The Option Investor Newsletter Sunday 6-4-2000 Copyright 2000, All rights reserved. 1 of 5 Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com Entire newsletter best viewed in COURIER 10 font for alignment ****************************************************************** MARKET STATS FOR LAST WEEK AND PRIOR WEEKS ****************************************************************** WE 6-2 WE 5-26 WE 5-19 WE 5-12 DOW 10794.76 +495.52 10299.24 -327.61 10626.85 + 17.41 + 31.51 Nasdaq 3813.38 +608.27 3205.11 -185.29 3390.40 -138.65 -287.75 S&P-100 792.69 + 56.61 736.08 - 16.87 752.95 - 8.72 - 8.12 S&P-500 1477.26 + 99.24 1378.02 - 28.93 1406.95 - 14.01 - 11.67 RUT 513.03 + 55.66 457.37 - 22.33 479.70 - 11.24 - 21.90 TRAN 2829.36 +141.81 2687.55 - 54.45 2742.00 -132.02 - 2.09 VIX 24.11 - 3.38 27.49 - 1.28 28.77 - 1.23 - 0.44 Put/Call .41 .65 .89 .53 ****************************************************************** Buyers beat back bears as battle turns, Fed under attack! Yeee Haaa! Rally mode! Market bulls pulled a rabbit out of their hat Friday morning with a weaker than expected jobs report. The market, already up strong for the week, roared out of the gate and never looked back. Volume increased again with the NASDAQ posting a robust 1.9 bln shares and the NYSE 1.1 bln shares. The anemic jobs report came in with only 231,000 new jobs and a spike in the unemployment rate back up to 4.1%. This was exactly what traders were looking for, an excuse to discount the Fed and justify a "no hike" outlook going forward. The markets celebrated with a strong finish to the short week's rally. The rally produced a strong finish to the best week ever for the NASDAQ with a +19% gain of over +600 points. The Dow turned in a similar performance on the back of HWP with a +495 point gain for the week. Every major sector participated except for Oil, Drugs and defensive stocks. Those sectors were hot when techs were out of favor last week but all gave back some of their gains on Friday. The average hourly wage increased only +.1%, a much lower rate than the expected +.4%. Many analysts were so surprised with the report that there was a large amount of unrest. Many pointed to research on previous May reports that seemed to indicate that May reports were typically flukes. Many have been first reported abnormally low only to be revised upward the following month. The challenge appears to be the rotation of the work force as summer schedules arrive and schools go into recess. This abnormal "estimate" of job growth is then corrected in July with the June report. Still investors did not care and took the number at face value. The next series of reports that could fuel the fire or derail the rally will start with the productivity report on Tuesday followed by Import/Export prices on Thursday. These are small change compared with the PPI on Friday and CPI the following Tuesday. The lightweights at the beginning of the week could give us a couple days more extension on the current rally before the obligatory pull back in front of the PPI. Over 70% of analysts now expect the Fed to take a pass on another rate increase at the June 28th meeting after the recent indications of a slowing economy. The debate of will they or won't they is heating up. There are analysts now that point to the rash of negative economic news as indications of an impending crash landing for the economy from an over aggressive Fed rate hike policy. The fear for the Fed is that they go one hike too far and send the economy into recession instead of steady growth. The only thing we need to worry about is stronger economic signals that would put the Fed back into the drivers seat. Once it appears the economy is truly moderating then the stock market should be be back on track. The Fed will slip back into the shadows and the next thing we hear from them is a rate cut. Now that would be a market mover. The rally this week has been spectacular. Almost every high profile stock has seen strong double digit gains. Too far, too fast? +608 points is a big move for any week but with the NASDAQ beaten down so far we may have room left. The NASDAQ closed at 3813 on Friday. Thirteen points above my arbitrary 3800 level for confirmation that the rally was for real. This is a good news, bad news story. Yes, it closed over 3800 but barely and on a huge spike. I would really liked to have seen it get there a little more slowly with a sustainable pace. The rocket ride from the 3042 low last week of almost +800 points has me concerned. Nothing goes up or down in a straight line. Markets and stocks cycle every 3-5 days. We had one minor down day last week but it was after a +200 point gain. At this point most traders are concerned that the good economic news will continue to power the market next week until it is over extended and subject to a sharp sell off. Clearly the pressure needs to be relieved and hopefully it will happen Monday or Tuesday. The tighter the rubber band is stretched the faster and farther the drop will be when it finally comes. A small pull back Mon/Tue would allow the pressure to ease and provide another entry point for those still on the sidelines. Microsoft Windows NT, Made in Canada? Don't laugh! This story was floated on Friday and the networks ate it up. In a story attributed to Michael Murphy by some, it was rumored that Microsoft might move from Seattle to Vancouver, just across the border, and escape from the current breakup battle. While Canadian authorities were glowing and promised to do everything but sacrifice virgins to get Microsoft to seriously consider a move, it will not happen. Microsoft would still have to answer to the Justice Dept as long as it did business in the U.S. What it could do is cost the U.S. billions of dollars in lost tax revenue by making such a move. While taxes are technically higher in Canada, it is a given based on the smiles of authorities that they would cut a very good deal to get Microsoft to move a little further north. Many think the story was simply another shot across the bow by Microsoft in the constant posturing of the current players. How strong would the government press its case if it stood to lose hundreds of billions of dollars over the next two decades in taxes and wages? Who knows but I would not put it past Bill Gates and company to float this trial balloon to make them think twice before the case closes. Kind of like calling a timeout just before a winning field goal attempt to give the kicker more time to be nervous. With no real market moving news or events other than above I won't ramble on trying to interpret things that are not there. This is black and white. The market is up because the economy is slowing. Economy slowing equals no more rate hikes. No more hikes equals stable markets. The only topic of discussion is what day next week will the euphoria wear off? The answer nobody knows but the sooner the better. The markets should move up from here into July earnings but we need to consolidate first. Consolidate is a nice word for down, choppy, sideways and backwards but in no particular order. Consolidate means most stocks will pull back, lose ground or drop in price. This means your call options will go down in price. (I am being specific because many readers accuse me of not telling them exactly what is going to happen.) If I say consolidate for several days they think it means that their stocks will just go up slower while stocks that others own go down. This is the selective reading disease. Here is the point. I think the NASDAQ has come too far too fast and needs to backup about -200 points before going forward again. We debated here at the office Friday afternoon about selling our calls and buying puts at the close. Some bought puts, some held their calls hoping for a bump on Monday morning to sell into. The consensus was unanimous that there would be a pull back next week. The division was when it would occur. We even considered dropping some of the big movers from the pick list to prevent people from buying at the top. Take SDLI, up +100 points from last week. Should you buy now? Heck no! Is it still a good stock? You bet! But it needs to drop 20-30 points to provide a new entry point. We left it in because we think it will continue up after any correction. Multiply this problem across all the picks. They are up huge for the week. Should you buy more on Monday? NO! We need to wait for a pull back. Should you sell on Monday morning? NO, not if you can set stops. If you have stop loss capability we suggest setting stops where you would like to get out assuming the stock dropped $10. If your call is $20 in the money then a $10 drop would take about $8 off the option price. Do you want to risk that amount? If you set your stops tight and the stock pulled back then you would be taken out at the top and you could get back in when the market/stock started back up again. By setting stops instead of outright selling you can get the benefit of any continued rally on Monday. Just keep moving your stop up until the stock/market pulls back. Just remember before you get back in that not all stocks may go back up after a pull back. The rising tide of euphoria this week floated almost all stocks as traders threw money at anything. After a market pull back traders will not be so eager to just throw money at any stock. Many stocks will plateau or start drifting downward again while others will continue to run. The farther the market goes the fewer stocks will participate. The first rally from last week was very broad. Each market up cycle from this point forward will involve fewer stocks as each stock slows when it nears where investors feel they are fairly valued. Last week, all stocks were beaten up equally. Next week many investors will rethink the ones that set new highs or were up $30-$40-$50 in only five days. In April many investors gave back their profits from January and February because they kept hoping the rally would come back. They just KNEW that their stock would turn around the next day. Instead they bled to death and suffered serious losses. Don't give back your gains from last week. Take a profit. Even if the market continues up selected stocks will start falling back. Get out when it starts. Don't bleed to death again. When you decide to get back in, be selective. Invest in stocks that have not had the huge gains. These are the ones other investors will be searching out. Plan your trades with the idea that July and August will be bad months. Typically, the summer months are the worst months of the year beginning the second week of July. One only needs to look at these charts from the last two years to see about a -15% drop each year. The VIX dropped to 24.16 on Friday and the put/call ratio to .41, still not in the danger zones but real close. Be very careful next week. Enjoy the rally but be ever vigilant for the next market change. With the piles of cash on the sidelines we expect any pull back to be brief. AMG Data said that fund inflows were actually positive last week with +$7.8 bln moving into equity funds. This stopped a multi week pattern of outflows from stock funds. With the NASDAQ soaring almost 800 points in one week you can bet the money inflows for this week will be huge. This influx of cash is sure to be put to work immediately. Mary Meeker called the bottom for Internet stocks last week and she was only one of dozens of analysts who think the worst is over. This positive press could create a real June rally. Now if only we can get a pull back Mon/Tue to give everyone still on the sidelines a comfort factor about not buying at the top! Because we have so many new readers I am going to update the series of ten educational articles from last fall and reprint them again. I am starting next Sunday with Entry Point, Entry Point, Entry Point. Look for it in the Options 101 section of the website. Trade smart, sell too soon. Jim Brown Editor Disclosure: My current long positions: NOK, VOD, MSFT, VIGN, YHOO *************** SEMINAR RESULTS *************** Houston The Regional Technical Analysis and Option Seminar was held in Houston this week and the results were outstanding. The following are some of the comments from attendees: "I would absolutely recommend this seminar to others! I only regret I did not know about your newsletter and seminars earlier!" Kathy R. "The seminar exceeded my expectations. Chris is truly an exceptional speaker. I enjoyed Steve's knowledge and Renee's presentation on Qcharts as well. I plan on returning to another in the fall!" B. Smith "It was great, they exceeded my expectations! I learned so much and fine tuned what I thought I knew already." Debbie Z. "The delivery of complicated information was clear and precise. This made it easy to understand and apply. The speakers were patient with questions the seminar encouraged more confidence in me." Maxine A. The next seminar is in Los Angeles and we still have several seats available. If you would like to learn more about technical analysis and powerful option strategies