual=0.07 Next earnings 07-20 est=0.08 versus=0.05 Average Daily Volume = 4.05 mln /charts/charts.asp?symbol=ITWO ***** LEAPS ***** by Mark Phillips leaps@OptionInvestor.com Are we there yet? Those of you with small children are familiar with that question - one I seem to be asking myself on a regular basis lately. The markets continue to drift lower, as the fear of more interest rate hikes keeps the buyers at bay. The VIX is mirroring the major indices as its range continues to narrow. It hasn't been below 25 since early April, and the highs are getting lower, as it becomes less willing to move above 30. The directionless and apathetic markets on Friday dragged the VIX down to close out the week at 27.88, and with the markets still trading at very low levels, the bargain-hunting should soon begin in earnest. If you are a LEAPS investor and you have cash in hand, you are likely salivating at the prospects of some of the tasty entry points we are being served. Look at the number of plays that are at or near their 200-dma or a major level of support, and you can see what I am so excited about. CSCO finally made it as the L.O.W. and QCOM is trading at less than a third of its January highs. Some of the big winners in the past 6 months (EMC, CY, NT, SUNW) are all trading near their 200-dmas. They had great runs and have pulled back with the rest of the market. This is why I started talking about taking profits on winning plays back in early April. The profit-taking was bound to happen (although it came a bit earlier than we expected), and our primary goal is to make and KEEP our profits. Whether you set profit targets and close a position when it is met or use trailing stop losses, money management is the one skill that will keep your account growing and keep you in the game. That way, when the pullback does take place, we are poised to take the cash sitting in our accounts and buy LEAPS again when the entry points appear. One note of clarification; our plays are intended to be used similar to those found in the Call and Put section of the newsletter. We list the necessary conditions to provide a good entry point, and if those criteria are not met, you don't want to be in that play. Simply jumping into the newest LEAP plays first thing Monday morning is a quick way to drain your account dry. Pick the plays that you like, and then decide where you would be happy getting an entry. If the stock comes to you and the play still looks good, then pull the trigger. But don't chase entry points in this market just because you are afraid it will get away from you. Patience is being rewarded in this market, so follow Jim's advice, "Don't buy too soon". Administrative Note: I told you last week what the situation was with respect to the 2001 and 2003 LEAPS and the complicated way in which the CBOE has managed the addition of 2003 strikes and the conversion of 2001 strikes to regular call options. Unfortunately, the situation has changed very little in the past week; there are still LEAP symbols for 2001 on many of our plays (NT, CY, NSM, CMGI, and VSTR), and the picture isn't much better for the 2003 LEAPS. There are a few stocks that have listed LEAPS for the 2003 expiration cycle, but none have prices listed and there is no open interest yet. I'm still trying to get an answer from CBOE when the situation will be rectified and will inform you as soon as I know anything more. Stay tuned... Current Plays SYMBOL SINCE LEAPS SYMBOL PICKED CURRENT RETURN EMC 11/07/99 JAN-2001 $ 80 EMB-AP $15.38 $41.50 169.83% JAN-2002 $ 90 WUE-AR $19.00 $57.25 201.32% IBM 11/07/99 JAN-2001 $100 IBM-AT $13.63 $19.63 44.02% JAN-2002 $110 WIB-AB $16.50 $25.75 56.06% CSCO 11/14/99 JAN-2001 $ 40 CYQ-AH $ 9.56 $20.75 117.05% JAN-2002 $ 45 WIV-AI $11.00 $24.13 119.36% NT 11/28/99 JAN-2001 $37.5 ZOO-AU $11.13 $20.38 83.11% JAN-2002 $37.5 WNT-AU $15.13 $25.88 71.05% TXN 12/12/99 JAN-2001 $ 55 TNZ-AK $11.13 $20.38 83.11% JAN-2002 $ 60 WGZ-AL $14.25 $25.13 76.35% SUNW 12/19/99 JAN-2001 $ 80 SUX-AP $17.63 $13.38 -24.41% JAN-2002 $ 90 WJX-AR $22.00 $20.38 - 7.36% CY 01/16/00 JAN-2001 $ 40 ZSY-AH $ 9.13 $11.75 28.70% JAN-2002 $ 40 WSY-AH $12.63 $18.25 44.50% ERICY 01/30/00 JAN-2001 $16.3 RQC-AO $ 4.94 $ 5.13 3.85% JAN-2002 $16.3 WRY-AO $ 6.75 $ 7.38 9.33% NSM 02/27/00 JAN-2001 $ 70 ZUN-AN $18.50 $ 8.38 -54.70% JAN-2002 $ 70 WUN-AN $24.25 $16.00 -34.02% AOL 03/12/00 JAN-2001 $ 60 AOO-AL $14.00 $ 5.88 -58.00% JAN-2002 $ 65 WAN-AM $18.63 $10.88 -41.60% AXP 03/12/00 JAN-2001 $43.3 AXP-AP $ 7.25 $11.13 53.52% JAN-2002 $46.6 WXP-AQ $ 9.33 $13.75 47.37% WM 03/19/00 JAN-2001 $ 25 WM -AE $ 5.00 $ 6.50 30.00% JAN-2002 $ 30 WWI-AF $ 5.38 $ 6.88 27.88% QCOM 03/26/00 JAN-2001 $150 AUA-AJ $39.25 $ 3.75 -90.45% JAN-2002 $160 XQO-AL $52.88 $ 9.88 -81.32% AMD 04/16/00 JAN-2001 $ 70 AMD-AN $17.50 $22.38 27.89% JAN-2002 $ 70 WVV-AN $26.00 $32.13 23.58% CMGI 04/16/00 JAN-2001 $ 50 ZB -AJ $21.50 $12.88 -40.09% JAN-2002 $ 55 WCK-AK $27.75 $19.50 -29.73% JDSU 04/16/00 JAN-2001 $ 80 XJU-AP $27.50 $24.63 -10.44% JAN-2002 $ 80 YJU-AP $39.63 $38.00 - 4.11% VSTR 04/16/00 JAN-2001 $ 90 ZTB-AR $23.88 $33.38 39.78% JAN-2002 $ 90 WWP-AR $35.00 $47.13 34.66% YHOO 4/30/00 JAN-2001 $140 YMM-AH $32.13 $18.88 -41.24% JAN-2002 $140 WYZ-AH $46.38 $34.25 -26.15% MOT 5/14/00 JAN-2001 $100 MOT-AT $19.75 $16.00 -18.99% JAN-2002 $110 WMA-AB $28.63 $25.38 -11.35% NOK 5/21/00 JAN-2001 $ 50 NZY-AJ $10.25 $ 9.25 - 9.76% JAN-2002 $ 50 IWX-AJ $17.25 $15.75 - 8.70% To review the play description on any of our current plays, go to the LEAPS section for the date the play was added. Option Selection: Notice that many of our LEAP plays have moved considerably since initially being picked. The listed options may therefore be deep in the money and very expensive. When entering a new position, look to buy LEAPS according to your suitability level, but note that we typically initiate strikes that are slightly out of the money from the stock's current price. Leap of the Week CSCO - Cisco systems $54.94 Oh how the mighty have fallen. After its brief moment in the limelight in late March, where the company reached the coveted position of the company with the largest market capitalization, CSCO has been brought back to earth with the rest of the NASDAQ. Valuation concerns from various analysts and continued weakness in the tech sector dropped the stock through support at $60, and there was widespread concern about the $50 support level (just below the 200-dma). Fortunately this level held and there was heavy institutional buying last week as the stock traded nearly 100 million shares on Wednesday, more than double the daily average. The company's revenue growth continues to increase and analysts are watching the stock closely as it will likely be a good indicator for the whole tech sector. Consider repeated bounces near the $50 support level to be good entry points, but keep your eye on the volume; it will be absolutely necessary to confirm the strength of any upward move. BUY CALL JAN-2001 $60.00 CWY-AL at $ 9.75 BUY LEAP JAN-2002 $60.00 WIV-AL at $16.88 BUY LEAP JAN-2003 $65.00 ------ at $--.-- **Wait for Strike** /charts/charts.asp?symbol=CSCO New Plays XLNX - Xilinx, Inc. $66.88 As the tech sector has fallen down around us, it has become increasingly clear that relative strength is king. The company is a leading supplier of field-programmable gate arrays and other complex programmable logic devices that customers can customize to perform specific functions. With its products used in a wide variety of applications in the telecommunications, data processing, medical instrumentation, military and networking markets, XLNX counts Cisco, Hewlett Packard, IBM and Nortel among its customers. XLNX is one of the few Semiconductor stocks that has refused to bow down to touch the 200-dma. Industry leaders like TXN, CY, NSM (all current plays) have all either tested or violated theirs, while XLNX has kept a healthy distance from its 200-dma. Since the carnage of mid-April, the stock has posted consistently higher lows to accompany the consistently lower highs. This is creating an attractive pennant formation that should provide a breakout in the next 2-3 weeks. Support is formidable near $56-57, with near-term support appearing near $60. Volume is dancing around the daily average with stronger volume accompanying up days. Resistance has settled in near $70, and move through this level on strong volume would provide an acceptable entry. With the NASDAQ continuing to be weak, a more attractive entry point can likely be had as XLNX dips to test support near $60. Just make sure it is a successful test and the rebound is confirmed by increased buying interest. BUY CALL JAN-2001 $70.00 ZIZ-AN at $14.63 BUY LEAP JAN-2002 $70.00 WXJ-AN at $23.38 BUY LEAP JAN-2003 $75.00 ------ at $--.-- **Wait for Strike** /charts/charts.asp?symbol=XLNX --- HD - Home Depot $46.88 There's nothing like an earnings shortfall in a weak market to tank an entire sector, and bring strong stocks down to attractive levels. Interest rate fears and general market weakness had served to bring HD down to support at $50, and then Costco missed earnings on May 24th, and the effect was felt throughout the Retail sector. Even HD, the leading home improvement retailer, felt the brunt of the sell-off that ensued, dropping the share price as low as $44 before more rational thinking prevailed. The stock attempted to recover late in the week, but was thwarted by an earnings warning from Office Depot, which tanked the sector again. So if the sector outlook is gloomy, why are we picking it as a new play? Simply put, HD is a great company that continues to grow revenues by 25% year-over-year, and has met or exceeded expectations for the past 14 quarters. The stock has performed well, and will likely continue to do so. With the guilt-by-association pullback last week, HD is now trading very near support at $43-45, followed by very strong support at $40. The market still has to sort out its near-term direction and this indecision by investors could provide some very attractive entry points on HD. Look to open new positions on a bounce from support as long as it is accompanied by increasing volume. BUY CALL JAN-2001 $50.00 ZHD-AJ at $ 6.25 BUY LEAP JAN-2002 $50.00 WHD-AJ at $11.38 BUY LEAP JAN-2003 $55.00 ------ at $--.