The Option Investor Newsletter Tuesday 5-30-2000 Copyright 2000, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 5-30-2000 High Low Volume Advance Decline DOW 10527.10 + 227.90 10528.10 10302.30 842,043k 2,019 919 Nasdaq 3459.48 + 254.37 3460.24 3286.54 1,457,529k 2,724 1,303 S&P-100 761.42 + 25.34 761.42 739.53 Totals 4,743 2,222 S&P-500 1422.45 + 44.43 1422.45 1382.65 68.1% 31.9% $RUT 476.70 + 19.33 476.70 457.37 $TRAN 2741.70 + 54.15 2742.60 2687.25 VIX 26.53 - 0.96 28.07 26.38 Put/Call Ratio .43 ****************************************************************** Is is real or is it Memorex? Most of the younger investors today are too young to understand the headline above so a more appropriate title might be, "Is it a real rally or an incredible bear trap?" The analogy is the same. Either option could easily be true or false. Only one is real! The "summer rally", (don't hold your breath), as they are calling it came right on schedule according to media pundits. Whose schedule? My email is full of gloom and doom articles from readers over the weekend showing the bull to be dead and disaster ahead. If the world of market timers was predicting disaster last week then who was forecasting a summer rally to start today? Nobody I know! To me the term summer rally means a protracted time of rising markets occurring during the summer. It does not mean a one-day oversold bounce the day after Memorial Day. Don't get me wrong, I would love to think this was the start of a multiday rally. Even the term sounds foreign, "multiday." It seems like forever since we had positive gains on the Nasdaq for multiple days. We should have had a bounce today. The constant selling pressure from the last two weeks, with only a couple of up days, had put the Nasdaq into a strongly oversold position and the bounce was due. Even the stronger than expected Consumer Confidence Report this morning had no impact on the already strong futures. Traders who left early last week for the holiday came back with a desire to trade and the Nasdaq gapped open +100 points and never looked back. The key here of course, is can it hold. One of the positive news events moving the market today was the initiation of coverage on INTC by Dan Niles. Dan moved from Bank Boston, Robertson Stevens to Lehman Brothers and his closely followed semiconductor recommendations were transferred as well. The semiconductor sector soared with RMBS adding +25, INTC +8, AMD +11, MU +4, XLNX +8, TQNT +13, PMCS +21, AMCC +13, BRCM +13. Absolutely incredible! Brokerage stocks rallied after Goldman Sachs analyst Richard Strauss upgraded the sector. MER +3, LEH +4, were the leaders. Citing evidence of slowing due to Fed hikes he said these stocks typically bottom one month before the market and he thought the Fed was almost done with rate increases. The slow down in big ticket items and autos is a result of the hikes and with each hike requiring 6-12 months to be felt, the six hikes since last summer still have 6-9 months to work their way through the system. The Fed has not raised rates seven times since 1994. Many analysts are now expecting only a +.25% hike on June-28th and they expect that to be the last hike. Lets hope they are right. With consumer spending at the lowest rate since last July the ripple down into reduced sales, layoffs, reduced productivity and finally higher wage costs as a result will impact stock prices as well. We are moving into the earnings warning period where Fed watchers will be looking for further evidence of rate hike impact. If the rate hikes are working then this warning season will be rocky as companies began disclosing profit problems. Several major warnings could trip this rally up really fast. Defensive stocks circled the wagons today but they still gave up some of their gains from last week. New Home Sales will be announced tomorrow and the estimates are for a drop of -3.2%. If this comes in much stronger then the fear of the Fed could start creeping back into the market. The big reports are the NAPM on Thursday and the Non-farm payrolls on Friday. This could cause stagnation as cautious traders move back to the sidelines before the report. Many analysts are chalking up much of today's rally to short covering. With pessimism strong last week many speculators had gotten short with the idea that the Dow would break 10300 to the downside. The rally today was on very weak volume of only 1.4 bln on the Nasdaq and only 842 mln on the NYSE. Advance/decliners were positive 2:1 but without any real volume there is much skepticism about the record gain. Today was the largest percentage gain ever at +7.35% and only below the previous record point gain of +254.41 by -.04 at 254.37. Clearly a strong gain even if the volume was weak. Futures for tomorrow have traded on both sides of positive but traders are hopeful for a continued rally. The S&P posted its seventh largest gain at +44.40. If investors decided it was for real there is plenty of cash on the sidelines. Mary is reporting in her article tonoght that there is $1.68 trillion in cash which could be put to work if the owners felt positive about the markets. I think it is going to take more than one day of strong gains to convince them. After two months of twice as many down days as up days the multiple bear trap rallies have bitten the hands that feed the market. The pace of funds returning to the markets is likely to start out as a trickle until after the Payroll Report on Friday. Once investors feel confident there are no surprises there and feel like the Fed is about done then cash will appear by the billions to power the bull again. Before you start feeling too optimistic I should warn you that there are some long term trends which are still unbroken. The Dow is still down trending as well as the Nasdaq. The channel on the Nasdaq is showing a top at about 3500 which is only 41 points from the close. Technicians will be watching the open closely tomorrow. One analyst told me that to confirm the reversal he wanted to see an open above today's close and a close above today's close. We could trade down intraday but the open and close had to be higher to confirm. The upside on the Dow could come anywhere between now, 10527, and 10700. A close over 11000 would be first confirmation of a breakout and a close 11400 would be very strong. In reality, this had better be the real thing. Another breakdown after today would be met with a really pessimistic outlook for the rest of the summer. There are only so many times that trader optimism can be dashed without making cynics of us all. Remember we never retested the lows from last week and with earnings warnings and the Fed ahead the markets have a huge wall of worry to climb. On the positive side many big caps appeared to have put in a bottom. GE and CSCO for instance are uptrending again. Trade the winners, avoid the losers, watch for a roll over on the $SPX or the $NDX. The S&P-500 ($SPX) has strong resistance at 1460 and the Nasdaq-100 ($NDX) has resistance at 3466. Be prepared to close long positions if either has trouble breaking those levels. The Houston 2 day, Technical Analysis, Stock and Option seminar is this week (thr/fri) and we still have seats available. We guarantee you will not be disappointed. The class size is only 20 so you will get plenty of individual attention from Chris Verhaegh and the staff. At less than the cost of a bad trade you can learn how to analyze stocks and trade options like the pros. Don't wait, do it now. http://www.OptionInvestor.com/seminar/seminar.asp Good luck and sell too soon. Jim Brown Editor Current long positions include: NOK, VOD, VIGN, MSFT, MLNM Yep! In meetings today, missed the open and decided to wait to see if it held. Cussed myself all afternoon. ************** SEMINAR UPDATE ************** A PHD Course For Traders By Austin Passamonte It was mid-February here in western New York and the weather was awful, maybe even worse than that. Wendy had seen enough cold & snow for awhile and approached me about an impromptu trip to someplace warm (read that as hot). After pondering this for a bit I told her that although it sounded good, I didn't want to take time away from trading and was still a bit burnt out from extensive travel I did in Canada last year. With disappointment on her part, the subject was dropped. Not even two weeks later I spotted the chance to grab a last- minute seat at an upcoming investment seminar. Without a moment's hesitation I whipped out the credit card and loaded up on a dose of higher education. By the time I booked airfare from Rochester, NY to Denver and garnered the very last room available in the conference center my card was saddled almost $4500. Then I informed Wendy. "You're going where for what?" she replied. "I thought you didn't want to go anywhere or do anything...just sit in that office & trade!" "Well, that's true Wen" I responded, "except this is an education I cannot afford to miss. With the profits gleaned from what I intend to learn there, you can book that 2 week trip to Hawaii we've been pondering for next February." Tall words on my part, but fancy footwork was in order to sooth the savage spouse. Oh, she groused to family & friends how a week in the sand & surf with her was spurned for days spent in frigid Denver with complete strangers. Still, she completely understood the my reasoning although the promise of Hawaii certainly tipped the scale for her blessings! Understand that I've traded futures and stocks for years and was having solid success in the option's arena as