The Option Investor Newsletter Wednesday 5-31-2000 Copyright 2000, All rights reserved. Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 5-31-2000 High Low Volume Advance Decline DOW 10522.30 - 4.80 10599.40 10490.80 955,780k 1,722 1,263 Nasdaq 3400.91 - 58.57 3501.51 3399.62 1,526,723k 1,952 2,092 S&P-100 761.55 + 0.13 769.49 757.92 Totals 3,674 3,355 S&P-500 1420.60 - 1.85 1434.49 1415.50 52.3% 47.7% $RUT 476.18 - 0.52 481.63 476.18 $TRAN 2709.99 - 31.71 2749.78 2709.99 VIX 26.57 + 0.04 27.17 26.15 Put/Call Ratio .49 ****************************************************************** Technicals, Not Talk, Tell The Story Talk, talk, talk, talk. That's all we hear all day long on CNBC. Is it a "Summer Rally" or "Summer Doldrums"? Or is it April showers brings May flowers? As the talking heads continue to do what they do best, we try to see how many stupid catch phrases they spew out. Well, now that May has come and gone, we can look back and say that the markets weren't too rosy for the month. In assessing the markets over that time, some cry bear and others just cry. The hype has driven many mad and the truth is that no one has really shed any light. So the only thing left to due is look at the technicals. They provide the true story behind all of the trading and allow you to draw your own conclusions. After yesterday's overly impressive rally in which the NASDAQ had its biggest percentage gain ever, I thought for sure that it would sell-off today. As much as I wanted to believe that most of the sellers had already been shaken out, the trend has shown us that where there are buyers, there are sellers. Not to take anything away from the rally, but as Jim mentioned in his wrap yesterday, the key question is can it hold? Investors and market watchers were eagerly watching today's trading for a sign of follow-through. Obviously, we would have liked to have seen increasing volume and a strong advance through 3500. Yet, after just touching that level an hour and a half into the session, the NASDAQ rolled over and traded in a narrow range, only to give up in the final hour. We had our chance today to breakout of this downtrending channel, but not enough money was convinced to make this the day. This trend is nothing to balk at. It is a controlling trend that has frightened quite a few people. Noting the regression channel that the NASDAQ has been trading in since last testing the 4000 level, you can see the resistance and support levels clearly. Today, the sellers lined up at 3500 and proved that it was formidable resistance. It looked as if the NASDAQ could have gone either way into the close, but it just didn't feel right. Another dip toward the middle of the range may be in the future, and we will once again be watching for volume to return with the buyers. Without it, breaking this trend may be more difficult than these summer optimists think. I know, I know. I said it. Volume. It was once again at the center of discussion today, yet with a little bit of a twist. For the past month, everyone on the Street was calling for a return of the extraordinary volume that we were seeing in the first quarter of the year. Finally, one of those talking heads popped up on the TV and said something that actually made sense. The analyst commented that we very well may not see those volume days of old as they were an aberration. In comparison to last year's volume at this time, we actually are having heavier days. The NASDAQ traded 1.5 bln shares and the NYSE exchanged 955 mln. Considering that we are headed into the summer when we perennially have lighter volume, days like these aren't too terrible. But, I still believe that heavier than normal days will be essential in breaking out of the downtrend. Initially, the semiconductor sector continued its strong gains on more analyst actions. After yesterday's upbeat outlook for SDLI, the semis appeared to have reasserted themselves as leaders in this teetering market. Today, Morgan Stanley Dean Witter had positive comments for LSI Logic(LSI). They reiterated their Strong Buy and $100 price target for the stock, citing "very strong" business conditions going forward. LSI managed to hang on to some of its gains, closing up $2.63 to $52.63. Yet, that good news for the sector wasn't enough and the Semiconductor Index(SOX.X) finished in the red by 1.2%. QCOM was the real disappoint today for the NASDAQ. Does anyone remember the $1000 price target issued late last year on QCOM? How can we forget. Well, QCOM fell even further away from that goal today as shares slid on fresh news out of China. According to analysts, there are now increasing doubts that a deal with China's second-largest telephone carrier will bear fruit in the near-term. China Unicom, the state-owned No. 2 telephone carrier, said on Tuesday it would not adopt Qualcomm's current-generation code division multiple access(CDMA) wireless telephone standards. Their approximately seven million subscribers use an alternative standard called GSM, the analysts said. Traders did not like this news one bit and shares of QCOM fell by $10 to $66.38. Another NASDAQ general in the news was the mighty MSFT. As the software giant was trying to dodge the government's stones, their attorneys were preparing to file their final brief Wednesday afternoon, thus clearing the way for a remedy ruling. Don't be surprised to hear that U.S. District Court Judge Thomas Penfield Jackson will likely order a breakup of the software titan. This is just another step in the ongoing saga which will probably end up as an appeal in the Supreme Court anyway. Nevertheless, it will be all over the newswires once again. MSFT closed at $62.94, down $0.44. I don't want to neglect the DJIA, which has also felt the pain of MSFT. The tale of the chart tells us that the DJIA flat-lined after touching just below its resistance at 10600. Its intraday high was 10599.43. Compared to the NASDAQ, the DJIA doesn't look as bad with a less dramatic downtrend. Jim's DJIA chart from yesterday illustrated how the Dow 30 has some headroom up to 10700, where the downtrend line currently lies. Looking at the 60-minute chart below, you can see that resistance is fairly light between 10600 and 10800. If it can move through the trendline resistance at 10700, 10800 isn't much of a problem. The 100-dma for the DJIA sits at 10735. If a company in the process of improving margins is your kind of investment, then DJIA component Hewlett-Packard may be worth a look. Today, CEO Carly Fiorina met with analysts, painting an upbeat picture of growing margins in the