-- **Wait for Strike** /charts/charts.asp?symbol=HD Drops None ***************************************************************** PUT PLAYS ***************************************************************** Put plays can be very profitable but have a larger risk than call plays. When a stock is falling the entire investment community (except the shorts) is hoping it will reverse and start back up. The company management is also doing everything they can to shore up their stock price. The company issues press releases, brokers talk it up, analysts try to put a positive spin on everything. Then of course there is the death knell, the "buy recommendation" simply because the price has dropped to some level that analysts feel attractive again. Buyers who like the stock wait until it appears a bottom has been reached and then jump on it in a feeding frenzy. They may already have a large position and are averaging down. Many factors can stop a free falling stock in mid drop. **** ANAD - Anadigics Inc. $27.81 (-16.44)(-14.00) Anadigics produces radio-frequency (RF) integrated circuits that allow more functions on a single circuit. The company's products are used to transmit signals in a variety of high-volume communications applications, including wireless and fiber-optic telecommunications, cable television, and satellite TV systems. The company sells direct to customers such as Ericsson, Motorola, and Palm. Most of its sales come from customers outside North America. Rising interest rates, a stumbling currency, and slowing demand from a major customer bodes poorly for a weak tech stock. Faced with a harsh environment for highly valued tech stocks, ANAD's problems worsened two weeks ago. The company's largest customer, ERICY, told analysts that a slowdown in their handset business will result in fewer orders for RF components. The announcement sent ANAD plunging past support levels and into the mire. Institutions ran for the exits as volume swelled in the stock. ANAD had four days last week when traders exchanged more than 2 mln shares, versus an ADV of 768 K. Like ERICY, many of ANAD's customers are European concerns. As the EURO erodes in value, ANAD's customers have less buying power. So it goes, customers buying fewer products equates to less revenue for ANAD. Also, a quick glance through ANAD's most recent 10Q reveals that the company is expecting stiff competition in the fiber optic arena. ANAD has to cope with slowing demand for the company's integrated circuits. ANAD executives stated that an increase in competition will result in increased pricing pressure, leading to lower revenues. You may have noticed that ANAD edged higher Friday. The gains Friday can be linked to the positive news spilling from ANAD competitor, SDLI. While business is booming for SDLI, it's a different story for ANAD. There are two possible ways to gain entry into the play. First, if the institutions return next week, watch for ANAD to fall below $25 for a solid entry point. If ANAD extends its gains from here, and you're willing to take more risk, consider an entry if the stock bumps against resistance at $30. If you choose the latter, make sure to wait for the downward momentum to return before entering the play. BUY PUT JUN-35 DQA-RG OI= 1 at $9.38 SL=6.50 BUY PUT JUN-30*DQA-RF OI=11 at $5.75 SL=3.75 BUY PUT JUN-25 DQA-RE OI=30 at $2.94 SL=1.50 Average Daily Volume = 768 K /charts/charts.asp?symbol=ANAD **** EXTR - Extreme Networks $44.06 (-9.31) 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. The recent market decline has been tough on EXTR, and the outlook is still grim. Although the stock has now given up more than 60% of its price from the March high of $121.38, the company has given the Street some pretty bad news. Revenue growth has slowed each quarter since the company went public and the May 16th quarterly report was not encouraging. Citing competitive pricing pressure, promotional pricing and rapid technological change, management has warned the Street that they expect to see rapid erosion of average selling prices, which will inevitably affect gross margins. Investors might have overlooked this fact in last year's euphoric market, but the recent correction has humbled many companies that have failed to keep up with investors' expectations. As evidence that this news was not well received, after the report became public, EXTR proceeded to drop from $62 to 42.38 in a little over a week. This decline came on strong volume and dropped the stock right through support at $51. The price is being pressured by the 5-dma (currently $48.50), and is rapidly approaching the 52-week low at $37.13. The directionless action on the broader markets actually served to buoy the stock a bit, as it managed to gain $1.19 on slightly less than average volume. Look for the decline to continue as investors move their cash to the strongest stocks and leave the under-performers on the sidelines. Any failed rally will provide a better entry point; consider new positions when the stock rolls over near resistance and enjoy the ride. BUY PUT JUN-50*EUT-RJ OI=291 at $8.88 SL=6.25 BUY PUT JUN-45 EUT-RI OI= 69 at $5.75 SL=3.75 BUY PUT JUN-40 EUT-RH OI= 34 at $3.13 SL=1.50 Average Daily Volume = 1.60 mln /charts/charts.asp?symbol=EXTR **** HLIT - Harmonic Lightwaves $38.00 (-8.13)(-17.75) Harmonic designs, manufactures and markets digital and fiber optic systems for delivering video, voice and data over cable, satellite and wireless networks. The company is headquartered in Sunnyvale, CA where it also operates an R&D center and a manufacturing facility. It maintains several sales and support centers worldwide including its subsidiaries in Israel and the UK. Since that apocalyptic Fed meeting on May 9th, HLIT has lost $26.38, or put in a more applicable perspective, 41% of its share price. WOW! The phenomenal rate at which apprehensive investors have unloaded HLIT is just "peachy keen" for us put players. The uncertainty in the markets and big concerns regarding Harmonics future value continues to drive it closer to $23.25, the 52-week low. Let's back up a little to May 3rd for the new readers. On that day, Harmonic completed its acquisition of Divicom, a maker of video compression equipment used by satellite-TV companies. The news didn't fare well with shareholders. Many feared the $1.74 bln deal would be a drag on the company's future revenue growth. As you can see in hindsight, investors lost no time spearheading their disapproval. While the play has without doubt lavished a multitude of profit opportunities, we want to be on guard next week. First, we can't ignore the tempting basement prices nor the possibility of a changing market sentiment (yes, a rally is possible!). From the a 10-dma perspective, HLIT is far below that $46.78 line. However, the 5-dma ($39.68) is now closer at hand. Downward bounces from here followed by moves through Wednesday's intraday low of $35 would provide reasonable confirmation that HLIT's isn't veering from its path. Look too for the volume to remain robust in the coming days. BUY PUT JUN-45*LOQ-RI OI=316 at $8.13 SL=5.75 BUY PUT JUN-40 LOQ-RH OI=164 at $5.75 SL=3.75 BUY PUT JUN-35 LOQ-RG OI= 7 at $2.94 SL=1.50 Average Daily Volume = 1.99 mln /charts/charts.asp?symbol=HLIT **** NTOP - Net2Phone $26.50 (-4.63)(-9.13) Net2Phone provides its 325,000+ customers with the ability to make phones call through the Internet using personal computers, faxes or telephones at a much lower cost than wireless or hard- line calling. The company is the #1 Internet telephone carrier and is expanding internationally through an alliance with AT&T and Sprint. The long-distance company, IDT, still retains 48% of NTOP. NTOP is one of those Internet Telecoms that has, thus far, avoided charging customers high-cost access fees. The bottom- line? NTOP is at a big competitive advantage over traditional and local phone companies, that is until now. While on one hand the House of Representatives passed a bill May 16th to permanently ban the FCC from taxing ISPs on a per-minute basis, the bill failed to bar the FCC from imposing so-called access fees on ISPs. Essentially, this boils down to the reality that consumers could still pay a tax on Internet access someday. Bad news in an already troubled environment. Needless to say NTOP was kicked to the curb. Since getting the boot, the share price's been reduced by one-third. The technical players likely stepped into the game when NTOP slid under the $40 mark further pumping up the downward pressure. This technical breakdown is significant when you consider NTOP saw a rapid rise from a low of $15 to an all-time high of $92.38 during the days of its IPO in July/August 1999. This Wednesday we saw an intraday bottom at $22.50, just above the light support level of $20. But while $28 served as an impregnable resistance this week, it'd still be better to see NTOP make subsequent downward moves from here. We don't want to get caught in a narrow trading range. And mark your earnings' calendar too. Net2Phone is confirmed to report 1Q earnings on Wednesday, May 31st after the market. BUY PUT JUN-30 UPT-RF OI= 9 at $4.50 SL=2.75 BUY PUT JUN-25*UPT-RE OI=25 at $1.56 SL=0.75 Average Daily Volume = 555 K /charts/charts.asp?symbol=NTOP **** FDRY - Foundry Networks Inc. $55.00 (-10.50)(-2.63)(-22.00) Foundry Networks Inc. is a leader in high performance end-to-end switching and routing solutions including Internet routers, Layer 3 switches and Layer 4-7 Internet Traffic Management switches. Foundry products are installed in the some of the world's largest ISPs including