well. To be honest, I considered myself a bit more knowledgeable than the average Joe. I expected to learn a bunch but wasn't prepared for the magnitude of reality. To say I learned a few things is a gross understatement. My new level of understanding and advanced tactics learned would have taken me several years of daily trial & error to figure out. I don't mind the trial part of that; it's the error bit that scares me. Each bad trade is a lesson learned but at what price? How many of these lessons can any of us afford before the learning curve becomes straight? Those few days of intensive lessons sent me light-years ahead in my career. I was able to parlay a combination of things learned in class to a paid trip to Hawaii and much more. What price can be placed on a lifetime of application of tactics learned today? How much is the sum total of missed gains that could accrue through trading methods learned now instead of later(if ever)? I wonder. Which leads me to the point. No doubt you have noticed the invitation to attend one of these trading seminars listed here. I'd like to share with you my unsolicited opinion of what it has to offer you. I believe that a course similar to the one I attended has something to teach 99% of the traders out there. I don't care how many year's experience or millions in profits racked up, most every trader alive will walk away having garnered their money's worth and then some. As a matter of fact, I shared breakfasts and lunches with tables of different attendees every day. A few of them were actually brokers and high-dollar guys with eight-figure accounts. Every single one of those successful types were absolutely gushing over how much they gleaned from this event. If it meant that much to them, how important was it for me to be present? There is only so much detail a book or videotape can cover concerning market basics. My bookshelves sag beneath a good number of volumes yet countless points were covered at this event contained in none of them. Little things like splitting bids, order execution and numerous other tidbits were brought up many times off the cuff. Paying strict attention to details and taking copious quantities of notes isn't a maybe. it is a must! Many large cities are on the seminar event's tour. If you live within reasonable range of one and are even half-serious about being the best trader you possibly can, I strongly encourage you to attend. It is impossible to know what you do not know and you will never reach your maximum without learning the tactics and tools taught there. Maybe you feel you know all of them now, maybe you don't. How long will it take you to discover them on your own, and at what price from drawdowns or profits missed will that be? I can honestly attest that many of the lessons learned there have helped me greatly to survive and even prosper during the latest market challenges. Perhaps you have done well too, but how much better might that have been with a few more tools under your belt? It never ceases to amaze me how some people are willing and even anxious to spend a mass fortune and several years of their life to attend college, yet turn down the opportunity for a condensed course that may offer far greater monetary returns. Does that describe you? Do you feel that years in college are of value but a three day seminar is not or do you take advantage of every chance for education to better yourself and your skills? I have a feeling if you hold the latter opinion your future account balance may serve as living proof to the phrase of "information is golden". Fill your mind with knowledge and it shall fill your purse beyond overflowing with coins! **************** MARKET SENTIMENT **************** Let Summer Begin! Memorial Day turned out to be relief, as investors didn't have to worry about their stock portfolios for at least one more day. However, there must have been some really good barbecues across the country, as investors lined up for a technology stock smorgasbord Tuesday. The main dish over the weekend must have been crème-de-bear, as investors sent the NASDAQ up 7.94% for a new percentage-gain record. This move eclipsed even the 7.3% gain on Oct. 21, 1987, when the market rebounded from Black Monday! Volume was not as great as many would have liked, as the NASDAQ traded just over 1.46 billion while the Dow was just short of 900 million. Regardless, this was a good way to let summer begin! One major positive in today's action was that the generals led the way. Leadership has been extremely poor recently, but today's move was extremely impressive. Leaders such as Intel (+8), Oracle (+7), Sun Microsystems (+6 ¾), and Applied Materials (+10 5/8), all had stellar days on decent volume. We witnessed a nice reversal in Qualcomm (+10), and were impressed by the moves of Ciena (+21), SDLI (+24), and PMC Sierra (+21) as well. What this points to again is the fact that the bears are quick to run and hide, and the bulls (who have been accumulating cash on the sidelines) are getting ready to pull the trigger. With short interest nearing record levels as well as the increase in money market reserves, a squeeze could easily propel this market significantly higher. However, the recent trend in this market is to sell into any strength, and we would imagine that some traders did just that today. Many will be watching tomorrow's action with close scrutiny, as a follow through will be pertinent before buy decisions are executed. If we can show strength tomorrow, this will be a week to remember. If not, it is just another day within a very volatile year. 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 (26.53): 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 (6.086): 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 5.25 Overhead Resistance (745-770) 1.20 1.29 OEX Close 736.08 761.42 Underlying Support (715-740) 2.85 2.97 Underlying Support (680-710) 22.80 24.78 What the Pinnacle Index is telling us: OTM overhead resistance is strong, indicating that the OEX has a good chance of failing at that level. Both underlying support levels continue to gather strength, which may indicate that we have reached a bottom. However, the OEX put/call ratio was 0.60 today, indicating the bulls were on a buying spree. This further supports the fact that the OEX may stall at the OTM resistance level. Put/Call Ratio ***************************************************************** Friday Tues Thurs Strike/Contracts (5/26) (5/30) (6/1) ***************************************************************** CBOE Total P/C Ratio .65 .43 CBOE Equity P/C Ratio .61 .36 OEX P/C Ratio 1.20 .60 Peak Open Interest (OEX) ***************************************************************** Friday Tues Thurs Strike/Contracts (5/26) (5/30) (6/1) ***************************************************************** Puts 740 / 7,555 740 / 7,788 Calls 800 / 6,388 800 / 6,680 Put/Call Ratio 1.20 1.17 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 30, 2000 26.53 ************** MARKET POSTURE ************** As of Market Close - Tuesday, May 30, 2000 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,200 11,400 10,527 Neutral 5.05 SPX S&P 500 1,350 1,500 1,422 Neutral 5.30 ** OEX S&P 100 725 800 761 Neutral 5.30 ** RUT Russell 2000 450 550 477 Neutral 5.05 NDX NASD 100 3,000 4,000 3,414 Neutral 5.30 ** MSH High Tech 800 1,000 922 Neutral 5.30 ** XCI Hardware 1,250 1,600 1,388 Neutral 5.30 ** CWX Software 1,050 1,300 1,209 Neutral 5.30 ** SOX Semiconductor 850 1,200 1,010 Neutral 5.30 ** NWX Networking 900 1,100 1,041 Neutral 5.05 INX Internet 500 800 558 Neutral 5.30 ** BIX Banking 530 600 594 Neutral 5.11 XBD Brokerage 400 500 428 Neutral 5.05 IUX Insurance 540 620 636 BULLISH 5.16 RLX Retail 900 1,000 846 BEARISH 5.23 DRG Drug 355 400 390 Neutral 4.28 HCX Healthcare 710 800 793 Neutral 4.28 XAL Airline 140 155 158 BULLISH 5.25 OIX Oil & Gas 265 300 306 BULLISH 5.11 Posture Alert The NASDAQ was hitting on all cylinders today, as the index set a record for largest percentage gain with a 7.94% advance. This move eclipsed even the 7.3% gain on Oct. 21, 1987, when the market rebounded from Black Monday! Leading the way today was Semiconductors (+11.07%), Software (+10.76%), and the NASDAQ 100 (+10.08%). With this most recent surge, we have upgraded (S&P 100, S&P 500, NASDAQ 100, Morgan Stanley High Tech, Hardware, Software, Semiconductors, and Internet) to Neutral from Bearish. *********** IN THE NEWS *********** High Oil Prices Won't Last By S.P. Brown A lot of folks were bummed this holiday weekend because of high gasoline prices. Getting to the beach or to the mountains hasn't been this costly in years. In fact, in most of the country, low-octane petrol was trading for about $1.50 a gallon, a 50 percent premium over what it was trading for this time last year. The high cost of getting there and back has many Americans pointing an accusatory finger at the OPEC cartel, and with good reason. The OPEC nations have done a good job of manipulating supplies to raise oil prices to over $30 a barrel. No need to worry, though, the artificially high price won't stick. It can't. In order to maintain a targeted price, industry output must be held below the competitive price level. However, when this happens, price exceeds marginal costs, which means any given firm can increase its profits by selling a few more items at a slightly lower price. Of course, this increased output will tend to lower the price and to reduce industry-wide profits. Therefore, a member of a cartel who cheats by increasing output beyond