PC business and sustainable top line growth. She also said Amazon has become one of their top five customers. This is due to a new deal to supply 90% of the infrastructure for the online retailer. Hewlett also talked about expanding their reach in the storage sector and becoming a more formidable foe to EMC. So HWP went up, right? Ehh, wrong. HWP slid by $4.31 to $120.19, though mostly in sympathy to the NASDAQ decline. During the past two days, the DJIA has received help from the brokerage stocks and retail leaders. As Fed-watchers begin to see some slowing from the previous rate hikes, optimism that tightening monetary policy may be drawing to a close has increased. Adding to yesterday's gains, the following brokerage stocks had strong days: MWD (+4.94), MER (+4.00), AXP (+3.38), C (+1.88), and GS (+1.56). Other DJIA standouts include WMT (+4.25) and HD (+1.75). Evidence of a possible slowing in the economy came in the form of New Home Sales, which were 909,000 versus an expectation of 940K. That is a 6% decline. Good news for those interest rate sensitive stocks. Also rallying on this news was the bond market as the 10-year note rose $0.72 to yield 6.28%. Due out tomorrow is the Chicago Purchasing Managers' Report which is forecast at 55.5%- with 50% representing the breakeven line between an expanding and contracting manufacturing sector. The big numbers that everyone is anticipating are on Friday. Non-farm Payrolls are expected to be 375,000 with an Unemployment Rate of 3.9%. Those two economic reports will be essential in defining the next direction of our drifting markets. Keep your eyes on the markets' reaction to these economic numbers. They will make or break investor spirit this week. In a market that is looking for a reason to buy, any further indication that the Fed's previous rate hikes are slowing this freight train economy may spark the buying we need to break this downtrend. When trading, stay with issues or indices with which you are comfortable and don't risk what you're not willing to lose. Good luck and when in doubt, stay out. Matt Russ Research Analyst *********** IN THE NEWS *********** Motorola and Flextronics in Outsourcing Pact By Matt Paolucci The world's No. 2 wireless communications provider, Motorola Inc. (MOT), and Singapore-based contract manufacturer Flextronics International Ltd. (FLEX) on Wednesday announced a 5-year global strategic alliance worth an estimated $30 billion. Under the terms of the agreement, Flextronics will supply and manufacture certain parts and units included in Motorola's wireless phones, two-way pagers, wireless infrastructure products and other devices. The deal with Flextronics is the largest outsourcing agreement between a name-brand electronics company and a contract manufacturer. The companies expect FLEX to make more than $10 billion worth of parts and equipment for Motorola by 2005. The alliance is certainly a big deal for Flextronics. The Company's total revenue for fiscal 1999 was just $1.81 billion, ending March 31. The Company's market cap is roughly $6.65 billion. Motorola will also purchase a 5 percent stake in Flextronics for an initial payment of $100 million. The equity instrument is convertible over time into 11 million shares, worth roughly $550 million, based on yesterday's closing price. The deal is the latest in the recent trend of broad outsourcing pacts by electronics makers with smaller firms like Flextronics, Jabil Circuits (JBL) and Celestica (CLS). In March, Canadian telecommunications-equipment maker Nortel Networks Corp. (NT) agreed to sell four factories to Solectron and agreed to buy roughly $10 billion of products from Solectron over four years. The alliance should allow Motorola to better anticipate its customers needs and speed the time to market for its products globally. Motorola's Communications Enterprise (CE) unit will be the main beneficiary of the deal with Flextronics. Among the FLEX will provide to Motorola include finished assemblies, plastics, PCB's (printed circuit boards), backplanes, enclosures and engineering services. Motorola has been making strides in its efforts to reduce costs. MOT's manufacturing and other costs of sales stood at 59.9 percent last year (excluding one-time items), down from 61.8 percent in 1998, but up from 58.6 percent in 1997. With its increasing focus on low-margin PCS (personal communications) devices, production costs were expected to rise this year. Today's deal with FLEX should reverse MOT's increasing costs trend, and subsequently boost the communication giant's profitability. Motorola will turn over roughly 15 percent of the manufacturing duties in its Communications Enterprise (CE) unit to Flextronics. Gray Benoist, a Motorola vice president, said the Schaumburg, Ill., electronics concern will continue to do most of its manufacturing itself, but said Motorola will assign an increasing share of its growth to contract manufacturers. Internal manufacturing will continue to grow, he said, but "the outsourcing piece grows faster." Flextronics provides manufacturing services for original equipment manufacturers (OEMs) such as Cisco Systems (CSCO), Lucent Technologies (LU), and International Business Machines (IBM). Revenue for the contract electronics-manufacturing industry reached approximately $75 billion last year, and is expected to grow 25 percent this year, according to research firm Technology Forecasters Inc. "We are extremely pleased that this alliance calls for the use of virtually all of Flextronics' capabilities," said Michael Marks, Chairman and CEO of Flextronics International. "Both companies have agreed to develop our businesses together in a substantial way, from e-commerce connections to global supply of a wide range of services, while sharing some financial costs and gains." Motorola didn't give any guidance in its release as to how much it expects to save or shave off margins with the deal. Volume in the June 90, 95, 100, 105, and 110 calls on Motorola was very active, as well as the June 55, 60, and 65 calls in Flextronics. *************** ASK THE ANALYST *************** Get used to it! By Eric Utley At least that's what the market pundits are saying about the bleak volume. And although the NASDAQ finished Tuesday with its biggest percentage gain in history (7.9%), many market "experts" dismissed the rally due to the light volume it came with. While at the same time, other market "experts" explain that the heavy trading we saw earlier in the year was an anomaly, and that the current level of trading activity is back to normal. So