AOL, EarthLink, AT&T WorldNet, MSN, and Cable and Wireless. Their products are also installed in large enterprise, entertainment, pharmaceutical and manufacturing companies as well as search engines, e-commerce sites, universities and government organizations. Oversold or not, you have to wonder just how much lower Foundry can go. The successive lows the past three days have dragged FDRY back below the level of its IPO in late September. Friday the company made another new low at $51.88. Keep in mind not only did the stock open near $54.50 last fall, but hit an all-time high at $212 on March 10th. The decline since then has been brutal to say the least. For our purposes, it's been a very profitable play. In mid April FDRY reported better than expected earnings, yet the buyers that have come to the rescue have been slapped by waves of selling. It's really not clear whether the company is suffering from competition in the industry, or from the overall sentiment in the market place. Of the eight brokers covering FDRY, seven have the company rated a Strong Buy or Buy. However, the people that vote with their money have the company rated a sell. We said earlier that for most of the week FDRY traded like a stock trying to find a bottom. Friday's low came in the first hour of trading when a few brave souls stepped in and put their money on the table, bidding the price back up to close at $55. Resistance now comes into play near $58, $60 and $62. The move back up Friday came on very light volume with no "spikes" or "surges" of buyers entering the market. This would indicate that it's probably only a short-term move back up to a resistance area, which is likely to find bears lurking in the bushes. For now, the trend is our friend, and our friend is still headed south. BUY PUT JUN-60 OUJ-RL OI= 25 at $10.13 SL=7.13 BUY PUT JUN-55 OUJ-RK OI= 3 at $ 6.75 SL=4.75 BUY PUT JUN-50*OUJ-RJ OI=275 at $ 4.00 SL=2.50 Average daily volume = 1.39 mln /charts/charts.asp?symbol=FDRY **** ICIX - Intermedia Communications $24.94 (-5.94) Intermedia Communications is an integrated communications provider headquartered in Tampa, Florida. They offer local and long-distance services, enhanced data transmission, Internet access, and Web hosting to businesses and government agencies. Its fiber-optic network stretches across 14 southeastern US cities and they have a 5,000-mile long-haul microwave transmission system in the Northeast. Their services are offered throughout the US and in select international markets. Some people have a lucky number or best day of the week. On the flip side, ICIX seems to be having "bad hair" days on Fridays. After getting the fatal push off bottom support of $32 and $33 the previous Friday, in which traders sold off their holdings in a panic, things have just gotten worse for this struggling telecom. On Tuesday ICIX bearishly closed smack on its intraday low of $28.19 and by Wednesday mid-afternoon had dipped to $23.88 setting a lower near-term bottom support. Importantly, overhead resistance also established itself at $28.63 as the market tried to fight its way into bull territory in the following days, just under the prevailing 10-dma ($30.72). Another good sign for this put play was the late day sell-off on Friday. ICIX tracked lower and once again cut down its share price a whopping percentage. ICIX shed $2.94, or 11.8% on increasing volume, which matched the previous Friday's sentiment at more than double the ADV. Bounces off the 5-dma at $27.59 or more conservatively, watch for downward progression through the current price level as potential entry points. Of course, your entry depends on your risk portfolio. Keep a sharp lookout for signs of a buying spree (positive moves through the 10-dma) or an impressive change in market sentiment. BUY PUT JUN-30*QIX-RF OI=293 at $6.00 SL=4.00 BUY PUT JUN-25 QIX-RE OI=300 at $2.63 SL=1.25 Average Daily Volume = 1.28 mln /charts/charts.asp?symbol=ICIX **** INCY - Incyte Pharmaceuticals, Inc. $49.06 (-8.69)(-11.00) Quick version: Incyte provides information about genes, related data management software, verified copies of genes and related reagents and services to pharmaceutical and biotechnology researchers. Details: INCY is a leading provider of an integrated platform of genomic technologies designed to aid in the understanding of the molecular basis of disease. Incyte develops and markets genomic databases, genomic data management software, microarray-based gene expression services, and related reagents and services. These products and services assist pharmaceutical and biotechnology researchers with all phases of drug discovery and development including gene discovery, understanding disease pathways, identifying new disease targets and the discovery and correlation of gene sequence variation to disease. Friday didn't give us much of an entry since INCY traded fairly flat from $50 at the open to $46 intraday. Nonetheless, in the heat of the down market, INCY has been a shriveling grape. Based on the chart, we look for the trend to continue. The rest of the sector is suffering too with most other biotech charts in descent mode (except DNA and SEPR). While there was some price recovery action into the close, the volume was rather light telling us that there may have been someone trying to put a headfake on the markets Tuesday morning with the hope of selling into strength. Unless the rest of the sector takes off on Tuesday, don't bet on INCY getting much over $50. In fact, we think that would make an excellent level of resistance to take a position once the rollover begins. If things get out of hand, that same rollover could occur at $53, which could make an even better entry. Just make sure you see the bounce down from there. If you are bit more conservative, start looking for an entry on a descent under $46. There is strong support again at $43, then after that at $40 where we would expect firm support. Careful. With the sector beaten up so badly, and a likely trading rally probably on tap sometime this week, traders could jump into this sector again, thus derailing the play. Just because it looks bad doesn't mean we shouldn't exercise good money management by keeping stops in place. Be prudent and enjoy the ride. BUY PUT JUN-55 IPQ-RK OI= 38 at $12.50 SL=9.50 BUY PUT JUN-50 IPQ-RJ OI= 58 at $ 8.75 SL=6.00 BUY PUT JUN-45*IPQ-RI OI=150 at $ 5.75 SL=3.75 Average Daily Volume = 1.3 mln /charts/charts.asp?symbol=INCY **** PCLN - Priceline.com $36.13 (-8.63) Priceline.com has pioneered a type of e-commerce known as a "demand collection system" that enables consumers to use the Internet to save money on a wide range of products and services, while enabling sellers to generate incremental revenue. Using a simple consumer proposition (name your price), PCLN collects individual customer offers (guaranteed by a credit card) for airline tickets, hotel rooms, groceries, long distance, and new cars at a price set by the customer, then communicates that demand directly to participating sellers or to their private databases. Consumers agree to hold their offers open for a specified period of time to enable priceline.com to fulfill their offers from inventory provided by participating sellers. Once fulfilled, offers generally cannot be canceled. By requiring consumers to be flexible with respect to brands, sellers and/or product features, PCLN enables sellers to generate incremental revenue without disrupting their existing distribution channels or retail pricing structures. Welcome to the latest edition of "The Price is Wrong", where consumers lose unless they are clairvoyant. Huh? Say Priceline can get you a ticket for $280. You bid $275 - sorry, you lose. OK, say you are willing to bid $300. You win the ticket, but you've overpaid because you can already find the best price yourself. You can do it now with a proxy comparison shopper like My Simon. The Internet in the end is the great equalizer and will leave no room for middlemen whose secret desire is to get you to overpay in hopes they can profit from your lack of knowledge. In short, their business model is not in the best interest of consumers and is ultimately unsustainable (strike one). What about their patented technology? Sorry, it's not likely enforceable and any code writer can build a comparison shopping engine to better benefit consumers (strike two). Technically too, PCLN closed at another new low since going public in March, 1999. It's been falling steadily since breaking below $45 support and now has the 5-dma (currently $38.76) acting as resistance. No support and all resistance makes a bad chart (strike three). If you need strike four, note too that PCLN is a long way from profitability - it's losses exceed its revenue. Pretty compelling argument, eh? You may want to consider an entry on any bounce south of $38.50 or $41, depending on your risk profile. Otherwise, wait for a clear descent below $33, last Wednesday's intraday low. Any market driven reversal or positive announcement from the company has the potential to hike the price, though we think it's a bit like re-arranging the deck chairs on the Titanic. Careful though - not every day will be negative since nothing goes down forever in a straight line. We still need to exercise good money management techniques by using stop losses if the trade goes against us. BUY PUT JUN-40 PUZ-RH OI=1606 at $6.13 SL=4.25 BUY PUT JUN-35*PUZ-RG OI=1364 at $3.38 SL=1.75 BUY PUT JUL-35 PUZ-SG OI= 134 at $5.13 SL=3.13 Average Daily Volume = 3.9 mln /charts/charts.asp?symbol=PCLN **** DCLK - DoubleClick $41.13 (-9.25) DoubleClick is an online advertising firm that offers targeted ad delivery using it patented DART technology, a dynamic analysis tool that collects information on audience behavior and uses that data to target ad placement. DART also measures Web traffic and ad effectiveness. DoubleClick delivers ads to more than 1,300 sites in its network, including AltaVista and US