his allotted share will reap all of the benefits from his action while bearing only some of the costs. In other words, the cheater gets all the additional revenue from the increment to output, whereas everybody shares the losses due to the fall in prices. For a cartel to succeed, it needs an enforcement mechanism. That is, it needs a way to monitor members' actions and a way to punish those who cheat. However, even though it lacks an enforcement mechanism with any teeth, OPEC is often cited as an example of a successful cartel The organization first flexed its price-setting muscles in the early 1970s during the Arab-Israeli War. Back then, the seven Arab members of OPEC announced a cutback in production and the first of a series of price increases that brought the world market price from less than $3 to more than $12 a barrel. At least part of the short-run success of OPEC back then could be attributed to the role played by it most powerful member, Saudi Arabia. During the 1970s, Saudi Arabia, with one-third of the cartel's productive reserves, allowed other members to sell as much oil as they could produce at the going cartel price while it reduced its own production to prevent a surplus. This type of self-sacrifice could only go on for so long. By the early 1980s, the Saudis turned up the spigots and oil prices dropped precipitously to $12 a barrel by 1986. Still, does that mean OPEC could very well keep the price of oil at $30 a barrel for years to come? Don't count on it, at least not in this environment. OPEC members' propensity to cheat coupled with Federal Reserve Chairman Greenspan's master plan to stall the economy could easily pull the price of oil back below the $20 by the end of the year, which is something to consider for those investors who are planning on the price of Texas tea to hover around $30 a barrel market for an extended period of time. ************* READERS WRITE ************* Entry/exits on covered-calls with LEAPS DEAR OIN; Ok, I 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! ************** TRADERS CORNER ************** Is It Over Yet? By Mary Redmond If you look at the block transaction summary for last week, you can see an interesting pattern. On Monday, May 22 and Tuesday, May 23 the markets were relatively slow. On May 22, the NYSE reported a total of 19,363 block transactions, with 4947 up ticks and 4519 down ticks. (The rest of the blocks did not have an up tick or a down tick.) The NASDAQ reported 15,920 block trades with 5143 up ticks and 6100 down ticks. Tuesday, May 23 was a similar day with 19,371 block trades on the NYSE, with 4741 up ticks and 4378 down ticks. The NASDAQ reported 14,020 block trades with 4711 up ticks and 4677 down ticks. Both of these days were down days in the market on both the Dow and the NASDAQ, with relatively light volume. Wednesday, May 24 was an optimistic day with high volume and a strong percentage gain on both exchanges. The NYSE had 26,477 block trades with 6587 up ticks and 5905 down ticks, and the NASDAQ had 22,856 block trades with 7154 up ticks and 8928 down ticks. The Dow and the NASDAQ both gained over 100 points. Thursday and Friday of last week were both relatively slow days with light volume. On Thursday 22,762 block trades were reported on the NYSE and 17,589 block trades were reported on the NASDAQ. On Friday 15,722 block trades were reported on the NYSE and 10,747 block trades were reported on the NASDAQ. The upticks and downticks on both days were nearly even, and both indexes were down on both days. The pattern you can discern from the block trades is that a slight increase in the number of block trades can have an enormous impact on stock prices. This may be indicative of an oversold market. The old saying is, never short a dull market because any good news or positive momentum can have a huge impact. In addition, last week Wednesday was an up day with strong volume, and the rest were down days with weak volume. The number of block trades was approximately 35% higher on the NYSE on the up day, and approximately 56% higher on the NASDAQ. This can be indicative that there aren't many sellers left and that if institutional buyers come in, the market can run way up in a short period of time. If you look on the Investment Company Institute's web site, you can see the amount of money which went into money market funds last week. Last week showed the largest weekly redemption of equity mutual funds in a long time, and a lot of that money was was deposited to money market funds. The nation's retail money market funds increased by $3.53 billion while the institutional money market funds decreased by $4.93 billion. There is no shortage of cash on the sidelines. The ICI reported that there is $1.68 trillion in cash in money market funds. This is an astonishing $1,680 billion dollars. All we need is to have a mere $20 or $30 billion a month go into the stock market and we could see a huge percentage gain. Although we did see a weekly redemption of equity funds last week we have not seen a monthly redemption so far this year. The only month in the last nine years which showed a net redemption was August of 1998. That was a scary market to a lot of people because the market had gone up from 1995 to 1998 without a major correction. In a few months, the Dow had dropped from over 9000 to under 7500, and the NASDAQ had dropped from 2000 to a low of 1500. The situation is different now as it is different every time we have a market correction. However, I think it is likely that the market is going to continue to astonish people in the rapidity of movement and unprecedented volatility. This is probably due to the speed of transmission of information and the massive amounts of money which enter and leave the market daily. A lot of people are flabbergasted at the monthly price movements we have seen, and how quickly the high flyers corrected. We know that sometimes you can use certain options strategies to help offset some of the risks of buying stocks in this very volatile market. The simplest example of this is probably to buy the stock and buy a put option on the same stock. This way if the stock crashes you can sell at the strike price of the put and perhaps lose less money than you would have lost without the put. The problem is that put options can be expensive which increases the cash outlay for the stock. Some people write a covered call and use the proceeds to help pay for a put. This can be a good strategy as long as you don't use a call and put with the same strike price because this will net little profit. If you look at a stock which has moved up over a few days or a week sometimes you can write a call with a high strike price and buy a put with a low strike price. An example of this is a trade I did Friday: Buy 100 State Street at 113.8125, write a July 120 STT call at 7.5 and buy a July 110 STT put at 8.125. If you would like to own it for the long term, for example in an IRA account, but you want to minimize your risk, this can be a possible strategy. In this particular example, the written call pays for all except .625 of the put price. If you are called away, the profit (minus transaction fees) would be 120 - 114.43. If the stock drops catastrophically, you can exercise the put and sell the stock for 110, a loss of 4.43 points. This would be a minor loss compared to the losses some people have experienced over the last two months. Contact Support ****** OEX Debit Spreads: Details, Details By Austin Passamonte As they say, the devil's in the details. Let's dissect one of my favorite strategies that's just about ready to come into its own. First of all, OEX index options are cash-settled American style. This means that upon expiration the value of your position will either be worthless or settled in cash. You will not be assigned X number of S&P 100 futures contracts as you might be assigned stocks when short those type of securities. This is good news. Win or lose you will be credited or debited cash only. American-style means the options can be exercised at any time during their lifespan. European style options may only be exercised at expiration. Just like options on stocks, OEX short options have the possibility of being exercised or assigned in cash at any time. This means if you were to write a credit spread on the OEX and it moved against you, even for a brief time, you stand the risk of having that short option assigned to you. The option you are long will be offset by your broker, limiting your loss to the spread's maximum downside. Even though the risk is defined, I prefer to eliminate the possibility of losing a position before I'm prepared to. Therefore, I only write credit spreads on the SPX which is European settled but that's another topic we'll save for the future. So, debit spreads only for the OEX, now what? To begin with, I only look at spreads within the final two weeks before expiration. Time decay for OTM option contracts withers and shrinks the extrinsic premiums in our favor. For example, if you would have bought the June 720/710 put debit spread on Monday, May 22nd, it would have cost you 3.67 while the OEX index closed at 753. As of market's open today, the same June 720/710 put spread sold for 3 or less even as the underlying index was now trading near 736. Had you bought that spread one week earlier the index would now be 17 points lower but your put spread worth LESS than what you paid for it! Timing is everything, for sure. I refuse to pay more than 3.50 to purchase a debit spread with 10 point profit