to maximize your investment returns then you owe it to yourself to attend. There is a 100% money back guarantee and the price is less than the cost of a bad trade. June 22-24 Los Angeles 3 day June 27-28 Washington DC 2 day July 3-6 London England 3 day July 13-15 New York 3 day July 21-23 Seattle 3 day July 27-29 Atlanta 3 day Aug 11-12 Pittsburgh 2 day Aug 17-19 Orlando 3 day Aug 28-29 Detroit 2 day Australia coming soon! Has the market been beating you up? Did you give back your gains from April? Would you like to understand all the technical indicators our writers use? Does the alphabet soup of technical terms like RSI, DMA, MACD, ROC, Stochastics, Bollinger bands, sound like Greek to you? You can learn from the experts how to interpret all these indicators, read charts, pick stocks and which option strategies to use on those stocks for less than the cost of one bad trade. Reserve your seat now for one of our regional seminars. Click here for more info: http://www.OptionInvestor.com/seminar/seminar.asp *************************** OptionInvestor/Optionetics Summer Seminar Series Back by popular demand! *************************** We are proud to announce the summer OptionInvestor & Optionetics seminar schedule featuring options guru, money manager and best selling author George Fontanills. The OptionInvestor/Optionetics Seminar was designed to help you gain the know-how necessary to compete in the marketplace. Over the course of the last 7 years George Fontanills has developed a series of high profit, low risk, low stress trading techniques that will empower you to systematically approach the markets. Learn how to intelligently combine options to maximize profits and minimize risk. Designed to fit the needs of novice and seasoned traders, this workshop and home study course will show you how to use managed risk options strategies in today's highly volatile markets. The seminar and home study course materials include: Delta neutral non directional trading 28 options strategies including Spread Trading, Straddles, Strangles, Condors (low risk trades), Butterflies George Fontanills' "5 Minutes a Day to find a trade" How trade volatile markets 911 Repair Strategies - what to do when a trade goes wrong trade action plan "How to get Started". With our unique tuition package you will receive: Before the event: Home Study Course with 8 digitally mastered video tapes and a 500 page manual "Trading for the 21st Century" plus your personal coach available to answer your questions. Live Seminar: 2 days of live trading with George Fontanills and Tom Gentile plus FREE partner attendance - two people for the price of one. You may bring a friend, spouse and business partner to the event for FREE. Both teachers available for our personal questions and you get a full Money Back Guarantee. Venues: George Fontanills, together with his chief options strategist Tom Gentile, will personally teach two days live trading delta neutral strategies in the following cities: June 18 & 19 Chicago June 25 & 26 New York July 10 & 11 Atlanta (Tom Gentile only teaching) July 16 & 17 Houston July 23 & 24 San Francisco Our Home Study Course is available for the same price if you can't make these dates and you may attend a later seminar when your schedule allows. Order today as seating is strictly limited to first come first served basis. You will receive a $5,000+ value package, but pay only the special price of $2,400 for your tuition. Please reserve your place now to not be disappointed when we sell out. Click here for more info: http://www.OptionInvestor.com/seminar ****************************Advertisement************************* Options Traders ! Mr. Stock's new online trading site has been designed for you. Trade spreads, straddles, covered calls, and stocks online. Get real-time market data throughout our site. Advanced options tools include volatility graphs, implied volatilities, and more. http://mojofarm.mediaplex.com/adserver/click_thru_request/565-58-1875-3 ****************************************************************** *********** JIM'S PLAYS *********** Okay, exhale! That is the way I felt on Friday as VIGN gained +7.44 to $37.50 and a $10 gain for the week. Fortunately there was good news for VIGN on Friday and that news brought me back to almost even. Whew! I had bought the June-25 calls for $4.25 and they closed on Friday at $11.38. I could get out now but with the market likely to move higher I am thinking about selling 60 of the June-$45 calls if they get to $3.00. This would give me a nice profit on the 3000 shares of stock and the 30 contracts of calls I own plus take me out of the stock at $45 if it closes above that price. I can't say I would be disappointed! (See last weeks articles for play history) ********** YHOO - Calls - Earnings Run Play Last week I said I was going to buy calls on Tuesday on YHOO for the normal earnings run into July. The gap up on Tuesday kept me from buying but the drop back down on Wednesday gave me another chance. I tagged the July-100 calls for $21.38. Historically you should close any long positions on YHOO about 7-10 days before earnings. With July 4th complicating the picture I would suggest closing about Wednesday the week before. *********** SDLI, PMCS, CIEN Naked puts. After being emotionally removed from the market with the DNA and VIGN problems the prior week, I was not emotionally ready to jump back in with both feet on Tuesday. The gap open kept me out since I thought there was a chance the NASDAQ would roll over the next day. When it did not roll far I nibbled with some naked puts on CIEN, SDLI, PMCS. All three gapped up on Friday and I closed the positions. I was still worried that the market might roll over at the close. It obviously did not happen but I got out with a nice profit on each anyway and I can't complain. Well, maybe just a little. I wish I had jumped in with both feet! It would have been a huge payday! *********** With the NASDAQ over extended in my mind I am going to wait for a pull back before initiating any new plays. As soon as I see it starting to roll over I am going to sell June calls against my VOD, NOK leaps. There is a telecom conference next week and I am hoping for another bump on these two stocks. Both are up strong and premiums are high. Hopefully I can sell the calls as they roll over for a rest. I am still naked on the MSFT leaps until we see what the impact of the court decision is next week. I don't want to sell calls against them until there is a trend after the decision. Good Luck Jim *********** IN THE NEWS *********** Cell Phones Power Up Chip Sales By Cindy Christ Worldwide sales of semiconductors reached an all-time high in April, fueled by a global explosion in demand for mobile phones and healthy sales of personal computers. The Semiconductor Industry Association reported Friday that semiconductors sales hit a record high of $15.2 billion in April, up 36 percent from $11.2 billion a year ago. "April sales show continued industry growth and are surpassing our expectations for 2000," said George Scalise, SIA president, in a statement. The SIA said demand for flash memory chips, which increased a whopping 193 percent, showed the strongest gains driven by a surge in wireless communications and consumer electronics. Semiconductor sales also are being boosted by the Internet and e-commerce revolution. According to the Boston Consulting Group, business-to-business e-commerce will increase from $92 billion in 1998 to nearly $2 trillion by 2003. Among regions, Asia Pacific and Japan represented the fastest growing market for semiconductors, supported by the telecommunications build-out in China. The industry expanded 46 percent in Asia Pacific and 41.1 percent in Japan over last year. The Americas market was up 25.7 percent, and Europe's sales grew 33.6 percent. Shares in semiconductor companies moved up across the board on the industry's upbeat outlook with the Philadelphia Semiconductor Index (SOX) registering an 8.5 percent gain at 1157.75. Shares in RF Micro Devices (RFMD), which makes chips used in cell phones, soared $15.88, or 14.3 percent, to $127.25. Texas Instruments (TXN), the world's No. 1 supplier of digital signal processor chips used to power mobile phones, catapulted $7.56, or 9.7 percent, to $85.69. PMC Sierra (PMCS), whose products are used in high-speed telecommunications and networking systems, surged $18.25, or 10.7 percent, to $188.25. Chip equipment makers also benefited. Teradyne (TER) jumped $9.06, or 10 percent, to $99.62. Applied Materials (AMAT) gained $5.81, or 6.6 percent, to $93.56. KLA Tencor (KLAC) climbed $6.62, or 12.1 percent, to $61.50. Shares in Micron Technology (MU), which designs and manufactures semiconductor memory products and personal computer PC systems, shot up $4.50, or 6.1 percent, to $78, a new 52-week high. Intel (INTC), the world's top chipmaker, moved up $4.50, or 3.5 percent, to $134.19. National Semiconductor (NSM) ran up $6.25, or 10.6 percent, to $65.38. Options volume on mobile handset makers also was jumping, with the June 55 calls in Nokia (NOK) and June 20 calls in rival Ericsson (ERICY) among the most actives at midday. The June 70 puts for DSP chip maker Texas Instruments and June 50 calls for National Semiconductor (NSM) made the most active list as well. *************** ASK THE ANALYST *************** What a week! By Eric Utley It's nice to see some green arrows on the quote sheet again. After last Tuesday's follow-through day the bull came charging back with a vengeance. Before I go on, I'd like to pay an accolade to Jim for suggesting in his market wrap column last weekend that the week following the Memorial Day holiday has historically been a very good time for Wall Street. What a call! Have you heard from Robert Schiller lately? You probably remember the briefly famous economist appearing on CNBC, CNNfn, and the Today Show warning the public of the perils that lie ahead for investors. As he finally got his bear market that he had been predicting since DOW 6000. The doomsayers such as Schiller and Barton Biggs disappeared from the spotlight last week amid the resurgence of the bull. Now don't get me wrong, I read Schiller's book, titled Irrational Exuberance. I found the book quite interesting and thought he made several valid arguments. But once again, the market has proved more omniscient than any one person's opinion. Last Wednesday I suggested that two things needed to take place for a new bull market to emerge and have staying power. First, the Fed had to back-off! With the tame jobs report Friday, hopefully Mr. Greenspan is content with the slowing economy and eases off his interest-rate rising binge. And second, I said we needed to see leading stocks emerge from their basing prices and trace new highs. We need look no further than the OIN call list to see two of the many tech stocks moving higher. About a week ago, SDLI told analysts that the company expected to beat earnings estimates for its second quarter by 24%. The company went on to forecast a sequential rise in revenues by about 140% and revised its operating profits upward as well. The stock is up 55% over the past five trading days. MU is another play on the OIN call list that broke away from congestion last week on the heels of upbeat comments from analysts and a positive outlook for the DRAM market. Going forward, those are the types of events to watch for. Namely, leading stocks breaking out from congestion on healthy volume, because of fundamental changes in their respective businesses. Now we're not completely out of the woods yet, we've had two strong back-to-back rallies without a hint of profit taking. We'll see if this rally is for real next week when the PPI is reported. But with the NASDAQ moving back above its 200-dma last Friday, on a 21% increase in volume no less, things are looking much brighter this summer. I chose a couple of interesting stocks to review this weekend. One winner and two...well you'll see below. If you have a stock that you would like me to review please send your request to Contact Support. Please put the symbol in the subject line of the e-mail. ---------------------------- Power-One - PWER I hope that you are doing good with TRMB. It has been up nearly 6 - 7 points since you covered in OIN. I've another one for you and its chart too looks appealing. Please review PWER. Thanks a lot. - Vishal Vishal, unfortunately I didn't buy TRMB, I wish I had. If I had a "Stockpicker of the Year" award to give out to one of our OIN readers it would probably go to you Vishal. You've managed to deliver yet another bear market defying tech stock with PWER. Like the name suggests, Power-One designs and manufactures power supplies designed to meet the needs of subsystems and components within electronic equipment. The company has an all-star list of customers. PWER's customers include: CSCO, NT, TER, LU, NN, ALA, HWP, and ERICY. As business booms in their respective sectors PWER stands to benefit. In keeping with our discussion of picking winning