who do we believe? I'll tell you this much, yesterday's rally came at an interesting time, at least to me. If you recall my column last Wednesday, I talked about how to spot a market bottom, and the need for a follow-through day after the initial rally. Well, the initial rally was last Wednesday and Tuesday we got our follow-through day. I'm not claiming victory here, or suggesting that I picked the bottom, I'm just trying to examine the facts in an objective way. And the facts are: NASDAQ volume increased 36% from the previous day, trading on the NYSE was also higher, and the three major indices (NYSE, S&P, NASDAQ) all surged three days after the initial rally last Wednesday. Now I know that Friday's trading was muted because of the holiday weekend which takes away from the huge increase in volume Tuesday. And, the NASDAQ has had two failed follow-through days so far this year (March 21st and April 25th). Nonetheless, Tuesday's rally marked a follow-through day. And it begs the question: Will the third time be a charm? A few things that we need to watch for in the coming days is first, for the market leaders to emerge, and charge higher. We need the generals such as CSCO, INTC, AMAT, and DELL to stare the bear in the face and run it over. Secondly, we need to get the Fed off our backs. And with the non-farm payrolls and the unemployment rate numbers coming out Friday, Mr. Greenspan & Co. might start easing off. So watch closely in the coming days to see if this rally is for real, or simply another bear trap. Who knows, the third time might be the charm. I owe our readers an apology once again. I just couldn't resist a three-day weekend of fly fishing over the holiday. Sorry for not writing my usual Sunday column, but I'm back for more so send your requests to asktheanalyst@OptionInvestor.com. Please put the stock symbol in the subject line of the e-mail. ---------------------------- Advanced Micro Devices - AMD AMD has beat the bears. Please review this stock. - Ron & Pam Stocks that have bucked the bear market...how about Advanced Micro Devices. - Joe & Diane The preceding comments are just two of the many requests I have received to review AMD. Due to the popular demand, I'm more than happy to review the stock. From a long-term perspective, the story at AMD is getting better and better. Last week, Gateway (AMD's largest customer for its Athlon processor) said it would double its use of AMD chips. Gateway has been having supply problems with Intel (AMD's chief competitor) since January of this year. After the Gateway announcement last week, a spokesman for AMD said the company expects other big-name PC makers to follow Gateway's lead. Furthermore, the spokesman said that AMD expects to ship more than 10 mln Athlon units in the second half of this year, up from 3 mln in the first half of 2000! Wall Street expects AMD to grow earnings by about 20% annually over the next five years, while the average in the semiconductor sector is about 31%. However, analysts have been known to underestimate AMD, being that the company has absolutely blown away earnings estimates in its last two quarters. If AMD continues to execute, and steals market share from Intel, the stock is worth considering for a long-term investment. Now for you traders out there, AMD might have some profit potential in the near-term. The company is slated to report earnings around July 10th. And with two blow-out quarters behind it, investors may soon warm-up to the stock in hopes of an earnings run. The influential semiconductor analyst, Dan Niles, said Tuesday that he expects AMD to beat its estimates. Niles went on to say that he has a very positive outlook on AMD and rated the stock an Outperform. From a technical perspective, AMD is positioned well for an earnings run. The stock has been consolidating its gains over the past month, and could be building a base for lift-off. But a word of caution, this is a fickle market, everything needs to be just right if the stock is going to sail into earnings. Any bad news out of the chip sector could send AMD off course. ---------------------------- Chubb - CB Chubb keeps on keeping on during the recent corrections - what do you think? - Jim Despite falling short of earnings estimates in late April, CB has steadily climbed higher. Executives from CB attributed part of the decline in earnings to severe weather damages that increased claims from homeowners. The company said the losses were unusually high, and told analysts that it was a one-time event, and to expect improved profitability going forward. And the analysts rejoiced at the bullish guidance, a day after the earnings shortfall AG Edwards upgraded CB to an Accumulate. Like you pointed out Jim, while the broader market has languished since early March, CB keeps on going. Wall Street has warmed up to the once beleaguered insurance sector, and analysts continue to remain bullish on stocks such as CB. They point to the positive change in the property casualty business, and that prices are finally rising after slumping for four years. And with the rising premiums, analysts are looking for earnings to follow. Insurance sector analyst John Manley recently said that although CB has moved higher recently, it is down versus the broader market for the last several years and still holds profit potential. Additionally, Prudential Securities recently reiterated its Accumulate rating on CB and set a price target of $82, citing that fundamentals are clearly improving within the sector. With a reasonable valuation, strong Wall Street support, and steady earnings growth, the future looks bright for CB. I don't want to rain on the parade of the analysts' praise for CB, but I do see some risk in the near-term. Meteorologists are forecasting one of the worst hurricane seasons on record. Now that may sound a little crazy, but weather caused CB to fall short of earnings once before. Now who knows if the weather people are correct, predicting the movement of the stock market is easier than forecasting long-term weather patterns. But if the meteorologists are correct, CB could face an increased amount of claims, which could result in reduced earnings. But until the next Hurricane Irene wreaks havoc, CB may see blue skies for a while. ---------------------------- Sanmina - SANM Please provide me with your analysis of the SANM chart. It is being added to the S&P 500 to replace WLA after the PFE/WLA merger. Thanks. - Kenny To be quite honest Kenny, I didn't know much about SANM before your request. So if you don't mind, I'm going to provide