potential. That means looking for spread premiums between 1.50 and 3.50 that have a reasonable chance of the long option being in-the-money by or before expiration. The conventional way to do this would be running probability equations based on historical and implied volatility. That isn't what I do, although I'd encourage you to pursue this if you choose. I maintain a daily trade journal which records the price levels and true ranges of the Dow, NASDAQ, S&P 500, OEX and QQQ. Based upon recent price behavior, technical analysis, fundamental news events and "gut instinct," I attempt to forecast which direction and how far the markets may move. Tall order, isn't it? Thankfully I give myself a week or two leeway for such to happen. The other part of spread trading for me is that the entire position must either become profitable or expire worthless. At the entry point, time value has eroded deeply and when the index moves against me, the spread quickly decays to nothing. This means I only risk as much capital as I'm willing to lose entirely. I arrive at that sum by deciding how much I'd be willing to risk on a stop if I took a directional play buying calls or puts. When following Skybox methodology, I commonly give up $250 to $300 drawdown per option to non-performing trades. Think about it. We take a directional trade, our stop is hit and the loss is limited and small. However, that money is now lost to us forever. For gosh sakes, I love taking small losses instead of holding on for big ones! Yet, if we use the exact same amount that would've been jeopardized on a stop to now buy debit spreads, it is a no-lose scenario. Let's say you would have bought five OEX options in either direction today. You had better be protecting with stops, and that amount might be up to $300 with slippage. If the index moves in your favor, profits will grow. If it moves against you and the stop is hit, you are out of the trade with a $1500 loss. Even if the market later reverses and moves in your favor, you're now on the sidelines wishing you were in. What if you took that $1500 you're willing to lose on a stop and use most to all of that for OEX debit spreads in the same direction? If you wait until the last two weeks of option life or less, they can be bought cheaply enough to offer a 3/1 or even 5/1 profit-loss leverage. Using the June 720/710 put example, if you bought five spreads on 5/30 for asking price of 3, you spent the same $1500 that would have been lost on a stop out in a put play if the OEX rallied. However, you will stay alive in this trade for two more weeks. Would you agree that a lot can happen to the markets in two weeks lately? If the index never trades into 720 or less, you lose the entire $1500 just like you would on a stop out. But, if the market dives below 720 anytime before June 16th expiration, your spreads have value. Should the OEX move deeply or close anywhere below the 710 level each spread will be worth up to $1,000. That is an impressive return on the $1500 capital used for this play that would have otherwise been earmarked for total loss on a plain put purchase instead. Can you see the staying power and leverage that debit spreads offer us now that they are affordable? I will buy debit spreads up to the day before expiration, adjusting only for price and likelihood of profit potential. Again, I never pay more than 3.50 per spread because I want to preserve my 3/1 or greater profit leverage. This ensures that I can use the same strategy each month and win at least one out of every three months to be profitable at year's end. I usually buy spreads at 2.00 to 2.50 premium for a 10 point profit potential. They can be commonly found during expiration week for those contracts. Common reasoning states we have one in three odds of winning these trades. The index can either move against us, stay flat/fail to reach our profit point, or move into the profit. Basic one out of three odds. Reality is we can increase our chances greatly by forecasting the general market direction. The closer we are to expiration, the better that guess might be. Yet, with a shorter time frame comes a smaller margin for error. Tomorrow, we will cap this subject off by discussing how to select the right play, the manner in which to enter the trade and what to do next. We'll talk about brokerage features, premium prices, market guessing via information supplied within OIN and how to handle the massive windfalls if we're right! Have fun and we'll see you then. ************* DAILY RESULTS ************* Index Last Tue Week Dow 10527.13 227.89 227.89 Nasdaq 3459.48 254.37 254.37 $OEX 761.42 25.34 25.34 $SPX 1422.45 44.43 44.43 $RUT 476.70 19.33 19.33 $TRAN 2741.70 54.15 54.15 $VIX 26.53 -0.96 -0.96 Calls Tue Week CHKP 188.75 26.25 26.25 "Best Partnering Alliance" award RMBS 188.25 25.25 25.25 Straight into orbit! SDLI 221.88 24.13 24.13 If you stuck around on Friday. CIEN 121.50 21.81 21.81 Bullishness came to fruition TQNT 96.94 13.78 13.78 Breakout alert!! SCMR 90.00 13.50 13.50 Unless you are a brave soul. AMCC 103.13 13.44 13.44 Semi sector moved this higher ITWO 105.94 10.44 10.44 Smooth sailing above $108 RBAK 82.31 10.25 10.25 Never got a pullback ADI 75.00 7.06 7.06 New, strength all the way to close EXDS 67.88 5.88 5.88 Technical breakout welcome YHOO 117.00 4.94 4.94 On fire hitting $120 midday SEPR 94.25 3.06 3.06 Needs to hurdle resistance $96 DNA 104.50 1.88 1.88 Arms crossed, feet tapping ABT 41.00 -0.56 -0.56 Dropped, one-two punch Puts CL 54.13 -1.63 -1.63 New, old economy put TRW 48.06 0.06 0.06 Rally? What rally? ICIX 25.94 1.00 1.00 Red alert for a reversal NTOP 28.00 1.50 1.50 Dropped, earnings tomorrow HLIT 41.00 3.00 3.00 Walking on the tightrope PCLN 39.25 3.13 3.13 Lack of volume could mean rollover DCLK 44.56 3.44 3.44 Problems mount with a downgrade ANAD 31.63 3.81 3.81 Dropped, detrimental rally EXTR 48.13 4.06 4.06 Signs of life creeping back FDRY 61.00 6.00 6.00 Dropped, all good things end INCY 57.13 8.06 8.06 Dropped, time to go PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** ABT $41.13 -0.56 (-0.56) The one-two punch at the $44 resistance level last Wednesday foreshadowed today's knockout in the call ring. ABT failed to bounce off the ropes at the 5 and 10 DMAs Instead it cowered under the technicals. Our optimism faded when this momentum play didn't move in a positive, clear-cut direction amid the rallying markets. This isn't the behavior of a winner! Consequently ABT made early retirement tonight. It's possible the resurfaced news concerning the company's trouble with the FDA about its failure to comply with manufacturing standards for medical tests over a six-year history was a crucial factor in today's session. The banned test kits represented $250 mln, or 8% a year in total sales. PUTS: ***** ANAD $31.63 +3.81 (+3.81) The broad tech rally, particularly in the chip sector, proved to be detrimental to our put play. The bullish news reported by SDLI last Friday carried over the long weekend and into Tuesday's trading, sending the entire semi sector into rally mode. Investors forgot about their bearish ways from last week and turned extremely bullish on the whole group. ANAD's rally came on convincing volume as traders exchanged nearly three times the stock's ADV, en route to an impressive 13% gain. If you still have profits in the play, it's time to lock them in and sell too soon! FDRY $61.00 +6.00 (+6.00) It is said that all good things must come to an end. That's the case with this play. As we said this weekend, you had to wonder just how low FDRY could go. It looks like at least for now we have our answer. Foundry gained just over 10% today. The volume behind the move was better than we've seen lately. Has this one turned the corner? We can't say for sure, but it would appear as though a short-term bottom has been put in. There was no news from the company, but the sentiment towards FDRY and the broad markets may be changing. This is a stock that declined over 75% in the past couple of months, which seems to have found some new found enthusiasm. Since being added to our list of puts, FDRY has treated us very well, but for now its time to move on. INCY $57.13 +8.06 (+8.06) "Unless, the rest of the sector takes off on Tuesday, don't bet on INCY getting much over $50." Remember that from Sunday? WRONG!! The whole sector took off and never looked back, while INCY opened at $50 and moved up to $52. There was no rollover, which demonstrated that INCY was going to move with the rest of the sector. Darn it! Not only did it move with the sector, it blew clean through $52 resistance in the last hour, blasting up to $57 in the final five minutes of trading. While there may be some early morning profit taking tomorrow, thus lowering the price, consider using any pullback to make an exit if you haven't already done so. It's trading moments like these that make stop orders absolutely necessary. NTOP $28.00 +1.50 (+1.50) After the market tomorrow, Net2Phone is reporting 1Q earnings. Therefore consider closing out any open positions just in case this event causes an upsurge off these bargain-basement prices. Plus take a look at today's activity. NTOP closed smack on its resistance level and to top it off, this was a mere quarter fraction away from the intraday high. Generally speaking this type of behavior is considered rather bullish. Therefore we've got two good reasons to move on to other put plays. The earnings' release is tomorrow and there's a strong possibility that NTOP may be finding this current level above the 5-dma ($26.43) just too comfortable. The big issue about new telecom taxes isn't likely to go away too soon though. NTOP, along with Vocal- Tech Communications (VOCL), I-Link (ILNK), and Firetalk Communications (http://www.firetalk.com ) are sponsoring an Internet Freedom Rally - Free Concert on the Capitol Building Steps In Washington, DC on June 11th to draw attention to its plight. ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at 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 Thursday 5-30-2000 Copyright 2000, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. ***********************Advertisement*************************** fnCentral.com frees movers, shakers, decision-makers! No apps to buy or learn. Use the web's first fully integrated personal finance manager on the fly with any PC, Palm, phone, or internet appliance. Manage your money. Consult with CPAs. Estimate taxes. Track investments. All on fnCentral. OPEN A FREE ACCOUNT NOW! http://www.fncentral.com/cgi-bin/ad?from=op511 *************************************************************** ******************** PLAY UPDATES - CALLS ******************** AMCC $103.13 +13.44 (+13.44) Leading the market higher today, Semiconductor stocks had their best day since April 17th. AMCC wasn't to be left out and managed to tack on an impressive $13.44. Even in light of the light volume on the major exchanges, AMCC managed to trade slightly more than its ADV. The strong move today takes the stock above the $100-102 resistance level and right up to the upper edge of the descending wedge we talked about on the weekend. If the recovery is for real, we should see a strong breakout through the next level of resistance at $108, which would also represent a breakout from the wedge pattern mentioned above. The late day action was very encouraging as volume ramped up right into the close, and if the market and sector strength continues for more than a day, AMCC could be in for a nice run. Consider new entries on a volume-backed bounce from the $100 level as a good opportunity to enter on strength. More attractive entry points could present themselves in the form of an intraday dip to the $94 level. This Semiconductor stock will have wide daily swings, so evaluate your risk profile accordingly before playing. TQNT $96.94 +13.78 (+13.78) Breakout alert! Last weekend, we indicated that many Semiconductor stocks looked like they were getting ready to break out of their descending wedge patterns. TQNT did so in a big way today, tacking on almost $14, and spending the entire day above the upper edge of its wedge. The fly in the ointment though is still volume. For such a strong gain, it was disappointing to see less than average volume, and we are concerned about a pullback if there is no follow through tomorrow. Conversely, the intraday volume picture is much rosier, as volume strengthened continuously throughout the afternoon, indicating strong buying interest. The late-day strength pushed the issue through near-term resistance at $95, and aggressive investors may want to jump in if TQNT can use this level as support tomorrow. Consider a bounce at intraday support ($90) or stronger support ($85, then $80) as an opportunity to enter the play at a better price, but keep your eye on the volume. It will be key to the strength and longevity of any move; ignore it at your own peril. ITWO $105.94 +10.44 (+10.44) ITWO extended its gains from last Friday by gapping higher by $5 Tuesday morning. And the momentum built throughout the day as ITWO cruised past its various resistance levels. Traders were encouraged to buy ITWO from John Hancock Technology fund manager, Marc Klee. In an interview during the Monday holiday, Klee said that he likes ITWO more than its B-2-B brethren, CMRC and ARBA. Klee also noted that ITWO's $1 bln in revenues presents more upside potential in the stock than downside risk. The bullish comments combined with a broad rally in the software sector boosted ITWO into rally mode. From here, ITWO doesn't have much resistance above, but some minor congestion at $108. We might see smooth sailing to $120 if ITWO can clear that last hurdle. Consider an entry at current levels if you can take on more risk, otherwise, wait for a bold move above $108. Watch direction in the sector with stocks like ORCL, VRTS, and CMRC to confirm that the rally is here to stay. CIEN $121.50 +21.81 (+21.81) Our bullishness in CIEN came to fruition Tuesday. The strong technical base formed last week combined with the bullish outlook for business in China provided enough catalyst for the stock to clear congestion and rally sharply higher. Several financial journals published bullish articles over the weekend about the prospects for tech companies in China. IDC, a tech research firm, issued a report stating that China currently has 3.2 mln Internet users, and analysts expect that number to grow to 25 mln by 2003! Analysts believe that the potential for communications infrastructure companies, such as CIEN, is huge. Those bullish reports helped CIEN to breakout from its basing price and close Tuesday's session near its day high. The rally in the stock came on impressive volume as traders exchanged nearly 10 mln shares. Feel free to enter the play at current levels if the momentum carries over into Wednesday's trading. But make sure to set your trailing stops after entering the play, after Tuesday's run-up, CIEN doesn't have much support below. SEPR $94.25 +3.06 (+3.06) The momentum returned to the Biotech sector Tuesday. The AMEX Biotech Index ($BTK) rose 8.3% on the back of the broad market rally. And SEPR's momentum may build as traders gear up for the Investors Boston Biotechnology Stocks Forum, beginning Monday, June 5th. SEPR is scheduled to be a keynote presenter at the gathering. Additionally, analysts from Boston-based SG Cowen & Co will offer insight into the latest trends and developments in the biotech arena. Despite the broad rally in the Biotech sector Tuesday, SEPR was unable to breakout from its bottom head-and-shoulders basing pattern. The stock did gap higher by $2.50 Tuesday morning, but fell short of hurdling resistance at $96. In the coming days, watch closely for SEPR to break away from congestion, and to boldly move above $96. A move above that level might precede an extended rally for SEPR. Make sure to confirm a breakout with heavy volume! SDLI $221.88 +24.13 (+24.13) If you stuck around Friday and opened a position in SDLI then after today you deserve a pat on the back. SDLI soared today adding over 10% to its pre-holiday close. While the broader market saw the volume remain a bit light, investors traded over 9.0 million shares of SDLI. Our play got a boost after announcing it had extended its contract with JDS Uniphase. Under the deal the two will continue to swap optical networking gear. SDL will provide grating-stabilized 980 mm pump lasers to JDSU for its erbium doped fiber amplifiers. The analysts were busy today as well. Analysts at Credit Suisse First Boston reiterated their Buy rating, while the folks at DLJ maintained their Buy rating, but upped their earnings estimates and price target from $210 to $250 per share. Max Schuetz at Thomas Weisel partners raised his rating of SDL from a Buy To a Strong Buy. So where do we go from here? Most indications point higher. Today's gap higher could see some back-filling to support near the $200 area. Intraday support shows up near $213 as well. A bounce off either, as long as it's accompanied by good volume could provide an attractive entry for our play. RMBS $188.25 +25.25 (+25.25) Well this one didn't bounce off support at $160, it flat went into orbit. Today's 15.5% gain came on the heels of an upgrade of many of the stocks in the chip sector by an influential analyst at Lehman Brothers. No company specific news to speak of, just the upgrades and an improved investor sentiment as traders returned to Wall Street. We certainly don't want to dismiss today's move, although would point out the volume was somewhat lighter than we would like to have seen. Keep in mind however, RMBS could continue to climb the ladder with or without volume. The last thirty minutes today, RMBS had more buyers step up to the plate, driving the price to $188.50. Closing near its high of the day is a definite plus. If we see profit taking on Wednesday, a pullback to the $180 or $175 area followed by a bounce could provide a good entry for new plays. CHKP $188.75 +26.25 (+26.25) Ok, so we are back at the top of the trading range we mentioned this weekend. While we believed CHKP would move higher, we honestly didn't expect it to occur in just one day. As with many of the Nasdaq stocks, CHKP finished the session going out near its high of the day. Granted one day does not make a trend, but this could be the beginning of breakout to levels not seen since March. The volume today was better than average with 1.9 million shares changing hands, which would certainly suggest continued momentum to the upside. Technically support is now found near $175, which happens to coincide with its 100-dma. After today's 16% move traders may choose to put some money in the bank, so bounces of intraday support could prove to be a good entry point for new positions. Although not a market moving press release, CHKP did announce today that Software Business magazine has awarded the company the "Best Partnering Alliance" across the entire software industry for its Open Platform for Security Alliance. YHOO $117.00 +4.94 (+4.94) Our play took off like it was on fire hitting $120 by midday. It