stocks, I'll examine why PWER was able to beat the bear and move onto new highs. Our current market wants fundamentals in a stock and that means earnings, earnings, earnings! PWER has beat estimates in its last four quarters and that trend might continue considering the numerous upward revisions by analysts over the past month. The company is expected to grow its bottom-line by an amazing 42% annually over the next five years. What's more, the stock is still pretty cheap. Don't let the trailing PE of 144, which accounts the last four quarters of profits, fool you. Instead, take a look at PWER's price-to-earnings-growth (PEG). The PEG takes the stock's current market price divided by the company's future earnings growth rate. Essentially, it's a measurement of how much you have to pay for PWER's earnings growth. A ratio below 1.0 is considered cheap; PWER's 2000 PEG is 0.48! Get this, the S&P 500's PEG is 1.89. A quick glance at the chart reveals why PWER has the highest relative strength rating in its sector. The stock has used its 20-dma for support during its massive run. I'd like to point out two items on the chart. First, notice the hammer formed back in mid-April, that was a bullish indicator since the bulls were stronger than the bears on that particular day. Secondly, volume has steadily increased over the past two months while the stock has rallied. Unfortunately, options are not yet available on PWER. ---------------------------- Biogen - BGEN BGEN seems to be in a trading range between 50-60. I have a feeling this will eventually breakout to the high side. BGEN has the lowest PE in the biotech sector. The whole sector looks to be trying to break north. My question is whether or not to sell covered calls June 55 or 60 when BGEN approaches resistance at 58 or to just sit tight and wait for the trend to develop? Thanks. - Bill While I can't be specific on how to play the stock Bill, I'd be more than happy to review it for you. The AMEX Biotech Index ($BTK) is up around 33% for the year, yet BGEN is not too far from its 52-week low of $48.50. Behind BGEN's demise was the sell-off in the biotech sector, but more specifically, the company was punished for missing first quarter earnings in early April. BGEN reported a 77 cent per share profit, but excluding a one-time gain, the company fell two cents short of analysts' 43 cent estimate. BGEN blamed the earnings shortfall on seasonal weakness in sales of Avonex, its chief product. Avonex, which is used by patients to fight multiple sclerosis, has a 60% market share, and analysts expect sales to grow by 30% this year. Although analysts expected weakness in sales for the first quarter, investors were scared away from the stock after the earnings shortfall. Since then, BGEN has been stuck in the range that you mentioned Bill. Fundamentally, BGEN is pretty much the same company it was when it was trading near its high around $120, it's just a lot cheaper now. And it appears that Wall Street is warming up to the stock once again. Last week, Robertson Stephens raised its rating to a Buy from Accumulate and increased its 2001 EPS estimates to $1.97 from $1.94. Analysts expect Avonex sales to meet second quarter estimates. While BGEN's pipeline is considered thin, analysts pointed out that the company is on track for FDA approval for Amevive and Angiomax. The two new drugs are expected to significantly add to BGEN's royalty payments. The biotech sector holds great promise for main street and Wall Street and BGEN is considered a bellwether within the group. If the company gets approval for its new drugs and continues to develop its pipeline the stock price could expand. Especially considering its relatively low multiple like you pointed out Bill. The chart for BGEN is not a pretty picture. But the technicals are improving. The stock gapped higher Friday morning and attempted to break-away from congestion. The thing that concerns me is the lack of interest in the stock. I normally like to see a breakout confirmed with at least 1.5 times the stock's ADV. There's not much resistance immediately above, so the stock could move fast if the buyers return in a convincing way. The improved outlook provided by Robertson Stephens last week might be the catalyst to lift BGEN from congestion. However, if the breakout fails the stock will probably fall back into its trading range. ---------------------------- Qualcomm - QCOM Tell me, oh wise one, what might the future hold. Seriously, this stock has to be a bargain @ < $70. What are your thoughts? - Jon Believe me Jon, I've a long ways to go before becoming a "wise one". I reviewed QCOM a while ago, but I thought it would be pertinent to take a look at the company again in light of the recent developments. What does the future hold for QCOM? To be quite honest, it doesn't look very good for the endeared QCOM. The biggest factor weighing on shares of QCOM right now is the ongoing debate over whether QCOM's code division multiple access (CDMA) technology will be used in China. With the free trade agreement passed allowing China into the WTO investors cheered the idea of telecom equipment makers entering into one of the world's biggest markets. But then came the announcement last Wednesday that China Unicom (China's #2 phone carrier) would not adopt QCOM's CDMA wireless standards. Instead, China Unicom will continue to use the competing Global Standard for Mobile Communications (GSM). The GSM system currently accounts for 55% of market share throughout the world. Analysts argue that it makes little sense for China Unicom to build networks using the current CDMA technology. Instead, they suggest that Unicom should wait for the next generation of CDMA technology to be developed. The story became more interesting last Thursday when the China Daily newspaper cited a spokesman at China Unicom as saying the plans to build a CDMA network were "still on track". The statement was contradictory from what company officials had said earlier in the week. Wall Street is mixed over the future of QCOM. AG Edwards upgraded the stock last week to a Buy rating from Accumulate. But, Chase H&Q telecom analyst, Edwin Snyder said he expects QCOM to extend its decline into the "next quarter or two". Snyder went on to say that besides the uncertainty about the China situation, QCOM is hurting in domestic areas, including concerns over retired employees pension plans. The stock has shed 55% in the last two months and is trading at levels not seen since last November. If the rumors of China Unicom adopting QCOM's CDMA technology come to fruition, the stock could easily regain its lost ground. But rumors are usually just that, and carry a great deal of risk. ---------------------------- 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. ************** MARKET POSTURE ************** As of Market Close - Friday, June 2, 2000 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,200 11,400 10,794 Neutral 5.05 SPX S&P 500 1,350 1,500 1,477 Neutral 5.30 OEX S&P 100 725 800 793 Neutral 5.30 RUT Russell 2000 450 550 513 Neutral 5.05 NDX NASD 100 3,000 4,000 3,756 Neutral 5.30 MSH High Tech 800 1,000 1,012 BULLISH 6.02 ** XCI Hardware 1,250 1,600 1,484 Neutral 5.30 CWX Software 1,050 1,300 1,312 BULLISH 6.02 ** SOX Semiconductor 850 1,200 1,158 Neutral 5.30 NWX Networking 900 1,100 1,134 BULLISH 6.02 ** INX Internet 500 800 633 Neutral 5.30 BIX Banking 530 600 643 BULLISH 6.01 XBD Brokerage 400 500 495 Neutral 5.05 IUX Insurance 540 620 654 BULLISH 5.16 RLX Retail 850 1,000 915 Neutral 6.02 ** DRG Drug 355 400 376 Neutral 4.28 HCX Healthcare 710 800 764 Neutral 4.28 XAL Airline 140 155 165 BULLISH 5.25 OIX Oil & Gas 265 300 303 BULLISH 5.11 Posture Alert Tame inflation numbers sent investors into a buying spree this past week, as the Dow gained +4.9% while the NASDAQ added a stunning +19%. Sectors leading the way Friday include Internet (+11.21%), Brokerage (+8.73%), and Semiconductors (+8.48%). With this most recent action, we have upped Retail to Neutral from Bearish. We have also upped Software, Networking, and the Morgan Stanley High Tech to Bullish from Neutral. **************** MARKET SENTIMENT **************** Cautiously Optimistic! Buyers came out in force this past week, as tame inflation numbers sent the broad market indexes up with a fervor. The NASDAQ, which posted its best week ever (both percentage and point wise), shot up 608 points for a +19% gain! The DOW also had a good week, as it posted a +4.8% gain. Volume was impressive as well, as the NASDAQ traded close to 2 billion Friday, while the NYSE managed 1.1 billion shares. The speed at which market sentiment now shifts is truly amazing. Just take a look at the bond market. Last week, everyone was on Fed Watch, speculating how high rates were going. If you listened to the talking heads on CNBC, you would have believed that rates were going higher for the rest of the year. However, after this past weeks economic indicators, the consensus now believes that after this next rate hike, no more will follow. All one had to do was watch the Banking Index to get some clues. In our Market Posture section, we upgraded the BIX early last week. As you can see, it has performed quite well since then. But more importantly, is the fact that this index has been climbing higher even in the face of adversity (Greenspan) and before Friday's employment data. For those trend followers, what the Banking Index was indicating based on its actions, was that higher rates were soon coming to an end. It works both ways though, as this sector got brutalized before the onslaught of numerous rate hikes. But now, it is indicating that the rate hikes will soon be done with, and that, is what the street is rejoicing now. Back on February 27, Pinnacle highlighted several sectors that were primed for a reversal. The 3 were Banking, Airlines, and Insurance. The sentiment on those sectors couldn't have been worse. But reversals are powerful, and the returns on those three indexes since we highlighted them are +36%, +41%, and +41%. Pretty good returns given this market environment. http://members.OptionInvestor.com/archive/marketsentiment/022700_1.asp Finally, with this past week's big performance and change in sentiment on interest rates: Has a lot of the upside been taken out of this market in the near term? If the next couple of economic indicators show a slowing economy, will this propel the NASDAQ up another 19% and the 30-yr Treasury down to 5.5%? Will the bulls be willing to buy some stocks that are now up 25% in one week? These are the questions that are on our minds. Pinnacle has highlighted the NASDAQ short interest, and stated numerous times that if we get any good news we will witness a major run as the shorts get squeezed. This has now happened. Now to answer the questions above, we do think that a lot of the upside has been taken out in the short term. We may see some continued pressure to the upside as more shorts throw in the towel, but based upon the Pinnacle Index for the OEX, we may be nearing the top of the trading range in the near term. We are a few weeks away before the Fed meeting as well as the start of the negative prerelease season. So given the swift and dramatic move in this market, we are cautiously optimistic! Have a good week! BULLISH Signs: Interest Rates (5.935): With the long bond breaking below the crucial 6% benchmark, fears of higher rates may finally be subsiding. 