a brief background on the company. SANM is an electronics contract manufacturing services company. SANM provides services to original equipment manufacturers in the communications, industrial and medical instrumentation sectors of the electronics industry. SANM is expected to complete its proposed merger with Hadco later this month. The acquisition will add to SANM's boutique of electronic offerings and create a force to be reckoned with within the sector. SANM got a nice lift Wednesday after the company said it had received FTC approval for the merger. Investors are optimistic about the merger and the synergies it will create. Insofar as SANM being added to the S&P 500, I don't think that should be the sole reason for buying the stock since that event has already been factored into the stock price. Playing stocks that are added to the S&P 500 is a little tricky and carries some risk that is hard to minimize since index fund buyers are somewhat unpredictable. However, there are a few bullish items for SANM going forward. The company is steadily growing earnings and selling at a reasonable valuation. And with the floodgates recently opened to the Chinese marketplace, SANM stands to reap huge rewards. In fact, analysts expect SANM to announce expansion agreements into China and Europe within the next 60 days, which could lead to big profits down the road. It has been a bumpy ride on the chart for the last two months, but it appears that SANM is emerging from congestion. ---------------------------- DISCLAIMER: This column is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The Ask the Analyst picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable, but is not guaranteed as to its accuracy. ***** LEAPS ***** The New 2003 LEAPs By Mark Phillips There has been a fair amount of confusion lately about 2 issues related to LEAPS. The first is when and how 2001 LEAPS will be converted to regular Call options, and the second issue concerns the date when 2003 LEAPS will be issued. I've been confounded along with many of you, as the CBOE has changed its process this year due, to the volume of options that are now traded. If you are like me, you are scratching your head and asking what this 'conversion' is and what it means to a LEAP trader. Fortunately the answer is fairly simple. All 2001 LEAPS symbols begin with the letter 'Z' and all 2002 LEAPS begin with the letter 'W'. Since the CBOE only carries LEAPS for 2 years at a time, before the 2003 LEAPS (which will begin with the letter 'V') can be issued, the 2001 LEAPS must be converted to regular cycle Call options expiring in January of 2001. This conversion refers to the simple process of changing the symbol from a LEAP symbol to a regular Call option symbol. In the case of AOL, the 2001 $60 LEAP (ZKS-AL) changed to a January 2001 $60 Call (AOO-AL) on May 15th. There is no change in the way the option trades when it is converted, except that it is now referred to as a Call (with a different symbol), rather than a LEAP. There is no change to the 2002 LEAPS at this time except that they now become the front-year LEAPS. Next year at this time, the 2002 LEAPS will undergo a similar conversion process as the 2004 LEAPS become available. According to information on the CBOE site, LEAPS expiration (conversion to regular Call Options) occurs in 3 cycles. "All new January equity LEAPS are initially listed on the first business day (usually a Monday) following the expiration in either May, June, or July each year. The month that the LEAP is initially listed in is dependent upon the quarterly cycle of the option. Cycle 1 options January expiring LEAPS are listed after the expiration in May, cycle 2 after the expiration in June, and cycle 3 after the expiration in July." The first step in determining when the conversion will take place is to find out what cycle the LEAP trades in. All equity (stock) LEAPS trade with expiration in January, and I mistakenly assumed (from the information listed above) that this meant all equity LEAPS traded on cycle 1. On Tuesday, I spoke with Investor Services at the CBOE and got a clarification of the actual process. The CBOE provides a comprehensive list of all tradable LEAPS at http://www.cboe.com/tools/symbols/ table (labeled 'Cyc') indicates the cycle on which the LEAP in question trades. The actual conversion process has historically happened all at once. This means that on the first business day after May expiration (for cycle 1 options), the front-year LEAPS (2001 in this case) were converted to regular Call options and the next LEAPS series (2003 in this case) was issued. Due to the large volume of options that now trade on the CBOE, the process has been staggered. Front-year (cycle 1) LEAPS now undergo their conversion on the Monday preceding the May expiration (May 15th in this case), and the next LEAP series is issued on the second Monday (actually Tuesday this year) following the May expiration, which is May 30th this year. Are you confused yet? Let's see if I can clear it up a little. All of the LEAPS in our Current Play list trade on cycle 1 except for those on cycle 2 (HD, NSM, and VSTR) and those on cycle 3 (CMGI, CY, JDSU, NT, and XLNX). Cycle 1 2001 LEAPS converted to regular Call options on May 15th, and the 2003 LEAPS began trading yesterday, May 30th. For cycle 2, the 2001 LEAPS will change to regular Call options on June 12th, and the 2003 LEAPS will begin trading on June 26th. For cycle 3, the 2001 LEAPS will convert to regular Call options on July 17th and the 2003 LEAPS will begin trading on July 31st. Look for 2003 LEAPS to begin appearing in our play write-ups as they become available. Happy trading! ************** TRADERS CORNER ************** OEX Debit Spreads: Let's Play! By Austin Passamonte Well, time for rubber to meet the road! Shall we determine what to do next? It's now within two weeks of June option expiration. We'd like to pick some plays that have an even chance of becoming profitable by or before then. A spread-trading budget we're comfortable with losing entirely has been set. Let's assume that happens to be $1500. It's time to target our trades. The first thing we do is examine the marketplace top down. We study candlestick charts or whatever our favorites are for possible clues. Technical indicators are added and examined as well. Looking at weekly and daily charts is vital. These are trades that may take 10 sessions to complete, making 10 minute tickers useless. We study OIN tools and columns as well. What do analysts and editors portray? Charts with trend lines