looked as though our sleeping giant had begun to wake up. While we won't throw rocks at a gain of better than 4%, we would like to have seen more follow- through at the end of the day. Early in the afternoon, YHOO began to drift sideways to lower, as the Nasdaq continued to gain momentum. This is not necessarily a negative, as continued strength in the tech area could bring buyers back to some of the more solid Internet issues. On a more positive note, our new play did move through and hold the $116 area of support mentioned in this weekend's write-up. The volume was a bit light as well, however the recent market environment may have many traders feeling "snake-bit". Investors may require more "proof" that the bullish sentiment seen today is for real before they lay anymore money on the line. There are actually several minor areas of support between $112 and $116. A bounce off those levels could be a good entry point for those that didn't enter today. In the news, Yahoo! signed a content services agreement with Scholastic Inc., which will provide appropriate news and entertainment stories for children. SCMR $90.00 +13.50 (+13.50) Unless you are a brave soul, you never got a buying opportunity since it opened at $81. Once it cleared $84 and showed increasing volume two hours before the close, aggressive traders might have wanted to take a position. If they did, they've been rewarded so far. The powerful move at day's end was backed by strong unrelenting volume, putting today's total volume at 21% over the ADV. It also moved SCMR much more quickly to that $90 level of resistance from which we would look for a breakout of the ascending wedge. If today is any indication, we'd SCMR to break through tomorrow. Careful though. Such a big move in one day is susceptible to profit taking and could easily send shares back to congestion in the $88 area or even down to previous support in the $83 range. Conservative traders may consider buying the breakout over $90, however, we suggest waiting for a pullback to your favorite level of support before getting in. RBAK $82.31 +10.25 (+10.25) Just like SCMR, this networking equipment company got traction right from the start this morning never giving us a pullback in which to make an entry. After a stretch to $81 in the first hour and a half of trading, intraday support came at $79 with congestion around $80 for most of the day. $80 is a level of previous long-term resistance that became pivotal in today's trading. Will it or won't it hold? If the afternoon held any clues, it was that RBAK steadily powered up, effectively clearing resistance and telegraphing to us that $80 might become support once again. While RBAK looks technically positive on the chart, it may yet see a pullback given that the huge one-day point gain. Keep your stops in place if you jumped in today. Otherwise, we think a dip to $78 might make a good entry. Just make sure you see a good bounce first. If there is no bounce, start looking back to $73 or find another trade. DNA $104.50 +1.88 (+1.88) Just like you might do when cross with your kids for failing to pick up their room, we're standing around with our arms crossed and collective feet tapping the floor. Despite it gaining a shade under $2, we're slightly disappointed with DNA's performance today give the rally in the market and the biotech sector. Lack of volume (only 76% of the ADV) confirms the lack of interest that helps explain today's direction-less trading. If it weren't for the last 15 minutes of trading, DNA would have suffered a loss. Supposing that tomorrow will be a follow through of today's rally, buying at the current level or even at $100 support might make a good entry. However, if today's rally was just a dead cat bounce and DNA drops under $97 with a failed rally tomorrow, consider passing up DNA. A return of money to the sector would be a welcome sign too. EXDS $67.88 +5.88 (+5.88) The pessimists say the volume wasn't there to back the rally. Well let's take this disposition closer to home. Yes it's a fact, Exodus's trading volume wasn't quite up to par (ADV = 7.63 mln) today. However it was respectable enough at 4.9 mln shares exchanging hands to indicate there may be more to come. EXDS opened above the 5-dma runway and took flight advancing the share price 9.5%. Its strong momentum importantly pushed it through the $69 mark and the 10-dma (now at $68.49). Over the past couple weeks, the latter indicator acted as a resistance top on the downtrend. EXDS was added as a momentum/recovery play over the weekend. We're looking for it to spike up after tumbling to what we consider a bottom. Last Wednesday EXDS slid to a bargain hunter's dream price of $52.50 and so, our bets are on a recovery. Accordingly this technical breakout is certainly a welcome factor. Some enterprising traders may have begun opening positions today, however the more cautious should wait for definitive moves through $70 on more robust volume. In the news today, Vigil Technologies announced it selected Exodus Communications to provide Internet hosting and management for e-Sense(TM), Vigil's online intelligence solution. ******************* PLAY UPDATES - PUTS ******************* EXTR $48.13 +4.06 (+4.06) Signs of life finally began to creep into EXTR towards the end of the today's session. The broad market strength gave the stock a bump at the open, and after meandering around the $46.50 level for most of the day, buyers began to get the upper hand and EXTR moved up into the close on increasing volume. The late-day gain pushed the share price above the 5-dma ($46.75) for the first time since may 17th. The recent weakness has been driven by investor disappointment with the company's recent quarterly report, which cautioned about "rapid erosion of average selling prices" which will inevitably affect gross margins. Near term resistance is found at $50, and if buyers cannot push through this level, consider entering new positions as the stock rolls over. The low from last Friday ($42.50) is very close to the all time low of $37.13, and today's move may indicate support forming near this level. TRW $48.06 +0.06 (+0.06) Rally? What rally? The resurgence in the broad markets today left TRW out in the cold. Trading in a range of less than $1, the stock was unable to take advantage of any of the upward momentum found throughout the market as investors came back from the holiday weekend in a buying mood. Although nearly the average number of shares traded hands, buyers and sellers battled to a virtual standstill, and this likely portends more weakness if today's market strength is short lived. Resting on support at $48, TRW is still well below the 5-dma (up at $50.13), and its inability to move higher today is a good sign for our play. If this support level fails to hold, consider opening new positions for a ride down to the next support level between $41-42. Intraday resistance near $48.50 today was as much of a bounce as the stock could manage. Catching a rebound to the 5-dma could provide a better entry as TRW rolls over, but in light of today's lack of interest, we may not get that lucky. Remember that volume is the key - use it to confirm the strength of any move before playing. DCLK $44.56 +3.44 (+3.44) DCLK's problems mounted Tuesday as Wit Soundview downgraded the stock from a Buy to a Hold. DCLK not only faces litigation over privacy issues on the Internet, but analysts see a continued decline in advertising spending on the Web. Citing the weakness seen in April spending continued into May. Analysts said that advertising had been strong in the past year due to the dot.com blossom, but spending has slowed in the last two months. If that weren't enough, B of A Securities lowered their revenue estimates for DCLK, citing the weakness at the low-end of the online advertising market. The slew of bad news pushed DCLK briefly below support at $40 Tuesday. But the broad tech rally proved to be too tempting for traders as they bid DCLK higher. However, Tuesday's rally might be a good entry in light of the bearish outlook for DCLK. Wait for DCLK to bump against resistance at $45, and turn south. Look for an entry as sellers return to the stock and downward momentum drags the stock below $43. ICIX $25.94 +1.00 (+1.00) Well the market sentiment was impressive across the board, but ICIX didn't follow the lead. Besides which ICIX didn't even raise it's eyes to take a gander at the 10-dma ($29.89) overhead. Remember a move towards this technical line should put you on red alert for a reversal! At this point though, the 5-dma ($26.81) is developing as a more pronounced measurement device for entry/exit. Be prudent in your strategy. A strong enough tech rally could easily bring more buyers off the sidelines and upset this stock's downtrend. HLIT $41.00 +3.00 (+3.00) Ok now we're walking the tightrope and there's no safety net. So what's a put trader to do amid strong rallying conditions? In this case, if you have open positions use the 10-dma as an ABSOLUTE "time to get out!" stop. The $3.00, or 7.8% advance in robust trading today left HLIT closer to the 5-dma ($39.08), which is reasonably a good sign. However before opening new plays, HLIT must slide back under this mark to demonstrate it can indeed return to the downward course. The good news, from a technical viewpoint, is that the current level may be evolving as a line of resistance. Still don't be fooled and end up caught in a strong updraft. PCLN $39.25 +3.13 (+3.13) If today's rally wasn't a headfake, a move back over $40 might end this