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. With the tame inflation numbers posted this past week, it was quite evident that a major short squeeze was occurring. Volatility Index (24.11): 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. It appears that the VIX is heading back to the trading range of old, after spending numerous weeks in uncharted waters. Mixed Signs: Slowing Economy: If the economy is truly slowing down, we will start feeling the effects once corporate earnings report over the next couple of quarters. BEARISH Signs: 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. ***************************************************************** 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 (6/2) (6/6) (6/8) ***************************************************************** Overhead Resistance (805-825) 24.20 Overhead Resistance (775-800) 5.74 OEX Close 792.69 Underlying Support (745-770) 1.28 Underlying Support (715-740) 3.47 What the Pinnacle Index is telling us: Overhead resistance is strong, indicating that the OEX will have a tough time clearing this level. Put/Call Ratio ***************************************************************** Friday Tues Thurs Strike/Contracts (6/2) (6/6) (6/8) ***************************************************************** CBOE Total P/C Ratio .41 CBOE Equity P/C Ratio .32 OEX P/C Ratio 1.18 Peak Open Interest (OEX) ***************************************************************** Friday Tues Thurs Strike/Contracts (6/2) (6/6) (6/8) ***************************************************************** Puts 740 / 8,382 Calls 800 / 6,553 Put/Call Ratio 1.29 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 June 2, 2000 24.11 ************* COMING EVENTS ************* For the week of June 5, 2000 Monday NAPM Services May Forecast: 63.0 Previous: 65.0 Tuesday Productivity - Rev. Q1 Forecast: 2.4% Previous: 2.4% Wholesale Inventories Apr Forecast: 0.4% Previous: 0.7% Wednesday Consumer Credit Apr Forecast: $7.5B Previous: $9.1B Thursday Initial Claims 06/03 Forecast: 280 K Previous: 286 K Export Prices ex-ag. May Forecast: N/A Previous: -0.2% Import Prices ex-oil May Forecast: N/A Previous: 0.1% Friday PPI May Forecast: 0.2% Previous: -0.3% Core PPI May Forecast: 0.1% Previous: 0.1% Week of June 12th 06/13 Retail Sales 06/13 Retail Sales ex-auto 06/14 CPI 06/14 Core CPI 06/14 Business Inventories 06/14 Fed Beige Book 06/15 Initial Claims 06/15 Industrial Production 06/15 Capacity Utilization 06/15 Philadelphia Fed 06/16 Housing Starts 06/16 Building Permits 06/16 Michigan Sentiment ************************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 Sunday 6-4-2000 Sunday 2 of 5 ************** TRADERS CORNER ************** Assessing Volume In A Volatile Market By Mary Redmond Once again this week, we witnessed the pattern of increasing volume on the up days and decreasing volume on the down days. The issue of whether or not we need to see the same type of volume we saw during the rallies of previous months has been raised. Some analysts have suggested that volume of 2 bln shares or more on the NASDAQ might have been an aberration. Those same analysts believe volume of approximately 1.5 bln shares may be enough to sustain a strong rally. A comparison of the NASDAQ volume figures over the past five months illustrates the trend. In the month of January, volume on the NASDAQ was reported at 34.8 bln shares. February's volume was slightly higher at 35.2 bln shares. Volume in March was the heaviest with 43.7 bln shares. In April, volume came in at 35.6 bln shares. May trading ended Wednesday with monthly volume of 30.7 bln shares. Using an average of 20 trading days per month, this works out to an approximate average daily volume of 1.74 bln shares in January and February, 2.1 bln shares in March, 1.78 bln shares in April, and 1.5 bln in May. Perhaps more important than the daily volume is the comparison of up days to down days. If the pattern shows that the up days in the market have stronger volume than the down days, it can indicate that buyers are increasing and sellers are decreasing. Another factor is worth considering. The Investment Company Institute reported that approximately $33.7 bln in net new cash went into equity mutual funds in April. Approximately 14.5% of the cash deposited in April was kept in money market funds. This net new cash was less than the inflows reported in January and February. However, the NASD has reported that block trade activity on the NASDAQ between January 2000 and April 2000 was approximately 21% of the total volume, about 375 mln shares on a good day. Last January, 346,627 block trades were reported on the NASDAQ, an average of 17,331 per day. In February, 367,798 block trades were reported, around 18,389 block trades per day. March had 435,078 block trades, or approximately 21,700 per day. In April, 377,448 block trades took place, about 18,875 per day. If you compare the number of daily block trades during these months to the past two weeks, you'll see that they are very similar. As I see this, the remaining NASDAQ volume probably was retail customers who lost money and got out. It appears that institutions were strong buyers this week. On Tuesday, May 30th, there were 11,093 block trades reported on the NASDAQ. Wednesday, May 31st had 16,578 block trades and 19,351 on Thursday, June 1st. AMG Data Services reported that $7.5 bln went into the equity funds for the week ending May 31st, with over 50% of the money going into growth funds. This number very well may have been higher if we didn't have a holiday on Monday. Retail money market funds experienced an outflow of approximately $3.7 bln, yet there is still over $1.67 trln in money market funds. For the month of May, the total cash flow to equity funds was in the range of $9.5 bln, approximately one third of the levels seen in the previous months this year. If you are like most people, then you put a significant percentage of your retirement savings in the stock market. We have found over time that this is the best way to earn compound interest. However, the volatility in today's market is unprecedented, and wild price swings in certain stocks are almost inevitable. Some people may not feel completely comfortable putting all their money in the market these days, especially after experiencing dramatic losses in the last couple of months. In certain cases, options may be able to provide a degree of protection from losses on some stocks. If you purchase a put option when you purchase a stock, then you have protection against loss for a period of time. The problem is that most volatile stocks usually have expensive put options, which will increase the cost of your stock purchase. One possible solution is to look for a stock which pays a high dividend and use the dividend to pay for the put. The risk in this case could be if the company is forced to cut the dividend for any reason. Usually stocks will not pay enough of a dividend to cover the full price of a long term put, but sometimes they can cover a significant percentage. For example, a couple of weeks ago I bought Greenpoint Bank which pays a dividend of $1 per share. At the time, the Jan 20 put was trading at $1, so the put would be paid for if I held the stock long enough to collect the dividend. Another possible solution might be to look at the stocks you are interested in and see if they have convertible preferred stock which pays a high dividend. Or convertible bonds which pay interest. You can then use the dividend or interest to help cover the price of the put. Standard and Poors has a book of convertible preferred stocks, and you would be surprised how many high tech stocks issue them. Sometimes you can use a dividend in combination with a deep out-of-the-money call to cover the cost of a put. Contact Support ***** Put Calendar Spreads Revisited By Lynda Schuepp First of all I need to apologize for the error in calculating the return on the Put Calendar Spread that I wrote about last Sunday. It was really encouraging to get all of your emails pointing it out to me. Really, I'm serious. First, that means that you truly are reading my articles and second, you are not accepting what the writers say at face value and that is precisely what smart traders would do. There are many writers and many strategies, but when it all comes down to it, you have to make your own decisions. Our goal is to open your minds. With that said I am going to correct AND elaborate the strategy presented last Sunday. By the way, it still is a really neat play, as you will soon find out. I suggest you re-read my article first but to recap, I presented a strategy that I learned about at our Options Club meeting. I have not done the strategy myself and would never do a new strategy until I had paper traded it first, which I always recommend for readers to do. The strategy consisted of selling a nearer-term put and buying a longer term put with the same strike price, very deep in the money, choosing a strike at a previous resistance level. The example I gave was JDSU using the Jan'01 and Jan'02 puts with a strike price of 120. JDSU was trading at 80-1/2. In this example you would buy the Jan 02 puts and sell the Jan 01 puts. The Jan'02 put was priced at 57-5/8 and the Jan'01 put was priced at 48-1/2. The net cost of putting on this spread would be 9-1/8. The cost of the spread is your maximum risk. Many of you questioned why would the maximum risk be the cost of the spread. In a worst-case scenario, you wake up tomorrow and JDSU is trading at 1000 (remember that analyst's projection). The value of a 120 put might have some time value but in reality a 120 put would be worthless if JDSU were trading at 1000. You couldn't sell or unwind your spread so you would lose your entire investment of 9-1/8. Ideally, you want the stock to run up to the strike by the near term expiration, in this case Jan'01. Most people don't like to trade spreads of long-term options because they think they have to wait around for 6 months but that is not the case. While waiting may prove to provide the maximum dollar return I, for one, am happy to get 50% of the projected return in 1 or 2 months and move on. Speaking of maximum return, this is where I blew it. So let's make our projections and refigure this. If JDSU gets to 120 by Jan'01 the value of the Jan'01 120 put would expire worthless. The value of our long leg, the Jan'02 120 put would now be an "at the money" put with 1 year left to expiration. We would sell that leg but what would the value be? We can conservatively guesstimate by looking at the current Jan'01 at-the-money put and see what it is currently trading at. The current at-the-money put at the time I wrote last Sunday's article was the Jan'01 80 put, which was selling at 20-1/8. So the net return would be 20-1/8 less 9-1/8 (cost of the spread) or 11 points profit, a mere 120% return. Now lets review this trade, one week later for all you impatient traders who thought they'd have to wait 7 months to make a profit. Lets look at the prices of the legs as of Friday's close this week and see what the spread is currently worth if we wanted to close it out. The Jan'01 put was priced at 33-3/8 and the Jan'02 was priced at 46-3/8. The value of the spread is now 13. Remember we bought the spread for 9-1/8, so we are already up almost 4, which is about a 40% return in one week! How do you like this strategy now? Now if you really want to tweak this strategy, here's another twist. This is for all you graduate students of options. Suppose the spread does not move like JDSU did this past week, but just plugs along merrily up to or near the 120 strike by expiration in Jan'01. If you believe the stock has further to go to the upside, you could then write a nearer term put very deep in the money. So in the case of JDSU, if it were at 120 by Jan'01 instead of selling the Jan'02 put you would hold it and write a 1 or 2 month put with a strike of 130 or 140. Because the time decay of the nearer month erodes disproportionately to the leap, the value of the near term put would deflate faster than the leap. Then at the next expiration of the near term option you would have the option of doing it again or selling the Jan'02 put and closing out the trade. By this time however, time decay would be accelerating quite a bit on the Jan'02, so you probably would want to close out the spread. Now how's that for something to think about this week. Remember, look for those fallen angels-good quality stocks that have gotten hammered. If the current rally fails you will still have lots of time to be right by trading leaps. Bear markets are short lived, and this may be the shortest one on record yet. I have to sign off now, as I am 100 words over my limit. Hope you find this strategy useful. Experiment, paper trade it, because it really works. Contact Support ***** Staging an Index By Molly Evans Back in March when the markets were coming down like a ton of bricks, I reported one play that had saved my sanity and probably one of my accounts. I had a healthy stake in Citigroup puts. In the ensuing weeks, the bear claws continued to scratch me, so be as it may, human nature encourages us to stay cozy with what we know and has treated us well. It's not good practice to be too cozy with anything in the market, as you well know. This mouse tried to go back for her cheese in the Citigroup trap but met little satisfaction or satiety. It seems that someone forgot to tell Citigroup that we had a bear market raging around it. What a resilient one! I didn't lose money, I just didn't make any. It just didn't make sense to me that in this interest rate and Fed board obsessed market that the financials were doing so well. Honestly, I made good effort to short these guys to no avail. American Express clawed me pretty good in fact. It just didn't make sense so I had to ask someone in the know. Let this be testimony to the power and utility of the internet. Quite by accident, I found Derek Baltimore of Pinnacle Portfolio Advisors in Denver, who was kind enough to give me an online lesson in banking and financial companies. My question to him was, "I'd like to know how rising interest rates affect companies like American Express, Fannie Mae, Citigroup, JP Morgan etc. Do they get hurt because costs are higher for them or do they help them because they can charge higher on credit cards and home loans etc? I always thought that the financials got hit when the rates rose but if you look at the stock prices of Citigroup and AXP - they're strong!" In a couple of emails, I had a much better understanding of the macro picture. As Derek