News Online. Doubleclick is expanding its business through merger and acquisition. We've picked up DCLK where we last left it. Facing harsh criticism from the Senate Commerce Committee. Chairman of the committee, Sen. John McCain criticized several Web sites for their privacy disclosure practices and their deceptive "mumbo jumbo" during a hearing on Capitol Hill Thursday. McCain stopped short of advocating a law to protect privacy, but he did signal that support for legislation was growing within the committee. The issue at hand is how Web companies collect and subsequently disseminate personally identifiable information about consumers as they shop on the Internet. And the inability of consumers to view their personal profiles that DCLK - in this case - has created. Whether or not the Commerce Committee proceeds with implementing the legislation remains a question. But people familiar with the situation said the likelihood of the legislation passing has improved in the past weeks. After witnessing what happened to other leading tech stocks after government intervention (i.e., MSFT and the WCOM-FON merger) investors have pulled away from DCLK. Creating a good opportunity to capitalize with a put play! Traders' nervousness is clearly seen on the chart. DCLK crashed through critical support last week, and closed Friday hovering above another key support level. DCLK hasn't traded at its current levels since last Autumn! A failure of support at $40 leaves DCLK with very little help. In fact, the stock doesn't have major support until $20. Look for an entry if DCLK falls below $40, and make sure that the heavy selling from last week continues before entering the play. Pay attention to the volume to confirm a full-fledged collapse. BUY PUT JUN-50 QWE-RJ OI=1951 at $10.38 SL=7.25 BUY PUT JUN-45*QWE-RI OI=3711 at $ 6.63 SL=4.50 BUY PUT JUN-40 QWE-RH OI= 207 at $ 3.50 SL=1.75 Average Daily Volume = 3.76 mln /charts/charts.asp?symbol=DCLK **** TRW - TRW Inc. $48.00 (-4.81) TRW is an international company that serves the automotive, space and defense, and computer industries. The company serves the auto market (which accounts for 70% of sales) with airbags, antilock brake and traction-control systems, seat belt systems, and steering and suspension systems. TRW's space and defense products include spacecraft and satellite technology, defense communications equipment, and high-energy lasers. The company also provides computer systems to government and private-sector clients through its information technology unit. Virtually ignoring the strength of the rest of the market, TRW has been stuck in a trading range since the middle of 1997. With amazing consistency, the stock is unable to crack either the $60 resistance level or the $40 support level. There have been a couple brief (2-3 day) excursions slightly beyond these levels, but like a rubber band, TRW always snaps back into the defined range. After several attempts to break through resistance during the recent market weakness, the bulls appear to have given up and TRW is rolling over again. Friday's decline was particularly encouraging, not because of the size (only $0.88), but because of the strong volume (more than 50% above the ADV) in a quiet and directionless overall market. As interest rate hikes are starting to finally have their desired effect, reports are coming out that the auto industry is slowing and will likely slow even more going forward. With 70% of sales coming from this sector, TRW will feel even more pressure as it heads back to the bottom of the range. Friday's decline dropped the stock right to support at $48 and conservative traders will wait for a break through this level on continued strong volume before initiating new positions. Overhead resistance is found at $51, (also the site of the 200-dma), and a brief rally to this level could provide an even more attractive entry. BUY PUT JUN-55*TRW-RK OI=161 at $6.88 SL=5.00 BUY PUT JUN-50 TRW-RJ OI=100 at $3.25 SL=1.50 BUY PUT JUN-45 TRW-RI OI= 66 at $1.06 SL=0.00 Average Daily Volume = 587 K /charts/charts.asp?symbol=TRW ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***************************** SEE DISCLAIMER IN SECTION ONE *****************************
The Option Investor Newsletter 5-28-2000 Sunday 5 of 5 ************* COVERED CALLS ************* Success Basics: Avoiding the "Buy-and-Hold" Mentality... With any investment, it is important to buy with both a defined purpose and a specific objective. In each and every scenario, a successful trader constructs a distinct plan for entry and exit, based on a target profit and maximum loss limit. Adjustments are anticipated and as the position matures, changes are made when the situation dictates. Vigilance is maintained and all options are reviewed even when the trade performs as expected. Only in this manner can you expect to achieve consistent profits. Rarely do we acquire investment positions with the expectation of holding them forever. That syndrome develops from uncertainty in one's trading goals. Inadequate preparation and the desire to avoid losses are the primary reasons that investors fall into the "Buy and Hold" mode. Failure to think strategically with a plan for success and an arsenal of defensive tactics for failure, will doom even the most prolific trader. Emotions also play a part in the process. Without a specific approach and clear-cut purpose, you are subject to an investor's worst enemies; hope and fear. Hope convinces you that the situation will improve no matter how bad the fundamental or technical outlook while greed keeps you in a winning play long after the optimum exit opportunity has passed. When there is difficulty in entering a trade, we subconsciously build an aversion to future decision-making that will eventually determine profit or loss. Since change is inevitable, chances are good the original position will need to be closed or adjusted long before it reaches maximum potential. After you've opened a new play, it is important to anticipate an unforeseen outcome. Assume that anything can go wrong. Incidents that could not possibly be envisioned will often occur. That's why it so important to have a trading plan and maintain a mind-set of constant vigilance. Even when events happen seemingly according to plan it's important to continuously review the position and its potential for profit. Knowledge of trading mechanics and the strengths and weaknesses of a specific position is a requisite for consistent success. If you don't understand completely what makes a trade profitable or when it might fail, the probability of a successful outcome is almost nil. Developing a portfolio based on the appropriate risk/reward attitude is paramount and suitability, along with an investors financial condition, is the key to determining which strategy may be best for any one individual. Regardless of the technique or method you select, each individual investment should support one's long-term portfolio goals. The purpose of any system is to help an investor successfully manage portfolio assets. The fundamental objective is to develop a selection of proven techniques that can profit under all but the most unfavorable conditions. This includes provisions for locking in gains and limiting losses, including specific guidelines for initiating, adjusting, and closing positions. Developing these rules can be difficult but the process is necessary for success in today's complex markets. After all, following a carefully planned approach with precision and discipline is the one sure path to consistent profits. Good Luck! SUMMARY OF PREVIOUS PICKS ***** NOTE: Using Margin doubles the listed Monthly Return! Stock Price Last Call Strike Price Profit Monthly Symbol Picked Price Month Sold Picked /Loss Return PSSI 9.50 7.88 JUN 7.50 2.63 *$ 0.63 10.0% FHS 11.38 11.81 JUN 10.00 2.13 *$ 0.75 8.8% CENT 11.81 10.38 JUN 10.00 2.50 *$ 0.69 6.4% SMRT 8.53 7.88 JUN 7.50 1.50 *$ 0.47 5.8% CCCG 13.50 12.38 JUN 10.00 4.00 *$ 0.50 5.7% CAIR 22.88 19.56 JUN 17.50 6.38 *$ 1.00 5.3% BEAM 12.44 18.50 JUN 10.00 3.00 *$ 0.56 5.2% AAS 22.00 24.88 JUN 20.00 2.88 *$ 0.88 5.0% WGR 21.00 22.50 JUN 17.50 4.13 *$ 0.63 4.1% LPNT 20.63 22.06 JUN 17.50 3.75 *$ 0.62 4.0% ANET 12.94 10.00 JUN 12.50 1.13 $ -1.81 0.0% DRIV 18.81 10.88 JUN 15.00 4.75 $ -3.18 0.0% BCC 36.44 29.38 JUN 35.00 3.38 $ -3.68 0.0% *$ = Stock price is above the sold striking price. Comments: Pss World Medical's (PSSI) technical picture has turned ugly after breaking below its 150 dma. There is support near $7.00 but an early exit may be prudent. One of PSS's board members, who is CEO of a fund, has resigned. Act Networks (ANET) is suffering as Clarent (CLRN) drops in price and concerns over a failed buyout increase. Although the selling has been on relatively light volume it may be sensible to close the play and move on. Digital River (DRIV) is testing its April low and is quite oversold. Rolling-out of the position on the next rally may be the best alternative. Deutsche Banc Alex Brown hammered the paper sector on Tuesday which in turn ruined Boise Cascade (BCC) for the near term. The gap-down drop on Tuesday should have signaled an early exit as it pushed the issue below its 150 dma. Monday's sell-off suggests somebody "knew" what was coming. It is hard to fight an uphill battle against both the Market and Sector. NEW PICKS ********* EDITORS NOTE: The current attitude toward equities is reflected in the lack of premium in call options. When combined with the technical outlook for the majority of small-cap issues, the potential number of favorable Covered-Call candidates becomes quite low. With that fact in mind, we ask that you carefully consider the Market's present condition and evaluate the overall risk/reward outlook before participating in any of these positions. Sequenced by Company ***** Stock Last Call Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return ADAC 17.38 JUN 15.00 QAB FC 2.75 