that others draw greatly interest me. Not that I'm lazy, but points of support and resistance are somewhat subjective and I prefer to see different views than mine. Market Posture and Market Sentiment by Pinnacle Advisors is very helpful indeed. Of great importance is the Pinnacle Index in their "Sentiment" column. This is a measure of open interest on nearby OEX option contracts that give an idea of trader's sentiment. Currently we see underlying support that's incredibly strong below the 710 index level. Overhead resistance is quite light all the way to 800. Is this a surprise? Certainly not...seems everyone expects a crash. They may very well get one but the OEX should have firm support near 700, and a surprise rally could ratchet up the charts with minimal resistance. Important factors to keep in mind. Next, what has been the OEX average range over the past few trading sessions? Since May expiration on 19th, it has moved from 764 to 724, or a 40-point range to date. I feel that if it moved 40 points in the last two weeks, it can surely move 40 more in either direction from its current level with two weeks to go. That would be down to 696 or up to 776. It's not an exact science but I haven't guessed wrong for the two-week range prior to expiration since last November. Of course now that I've said that you can be sure I'll miss it this month! Contrarian alert! Lastly, what are the fundamentals and news telling us? Does an upside or downside move look more likely? Remember that technical analysis indicates what the market wants to do but fundamental news can change all that on a dime. It's important to consider both. Based upon what I see, technical data on the charts seems negative. At the very least, I see little bullishness on the horizon. Market sentiment is negative in the media and on the Street with everyone expecting the worst. On the flip side, contrarian posture would be bullish. Heavy underlying OEX option support below 710 with almost no overhead resistance gives strength to their argument. What do you think? Considering there is little news or catalysts to drive the market higher and the charts show nothing to dispute that, let's enter some put spreads. Play the downside, the way the deck seems stacked. Remember, the trend is our friend. If we want spreads priced within our 3.50 premium level, they will be +/-20 points OTM either way. For example, I wrote this prior to market's open on 5/30. The OEX index currently rests at 736. If we want to play the downside of this market, the June 720/710 spread sells at 2.88. Our June 720 long option is 16 points OTM and 18.88 from par. However, call side spreads are pricey. A June 750/760 call spread sells for 4.50. Again, our long June 750 call option rests 14 points OTM, but the spread premium is much greater. We would have to go all the way to a June 760/770 call spread to meet our price of 3.00 ask. No thanks...27 points from par is too great for us today. We'll wait until further time decay before buying call spreads, and the market must seem poised for a rally besides. Our budget is $1500 and we're two weeks from expiration. I'm not ready to mortgage the farm just yet. While the downside is attractive I'm a bit scared of that light overhead resistance. The non-farm payroll report on Friday could spark a preemptive rally. Also, the markets have sold off with little relief thus far. If I had to commit 100% either way at gunpoint, I'd choose the downside and pray, but we're not under that kind of pressure today, now are we? Let's take 40% of that $1500 budget ($600) and buy two put spreads at our price limit or better. We see that the June 720/710 put spread closed Friday at 2.88. At the price we can buy two of them with our $600 capital. If futures are pointing down, let's enter a buy-limit order for two spreads at 2.75 or less. Futures indicating a rally? Enter a buy-limit at 3.00 or less. This leads us to the next topic of entering spreads. When it comes to OEX debit spreads, I cannot think of a single scenario where legging-in beats buying a spread to open. Selling the first put short is not within the realm of most trader's account clearance. Buying an option and waiting for it to become profitable before selling the next one could work to create a "free trade," but why not simply take the profit instead? Also, what happens if the long option doesn't become profitable and loses money? If you're smart it will be stopped for a small loss but isn't that exactly what we're trying to avoid? In any situation for OEX debit spreads, wait for your targeted premium price and buy the spread to open. I don't know about other brokers and have no intention of finding out, but I have a margin account with Mr. Stock as advertised within OIN. They allow the simplicity and convenience of entering spreads, straddles and covered writes online as a single transaction. This makes it incredibly easy to buy and sell spreads, let me tell you. It's also why I'm able to snapshot buy/sell prices without effort at any given time as well. I couldn't be much happier trading spreads with anyone else. As a matter of fact, ease of spread-trading entry and execution is the primary reason I chose Mr. Stock from the list in George Fontanills' book "Trading Options Online," which can be found in the OIN Bookstore. OK--we guessed a market direction, decided how much money to spend and selected a play that fits our plan. Now what? Well, we wait for execution! If the OEX rallies wildly and leaves our put spread in the dust, the remaining $900 from our original $1500 should be used on some call spreads for sure. If the market plummets and we enter the profit zone, take your winnings as seen fit. These two spreads have a combined maximum potential of $2000 profit, or 330 percent. That doesn't mean we should hold them until then. With two weeks to expiration, I like to set a sell-limit price of 100% profit on my spreads until the Monday before expiration. In other words, if we bought these spreads for 3, let's sell them for 6.25 to double our money after commissions. That way we'll have roughly $2100 to use for more spreads, or $600 to keep heading into the final week of current option's lifespan. Too much can happen in more than five trading sessions for me to pass up solid gains beforehand. If you're able to set stops on spreads with your broker, I would place a stop at the entry price of 3 once the position hits an ask price of 4.50 or greater. Trail it up. Mr. Stock usually doesn't allow stops on spreads, so this isn't a tactic I can use. I surely would