explained, "In theory, rising interest rates allow credit card companies and banks to charge more interest to clients. However, since banks are also forced to pay higher interest rates to borrowers (liabilities, i.e. customers), their spread (difference between what it cost them to borrow and the rate at which they can lend) is narrowed. Sixteen months ago, banks could pay 175 basis points less than they currently have to pay for short-term money, i.e. Fed Funds. So, they could pay client (savings acct) 3.50% (or usually less) for their money, and lend it out to a (for instance) mortgage borrower for say, 8.0%, a spread of 4.50% (275 basis points). Now, they have to pay the same client (saver) 1.75% more for the use of their money, (now 5.0%) and the exact same mortgage has only increased about .80% to 8.80% so their spread has narrowed to 3.80%. In addition, in a rising interest rate environment, consumers tend to slow their borrowing due to the higher cost of money---so banks not only have less spread in their product, but are faced with lower demand. To quell this slow down in demand, banks will tend to be more competitive, i.e. even further reduce their normal spread. While this may seem a small amount, when you calculate the 70 basis points difference on a 1 Billion dollar mortgage portfolio, you get a $7,000,000 difference in income. In addition, a rising interest rate environment hurts a financial institution's capital position as the value of their investment portfolio decreases due to higher interest rates. (Fixed rate bonds decrease in value as rates go higher --as new investors chase the higher yielding bonds)." "So Mr. Baltimore," I asked, "Why are the financials holding up so well in this market in the face of rising interest rates?" "The response of the stocks you refer to is hard to predict. Most of these companies are selling at very low multiples, and with the crumbling of the Glass-Stegal Act in 1999 which allowed banks, brokerages, and insurance companies to all co-exist together under one roof; these financial powerhouses no longer SOLEY rely on interest income for their profits. Much more of their income (more and more each year) comes from non-interest items. For instance, Capital Markets underwriting, insurance premiums, commissions from brokerage transactions, etc. Your example of Citigroup is a perfect example. They now own Soloman-Smith Barney (Brokerage), Travelers (Insurance), as well as their banking and own Capital Markets operations (Citibank Securities)." Aahh! I get it now. I know I wasn't the only one that didn't know how all this related. CNBC kept asking the question and noting with interest how the financials were holding up so well when the broader markets were flailing. Yet, something kept nagging at me about all of this. Back in March, at the OIN meeting, Austin Tanner presented what I thought was the most valuable portion of the entire conference. In discussing various sectors, we looked at charts of the "stages" each was in at the present time. I distinctly recalled that banking and financials were in "Breakdown!" I had to pull up my OIN disk that we were presented upon exiting the seminar. There it was, AXP was the charted example and the banking index was clearly in the breakdown stage. You don't have to do the work of looking at each sector to go finding which stage it's in. That information is readily found on the OIN site in an easy to read format. Under the Market Posture heading, Pinnacle Capital Advisors has designed a powerful tool to inform traders when they might initiate new positions in sectors with momentum in their favor. As it says in the explanation, "OptionInvestor.com is the only website that states and regularly updates its market posture across industry sectors. Investors who reference this section first before planning their trades will gain a decided advantage. The time horizon of our stated market posture is generally 2-3 weeks and is based upon a number of fundamental, technical and sentiment indicators." Don't skip this section of the newsletter or site folks. It's gold. Looking at it today, I see that Banking (BIX) has turned bullish on June 1. You have to understand how they arrive at this. It's not just pulled out of the air since they saw that a bunch of bank stocks went up in the past week. As with everything, you have to look at the chart. This is a daily chart of the one of the banking indexes. There are more but the one that Pinnacle looks at is the BIX or the S & P's banking index. To classify as "Breakdown" stage, a stock or in this case index must: 1) violate a long-term moving average (200 day) 2) are usually high P/E stocks with faltering earnings growth 3) show lower highs, lower lows and 4) the moving average turns downward above the price. The breakdown stage is the last of 4 stages before a new cycle starts all over again. Stage 1 is Bottom Consolidation, Stage 2 is Breakout, Stage 3 is Top Consolidation and Stage 4 is Breakdown. What this means, is that the BIX went through both stages 4 and 1 and is now at stage 2 or Breakout. This is an interesting topic so we'll discuss it further in the coming weeks. Hope you all did well this week and continue to do so! Contact Support ************* DAILY RESULTS ************* Index Last Week Dow 10794.76 495.52 NASDAQ 3813.38 608.27 $OEX 792.69 56.61 $SPX 1477.26 99.24 $RUT 513.03 55.66 $TRAN 2829.36 141.81 $VIX 24.11 -3.38 Calls Week CHKP 233.69 71.19 Does this remind you of March or what? SDLI 260.38 62.63 Only a plus $60 gain!!! RMBS 217.38 54.38 In the middle of a stellar split run RBAK 112.56 40.50 A nearly 50% move this week AMCC 128.81 39.13 Semiconductors back in the spotlight CIEN 138.31 38.63 A solid entry at $100 led us to profits ITWO 129.13 33.63 It's good to be B2B again SCMR 110.00 33.50 Networkers on fire, but use caution TQNT 114.38 31.22 A familiar name back from the dead EXDS 87.13 25.13 A fantastic recovery to say the least PDLI 125.13 25.06 Showing intensifying momentum YHOO 134.50 22.44 Is the earnings run officially underway? ADI 89.00 21.06 Turbo-charged to new highs on Friday MERQ 92.44 20.56 Teetering at a breakout over resistance SEPR 108.81 17.63 Back above water over $100 support MU 79.25 13.88 Another new high during the earnings run CPN 111.31 10.31 Splitting 2:1 this Thursday PGR 93.13 0.63 Off to a rough start, but holding support Puts BUD 72.69 -8.63 In need of profit-taking after long run MRK 68.94 -5.63 The entire sector is under pressure CL 54.50 -1.25 Cyclicals are falling back out of favor CAH 63.56 -1.19 Forgotten as money runs to techs TRW 50.69 2.69 Dropped, the trend found an end EXTR 56.56 12.50 Dropped, gapped up on Friday DCLK 54.50 13.38 Dropped, the NASDAQ was too strong STOCKS ADDED TO THE PICK LIST ***************************** Calls PDLI - Protein Design Labs MERQ - Mercury Interactive Puts CAH - Cardinal Health BUD - Anheuser Busch *************************** PICKS WE DROPPED THIS WEEK *************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS No dropped calls today. PUTS DCLK $54.50 (+13.38) DCLK went sailing higher Friday, following the Internet sector into the stratosphere. The stock received yet another upgrade Friday, this time coming from AG Edwards, who raised their rating on DCLK from Accumulate to Buy. The stock gapped nearly $4 higher after the morning upgrade, then came the midday call from Mary Meeker. The influential Morgan Stanley Internet analyst said Friday afternoon that the worst was over in the Net sector. Meeker's comments sent Web stocks into orbit. DCLK faces uncertainty as the Senate hearings on Internet privacy continue, but we don't want to stand in the way of this newly discovered momentum in the Net sector. EXTR $56.56 (+12.50) The broad technology rally late last week was too much for the bears, and even beaten down issues like EXTR participated. The stock paused at the 10-dma on Thursday, but Friday's good employment numbers propelled it strongly upward at the open on Friday, along with the bulk of Networking stocks. Gaining over $7 on very strong volume, EXTR broke above the descending trendline, which began in late March. After pushing above resistance at $55, our play held its gains all day and was moving higher again towards the end of the session. It looks like the bad news has been played out and investors are focusing once again on the positive. We will take our cue from them, and move on to other plays. TRW $50.69 (+2.69) There was just too much positive economic data last week for TRW to continue downhill. Finding support early in the week near $48, the stock was buoyed by strong moves across all the major indices. The economic data last week all pointed to a slowing economy, giving investors hope that the interest rate hikes are having their desired effect and that the Fed may be nearing the end of this series of increases. Even news of declining auto sales (70% of revenues come from this sector) couldn't dampen enthusiasm for shares of TRW, as the issue pushed through the 10-dma ($50.38) on Friday. Resistance did finally appear at the 200-dma ($50.94), but after the pullback TRW headed higher for the balance of the day. With the technical picture changing so dramatically, we say goodbye to our play this weekend. STOCKS WITH UPCOMING SPLITS **************************** We don't list all splits available, only those we feel may have play possibilities. Symbol - Stock Splits/Date NXTL - Nextel Comm 2:1 06-06-00 ex-date 06-07 FKL - Franklin Capital 3:2 06-07-00 ex-date 06-08 CPN - Calpine Corp. 2:1 06-08-00 ex-date 06-09 CAKE - Cheesecake Fact. 3:2 06-08-00 ex-date 06-09 VSH - Vishay Intertech 3:2 06-09-00 ex-date 06-12 LMGA - Liberty Media Grp2:1 06-09-00 ex-date 06-12 CMB - Chase Manhattan 3:2 06-09-00 ex-date 06-12 ANEN - Anaren Micro 3:2 06-09-00 ex-date 06-12 AA - Alcoa 2:1 06-09-00 ex-date 06-12 HC _ Hanover Comp. 2:1 06-13-00 ex-date 06-14 RHI - Robert Halg Intl 2:1 06-12-00 ex-date 06-13 RMBS - Rambus 4:1 06-14-00 ex-date 06-15 HSP - Hispanic Broad. 2:1 06-15-00 ex-date 06-16 CKH - Seacor Smit Inc. 3:2 06-15-00 ex-date 06-16 IFIN - Investors Fin. 2:1 06-15-00 ex-date 06-16 CYBE - CyberOptics 3:2 06-15-00 ex-date 06-16 MXT - Metris Companies 3:2 06-15-00 ex-date 06-16 JNPR - Juniper Networks 2:1 06-15-00 ex-date 06-16 IPAR - Inter Parfums 3:2 06-15-00 ex-date 06-16 NXLK - Nextlink 2:1 06-15-00 ex-date 06-16 CHP - C&D Technologies 2:1 06-16-00 ex-date 06-19 DLTR - Dollar Tree 3:2 06-19-00 ex-date 06-20 RHB - RehabCare Grp. 2:1 06-19-00 ex-date 06-20 MTZ - MasTec Inc. 3:2 06-19-00 ex-date 06-20 SEIC - SEI Investments 3:1 06-19-00 ex-date 06-20 POOL - SCP Pool Corp. 3:2 06-19-00 ex-date 06-20 MEAD - Meade Inst. 2:1 06-19-00 ex-date 06-20 EXDS - Exodus Comm 2:1 06-20-00 ex-date 06-21 AAPL - Apple Computer 2:1 06-20-00 ex-date 06-21 KG - King Pharma. 3:2 06-21-00 ex-date 06-22 CDWC - CDW Computer 2:1 06-21-00 ex-date 06-22 NVDA - NVIDIA Corp. 2:1 06-26-00 ex-date 06-27 MRCL - Micrel Inc. 2:1 06-27-00 ex-date 06-28 BRL - Barr Lab. 3:2 06-28-00 ex-date 06-29 AMFC - AMB Financial 3:2 06-30-00 ex-date 07-03 TQNT - TriQuint Semi. 2:1 07-11-00 ex-date 07-12 IWOV - Interwoven 2:1 07-13-00 ex-date 07-14 XETA - Xeta Corp 2:1 07-17-00 ex-date 07-18 TBL - Timberland Comp. 2:1 07-17-00 ex-date 07-18 TIF - Tiffany and Co. 2:1 07-20-00 ex-date 07-21 INTC - Intel Corp. 2:1 07-28-00 ex-date 07-31 AIG - American Intl. 3:2 07-28-00 ex-date 07-31 POS - Catalina Mktg. 3:1 08-17-00 ex-date 08-18 For a complete list of all the coming splits check out the "split calendar" on the side of the online edition newsletter page. ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************** CPN - Calpine Corp $111.31 (+10.31) See details in sector list Chart = /charts/charts.asp?symbol=CPN Put Play of the Day: ******************** MRK - Merck & Co $68.94 (-5.63) See details in sector list Chart = /charts/charts.asp?symbol=MRK ************* DEFINITIONS ************* SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. TP/P= True premium or Time premium RRR = Risk/Reward/Ratio ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume Numbers within ( ) are the amount of change for the week. Numbers within ( ) may be designated with PxW, like P3W, prior 3 weeks The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ********** CALL PLAYS ********** ******** HARDWARE ******** SCMR - Sycamore Networks $110.00 (+33.50)(-4.44) Sycamore Networks develops and markets intelligent optical networking products that transport voice and data traffic over wavelengths of light. The Company combines significant experience in data networking with expertise in optics to develop intelligent optical networking solutions for network service providers. Sycamore's products are based on a common software foundation, enabling concentration on the delivery of services and end-to-end optical networking. Sycamore's products and product plans include optical transport, access and switching systems and end-to-end optical network management solutions. Walking the tight rope without a safety net - that's what trading SCMR is like these days. You just can't find a hotter sector than optical networking. With the huge gains on the NASDAQ last week, it's no surprise that SCMR, the emerging king of pure play optical networking gained 44% in price. While Friday saw lots of short covering, at over twice the ADV, the action was more than just covering. Institutions not wanting to miss the train's departure were piling on in droves. Need evidence? Look no further than 63 block trades. SCMR is fundamentally on fire. Technically, it's on fire too, but watch for flameout despite the incredible strength. Here's why. SCMR broke through strong resistance of $94 in a "gap up" opening at $97 followed by a buying frenzy. The island created will likely be tested when the panic buying halts. Not only that, but mild resistance is encountered at $113 with a strong resistance hurdle at $120. Blend in a lopsided favoring of open interest in JUN-120 calls(1088) over JUN-120 puts(40), and you have a recipe for major pullback. Also, with the 5-dma back at $90.88 and the 10-dma way back at $83.64, there is a lot of technical room to fall, and other than panic buying, there is not much reason for SCMR to move up in the very short run. We're not saying it will reach down to that level. But having come so far so fast, count on some give back. That said, it might behoove you to move your stops up to Friday's intraday support levels of $108, or even $105 if you have enough profit to allow for some jiggle room. Otherwise, we'd be looking for a pullback to $100, $97, or even $94 to make an entry. It's been fun and looks like there could be more fun, but common sense says it can't go up forever. Open new plays with caution. It's not all fear and quivering. This week, the SuperComm conference in Atlanta will host what seems like every major telecommunications company in the world, with the hot optical networking gear sector taking center stage. An SG Cowen analyst has SCMR slated to have a big presence at the show, along with LU, NT and CIEN. Look for positive news to lend support on any pullback. ***June contracts expire in 2 weeks*** BUY CALL JUN-100*QSM-FT OI=1573 at $14.13 SL=10.50 BUY CALL JUN-110 QSM-FB OI= 272 at $ 8.50 SL= 6.00 BUY CALL JUN-120 QSM-FD OI=1088 at $ 4.00 SL= 2.50 BUY CALL JUL-110 QSM-GB OI= 36 at $15.13 SL=11.00 BUY CALL SEP-120 QSM-ID OI= 197 at $16.25 SL=11.50 SELL PUT JUN-100 QSM-RT OI=263 at $ 3.25 SL= 5.25 (See risks of selling puts in play legend) Picked on May 28th at $76.50 P/E = 93 Change since picked +33.50 52-week high=$199.50 Analysts Ratings 8-3-0-0-0 52-week low =$ 47.25 Last earnings 05/00 est= 0.02 actual= 0.05 surprise = 150% Next earnings 08-17 est= 0.06 versus= N/A Average Daily Volume = 3.7 mln /charts/charts.asp?symbol=SCMR RBAK - Redback Networks $112.56 (+40.50)(+9.13) Founded in 1996 and headquartered in Sunnyvale, Calif., Redback Networks is a leading provider of advanced networking solutions that enable carriers, cable operators, and service providers to rapidly deploy broadband access and services. The company's market-leading Subscriber Management Systems (SMSs) connect and manage large numbers of subscribers using any of the major broadband access technologies such as Digital Subscriber Line (DSL), cable, and wireless. To deliver integrated transport solutions for metropolitan optical networks, Redback's SmartEdge multi-service platforms leverage powerful advances in application-specific integrated circuit (ASIC), IP, and optical technology. With this product portfolio, Redback Networks is the first equipment supplier focused exclusively on developing integrated solutions for the New Access Network. You thought SCMR was hot, take a look at RBAK - up 56% for the week. Wholly bandwidth blowout, Batman! The next big thing in optical networking is metro-DWDM (dense wavelength division multiplexing, meaning the stuffing of many light signals into a single fiber). RBAK is as hot as it gets with DWDM, unless you are the proud owner of last week's hot IPO, ONIS (up 288% on its Thursday debut). How'd it happen? According to Red Herring, "Redback has shown early success in integrating Siara, the company it got last year for $4.3 billion. This week, Redback announced a metropolitan-area networking product, the SmartEdge 800, that is based on application-specific integrated circuits (ASICs) engineered by Siara. The product appears to have legs, and has made Redback one of the new favorites on Wall Street." A Brean Murray analyst continues to rate it as a Buy, saying, "It has as much upside as Juniper at half the valuation." How about the technicals? RBAK is really strong there too. Friday's volume of 5 mln shares was almost twice the ADV, which had RBAK breaking clean over its $100 firm resistance in a "gap up" opening at nearly $107. That's an island that will likely be retested soon when the panic buying stops. Like SCMR, RBAK has come a long way fast. So you might want to tighten up your stops to Friday's opening price at $107 or intraday support of $110 if you don't have much wiggle room. Either way, protect your profits. The next major historical support is at $92, then $88. For the gunslinger types, there is historical resistance at $108 from January, which could act as fresh support. But it isn't ironclad. If it holds up well there, you can consider taking a new position following a bounce as long as volume remains intact. However, with the 5-dma at $90.25 and the 10-dma way back at $77.86, RBAK is in thin air and is in danger of asphyxiation, or a big pullback. There is nothing to support it here. Nonetheless, a possible oxygen source this week could be the SuperComm conference in Atlanta, which could keep the whole sector flying high. Exercise caution in opening new plays. Want more good news? A Lehman Bothers analyst, Steve Levy, has upped his Redback revenue forecasts as a result of the development of the new Siara product line. He sees it contributing $15 mln in revenues to the second half of 2000, as well as $120 mln to the 2001 forecast. He expects $190.9 mln of total revenue in 2000 and $440.2 mln in 2001, with earnings per share of $0.46 predicted for 2001. He has reiterated a Buy rating with a $160 price target for year-end. In a related issue, RBAK announced an alliance with IBM to have IBM manufacture it copper-interconnect ASICs chips for use in the new metro-DWDM SmartEdge equipment. ***June contracts expire in 2 weeks*** BUY CALL JUN-100 BUK-FT OI= 353 at $17.88 SL=13.00 BUY CALL JUN-110*BUK-FB OI=1038 at $12.00 SL= 9.00 BUY CALL JUN-120 BKK-FD OI= 62 at $ 7.38 SL= 5.00 BUY CALL JUL-110 BUK-GB OI= 84 at $20.13 SL=14.50 BUY CALL OCT-120 BKK-JD OI= 311 at $28.00 SL=19.00 SELL PUT JUN-110 BUK-RT OI= 4 at $ 4.00 SL= 6.00 (See risks of selling puts in play legend) Picked on May 18th at $72.06 P/E = N/A Change since picked +40.50 52-week high=$198.50 Analysts Ratings 9-3-1-0-0 52-week low =$ 20.00 Last earnings 04/00 est= 0.03 actual= 0.05 surprise = 33% Next earnings 07-12 est=-0.06 versus=-0.05 Average Daily Volume = 2.7 mln /charts/charts.asp?symbol=RBAK ******************************** CALLS CONTINUED IN SECTION THREE ******************************** ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** **************************** SEE DISCLAIMER IN SECTION ONE
The Option Investor Newsletter Sunday 6-4-2000 Sunday 3 of 5 *************** CALLS CONTINUED *************** ************* SEMICONDUCTOR ************* CIEN - Ciena Corp $138.31 (+38.63)(-16.81) Ciena makes multiplexing systems that increase the capacity of long-distance fiber-optic telecommunications networks. The company's systems transmit signals simultaneously over the same circuit. Customers such as Sprint, Bell Atlantic, and MCI Worldcom, use its lines for long-distance optical transport and for shorter distances. The company is expanding its product and geographic breadth as it transforms itself from niche market specialist to optical networking supplier. The telecom sector was on fire Friday! The tame jobless report Friday signaled the economy is slowing which in turn should lead to fewer interest-rate increases. And that would be a welcome sign to the fast-growing, cash-intensive telecom companies like CIEN. While the long-term outlook in the telecom sector clearly favors the fiber optics area, the SuperComm 2000 conference might provide fireworks in the sector in the near-term. CIEN will showcase its two latest product offerings at the three-day seminar that begins Tuesday. CIEN will demonstrate its Intelligent Optical Internet architecture that the company uses to turn networking intelligence into new optical services. Patrick Nettles, CEO of CIEN, said, "This will be the first time that all the different network systems are available for true dynamic delivery of new optical services. At SuperComm, CIENA will demonstrate how to achieve next-generation service delivery today." Investors bid shares of telecom equipment-makers higher in part from anticipation of the upcoming conference. And analysts expect good news from CIEN next Tuesday as we'll expand upon further below. On the heels of the positive economic data released Friday morning, CIEN gapped over $9 higher on impressive volume to boot. The stock still faces congestion above its current levels at $140 and again at $145. The wide intra-day price swings have provided good entry points recently, so continue to use the volatility to look for entry. Consider your risk levels and shoot for entry points as CIEN clears its resistance levels. Consider a bounce from support at $135 as an entry if the profit takers come out of hiding Monday. If the stock stumbles make sure momentum resumes before entering the play. Optical networking companies will take center stage next week at the Annual SuperComm conference in Atlanta. Jim Kedersha, SG Cowen's telecom analyst, said CIEN is expected to display its switching technology at the gathering. A spokesman for CIEN added that the company will be making some announcements but he wasn't specific about what they might be. ***June contracts expire in 2 weeks*** BUY CALL JUN-135 UEE-FG OI= 527 at $12.00 SL= 9.00 BUY CALL JUN-140*UEE-FH OI=1371 at $ 9.75 SL= 6.50 BUY CALL JUN-145 UEE-FI OI= 633 at $ 7.63 SL= 5.25 BUY CALL JUL-140 UEE-GH OI= 376 at $18.88 SL=13.50 BUY CALL OCT-145 UEE-JI OI= 705 at $29.25 SL=20.00 Picked on May 25th at $104.50 P/E = 586 Change since picked +33.81 52-week high=$189.00 Analysts Ratings 11-8-1-0-0 52-week low =$ 26.81 Last earnings 04/00 est= 0.10 actual= 0.12 Next earnings 08-17 est= 0.16 versus= 0.01 Average Daily Volume = 6.45 mln /charts/charts.asp?symbol=CIEN ADI - Analog Devices $89.00 (+21.06) 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. This turbo-charged racer is breaking the record books quicker than anticipated! The friendly economic news on Friday flagged the buyers and ADI shattered its all-time high as it came off the line. The 52-record now stands at $95.31. Volume was almost double the ADV throughout the session. And in spite of some mild profit taking mid-afternoon, ADI finished in a lead position closing above Thursday's daily highs. ADI started its strong momentum run this week after bursting through a tough resistance level at $70. The broad market rally and its favored sector initially propelled ADI from the depths of $61 last seen on May 24th. However, welcoming product releases and an upcoming showcase conference is also generating some excitement. Earlier in the play there was concern as to whether ADI could maintain a share price above $70, but now the level to watch is in the proximity of the 5-dma ($78.39). If there's a pullback, then $80 should be the cut-off for support. Anything lower than that is a sign of trouble. Granted ADI has seen huge advances in recent trading, but the past two sessions indicate a near- term support should easily evolve around $83-$85, or higher. The semiconductor industry saw worldwide sales shoot up 36% to a record $15.2 bln in April fueled by revenues from chips used to power cell phones. As many analysts have predicted, the sales are easily beating year 2000 expectations. ***June contracts expire in 2 weeks*** BUY CALL JUN-80 AKI-FP OI=1056 at $11.13 SL=8.75 BUY CALL JUN-85*AKI-FQ OI= 603 at $ 7.50 SL=5.75 BUY CALL JUN-90 AKI-FR OI= 634 at $ 4.63 SL=2.75 BUY CALL JUL-85 AKI-GQ OI= 312 at $12.00 SL=9.50 BUY CALL JUL-90 AKI-GR OI= 69 at $ 9.50 SL=7.00 BUY CALL JUL-95 AKI-GS OI= 68 at $ 7.50 SL=5.75 Picked on May 30th at $75.00 P/E = 97 Change since picked +14.00 52-week high=$94.69 Analysts Ratings 11-8-0-0-0 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 = 2.57 mln /charts/charts.asp?symbol=ADI MU - Micron Technology Inc $79.25 (+14.63) Micron is one of the world's leading makers of semi-conductor memory components. They design, manufacture, and market a variety of complex circuit boards, memory modules, system level assemblies, and PCs. Although approximately two-thirds of its sales revenues come directly from the dynamic random-access memory (DRAM) components and other related chips. To