106 14.63 21 3.7% CWST 12.63 JUN 10.00 KWQ FB 3.00 176 9.63 21 5.6% CYBS 14.94 JUN 12.50 CAQ FV 3.00 52 11.94 21 6.8% EGOV 15.44 JUN 12.50 EGU FV 3.50 340 11.94 21 6.8% PXD 14.06 JUN 12.50 PXD FV 1.88 407 12.18 21 3.8% WGR 22.50 JUN 20.00 WGR FD 3.25 308 19.25 21 5.6% Sequenced by Return ***** Stock Last Call Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return CYBS 14.94 JUN 12.50 CAQ FV 3.00 52 11.94 21 6.8% EGOV 15.44 JUN 12.50 EGU FV 3.50 340 11.94 21 6.8% CWST 12.63 JUN 10.00 KWQ FB 3.00 176 9.63 21 5.6% WGR 22.50 JUN 20.00 WGR FD 3.25 308 19.25 21 5.6% PXD 14.06 JUN 12.50 PXD FV 1.88 407 12.18 21 3.8% ADAC 17.38 JUN 15.00 QAB FC 2.75 106 14.63 21 3.7% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MR-Monthly Return. ***** ADAC - ADAC Laboratories $17.38 *** Break-out! *** ADAC Laboratories is the world market-share leader in nuclear medicine and radiation therapy planning systems, and a technology leader in providing clinical workflow solutions, management information and knowledge systems to healthcare organizations in North America. ADAC is headquartered in Milpitas, CA, and its HealthCare Information Systems Division is located in Houston, TX. Lots of news on ADAC Labs: earnings improvement, new contracts, new products, and an upgrade back in January. It appears the improvement in gross margins and tighter control of operating expenses has helped the company. The stock has climbed steadily from last year's low, recently moving to a new 52 week high. The technical picture continues to improve and strengthen even in this horrid market environment. We feel ADAC Labs offers reasonable speculation on a bullish stock. Target shooting for a net debit of $14.50 or selling half the position at a higher strike offers a larger potential return. JUN 15.00 QAB FC LB=2.75 OI=106 CB=14.63 DE=21 MR=3.7% Chart = /charts/charts.asp?symbol=ADAC **** CWST - Casella Waste Systems $12.63 *** Improving Sector *** Casella is a regional integrated non-hazardous solid waste services company that provides collection, transfer, disposal and recycling services in the eastern area of the U.S. and parts of Canada. Its operations include the ownership and/or operation of landfills, transfer stations, tire processing, and similar sites and services. Casella was cut almost in half in February after lowering its earnings estimates. There has been no recent news since a lawsuit was filed April 3rd regarding the lowered expectations. The stock has climbed quickly out of its stage I base and recently closed above its 150 dma. The waste management sector is gaining a lot of attention in the media and the technicals suggest Casella is under strong accumulation. We favor a cost basis below the 30 dma as the stock is somewhat overextended in the short term. JUN 10.00 KWQ FB LB=3.00 OI=176 CB=9.63 DE=21 MR=5.6% Chart = /charts/charts.asp?symbol=CWST **** CYBS - CyberSource $14.94 *** Stage I Base *** CyberSource is a leading developer and provider of real-time, e-commerce transaction services. They offer applications to online merchants for global payment processing, fraud prevention, tax calculation, export compliance, and similar services. More than 1700 clients, including Amazon, Priceline, and Compaq. CyberSource reported revenues for the first quarter of 2000 were up 294% over last year's first quarter and saw stronger than anticipated demand for their professional services group. Several new contracts suggest another upside surprise may be in store for next quarter. The stock has been flat over the last month even as the rest of the Market moved lower. There are several positive technical indicators that suggest an upward resolution is the more probable future for CyberSource. JUN 12.50 CAQ FV LB=3.00 OI=52 CB=11.94 DE=21 MR=6.8% Chart = /charts/charts.asp?symbol=CYBS **** EGOV - Nat'l Information Consortium $15.44 *** Speculation *** National Information Consortium is a provider of Internet-based, electronic government services that help governments use the Internet to reduce costs and provide better service. It does this through its portal business, by contracting with governments to build and operate Internet-based portals. It also has two additional business lines, eFed and NIC Conquest. NIC recently completed its acquisition of SDR Technologies and now has government partnerships in 23 states representing more than 50 percent of the U.S. population. This week, Credit Suisse First Boston initiated coverage on NIC with a STRONG BUY rating, a near-term price target of $35, and a twelve-month price target of $60. The stock climbed $5 on heavy volume and appears to be putting in a technical bottom. For speculators only! JUN 12.50 EGU FV LB=3.50 OI=340 CB=11.94 DE=21 MR=6.8% Chart = /charts/charts.asp?symbol=EGOV **** PXD - Pioneer Natural Resources $14.06 *** Oil Hedge *** Pioneer is an independent oil and gas exploration and development company. The Company has ownership interests in oil and gas properties principally in the Mid Continent, Southwestern and onshore and offshore Gulf Coast regions of the U.S., and in Argentina, Canada, South Africa and Gabon. Favorable earnings and a couple of upgrades, not to mention oil around $30 a barrel, have helped move Pioneer to a new 52 week high. The stock is in a stage II climb with support near our cost basis. We favor a conservative entry point but more aggressive types may try to target shoot a net-debit of $12.00 or sell half the position at a higher strike, depending on your long term outlook. JUN 12.50 PXD FV LB=1.88 OI=407 CB=12.18 DE=21 MR=3.8% Chart = /charts/charts.asp?symbol=PXD **** WGR - Western Gas Resources $22.50 *** It's A Gas, Man! *** Western Gas Resources is an independent gas gatherer and processor, producer, transporter and energy marketer providing a full range of services to its customers from the wellhead to the sales delivery point. The Company designs, constructs, owns and operates natural gas gathering, processing and treating facilities in the major gas producing basins of the United States. The company is in position to reap a rich bounty as the fundamentals for natural gas prices strengthen. This quarter's earnings were quite favorable with revenues increasing 32% over the first quarter last year as the company posted an EPS of $0.32 vs. a loss of $0.15. There was no technical pause after earnings as WGR continued its up-trend and closed at a new 52-week high. It another week and a $1.50 higher but we still favor a conservative entry point, even with the recent upgrade to a strong buy. JUN 20.00 WGR FD LB=3.25 OI=308 CB=19.25 DE=21 MR=5.6% Chart = /charts/charts.asp?symbol=WGR ****************** BIG CAP NAKED PUTS ****************** By Matt Russ Stock Stock Strike Option Option Margin Percent Support Symbol Price Price Symbol Price At 25% Return Level AETH 118.50 110 HEX-RB 9.63 2963 33% 115 AETH 118.50 120 HEX-RD 15.00 2963 51% 115 AMCC 89.50 85 AEX-RQ 7.88 2238 35% 85 AMD 73.56 70 AMD-RN 4.13 1839 22% 70 AMD 73.56 80 AMD-RP 9.63 1839 52% 70 BRCD 104.38 100 UBF-RT 7.25 2610 28% 100 CHKP 162.31 150 YKE-RJ 6.75 4058 17% 150 CHKP 162.31 155 YKE-RK 8.75 4058 22% 150 CHKP 162.31 170 YKE-RN 17.88 4058 44% 150 DNA 103.50 100 DNA-RT 6.00 2588 23% 100 ELON 54.03 50 EUL-RJ 4.88 1351 36% 50 EMC 109.25 105 EMB-RA 4.38 2731 16% 105 ETEK 170.63 165 FNY-RM 9.38 4266 22% 160 EXDS 61.94 60 DUB-RL 4.63 1549 30% 60 ITWO 96.06 90 QYJ-RR 7.12 2402 30% 90 JNPR 153.00 140 JUX-RH 7.12 3825 19% 140 JNPR 153.00 150 JUX-RJ 12.00 3825 31% 140 MLNM 75.00 75 QMR-RO 6.25 1875 33% 75 MRVC 50.75 50 VQX-RJ 5.63 1269 44% 48 NEWP 132.56 130 NZZ-RF 10.75 3314 32% 130 NSOL 130.94 125 JNV-RE 8.38 3274 26% 125 NVDA 105.31 100 UVA-RT 8.63 2633 33% 100 PDLI 101.00 100 PQI-RT 10.38 2525 41% 100 PMCS 135.00 120 SZI-RD 5.50 3375 16% 130 PMCS 135.00 130 SZI-RF 8.88 3375 26% 130 RBAK 72.00 70 BUK-RN 7.63 1800 42% 68 RMBS 162.88 150 BNQ-RJ 10.50 4072 26% 150 RMBS 162.88 160 BYQ-RL 14.63 4072 36% 150 RMBS 162.88 180 BYQ-RP 26.63 4072 65% 150 SDLI 197.75 180 QZL-RP 11.25 4944 23% 170 SDLI 197.75 190 QZL-RR 15.25 4944 31% 170 SSTI 69.00 65 SSU-RL 3.13 1725 18% 65 TQNT 83.25 80 TNN-RP 5.50 2081 26% 75 VRTS 107.06 105 VUQ-RA 7.38 2677 28% 100 VRTX 64.25 60 VQR-RL 3.38 1606 21% 62 YHOO 112.00 110 YMM-RB 6.50 2800 23% 110 To download a spreadsheet version of this file, click here: http://www.OptionInvestor.com/downloads/hpmay-28.xls AMD - Advanced Micro Devices AGGRESSIVE SELL PUT JUN-80 AMD-RP at $9.63 = 52% CONSERVATIVE SELL PUT JUN-70 AMD-RN at $4.13 = 22% CHKP - Check Point Software AGGRESSIVE SELL PUT JUN-170 YKE-RN at $17.88 = 44% MODERATE SELL PUT JUN-155 YKE-RK at $ 8.75 = 22% CONSERVATIVE SELL PUT JUN-150 YKE-RJ at $ 6.75 = 17% RMBS - Rambus AGGRESSIVE SELL PUT JUN-180 BYQ-RP at $26.63 = 65% MODERATE SELL PUT JUN-160 BYQ-RL at $14.63 = 36% CONSERVATIVE SELL PUT JUN-150 BNQ-RJ at $10.50 = 26% DISCLAIMER: Before entering any of the positions listed above, you need to understand your risk tolerance. Selling puts can be a High-Risk endeavor depending on the strike you choose to sell. For a greater return, you run a higher risk of being exercised. Therefore, please consider other strikes than the ones listed below if you aren't comfortable with the one we choose. We are gearing these towards higher-risk players. In any case, you can always select a lower strike with a lower return if it better meets your suitability. *********************** CONSERVATIVE NAKED PUTS *********************** Option Trading Basics: The Possibilities Are Endless! One of the most common questions we receive from new subscribers is, "What makes option trading so attractive?" The benefits of stock and index options are numerous. Trading options offers the investor a method to participate in the market with limited risk and increased flexibility. Options can be used to hedge stock portfolios, protect long-term holdings from market declines or benefit from directional trends or changes in the technical character of a specific