play. However, we suspect given the lack of market volume accompanying today's market gain, we could see a rollover...in which case, PCLN's finish today could make for a good entry price tomorrow. Over the past four trading days, $40 has proven to be good resistance. However, if the market continues to rally, PCLN will get dragged upward with it (though kicking and screaming). The long term potential of this put play is still great given what we think is PCLN's flawed business model. That said, today's late afternoon move over opening resistance at $38 conveys that there may be some strength in PCLN tomorrow. It will then be important to keep your stops set so you don't give back any profits in this (so far) great play. If you are a bit more conservative, you may want to wait for a drop under $37.25 (5-dma) or even $36 (recent historical support) before taking a position. While a Trademark infringement lawsuit filed against them today stemming from unauthorized use of the "Name your own price" slogan may not look good, it's unlikely to affect the play. Keep your stops set and let PCLN come to you before making your entry. ************** NEW CALL PLAYS ************** ADI - Analog Devices $75.00 +7.06 (+7.06 for the week) ADI is a semiconductor company. They design, manufacture, and market analog and digital integrated circuits (ICs) including digital signal processors. Most of the company's components are used by original equipment manufacturers (OEMs) and include such clients as 3Com, Hewlett-Packard, and Electrolux. Analog Devices has operations in the US, the Philippines, Taiwan, and Ireland. ADI is back on the starting line and revved up to take the fast- track! The DOW topped 227 pts by the finish and the tech-laden Nasdaq pushed higher at 254 points. And there was ADI, gunning her accelerator to keep a lead position amongst the chip stocks. After beating the consensus estimate by a landslide on May 17th by coming in at $0.32 versus the expected $0.28, ADI's share price struggled. The following day it did pinnacle at $75.31 although this was likely the result of two upgrades. Chase H&Q boosted ADI to a Strong Buy from Buy and Adams Harkness upped its rating to a Trading Buy from Accumulate. But even so, ADI was to see an intraday low of $61 by May 24th before perking up today. As was the case in earlier attempts to rally, ADI kept bumping into fierce opposition near $70. But today was clearly a different scenario. After a strong start, ADI made its way down the track at $72 and then sprinted forward at top speed for a winning close on its daily high. Why the sudden upsurge? Well as stated earlier, the broad market rally and favored sector today were pertinent factors. Plus ADI was in the news announcing various product enhancement, which is always welcoming to investors. Technically too, the breakout above the 50-dma ($71.41) is promising; although it's important that ADI maintain a strong stance above this line in the near-term. Take a look at a two-month chart and you can visually confirm its importance. A slide back under could signal a head-fake. Nevertheless, we have confidence ADI is poised for a strong momentum run in a cooperating market. The ultimate choice is yours, but in consideration of the caution many traders are taking before opening call positions, wait for positive bounces off this level before starting new plays. Analog Devices announced today the release of a new product, the OP7x7. It's the first family of high-voltage, bipolar-precision amplifiers and is ideally suited for an ever-widening variety of low-voltage equipment. The company also unveiled two new broadband CATV line drivers which promises a low-cost solution for reverse-path data transmission in interactive digital cable terminals. And finally, ADI released the AD8343, a monolithic, double-balanced, active device that provides wide bandwidth on all ports that delivers the industry's lowest level of distortion up to 2.5 GHz. But wait, there was more to add to its cache of news. Analog Devices came forward with another leading industry solution, the ADSP-21ESP202, a programmable full-duplex speech processing solution on a single chip. BUY CALL JUN-70 AKI-FN OI=2993 at $7.00 SL=5.25 BUY CALL JUN-75*AKI-FO OI=1123 at $4.50 SL=2.75 BUY CALL JUN-80 AKI-FP OI= 836 at $2.56 SL=1.25 BUY CALL JUL-75 AKI-GO OI= 14 at $8.25 SL=6.25 BUY CALL JUL-80 AKI-GP OI= 122 at $6.25 SL=4.50 Picked on May 30th at $75.00 P/E = 82 Change since picked +0.00 52-week high=$94.69 Analysts Ratings 11-8-1-0-0 52-week low =$19.09 Last earnings 03/00 est= 0.28 actual= 0.32 Next earnings 08-16 est= 0.37 versus= 0.15 Average Daily Volume = 2.52 mln /charts/charts.asp?symbol=ADI ************* NEW PUT PLAYS ************* CL - Colgate Palmolive $54.13 -1.63 (-1.63 this week) Colgate-Palmolive is the #1 seller of toothpaste and a world leader in oral care products. Colgate is also a major supplier of personal care products (baby care, deodorants, shampoos, and soaps). Its Palmolive is a leading dishwashing soap brand worldwide. In household cleaning products (bleaches, laundry products, and soaps), Colgate is a top producer of bleach and liquid surface cleaners (including Ajax). Foreign sales account for about 80% of Colgate's total revenues. Read the last line of CL's company description one more time. That's right, foreign sales account for 80% of the company's sales. The strong dollar and the weak euro are slicing into CL's revenues. With interest rates steadily climbing, economists expect the dollar to strengthen. Which bodes poorly for any company that does a substantial portion of business outside the US. We need look no further than the multinational Gillette (G), who last week said that because of the weakening euro the company lowered revenue estimates. Not only does CL face macro-economic difficulties abroad, the company has to contend with stiff competition back home. Procter & Gamble (PG) is taking CL head- on in the cutthroat toothpaste market. PG had lost market share with its Crest brand to CL, but the company plans to release an improved version that it hopes will convince consumers to switch from CL's brand. Also, analysts point out that although CL has managed consistent earnings growth, the company achieved it through the less lustrous practice of cost-cutting, and not revenue growth. Additionally, analysts feel that with a multiple of 36 times earnings CL is fairly valued considering its 13% growth rate. And with the threats of a weakening euro and intense competition from PG, CL's 13% earnings growth may be in trouble. G's announcement last week added fuel to CL's downward momentum, culminating with a failure of support at $55 during Tuesday's trading. The chart reveals that CL has support levels just below at $52.50 and again at $50. Watch for the selling to continue in the coming days, and target shoot for entry points as CL falls through its various support levels. BUY PUT JUN-60*CL-RL OI=160 at $6.25 SL=4.50 BUY PUT JUN-55 CL-RK OI=950 at $2.50 SL=1.25 Average Daily Volume = 2.23 mln /charts/charts.asp?symbol=CL ********************** PLAY OF THE DAY - CALL ********************** DNA - Genentech $104.38 +1.75 (+1.75 this week) 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. Most Recent Write-Up Just like you might do when cross with your kids for failing to pick up their room, we're standing around with our arms crossed and collective feet tapping the floor. Despite it gaining a shade under $2, we're slightly disappointed with DNA's performance today give the rally in the market and the biotech sector. Lack of volume (only 76% of the ADV) confirms the lack of interest that helps explain today's directionless trading. If it weren't for the last 15 minutes of trading, DNA would have suffered a loss. Supposing that tomorrow will be a follow through of today's rally, buying at the current level or even at $100 support might make a good entry. However, if today's rally was just a dead cat bounce and DNA drops under $97 with a failed rally tomorrow, consider passing up DNA. A return of money to the sector would be a welcome sign too. Comments Today was quite impressive as money flowed back into the tech sector and the NASDAQ. Many stocks posted double-digit percentage gains. DNA managed to hold throughout the day and spiked up in the final moments of trading for a modest gain. With so many stocks with large gains, a rotation into some that were left behind today may be next. DNA may be one of these. Look for intraday resistance at $105. A move through that level with volume would be a confirmation of strength. Entry can also be made on intraday dips. Watch the NASDAQ for direction tomorrow. BUY CALL JUN- 95 DNA-FS OI= 12 at $13.38 SL=10.75 BUY CALL JUN-100*DNA-FT OI=1176 at $ 9.88 SL= 7.50 BUY CALL JUN-105 DNA-FA OI= 53 at $ 7.38 SL= 5.50 BUY CALL JUL-105 DNA-GA OI= 791 at $11.75 SL= 9.25 BUY CALL SEP-110 DNA-IB OI= 427 at $15.38 SL=12.00 SELL PUT JUN- 95 DNA-RS OI= 246 at $ 3.38 SL= 5.50 (See risks of selling puts in play legend) Picked on May 28th at $102.63 P/E = N/A Change since picked +1.75 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 Next earnings 07-12 est= 0.29 versus= 0.28 Average Daily Volume = 1.2 mln /charts/charts.asp?symbol=DNA ************************ COMBOS/SPREADS/STRADDLES ************************ Memorial Holiday Produces Positive Results! Tuesday, May 30 The market rallied today on strength in technology issues and speculation in the telecom industry. The Dow surged 227 points to 10,527 and the Nasdaq soared 254 points to 3459. The S&P 