keep competitors Hyundai and Samsung on their toes, Micron is developing embedded memory for the digital video market. Texas Instruments and Intel both have interests Micron. Here's another exalted semiconductor to add to the call list. MU was already a favorite among investors and analysts, but now it's demonstrating just how likeable it can be through this week's swift advancements. On Tuesday, the influential semiconductor analyst, Dan Niles, now of Lehman Brothers put the #1 DRAM maker on top of his recommendation list. In a research note, he stated that "Micron currently is approaching 25% market share and can earn nearly five times as much money at the peak of this cycle, leading to a stock price that could be four to five times higher as well". MU was then bestowed with a new Buy rating and $100 price target. Other analysts are speculating that increasing PC demand is effectively driving up prices for processors and memory chips. But let's get a bigger picture. The latest round of tame inflation data is obviously a pertinent factor in MU's rise to new heights. MU is a leader in the industry and is therefore responding to the tech rally. Of course, the icing on the cake is the analysts' positive comments. For example, MU saw impressive gains in Friday's session, bulls-eyeing a new all-time ($81.88) at the open. This was a nice encore to Thursday's record of $74. However, investors started jumping on the bandwagon and backing up the trucks for shares of MU earlier in the week. Call options also saw a sharp increase in activity. Trading volume is also solid with levels reaching nearly twice the ADV. Keep in mind MU is in new territory and recently experienced tremendous gains so be patient for an entry. It's possible MU could bounce from here and shoot up some more ahead of its upcoming earnings. However, if it does, keep trailing stops in place to protect against profit taking. More conservatively, shorter-term support may develop lower in the $71 to $74 range. Besides, the current momentum driving this play is Micron's 3Q earnings release, scheduled for the week of June 19th, after the bell. It'd be quite a profitable play if the prevailing enthusiasm can carry it forward into an earnings' run. Besides Dan Niles comments this week, Salomon Smith Barney's Jonathan Joseph upped his rating on MU to a Buy from an Outperform and matched Dan Nile's price target of $100 on Friday. He cited rising spot prices and tightening market conditions. Joe Osha of Merrill Lynch also expects MU to reach $100 in the next year, upping his target from $75. In addition, he came forward with new price objectives for 2000 EPS of $1.99 and $3.05 for 2001. Within the industry, the World Semiconductor Trade Statistics group reported that it calculates global chip sales to increase 31% to $195 bln this year. They expect the growth to continue through 2003 as sales of mobile phones and Internet-related networking equipment lead the demand for computer chips. ***June contracts expire in 2 weeks*** BUY CALL JUN-70 MU -FN OI=4347 at $10.25 SL=7.75 BUY CALL JUN-75*MUY-FO OI=2071 at $ 6.63 SL=4.75 BUY CALL JUN-80 MUY-FP OI=3721 at $ 4.25 SL=2.50 BUY CALL JUN-85 MUY-FQ OI=2242 at $ 2.50 SL=1.25 BUY CALL JUL-80 MUY-GP OI= 880 at $ 8.88 SL=6.75 BUY CALL JUL-85 MUY-GQ OI=1083 at $ 7.00 SL=5.25 Picked on June 1st at $74.00 P/E = 99 Change since picked +5.25 52-week high=$81.88 Analysts Ratings 10-5-5-1-0 52-week low =$18.25 Last earnings 03/00 est= 0.81 actual= 0.58 Next earnings 06-20 est= 0.31 versus=-0.05 Average Daily Volume = 6.06 mln /charts/charts.asp?symbol=MU AMCC - Applied Micro Circuits Corp. $128.81 (+39.13)(-11.94) Fulfilling the need for speed, AMCC is a global provider of high-performance, high-bandwidth integrated circuits used to control the high-speed flow of transmissions through fiber-optic telephone networks. Communications products, used in LANs and WANs, account for 55% of the company's sales. The company's chips are also used in automated test equipment, high-speed computing, HDTV, and military applications. The company, which is growing through acquisitions, has a top-flight client list, including Nortel, Raytheon, Alcatel, Cisco, 3Com and Lucent. Now that is the kind of week that reminds me of the market last December. It took until Thursday to do it, but AMCC broke out of its descending wedge in style. Thursday's $10.75 gain paled in comparison to Friday's $18+ jump, which was aided by a weak employment report. The tame jobs report added to optimism that the Fed may be reaching the end of its current rate hike cycle, and this was all it took for investors to rush back into the NASDAQ with abandon. Semiconductors, Internets, and Networking all reaped the rewards and AMCC was leading the charge. The strong move on Friday pushed our play through the last of its moving averages (the 50-day at $112.63) and resistance at $115. Now, it is close to the next resistance level near $132. Volume was strong again on Friday and the late day jump also came on increasing volume. Now that we got the breakout we were waiting for, a 40% jump in less than a week, we think AMCC will need to consolidate its gains before heading higher. Look for a pullback to support near $117 to provide a more attractive entry, but confirm that the bounce comes on increasing volume. If you have open positions, tighten up those stop losses - the name of the game is profit, and you don't want to give it back if the market decides to take a breather. News has been sparse over the past couple weeks, but that doesn't seem to matter. With demand remaining strong for semiconductors and networking equipment, AMCC should continue to lead the markets higher. ***June contracts expire in 2 weeks*** BUY CALL JUN-125*AZV-FE OI=286 at $11.88 SL= 9.00 BUY CALL JUN-130 AZV-FF OI=364 at $ 9.38 SL= 6.50 BUY CALL JUN-135 AZV-FG OI=106 at $ 7.38 SL= 5.25 BUY CALL JUL-130 AZV-GF OI= 58 at $21.75 SL=16.25 BUY CALL AUG-135 AZV-HG OI=309 at $25.75 SL=19.25 SELL PUT JUN-115 AZV-RC OI= 63 at $ 4.13 SL= 6.25 (See risks of selling puts in play legend) Picked on May 28th at $89.69 P/E = 274 Change since picked +39.13 52-week high=$158.88 Analysts Ratings 11-3-0-0-0 52-week low =$ 14.81 Last earnings 04/00 est= 0.14 actual= 0.16 Next earnings 07-19 est= 0.17 versus= 0.06 Average Daily Volume = 4.11 mln /charts/charts.asp?symbol=AMCC TQNT - Triquint Semiconductor $114.38 (+31.22)(-0.59) A leading global supplier of a broad range of high performance integrated circuits, TQNT offers standard and customer specific products as well as foundry services. The company uses gallium arsenide (GaAs) instead of silicon as the substrate (base) for its analog, digital, and mixed-signal integrated circuits (ICs). GaAs ICs operate at greater speeds than silicon chips, or at the same speeds with less power consumption, making them ideal for all sorts of gadgets, such as cell phones, pagers, fiber-optic and satellite telecom equipment, and data networking devices. Playing with the big boys, its clientele includes Nortel, Alcatel, Ericsson, Lucent, and Raytheon. The budding Semiconductor breakout that we highlighted last weekend has come into full bloom. Most of the stocks in this sector had been coiling like springs in their descending wedge patterns, and their breakout helped fuel some impressive gains on the NASDAQ last week. TQNT was one of the first to break out, and after the strong move on Tuesday, the stock had cleared all of its moving averages. Wednesday saw a test of support near $90, before the stock really got moving. Adding $10 on Thursday and duplicating the feat on Friday, TQNT launched into the ozone (relatively speaking), and it is now more than $15 above its 5-dma ($98.63). TQNT is now cleanly above resistance at $110, with the next hurdle at $118-120. Given the strong gains last week, we are concerned that the stock will have to consolidate a bit before heading higher. Nothing moves in a straight line, so tighten up those stops, so you can keep all those juicy profits. The Semiconductor sector will likely continue to be strong, so look to initiate new positions on an intraday bounce from support at $110 or $105. If we see broad market weakness, we could even get a test of the $100 level. Use volume as your guide and wait for it to confirm any move higher before playing. The market recovery is still tenuous, and it won't pay to start grasping at falling knives. On May 25th, Dain Rauscher Wessels upgraded TQNT from Buy to Strong Buy, and this was likely part of the fuel that got this rocket launched. Add to that the company's pending 2-for-1 split (set for July 11th), and we have a play that could still see some impressive gains. ***June contracts expire in 2 weeks*** BUY CALL JUN-110*TNN-FB OI=210 at $ 9.63 SL= 6.75 BUY CALL JUN-115 TNN-FC OI=255 at $ 7.25 SL= 5.00 BUY CALL JUL-110 TNN-GB OI=215 at $16.75 SL=12.00 BUY CALL AUG-115 TNN-HC OI= 92 at $18.88 SL=13.75 BUY CALL AUG-120 TNN-HD OI=278 at $16.75 SL=12.00 SELL PUT JUN-105 TNN-RA OI= 24 at $ 3.38 SL=5.50 (See risks of selling puts in play legend) Picked on May 28th at $83.16 P/E = 133 Change since picked +31.22 52-week high=$135.50 Analysts Ratings 7-2-4-0-0 52-week low =$ 12.75 Last earnings 04/00 est= 0.19 actual= 0.25 Next earnings 07-19 est= 0.27 versus= 0.13 Average Daily Volume = 1.65 mln /charts/charts.asp?symbol=TQNT RMBS - Rambus Inc. $217.38 (+54.38)(-10.75) Rambus Inc. develops and licenses high bandwidth chip connection technologies to enhance the performance of computers, consumer electronics and communications products. Current Rambus-based computers supported by Intel chipsets include Dell, Compaq, Hewlett-Packard, and IBM PCs and workstations. Sony's PlayStation video game system uses Rambus memory. Providers of Rambus-based integrated circuits include the world's leading DRAM, ASIC and PC controller manufacturers. Currently, eight of the world's top-10 semiconductor companies license Rambus technology. By now you know the buying that began late Thursday afternoon carried over into Friday, as Rambus and others opened sharply higher on the better-than-expected economic data. Up until this week, it appeared that investors were really just testing the waters in RMBS, with most bounces finding sellers ready and waiting to push the stock back down. The 33% move this week came on better volume and it is beginning to look like folks were serious about owning shares of the tech company. While there was little in the way of company news, chip related issues seemed to be a favorite as investors began to dump money back into the markets. Most of the momentum seen this week was probably in sympathy with either the sector or the broader markets. However, our play does have something a little special up its sleeve. If you'll remember, RMBS will split 4-for-1 on June 15, which could keep this one on traders' radar screens in the coming days. Obviously, the chip company can't make the trip up the chart on its own. If investors return next week prepared to take some money off the table, then more than likely RMBS will follow along. To give you an idea of just how impressive last week's move was, the 5 and 10-dma are sitting back at $188.43 and $175.96 respectively. That's one reason why we would look for a bit of profit taking early in the week. Our play did close well above its 100-dma at $201.74. A pullback next week to either its 50-dma at $212.65 or more likely, the $200 area of support could provide a good starting point for new plays. If you have open positions in this play, move your stops up to protect profits. If investors return next week in the buying mood, feel free to join in, however, keep your stops in place. Some investors are sitting on positions entered on May 24th when RMBS bounced off $144. A profit of better than $73 in 10 days may be too much for some folks to resist. RMBS got a shot in the arm earlier this week when it announced that Vitesse Semiconductor Corporation had licensed the Direct Rambus ASIC Ceall(RAC) for use in its network ICs. The network ICs are targeted at high performance communications systems such as optical switches and routers which require extremely high bandwidth solutions. ***June contracts expire in 2 weeks*** BUY CALL JUN-210*BYQ-FB OI= 648 at $24.75 SL=18.00 BUY CALL JUN-220 BYQ-FD OI=1017 at $21.00 SL=15.00 BUY CALL JUN-230 BYQ-FF OI= 502 at $16.88 SL=12.25 BUY CALL AUG-200 BYQ-HT OI= 417 at $50.00 SL=36.25 BUY CALL AUG-220 BYQ-HD OI= 146 at $41.63 SL=30.00 SELL PUT JUN-220 BYQ-RD OI= 418 at $21.00 SL=29.00 (See risks of selling puts in play legend) Picked on May 28th at $163.00 PE = N/A Change since picked +54.38 52 week high=$471.00 Analysts Ratings 1-1-2-0-0 52 week low =$ 58.50 Last earnings 04/00 est= 0.14 actual= 0.15 Next earnings 07-12 est= 0.16 versus= 0.08 Average daily volume = 3.94 mln /charts/charts.asp?symbol=RMBS SDLI - Spectra Diode Laboratories Inc. $260.38 (+62.63)(P2W+23.75) SDL's products power the transmission of data, voice and Internet information over fiber optic networks to meet the needs of telecommunications, DWDM, cable