issue. Options have become a popular tool for managing portfolio risk and creating profits through increased leverage. Experienced traders and mutual fund managers use a number of techniques to maximize returns in long-term investments. The major advantage of options is their versatility. They can be utilized in a conservative or aggressive manner, depending on your investing style, and the variety of strategies enable an investor to tailor each individual position to a specific set of circumstances. One unique trait is their ability to provide trading opportunities in almost any market condition; trending, range-bound, or stagnant. Combinations of options can be used in a variety of different techniques to benefit from specific conditions and scenarios. Even when you don't have an opinion about an instrument's future direction, you can profit from changes in volatility or time decay in option premiums. The most significant advantage for the novice trader is that options can help you achieve any trading or risk management objective and multiply the opportunity for profits in almost every type of investment. For the beginner, options are complex but that's no different than the stock market which is extremely fast paced and demanding, even for an experienced trader. Understanding how options work is a daunting task for most investors but the advantages of this form of trading are worth the time involved in learning how it works. As an option trader, the most important skill is to be able to identify favorable opportunities, those with a high probability of profit and low risk. Unfortunately, with all of the positions to choose from, it can be extremely difficult to select the most appropriate trading strategy and the options in which it should be implemented. The key is position analysis and before you can be successful in option trading, you must understand the components that determine an option's value and its potential for change. The most important factors in option trading are market movement, option volatility and time decay. The knowledge of these concepts is vital to long-term success and without a complete understanding of option theory, your losses will be many. The first requirement is familiarity with option pricing. Option values can be measured through mathematical evaluation and if you aren't comfortable with complex formulas, pricing models will help you determine the fair market value of an option. Another important component of option trading is risk management. There are two fundamental risks in derivatives; undesirable price movement in the underlying issue and changes in the options potential value (implied volatility). Adverse price movements can be managed through the use of trading stops and combination positions. Implied volatility is often the most difficult concept to master but there are a number of ways to reduce your exposure to this aspect of option trading. One of the simplest approaches is buying premium (calls, puts, and straddles) when you foresee an increase in market volatility and in contrast, selling premium (credit straddles, spreads and ratio positions) when volatility is expected to fall. Most volatility fluctuations follow historical patterns and the tendency to return to previous ranges can be used to profit on a regular basis. Options offer both traders and investors a number of outstanding opportunities. The question is whether you are willing to devote the time and dedication necessary to become successful in this discipline. Good Luck! *** WARNING!!! *** Occasionally a company will experience catastrophic news causing a severe drop in the stock price. This may cause a devastatingly large loss which may wipe out all of your smaller gains. There is one very important rule; Don't sell naked puts on stocks that you don't want to own! It is also important that you consider using trading STOPS on naked option positions to help limit losses when the stock price drops. Many professional traders suggest closing the position when the stock price falls below the sold strike or using a buy-to-close STOP at a price that is no more than twice the original premium from the sold option. SUMMARY OF PREVIOUS PICKS ***** Stock Price Last Put Strike Price Profit Monthly Symbol Picked Price Month Sold Picked /Loss Return ADEX 19.56 15.00 JUN 15.00 0.69 $ 0.69 13.0% TMAR 9.25 8.81 JUN 7.50 0.25 *$ 0.25 12.3% UNM 20.19 20.81 JUN 17.50 0.56 *$ 0.56 10.2% ADVP 17.13 16.75 JUN 12.50 0.31 *$ 0.31 9.0% GZMO 17.19 12.38 JUN 10.00 0.31 *$ 0.31 9.0% CLPA 29.38 23.63 JUN 15.00 0.63 *$ 0.63 8.4% WLV 16.94 16.38 JUN 15.00 0.50 *$ 0.50 8.1% CLPA 27.19 23.63 JUN 15.00 0.44 *$ 0.44 8.1% NGH 20.88 21.19 JUN 17.50 0.38 *$ 0.38 7.7% VRTL 17.00 12.19 JUN 10.00 0.31 *$ 0.31 7.3% ALL 26.75 26.81 JUN 22.50 0.44 *$ 0.44 6.9% XTO 17.69 18.19 JUN 15.00 0.38 *$ 0.38 6.9% TBI 20.81 21.31 JUN 17.50 0.38 *$ 0.38 6.1% TRMB 36.00 38.94 JUN 25.00 0.44 *$ 0.44 5.0% *$ = Stock price is above the sold striking price. Comments: Evaluate your long-term outlook on Ade Corp. (ADEX) as it has fallen to a yearly low. Genzyme Molecular (GZMO) is testing support at its 150 dma and a move through that range would likely signal a new downtrend. Vertel (VRTL) is also testing the April low. Mind your loss-cut points. NEW PICKS ********* Sequenced by Company ***** Stock Last Put Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return ADAC 17.38 JUN 15.00 QAB RC 0.56 40 14.44 21 15.8% ADVP 16.75 JUN 12.50 QVD RV 0.38 86 12.12 21 14.8% BBSW 17.00 JUN 12.50 UUO RV 0.38 4652 12.12 21 14.6% MATK 18.88 JUN 15.00 KQT RC 0.31 5 14.69 21 11.0% MSM 22.06 JUN 17.50 MSM RW 0.50 215 17.00 21 14.7% NGH 21.19 JUN 17.50 NGH RW 0.25 1699 17.25 21 7.2% YRK 25.94 JUN 22.50 YRK RX 0.56 22 21.94 21 10.8% Sequenced by Return ****** Stock Last Put Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return ADAC 17.38 JUN 15.00 QAB RC 0.56 40 14.44 21 15.8% ADVP 16.75 JUN 12.50 QVD RV 0.38 86 12.12 21 14.8% MSM 22.06 JUN 17.50 MSM RW 0.50 215 17.00 21 14.7% BBSW 17.00 JUN 12.50 UUO RV 0.38 4652 12.12 21 14.6% MATK 18.88 JUN 15.00 KQT RC 0.31 5 14.69 21 11.0% YRK 25.94 JUN 22.50 YRK RX 0.56 22 21.94 21 10.8% NGH 21.19 JUN 17.50 NGH RW 0.25 1699 17.25 21 7.2% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MR-Monthly Return. ***** ADAC - ADAC Laboratories $17.38 *** Break-out! *** ADAC Laboratories is the world market-share leader in nuclear medicine and radiation therapy planning systems, and a technology leader in providing clinical workflow solutions, management information and knowledge systems to healthcare organizations in North America. ADAC is headquartered in Milpitas, CA, and its HealthCare Information Systems Division is located in Houston, TX. Lots of news on ADAC Labs: earnings improvement, new contracts, new products, and an upgrade back in January. It appears the improvement in gross margins and tighter control of operating expenses has helped the company. The stock has climbed steadily from last year's low, recently moving to a new 52 week high. The technical picture continues to improve and strengthen even in this horrid market environment. This position offers favorable risk versus reward speculation on a bullish issue. JUN 15.00 QAB RC LB=0.56 OI=40 CB=14.44 DE=21 MR=15.8% Chart = /charts/charts.asp?symbol=ADAC **** ADVP - Advance Paradigm $16.75 *** Own This One! *** Advance Paradigm is a leading independent provider of health benefit management services, providing pharmacy benefit management, disease management and clinical research programs to two primary customer groups: health plan sponsors and pharmaceutical manufacturers. ADVP supports a broad range of health plan sponsors its pharmacy benefit management and disease management services. They also provide clinical research services and work closely with pharmaceutical manufacturers in negotiating lower drug costs for its health plan sponsor customers. Last week, ADVP said revenues rose to $564 million, up from $229 million a year ago. Earnings were slightly ahead of expectations at $0.24 a share, up from $0.15 the previous year. The bullish technical character suggests a new trend is beginning. JUN 12.50 QVD RV LB=0.38 OI=86 CB=12.12 DE=21 MR=14.8% Chart = /charts/charts.asp?symbol=ADVP **** BBSW - Broadbase Software $17.00 *** Bottom Fishing! *** Broadbase Software is a leading provider of customer-focused analytic and marketing automation applications that analyze customer data from multiple touch points, and utilize that information to execute marketing campaigns, improve online merchandising and content, increase site stickiness and personalize all customer interactions. Broadbase applications are designed for rapid time to value and they can be installed quickly. The company provides e-commerce infrastructure to customers such as ADP, BEA Systems, Cisco, Fidelity Investments, Hewlett-Packard, Kodak, LoanCity.com, Mercata.com, The Sharper Image and United Airlines. Broadbase also has a major global presence with locations around the world. This unique software company recently announced more than 30 new global customers, a number of strategic resale contracts, and they are planning a significant International expansion. JUN 12.50 UUO RV LB=0.38 OI=4652 CB=12.12 DE=21 MR=14.6% Chart = /charts/charts.asp?symbol=BBSW **** MATK - Martek Biosciences $18.88 *** Upcoming FDA Approval? *** Martek Biosciences Corporation is engaged in the development and commercialization of high value products derived from microalgae. Martek's products are nutritional oils used as ingredients in infant formula and foods, and as ingredients in, and encapsulated for use as, dietary supplements. Martek rallied last week after a report in Barron's stated that its share value could rise if the FDA approves its infant formula containing DHA and AA fatty acids; supplements that could make infant formula superior to mother's milk. The report also said that Martek could earn $2 to $3 a share if formula