if possible. Again, I'm willing to let the position die with 100% loss if I'm wrong, but I hate to have that happen once it has become profitable. Alas, my allotted space is pushed to the limit once again. Don't I always do that? Next week we'll cover the final pieces to the plan: straddling the OEX with put AND call spreads that give us very high odds of profiting overall. Contact Support *********** OPTIONS 101 *********** The Hardest Lessons By David Popper "The hardest lessons to learn are the ones that I already know," said author, Pat Morley. Pat has authored a book called "The Man in the Mirror" which basically discusses men at the midpoint of their lives. Pat notes that there comes a time when men realize that they have spent the first forty or fifty years of their lives in a mad search for success, only to discover, to their surprise, that wealth and success are not nearly as satisfying as they had envisioned. Pat also mentions that we already know, intellectually, the answers to some of life's great questions. It is just that we do not live in light of the answers. We really do not believe in our hearts the truth that we have in our heads. So too in the market, if a trader has years of experience, or has done any reading whatsoever, he/she understands much of the truth in trading. For those who cannot watch the computer on an every day basis and who have an intermediate time horizon, it makes the most sense to purchase leading stocks in leading industries when the general market is acting correctly. Typically, during a bear market, the market will stage several rally attempts. If the rally attempts are on light volume, the rallies typically fail. We have seen several of these recently. Often traders try to recoup some of their losses and guess incorrectly that a market reached a bottom, only to suffer further losses. (It may be okay to attempt to guess if you are using only a very small portion of capital). When a market finally reaches a bottom, it is not possible to know it exactly at the time that the bottom is formed. Typically, you have to wait for a follow-through day. Follow-through days for the intermediate trader are defined as a rise of more than one percent on the major averages (Nasdaq, Dow, etc.) on higher volume. Waiting for a follow-through day makes sense. During a bear market, institutional investors are either selling(high volume to the downside) or simply not buying(light volume). A follow-through day indicates that institutions are beginning to buy. Several follow-through days(averages moving up on higher volume) indicate that institutions are buying in earnest. A market will not go up for long without institutional support. Typically, in a new bull market, the money will rush to some fresh new names and also to the institutional "must owns" such as EMC, SUNW, CSCO, ORCL, JDSU, etc. During a bear market, it pays to do your homework so that ou are able to get into the best stocks once the general market averages begin to act right. One way to be prepared is to begin looking at the charts of your potential stocks. Which ones appear to have been rolling over and turning lower? Which ones look like they have found support and are ready to move higher? Which ones are breaking out to new highs? Can you see profitable resistance and support levels? Once you have identified a short list of stocks that you think have a good probability of moving higher, make a plan. At what price do you wish to purchase a stock? Where will you set your stops? How do you plan to trade the stock if it moves higher? How big will your position be? If the stock moves lower, where will you choose to sell the stock to minimize your loss? Having a predetermined plan that you stick to can make all of the difference. Again, intellectually, we all know this information. The question is, what is our reaction when in the trenches? Do we allow the emotions of hope, fear, and greed to cloud our judgment? Do we really believe in our plan? Do we stick with our plan? Do we really have to suffer another loss to learn the lessons that we already know? Contact Support ********************* PLAY OF THE DAY - PUT ********************* TRW - TRW Inc. $48.50 +0.44 (+0.50 this week) 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. Most Recent Write-Up 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. Comments Thank you Soloman Smith Barney for this entry point. SSB came out today and reiterated their stance on TRW. They issued a $60 price target and claimed TRW as a "hidden value". Ok, fair enough, but many "hidden values" are left to wallow in obscurity until investors return. With that said, we view today's move as an entry point. You can see from an intraday chart how quickly it rolled over and resumed its trend. Resistance is at today's high around $51.50, with support at $47.50. Check market sentiment tomorrow for signs of continuing market weakness and enter accordingly. BUY PUT JUN-55*TRW-RK OI=201 at $6.50 SL=5.00 BUY PUT JUN-50 TRW-RJ OI=136 at $3.00 SL=1.50 Average Daily Volume = 587 K /charts/charts.asp?symbol=TRW ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** Slowing economy renews optimism in the Market... Equities recovered this week as investors began to speculate that the Fed is nearing the end of its interest-rate increases. The nervousness over monetary policy will continue to affect stocks but the market overcame early weakness today after new economic data offered signs that the economy is no longer growing at the recent rapid pace. Analysts said the most significant report came from the Purchasing Management Association of Chicago. The group's index of area business activity moved lower this month and the data is considered an accurate forerunner of the national purchasing managers' report, due out on Thursday. The Commerce Department reported that new homes sales tumbled in April, with the index reflecting the largest decline since last September. In addition, the Index of Leading Economic Indicators, a group of forward-pointing economic statistics designed to forecast the direction of the economy, declined by 0.1% in April. Of course the question is whether these new reports, combined with last week's declines in existing home sales and consumer confidence, will be enough to convince the FOMC that their efforts to subdue inflation are succeeding. The answer may come on Friday, after the government's employment report for the month of May. That data will indicate if the continued low jobless rate is forcing companies to boost wages and benefits to retain