500 Index rose 44 points to 1422. Volume on the NYSE was relatively light at 841 million shares, while trade on the Nasdaq was solid at 1.45 billion shares. Treasury markets gave back some ground with the 30-year bond slipping 16/32 to yield 6.09%. Sunday's new plays (positions/opening prices/strategy): J.P. Morgan JPM JUN145C/140C $0.50 credit bear-call Temple Inland TIN JUN60C/55C $0.62 credit bear-call BenchMark BHE JUN45C/50C $0.56 credit bear-call Aetna AET JAN65C/JUN65C $7.12 debit calendar MedImmune MEDI JAN190C/110P $2.25 credit strangle The majority of our new positions offered favorable entries during the session. Aetna was the only issue that failed to provide the target debit on a simultaneous order basis. Although the stock fell to a low of $62.38 in afternoon trading, the observed debit did not move below $7.12. We will monitor the position during the next few days for a better entry opportunity. Portfolio plays: The market soared today as bargain-hunting investors returned from the holiday weekend with an optimistic outlook. Technology stocks led the gains but industrial issues and broad market indicators were also positive. Today's surge in equities came despite a new economic report that suggested the Federal Reserve's interest rate hikes have failed to deter consumer sentiment. Confidence in the economy sharply in May, approaching an all-time high set earlier in the year. Traders chose to ignore the bullish data and look ahead to additional reports due out later this week. On Thursday, the National Association of Purchasing Management will issue data on activity in the industrial economy and the U.S. Labor Department will issue its May employment report the following day. Industry leaders came back in force today with high-profile stocks leading the way. Companies that have been under selling pressure in recent weeks rebounded in force. Ciena (CIEN) was our portfolio leader, up $22 to close near a recent high at $121 after announcing plans to manufacture optical components in a massive plant north of Boston. The plant will be Cisco's largest facility and is expected to be up and running by year-end. The move represents a strategic shift for Cisco, a company that has boasted about its ability to outsource its manufacturing needs, rather than build the technology required to offer leading-edge products. Cisco has become a Wall Street favorite based on a mastery of the networking domain. The company's routers, the electronic traffic boxes that connect one computer system to another, have become the heart of the Internet. But analysts have found fault in Cisco's future, notably a glaring weakness in optical-networking equipment at a time when networking companies are developing equipment to transition from electronics to optics. It remains to be seen whether Cisco can make the move before it's too late. The telecommunications sector received a lift today. News that France Telecom is buying Britain's Orange from Vodafone Air Touch for $37 billion in cash and stock boosted the group. The buyout helped Vodafone Air Touch (VOD) climb $4.25 to $46.25 and raised speculation that more global mergers will follow in the telecom industry. Our long-term position in VOD is near maximum profit (with the stock at $45) and we expect the issue to stabilize in that range. A number of telecom stocks made surprising moves. Andrew (ANDW) rallied $2.62 to end near $35 and a new all-time high while Covad Communications (COVD) recovered $2.75 to close at $26. The bullish diagonal spread in Andrew is trading near maximum profit and Covad is now exhibiting signs of a potential rally. Other small-cap technology issues that participated in the upside activity included Boston Scientific (BSX), Cabletron (CS), Excite@Home (ATHM), and Network Associates (NETA). Questions & comments on spreads/combos to Click here to email Ray Cummins ****************************************************************** - READERS REQUEST - Today we received two new requests; one for a spread play in Adac Labs (ADAC) and another for bullish positions on small-cap issues in the Financial Services Group. These plays are based on the current price or trading range of the underlying issue and the recent technical history or trend. News and market sentiment will have an effect on these issues. Review each play individually and make your own decision about the future outcome of the position. ****************************************************************** ADAC - ADAC Laboratories $18.25 *** A New Trading Range? *** ADAC Laboratories designs, develops, manufactures, and services medical imaging equipment and radiation therapy planning and healthcare information software systems used in hospitals and clinics worldwide. ADAC is the world market-share leader in nuclear medicine and radiation therapy planning systems, and a dominant technology provider for clinical workflow solutions, management information and knowledge systems to healthcare organizations in North America. Their Medical Systems business designs and develops nuclear medicine cameras and computers capable of performing single photon and tomography imaging. Its Radiation Therapy Products business unit designs and supports turnkey radiation therapy planning systems that assist hospital radiation oncology departments and cancer treatment centers in planning patient treatments. The Health Care Information unit develops, markets and supports integrated solutions consisting of computer equipment and software applications that offer healthcare providers the necessary tools to process and archive patient and clinical information. There have been a number of favorable announcements for ADAC; improving earnings, contract agreements, new products, and an upgrade from Warburg Dillon Reed. Fundamentally, the company is on track but our position is based on a bullish technical outlook. The stock has climbed steadily from last year's low, recently moving to a new, 52-week high and the current rally shows little signs of weakening. This spread provides a large return potential at relatively low cost. PLAY (aggressive - bullish/diagonal spread): BUY CALL AUG-17.50 OI=69 A=$3.38 SELL CALL JUL-20.00 OI=30 B=$1.81 INITIAL NET DEBIT TARGET=$1.38 INITIAL TARGET ROI=81% Chart = /charts/charts.asp?symbol=ADAC ****************************************************************** GSB - Golden State Bancorp $17.62 *** LEAPS/CC's *** Golden State Bancorp is a holding company whose only significant asset is its ownership of all of the common stock of Golden State Holdings, which owns all of the common stock of California Federal Bank, a Federal Savings Bank. Golden State provides diversified financial services to consumers and small businesses in California and Nevada. The company's principal business includes operating retail branches that provide deposit products such as demand, transaction and savings accounts, and investment products such as mutual funds, annuities and insurance. In addition, GSB engages in mortgage banking activities; originating and purchasing unit residential loans for sale to various investors in the secondary market or for retention in its own portfolio, and servicing loans for itself and others. To a lesser extent, the company originates and/or purchases commercial real estate, commercial and consumer loans for investment. The recent rally in Bank and Savings and Loans stocks has been driven in large part by money pulled from the technology industry. Investors are interested in companies that have earnings and book value and with speculation that the Fed may be nearing the end of this year's rate increases, there is hope for a recovery in the group. If and when the "inflation-fighting" hikes are over, the financial sector should rebound and this low risk position is one way to speculate on that outcome. PLAY (conservative - bullish/calendar spread): BUY CALL JAN01-20 GSB-AD OI=10 A=$2.06 SELL CALL JUL00-20 GSB-GD OI=1044 B=$0.38 MAXIMUM INITIAL NET DEBIT=$1.50 TARGET ROI=50% Chart = /charts/charts.asp?symbol=GSB ****************************************************************** KEY - KeyCorp $21.00 *** On The Rebound! *** KeyCorp is an integrated multi-line financial services company with consolidated total assets near $100 billion. KeyCorp's subsidiaries provide a wide range of investment management, retail and commercial banking, consumer finance and investment banking products and services to corporate, individual and institutional clients through four lines of business: Key Retail Banking, Key Specialty Finance, Key Corporate Capital and Key Capital Partners. These services are provided across much of the country through banking subsidiaries operating almost 1000 full-service branches. The technical outlook for this position is also favorable but there is a bit of a twist. Firstar (FSTR) could be preparing a takeover of a large Midwestern rival, a deal that would make the Milwaukee-based institution one of the nation's 10 largest banks and end the acquisitions drought that has plagued the financial sector for over a year. Firstar's acquisition targets include KeyCorp and if that speculation ends in the near-term future, this play may become less favorable. PLAY (aggressive - bullish/diagonal spread): BUY CALL SEP-20.00 KEY-ID OI=1593 A=$2.68 SELL CALL JUL-22.50 KEY-GX OI=12 B=$0.75 INITIAL NET DEBIT TARGET=$1.75-$1.81 INITIAL TARGET ROI=42% Chart = /charts/charts.asp?symbol=KEY ************************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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