supplemented with DHA becomes popular in the U.S. Martek has licenses with more than half of all formula producers, including the two biggest U.S. firms, Mead Johnson and Abbot Laboratories. The Federal Drug Administration is reviewing the issue and is expected to rule by fall. Based on the technical change in character, investors think the outcome will be favorable. JUN 15.00 KQT RC LB=0.31 OI=5 CB=14.69 DE=21 MR=11.0% Chart = /charts/charts.asp?symbol=MATK **** MSM - Msc Industrial $22.06 *** Strong Sector *** MSC Industrial Direct is one of the largest direct marketers of a broad range of industrial products to small and mid-sized industrial customers throughout the U.S.A.. They distribute a full line of industrial products: cutting tools, abrasives, measuring instruments, safety equipment, and similar items intended to satisfy its customers' maintenance and repair operations. Msc Industrial has made a new 52-week high after completing a rounded bottom formation. The January and April highs should provide near-term technical support above our suggested cost basis. JUN 17.50 MSM RW LB=0.50 OI=215 CB=17.00 DE=21 MR=14.7% Chart = /charts/charts.asp?symbol=MSM **** NGH - RJR Nabisco Holdings $21.19 *** Merger Speculation *** RJR Nabisco Holdings is a company whose subsidiaries are engaged principally in the manufacture, distribution and sale of cookies, crackers, and other food products. NGH is organized in three operating segments: Nabisco Biscuit, the U.S. Foods Group and the International Food Group, which are segregated by both product and geographic location. Their businesses in the United States are comprised of Biscuit and the U.S. Foods Group. Outside the United States, business is conducted by their International group. Nabisco's share value has rallied since mogul Carl Icahn raised his offer for the company to $6.5 billion, an increase of 37% in the price for the nation's largest maker of cookies and crackers. That's well above the current value but analysts say the offers will go higher, based on interest from other companies. Analysts believe a firm pact may emerge in late June or July. Target shoot the position at $0.31 or $0.38 for a higher return. JUN 17.50 NGH RW LB=0.25 OI=1699 CB=17.25 DE=21 MR=7.2% Chart = /charts/charts.asp?symbol=NGH **** YRK - York International $25.94 *** Strong Sector *** York International is the largest independent supplier of air conditioning, heating, ventilating, and refrigeration equipment in the U.S.A. and a leading competitor in the industry worldwide. They offer standardized systems for private homes, apartments, and small commercial facilities. They provide customized heating and refrigeration solutions for airports, hospitals, manufacturing facilities, and other large sites. York has been in a stage I base since last October and the current up-trend is gaining technical strength as it approaches the January high. We favor a conservative covered write at a strike price below near-term technical support. JUN 22.50 YRK RX LB=0.56 OI=22 CB=21.94 DE=21 MR=10.8% Chart = /charts/charts.asp?symbol=YRK ************************ SPREADS/STRADDLES/COMBOS ************************ The Market Needs A Rest... Friday, May 26 The market slumped today as traders moved to the sidelines ahead of the Memorial Day Holiday. Interest rate worries sent stocks lower driving the Dow Jones Industrial Average down 24 points to 10,299. The Nasdaq remained relatively unchanged at 3205 and the S&P 500 Index edged down 3 points to 1378. Trading volume was the lowest of the year with only 725 million shares exchanged on the NYSE. Breadth ended positive on the Big Board after advances moved ahead of declines 1,500 to 1,355 in the final hour of the session. Volume on the Nasdaq reached 1.07 billion shares with declines leading advances 2,145 to 1,754. Treasuries posted gains on a bigger-than-expected drop in April durable goods orders. The 30-year bond rose 23/32 to 102 18/32, with its yield down to 6.05%. Sunday's new plays (positions/opening prices/strategy): Campbell Soups CPB AUG30C/JUN30C $1.12 debit calendar Summit Technology BEAM SEP15C/JUN15C $0.00 debit calendar Campbell Soups moved in a small range during the morning session and although the position did not reach our target debit, there were a number of contracts traded. Based on the time and sales quote data, it appears that $1.12 was the average price achieved. Our new position in BEAM was rather untimely. Before the market opened, Alcon Laboratories, the eye care unit of Nestle (NSRGY), announced it was reportedly in talks to buy the company. Alcon makes eye care products such as eye drops, contact lens solutions and office systems for opthamologists and optometrists. It was said that Alcon will pay a premium to BEAM's $596 million market share, all in cash. The position did not trade during the first few hours of the session and when it opened, the share value was significantly higher. The reason of course is that Alcon agreed to BEAM for $892.8 million in cash. Obviously we did not enter the position. Portfolio plays: Today's session was relatively docile but the recent downward momentum continued amid fears of inflation and higher interest rates. The market rallied early in the day but failed to secure those gains as investors moved to sidelines ahead of the long Holiday weekend. Traders blame the slumping market on fears of another rate hike at the upcoming FOMC meeting. Many analysts believe the Federal Open Market Committee will further tighten its monetary policy to slow the growing U.S. economy. Market bellwethers pulled industrial stocks lower with General Motors (GM) and General Electric (GE) leading the way. Dow technology issues offset some of the losses with Intel (INTC), International Business Machines (IBM), and Hewlett-Packard edging higher. The Nasdaq provided little bullish activity but in the broad market, waste management, food and beverages, and regional banking issues gained ground while computers, electronic retail, aluminum and automobile stocks moved lower. Our portfolio was a mix of small rallies in the bullish issues with consolidation in the majority of positions. The technology group was led by Scm Microsystems (SCMM) which rebounded $8 after a week-long selling spree. This unpredictable stock may become the Murphy's Law "play of the month" as we opted to initiate a roll-out strategy last Wednesday. For those of you still in the position, we hope our early exit guarantees a profitable outcome. In the oil group, Apache (APA) and Texaco (TX) rallied but Falcon Drilling (FLC) and Ashland (ASH) slid lower. The current outlook for Ashland is somewhat negative and with the spread profit at $0.50, it may be prudent to exit the position. Falcon Drilling appears to have slightly more upside potential but the issue is at a key moment. The bullish debit spread position is trading near break-even and if the price falls through the support level at $21, an early exit should be considered. Magna International (MGA) slipped lower in early trading and based on the bearish technical outlook, we decided to close the position to protect current profits. The bullish calendar spread yielded a $1.50 profit on $0.38 invested in just under two months. The recent recovery in Excite@home (ATHM) has run its course and the issue appears to be struggling to hold the current price range near $17. Once again, a break below that key technical support would be a potential early-exit signal. Questions & comments on spreads/combos to Click here to email Ray Cummins ****************************************************************** - NEW PLAYS - These positions were discovered using one of our primary scan/sort techniques; identifying potentially failed rallies on issues with bullish options activity. In these plays, the premiums for the (OTM) call options are favorable and the potential for a successful (technical) recovery is significantly reduced by the resistance at the sold strike price; a perfect condition for a bearish credit spread. ****************************************************************** JPM - J.P. Morgan $126.75 *** Gloomy Financials! *** J.P. Morgan meets the financial needs for business enterprises, governments and individuals around the world. The company advises on corporate strategy and structure, raises capital, makes markets in financial instruments and manages investment assets. J.P. Morgan's business operations are divided into activities for clients, which include global finance, investment banking, equities, foreign exchange, interest rate markets, credit markets, credit portfolio and asset management and servicing, and activities for the Company's own account, such as proprietary investments, equity investments and proprietary investing and trading. Financial stocks have weakened in the past month, taking their cue from the FOMC's recent statement that the "rate-raising" may continue through the summer. Banks and other financials typically trade lower in times of rising rates with investors anticipating that a reduction in the margins between loans and deposits will hurt profitability. Last week, the group turned negative again on bearish comments from Wall Street analysts and new data that showed the U.S. economy growing at a faster- than-expected rate. Banks also neglected to join in the April post-rate-hike rally and some strategists are expecting the group to remain bearish in the near term on the belief that the tightening cycle will continue. PLAY (conservative - bearish/credit spread): BUY CALL JUN-145 JPM-FI OI=3169 A=$0.62 SELL CALL JUN-140 JPM-FH OI=2737 B=$1.06 INITIAL NET CREDIT TARGET=$0.62 ROI(max)=14% B/E=$140.62 Chart = /charts/charts.asp?symbol=JPM **** TIN - Temple Inland $49.63 *** Who's Buying Now? *** Temple-Inland is a holding company with interests in corrugated packaging, bleached paperboard, building products, timber and timberlands, and financial services. The Paper Group