workers. If the news is benign, it may be the last piece of evidence necessary to show the Fed that the expansion in the economy is slowing to an acceptable pace. Summary of Previous Picks: Covered Calls: (Margin would double the listed Monthly Return) Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return NEWP JUN 110 104.44 170.56 $5.56 5.4% Splits 6/1 NVDA JUN 90 85.50 114.13 $4.50 5.3% Splits 6/27 RFMD JUN 95 90.50 105.00 $4.50 5.0% ARBA JUN 55 51.63 52.13 $0.50 0.8% Time to exit? Naked Puts: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return ARBA JUN 50 48.00 52.13 $2.00 10.6% NEWP JUN 95 92.00 170.56 $3.00 9.5% Splits 6/1 NVDA JUN 80 77.87 114.13 $2.13 8.9% Splits 6/27 RFMD JUN 85 82.94 105.00 $2.06 8.3% SDLI JUN 140 136.75 226.56 $3.25 7.3% AFFX JUN 105 102.94 118.75 $2.06 6.1% Watch closely! YHOO JUN 115 112.75 113.06 $0.31 0.9% Own it or exit? Naked Calls: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return JNPR JUN 270 272.13 175.19 $2.13 6.1% Splits 6/16 New Candidates: This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. *************** BULLISH PLAYS - Covered Calls & Naked Puts *************** BRL - Barr Laboratories $53.88 *** Split Rally? *** Barr Laboratories is a pharmaceutical company engaged in the development, manufacture and marketing of generic and proprietary prescription pharmaceuticals. They currently market 70 generic and proprietary products, representing various dosage strengths and product forms of 32 drugs. Their product line is concentrated primarily on six core therapeutic categories: oncology, female healthcare, cardiovascular, anti-infectives, pain management and psychotherapeutics. Barr's first quarter total revenues increased approximately 11% over the first quarter of last year, primarily due to increased product sales. Today, Barr announced its board had approved a three-for-two stock split, the third time in four years the company has split its stock. It closed up $2 at $53.88, a new 52-week high, on five times normal volume. The recent breakout through a technical resistance near $45-$47 suggests this stock is poised for a higher trading range. In the short-term, the issue is slightly overbought and since we expect a brief consolidation, plan to "target shoot" the entry at a slightly lower cost basis. BRL - Barr Laboratories $53.88 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call JUN 50 BRL FJ 561 5.50 48.38 6.4% *** Sell Put JUN 50 BRL RJ 3 1.56 48.44 15.4% *** Chart = /charts/charts.asp?symbol=BRL *************** CHKP - Check Point Software $187.88 *** Which Way Now? *** Check Point Software Technologies is the worldwide leader in securing the Internet. Their 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 solutions from nearly 250 leading industry partners, including IBM, Compaq, Nokia, and many others. Check Point is a leader in the Internet Security Industry. In early May, the company announced that Software Business magazine has awarded Check Point the "Best Partnering Alliance" across the entire software industry for its Open Platform for Security (OPSEC) Alliance. It also received the Network Computing 2000 Well-Connected Award in the category of Best Firewall for its VPN-1/FireWall-1. Recognized for its intuitive interface, high performance, highest level of security, extensive logging and reporting and enterprise wide policy management capabilities, VPN-1/FireWall-1 also provides the security foundation for Check Point's VPN-1 product family. CHKP has moved into a relatively stable range near $165-$170 and our position offers an excellent reward potential at the risk of owning this industry-leading issue at a favorable cost basis. CHKP - Check Point Software $187.88 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put JUN 150 YKE RJ 120 1.13 148.87 5.5% *** Sell Put JUN 155 YKE RK 38 1.75 153.25 7.6% Sell Put JUN 160 YKE RL 94 2.38 157.62 9.1% Sell Put JUN 165 YKE RM 83 3.50 161.50 11.9% Chart = /charts/charts.asp?symbol=CHKP *************** LLTC - Linear Technology $59.06 *** Trading Range *** Linear Technology designs, manufactures, and markets a broad line of standard high performance linear integrated circuits. Applications for their products include telecommunications, cellular telephones, networking products and satellite systems, notebook and desktop computers, computer peripherals, industrial instrumentation, and factory automation. Their principal product categories include amplifiers; high-speed amplifiers; voltage regulators; voltage references; interface; and linear circuits. Linear Technology is one of the premier companies in the high profile chip industry and analysts are bullish on its long-term outlook. The recent trading range near $50 defines this issue as a relatively safe entry into the volatile semiconductor sector. Our position offers a low risk cost basis with a reasonable expectation of profit. LLTC - Linear Technology $59.06 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call JUN 55 LLQ FK 2339 5.50 53.56 5.1% *** Sell Put JUN 55 LLQ RK 157 1.50 53.50 13.5% *** Chart = /charts/charts.asp?symbol=LLTC *************** NVDA - Nvidia $114.13 *** Split Rally? *** NVIDIA designs, develops and markets 3D graphics processors, graphics processing units and related software that set the standard for performance, quality and features for every type of desktop personal computer user, from high-end machines to low cost PCs. Their 3D graphics processors are used in a wide variety of applications including games, the Internet and industrial design. The NVIDIA TNT2, TNT2 M64 and Vanta graphics processors deliver high performance 3D and 2D graphics at a reasonable cost, making them the graphics hardware of choice for a wide range of applications for consumer and commercial use. Nvidia continues to increase market share in the fast growing industry of computer graphics and their earnings are reflecting that growth. In early May, Nvidia announced record revenues and earnings for the first quarter of fiscal 2001. Nvidia's revenues increased 109% to $148.5 million, and earnings were $0.47 per share, well above the same quarter results last year of $0.18 per share. At the same time, Nvidia approved a 2-for-1 stock split for late June and was promptly upgraded by several analysts after the bullish news. The world's leading supplier of performance 3D graphics processors also recently announced that the GeForce family of GPUs dominated two of the industry's most recognized benchmark reviews, Mercury Research's quarterly report and PC World's Top 10 Graphics Boards for Gamers. NVDA - Nvidia $114.13 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call JUN 100 UVA FT 223 18.00 96.13 7.7% *** Sell Put JUN 85 UVA RQ 169 1.19 83.81 9.4% *** Sell Put JUN 90 UVA RR 40 1.88 88.12 14.5% Sell Put JUN 95 UVA RS 45 3.00 92.00 19.3% Sell Put JUN 100 UVA RT 80 4.25 95.75 22.6% Chart = /charts/charts.asp?symbol=NVDA *************** PLCM - Polycom $84.06 *** On The Rebound! *** Polycom develops, manufactures and markets a full range of high quality, media-rich communication tools and network solutions. The company's broadband communication solutions enable business users to immediately realize the benefits of video, voice and data over rapidly growing converged networks. Polycom's video conferencing and voice conferencing product provider, and has entered the DSL access market, particularly in the area of integrated voice appliances and broadband access devices. Polycom recently announced the introduction of ViaVideo, the first desktop video communications appliance that integrates a multimedia processor and camera for two-way video, voice and data transmission in a single device. The portable unit plugs into a desktop personal computer or laptop computer via the USB port and requires a simple software install to begin communications. ViaVideo's full-screen, full-motion images transmit at 30 frames per second, and an integrated microphone features breakthrough acoustic technology for crystal-clear voice quality with echo cancellation. Polycom's proven expertise in video conferencing, particularly over IP networks, make video communication a viable tool for businesses of all sizes and that's the wave of the future! PLCM - Polycom $84.06 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put JUN 65 QHD RM 6 0.88 64.12 9.5% *** Sell Put JUN 70 QHD RN 1 1.75 68.25 15.6% Chart = /charts/charts.asp?symbol=PLCM *************** RFMD - RF Micro Devices $105.00 *** Growing To Meet Demand! *** RF Micro Devices designs, develops, manufactures and markets proprietary radio frequency integrated circuits, or RFICs, for wireless communications applications such as cellular and personal communication services, cordless telephony, wireless local area networks, wireless local loop, industrial radios, wireless security and remote meter reading. They offer a broad array of products, including amplifiers, mixers, single chip transmitters, receivers and transceivers, which represent a substantial majority of the RFICs required in wireless subscriber equipment. As of March 1999, they marketed 158 products, with 50 more in various stages of development. RF Micro Devices is poised for growth and to meet the demand for their products, the company recently opened a new engineering design center. Located in Chandler, Arizona, the new facility is staffed with design engineers developing state-of-the-art power amplifiers, circuitry and other products used in cellular and PCS telephones. The additional design capacity is critical for the company to serve their growing customer base and it allows them to leverage premier design talent from around the country. The company also recently announced the establishment of its first local European sales and support center. The office houses a new support staff of sales representatives and design engineers to develop the communications market in that region. The company believes that the U.K. offers a tremendous growth potential in the consumer wireless arena, especially in the area of GSM handset design and development. The issue is technically sound and analysts are bullish on RFMD's fundamental outlook. CSFB, First Union, U.S. Bancorp Piper, and Paine Webber all have aggressive "buy" ratings on the company and it appears that investors agree with their outlook. RFMD - RF Micro Devices $105.00 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call JUN 90 RFZ FR 89 17.38 87.62 5.2% *** Sell Put JUN 80 RFZ RP 156 0.81 79.19 7.1% Sell Put JUN 85 RFZ RQ 156 1.75 83.25 14.0% *** Sell Put JUN 90 RFZ RR 117 2.50 87.50 16.1% Chart = /charts/charts.asp?symbol=RFMD *************** SDLI - SDL Inc. $226.56 *** New Contract! *** SDL, Inc. is a provider of solutions for optical communications and related markets. Their products power the transmission of data, voice, and Internet information over fiber optic networks to meet the needs of telecommunication, dense wavelength division multiplexing (DWDM), cable television and metro communications applications. Their solutions enable customers to meet the need for increasing bandwidth by expanding their fiber optic networks more quickly and efficiently than by using conventional electronic and optical technologies. Its revenue comes from two principal markets: fiber optic communications and industrial laser products. Tuesday's announcement that JDS Uniphase has extended a contract with SDLI lifted the company's share value significantly. JDS Uniphase and SDL said the contract extension through 2001 more than doubles the base quantities called for in the previous contract. Under the terms of the deal, SDL supplies pump lasers to JDS Uniphase for JDS Uniphase's fiber amplifiers, which are used in operation of high-speed telecommunications networks. SDLI also recently announced it would acquire Photonic Integration Research for $1.8 billion in cash and stock. SDL plans to use a silicon chip made by Photonic that allows more information to be channeled through a single fiber. The unique device would replace several components inside SDL's products and allow SDL to produce cheaper, more reliable and better-performing network systems. The move is viewed as a strategic acquisition in a rapidly growing market and very complimentary to their present business. Photonic will add to SDL's earnings immediately and based on their quarterly revenue of $20 million, it will account for over 20% of sales and profits in the combined company. Analysts agree with the company's positive future and investors have pushed the issue up $60 in just one week. Our cost basis allows a conservative position in an industry-leading company with a bullish technical outlook. SDLI - SDL Inc. $226.56 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put JUN 160 YAL RL 243 1.25 158.75 5.1% Sell Put JUN 165 YAL RM 69 1.56 163.44 6.3% *** Sell Put JUN 170 YAL RN 269 2.06 167.94 8.3% Sell Put JUN 175 YAL RO 160 3.00 172.00 11.8% Chart = /charts/charts.asp?symbol=SDLI *************** BEARISH PLAYS - None this week *************** ************************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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