consists of the company's corrugated packaging and bleached paperboard operations. Corrugated packaging includes the manufacturing of container-board that is converted into corrugated packaging and point-of-purchase displays. Their bleached paperboard operations produce various grades and weights of coated/uncoated bleached paperboard, bleached linerboard and bleached bristols. Temple's Building Products Group manufactures building products including lumber, plywood, particleboard, gypsum wallboard and fiberboard. The company's Financial Services Group consists of savings bank activities, mortgage banking, real estate development and insurance brokerage. Stocks in the paper industry gained some attention last month after Champion (CHA) received a $6 billion takeover offer from industry giant International Paper (IP). International Paper offered to buy Champion for $64 a share, $43 of which would be in cash and $21 in stock. With IP's bid to buy a major company in the industry, investors began to speculate on other issues in the group. Last week, the rally came to an end as Deutsche Banc Alex. Brown downgraded nine of the 13 stocks that make up the Forest and Paper Products Index. The call came after some negative comments on the group from UBS Warburg. The analyst said evidence is mounting that weak domestic demand and rising inventory levels are pressuring prices on some key commodities and he fears the industry is headed for a period of reduced earnings estimates. The current technical trend agrees this outlook and based on the recent resistance at $55, this play offers a new opportunity to benefit from the current slump in the Paper Industry. PLAY (speculative - bearish/credit spread): BUY CALL JUN-60 TIN-FL OI=2000 A=$0.50 SELL CALL JUN-55 TIN-FK OI=68 B=$1.00 INITIAL NET CREDIT TARGET=$0.62 ROI(max)=14% B/E=$55.62 Chart = /charts/charts.asp?symbol=TIN **** BHE - Benchmark Electronics $34.25 *** Technicals Only! *** Benchmark Electronics provides contract electronics manufacturing and design services to original equipment manufacturers in select industries including medical devices, communications equipment, industrial and business computers, testing instrumentation and industrial controls. The company specializes in manufacturing high quality, technologically complex printed circuit board assemblies with computer-automated equipment using surface mount and pin-through-hole interconnection technologies for customers requiring low to medium volume production runs. Benchmark also works with customers from product design and prototype stages through ongoing production and, in some cases, final assembly of the customers' products. The company provides manufacturing services for successive product generations. This play is based on the current price or trading range of the underlying issue and the recent technical history or trend. The probability of profit from this position is also higher than other plays in the same strategy based on disparities in option pricing. Current news and market sentiment will have an effect on this issue. Review the play thoroughly and make your own decision about the future outcome of the position. PLAY (conservative - bearish/credit spread): BUY CALL JUN-45 BHE-FI OI=32 A=$0.38 SELL CALL JUN-40 BHE-FH OI=65 B=$0.81 INITIAL NET CREDIT TARGET=$0.56-$0.62 ROI(max)=14% B/E=$40.62 Chart = /charts/charts.asp?symbol=BHE **** AET - Aetna $64.06 *** Covered-Calls and LEAPS *** Aetna, along with its subsidiaries, is a health benefits company and an insurance and financial services organization centered around three core businesses: healthcare, retirement services and international. Their business operations are conducted in the following segments: Aetna U.S. Healthcare, Aetna Retirement Services, Aetna International and Large Case Pensions. Aetna U.S. Healthcare provides a full spectrum of health products (managed care and indemnity) and group insurance products (disability and long-term care) on both an insured and an employer-funded basis. Aetna Retirement Services offers financial services products. Aetna International sells primarily life and health insurance and financial retirement services products in markets outside of the United States. Large Case Pensions manages retirement products offered to IRC Section 401 qualified defined benefit and defined contribution plans. Aetna has been on the move recently after the stock climbed above an intermediate technical resistance level. The rally came amid signs that the company's planned restructuring was moving ahead smoothly and comments that their financial guidance is on track. Earlier in the year, Aetna said it will split into two companies, one for health care and one for financial services, to increase its core value. Obviously, that bodes well for long-term stock owners and we are going to take advantage of the recent spike in implied volatility with a neutral, LEAPS/CC's position. PLAY (aggressive - neutral/calendar spread): BUY CALL JAN01-65 AET-AM OI=25 A=$9.75 SELL CALL JAN00-65 AET-FM OI=2284 B=$2.50 INITIAL NET DEBIT TARGET=$7.00 TARGET ROI=50% The basic premise in a calendar spread is simple; time erodes the value of the near-term option at a faster rate than it will the far-term option. It is generally best to establish this type of spread at least 2 - 3 months before the long option expires, capitalizing on the ability to sell another option against the longer-term position. Ideally, the spreader would like to have the stock finish just below the sold strike when the near-term option expires. If the short-term options are in-the-money at expiration, he will have to buy them back to preserve the long-term position. Of course, there are potential adjustments after you open the initial LEAPS/Covered-Call play. You may have to "roll-up" or "roll-down" if the stock price moves very far away from your sold option to keep the play profitable. For more information, read the appropriate chapters in Larry McMillan's "Options as a Strategic Investment" and Sheldon Natenburg's "Option Volatility and Pricing", these are two of the bibles of option trading and they will provide the necessary information on the subject of calendar spreads and the appropriate entry/exit/adjustment strategies. Chart = /charts/charts.asp?symbol=AET ****************************************************************** - STRADDLES AND STRANGLES - ****************************************************************** MEDI - MedImmune $148.25 *** Consolidation Period *** MedImmune is a biotechnology company with six products on the market and a diverse product development portfolio. The company is focused on using advances in immunology and other biological sciences to develop important products that address significant medical needs in areas such as infectious diseases, immune regulation and oncology. Its products on the market include Synagis, CytoGam, RespiGam, Ethyol, NeuTrexin and Hexalen. The majority of Major Drug companies have managed to avoid much of the suffering in the past few weeks and the Biotechnology Sector is performing as well as can be expected, considering the recent market malaise. A Needham & Co. analyst started coverage of MEDI this month with a "buy" rating, based on a partnership for the inhaled formulation Synagis and initiation of clinical studies for MEDI-5-7. But that's not the big news! MedImmune is planning a three-for-one stock split to be paid in the form of a 200% stock dividend to all shareholders of record at the close of business on May 18, 2000. We like the issue for a bullish position but there are not too many favorable ways to approach the inflated option premiums. In this case, we have decided to sell premium for credit and use the earned income to offset any losses on the downside, in the event we accept assignment of the issue. If the price of the issue moves through the resistance area near $190 on a pre-split rally, we will simply buy the stock to cover our sold options. PLAY (aggressive - neutral/credit strangle): SELL CALL JUN-190 MEU-FR OI=382 B=$1.12 SELL PUT JUN-110 MEQ-RB OI=638 B=$1.12 INITIAL NET CREDIT TARGET=$2.25-2.38 ROI(max)=12% UPSIDE B/E=$192.25 DOWNSIDE B/E=$107.75 Chart = /charts/charts.asp?symbol=MEDI ***** A less neutral and more bullish type of calendar spread is when the underlying issue is some distance below the strike price of the options. This position is speculative with low initial cost and large potential profits. Two favorable outcomes can occur: the stock rallies in the short-term and the position is closed for a profit as time value erosion in the short option produces a net gain or; the underlying stock consolidates, allowing the sold option to expire and then eventually rallies above the long option strike price. The basic premise in a calendar spread is simple; time erodes the value of the near-term option at a faster rate than it will the far-term option. It is generally best to establish this type of spread at least 2 - 3 months before the long option expires, capitalizing on the ability to sell another option against the longer-term position. That is the basic idea in this spread play; selling time value in the options when they are overpriced (high implied volatility) and buying it back (if necessary) when they return to intrinsic value. Ideally, the spreader would like to have the stock finish just below the sold strike when the near-term option expires. If the short options are in-the-money at expiration, he will have to buy them back to preserve the long-term position. UUI FC 9/16 13/16 55 UUI FW 1/8 3/8 17 GSB GW1 1/16 1 1/4 786 GSB GD 5/16 1/2 1,044 KEY GD 1 11/16 1 15/16 108 KEY FX 5/16 1/2 1,516 EFX FF 3/16 7/16 EFX GF 9/16 13/16 383 TIN FL 5/16 1/2 2,000 TIN FK 1 1 1/4 68 BHE FI 1/8 3/8 32 BHE FH 13/16 1 1/16 65 OIL FU 3/8 9/16 88 OIL FG 1 1 3/16 437 ************************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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