television and satellite communications applications. They enable customers to meet the bandwidth needs of increasing Internet, data, video and voice traffic by expanding their fiber optic communications networks more quickly and efficiently than would be possible using conventional electronic and optical technologies. SDL's optical products also serve a variety of non- communications applications, including materials processing and printing. How do you trade a play that makes another new high in the first thirty minutes of the day and then trends sideways to lower for most the rest of the session? Very Carefully. If you were among those fortunate enough to enter our play some time during the first three days of the week, give yourself a pat on the back. If you have been with us since we added SDL to our list and had the patience and staying power to ride this one up, then we applaud your efforts. If you'll remember SDLI pre-announced that second-quarter results would be about 24% higher than analysts estimates late last month. That seemed to set the wheels in motion a better than $100 move in the price of its stock since May 25th. Throw in an improved sentiment in the broad market and a few upgrades and we have a play that's added about 32% in the last week. Now back to our first question. We mentioned that SDLI should be traded very carefully. We are by no means giving up on this winner. On the contrary, we believe this one could be just getting warmed up. However, a pullback could certainly provide a better entry for new plays. SDLI is getting a bit overcooked. We would also note that as our play continued it's ascent to new highs this week, the volume did decline a little each day. This is not a negative, but does suggest a period of consolidation or back filling ahead. What do we do if traders come back with buy orders in hand on Monday? Depending on you trading style and risk profile, we would not be afraid to enter new plays, just be prepared to protect new positions, in case investors decide its time for a trip to the bank. Intraday support now shows up at $255, $240 and back at the 5-dma at $231.25. While we are not necessarily expecting a pullback to the $220 to $230 area, the distance between the close Friday and the moving averages shows how strong this week's activity in SDLI really was. Analysts did their part to provide support this week with five different firms either reiterating Buy or Strong Buy ratings or initiating coverage on the company. We could expect more in the coming days as SDL has already topped many of the analysts price targets of between $230 to $250 per share. Price targets this week from those mentioned above came in near $325. The company conducted their annual shareholders meeting on May 18th. On the agenda was a vote to increase the number of authorized shares from 140 million to 280 million. With earnings about six weeks away, we would keep our eye on SDLI a split announcement. ***June contracts expire in 2 weeks*** BUY CALL JUN-250*QJV-FJ OI=1473 at $26.88 SL=19.50 BUY CALL JUN-260 QJV-FL OI= 36 at $22.00 SL=16.00 BUY CALL JUN-270 QJV-FN OI= 116 at $17.25 SL=12.50 BUY CALL JUL-250 QJV-GJ OI= 346 at $46.50 SL=34.00 BUY CALL SEP-250 QJV-IJ OI= 451 at $65.00 SL=48.00 SELL PUT JUN-240 QJV-RH OI= 258 at $11.00 SL=15.00 (See risks of selling puts in play legend) Picked on May 21st at $196.00 PE = 519 Change since picked +64.38 52 week high=$270.19 Analysts Ratings 14-8-0-0-0 52 week low =$ 21.63 Last earnings 04/00 est= 0.16 actual= 0.22 Next earnings 07-19 est= 0.26 versus= 0.09 Average daily volume = 3.31 mln /charts/charts.asp?symbol=SDLI ******** INTERNET ******** ITWO - I2 Technologies $129.13 (+33.63)(-2.75) I2's RHYTHM supply chain management software helps manufacturers plan and schedule production and related operations such as raw materials procurement and product delivery. Companies that use RHYTHM include: 3M, Dell, Ford, and Motorola. Maintenance, training, and other services account for more than a third of sales. I2 is using acquisitions of complementary technologies and companies to position itself as a leader in the market for Internet-based production process applications. After Friday's impressive showing B-2-B is back! The rally in the B-2-B sector was ignited on the heels of the Lehman Brothers Industrial eMarketplace conference held late Thursday. B-2-B executives gathered in New York City to present to analysts and discuss the future of their business. While analysts agree the days of excessive exuberance are over in the sector, they still have a bullish outlook for the B-2-Bs and see the recent shakeout as a long-term positive. Jeff Bodenstab, Vice President of ITWO, told analysts that the company has expanded into e-business and is now able to provide all the necessary management functions, including marketplaces, for Internet commerce. Friday's explosive rally exposes the quiet accumulation of leading B-2-B stocks we have seen over the past two weeks. Investors have been easing back into the companies that are building Internet platforms. The software companies that provide integrated business-to-business services and e-commerce solutions have come back into fashion on Wall Street. But this time around is a little different. Investors are selectively buying B-2-B stocks of companies with proven business models and increasing revenues like ITWO. Friday's rally sent ITWO sailing past resistance at $120, subsequently breaking away from its congestion. The stock will face resistance at $133.50, its near-term high traced a month ago. The stock finished Friday near its day high, consider an entry at current levels if the buyers show up Monday morning. If you're looking to minimize directional risk, you might wait for ITWO to clear $133.50 before entering the play. If the sellers spoil Monday, look for ITWO to find support at $123.50 and consider entry if the stock bounces from that level. And thank you Mary Meeker! The prominent Morgan Stanley Internet analyst reinforced the fact that Wall Street has rediscovered its bullish view of the Net sector. Meeker told clients that she expects Web stocks to rally into the end of the year. The entire Internet sector tacked on additional gains after Meeker's midday call. ***June contracts expire in 2 weeks*** BUY CALL JUN-125*QYJ-FE OI=624 at $12.38 SL= 9.25 BUY CALL JUN-130 QYJ-FF OI=450 at $ 9.75 SL= 6.75 BUY CALL JUN-135 QYJ-FG OI=430 at $ 7.50 SL= 5.25 BUY CALL JUL-130 QYJ-GF OI= 63 at $20.75 SL=14.75 BUY CALL AUG-135 QYI-HG OI= 47 at $24.25 SL=17.50 Picked on May 27th at $95.50 P/E = 429 Change since picked +33.63 52-week high=$223.50 Analysts Ratings 8-17-2-0-0 52-week low =$ 13.06 Last earnings 03/00 est= 0.05 actual= 0.07 Next earnings 07-20 est= 0.08 versus= 0.05 Average Daily Volume = 4.05 mln /charts/charts.asp?symbol=ITWO EXDS - Exodus Communications $87.13 (+25.13)(-9.19) Exodus provides Internet system and network management solutions for enterprises with mission-critical Internet operations. They have pioneered the Internet Data Center (IDC) market and is one of the leading providers of Internet server hosting to the growing number of companies using the Internet. At present, Exodus also has twenty Internet Data Centers where clients store their servers in secure vaults. Clients include CBS Sports, eBay, Lycos, Yahoo!, MSNBC, and Hewlett-Packard. A fantastic recovery to say the least! First through $70, then $80, and a flash above $90 on Friday to top it all off. Where as before EXDS wouldn't even bounce on any market strength, it's now making up for lost time. The strong demand for integrated Internet services coupled with a return to the techs provided this recovering stock with an added boost amid the rallying conditions. The robust volume and positive analyst comments also ignited the enthusiasm. On Thursday, Prabhas Panigrahi of Dresdner Kleinwort Benson Securities began new coverage with a Buy rating and also issued a 12-month price target of $120. In addition, Rick Juarez of Robertson Stephens noted that companies like Exodus, who provide bundling and integration solutions, aren't seeing pricing pressures for their services. Be aware that earnings aren't until next month so EXDS will need to maintain this dynamism based purely on sector and market strength. On Friday, EXDS exhibited it could hold $86 and $87 intraday, however, the first level of support is lower at $78 and $80. Below that are the 5 and 10 DMA lines, at $73.36 and 68.75 respectively. At the current level, EXDS may need to consolidate a bit before challenging the psychological opposition at $100, so be prepared for a pullback. In other words, while the momentum is clearly intact, be careful about taking new positions and protect the huge gains. Exodus added two more customers to its already impressive clientele list this week. Vigil Technologies announced it selected Exodus Communications to provide Internet hosting and management for e-Sense(TM), Vigil's online intelligence solution. And later in the week, WorldSite.WS, better known as "The Alternative to .com", announced that it was contracting with Exodus Communication for Web connectivity, maintenance and availability in preparation for its expected explosive growth. ***June contracts expire in 2 weeks*** BUY CALL JUN-80*DUB-FP OI=3656 at $11.13 SL=8.25 BUY CALL JUN-85 DUB-FQ OI=2309 at $ 7.88 SL=5.50 BUY CALL JUN-90 DUB-FR OI=1943 at $ 5.38 SL=3.50 BUY CALL JUL-90 DUB-GR OI= 466 at $13.13 SL=9.75 BUY CALL JUL-95 DUB-GS OI= 215 at $11.25 SL=8.50 Picked on May 28th at $62.00 P/E = N/A Change since picked +25.13 52-week high=$179.63 Analysts Ratings 22-10-0-0-0 52-week low =$ 16.72 Last earnings 03/00 est= -0.26 actual= -0.23 Next earnings 07-21 est= -0.24 versus= -0.14 Average Daily Volume = 7.63 mln /charts/charts.asp?symbol=EXDS YHOO - Yahoo! Inc. $134.50 (+22.44)(-8.25) Yahoo! Inc. is a global Internet communications, commerce and media company that offers a comprehensive branded network of services to more than 145 million individuals each month worldwide. As the first online navigational guide to the Web, www.yahoo.com is the leading guide in terms of traffic, advertising, household and business user reach, and is one of the most recognized brands associated with the Internet. The company also provides online business services designed to enhance the Web presence of Yahoo!'s clients, including audio and video streaming, store hosting and management, and Web site tools and services. The company's global Web network includes 22 local World properties outside the United States. On Thursday, we said that for Yahoo! to stay in favor, it would need to move through that day's high with conviction. Ok, so it did that at the opening bell on Friday and never looked back. Unless you had open positions going into Friday, chances are you missed the better part of the 12% move. We certainly aren't complaining, but here's the scenario we see setting up. Our play gained about 20% for the week. Traders have had numerous chances to enter new plays and participate in the run up. However, as Jim mentioned in the market wrap, we've seen the major indices go from oversold to overbought in a matter of a few days. The dilemma now facing traders is how much follow-through buying will come early next week. As with many of the tech stocks, YHOO gapped up at the open on Friday. For you technical types, you know what they say about gaps in a chart, they will usually get filled. If the bullish sentiment continues on Monday, we would look for opportunities to enter new plays. However, we would definitely be prepared to protect new positions, in case the bears come knocking at the door once again. While we do believe sentiment is changing for the better, many investors have been on the wrong side of trades for the last couple of months and may pull the trigger to lock in profits, earlier than they used to. If we could write the script, we'd prefer to see a pullback to support near $128, or worst case near $120 and have the bulls come running to the rescue to begin the next leg up. Merrill Lynch Internet analyst Henry Blodget, said Friday, "the Internet stocks could be in for a rough summer, though established companies like YHOO and AOL will be good investments." Yahoo! closed just about right on its 200-dma at $134.65. A strong move through its May high at $139.25 accompanied by strong volume and our play could mount an assault on the next major level of resistance at 160.00. However, as you know, nothing goes straight up, so pick your entry points carefully. Henry Blodget went on to say "this year has been brutal...only the strong will survive." He continued saying, "Internet stocks have performed abysmally and could go lower if investor sentiment remains negative." YHOO gained momentum after another noted analyst said on Friday that the Internet stocks have been oversold, representing a time to buy YHOO and other quality companies. ***June contracts expire in 2 weeks*** BUY CALL JUN-125 YMM-FE OI=2872 at $13.25 SL=10.25 BUY CALL JUN-130*YMM-FF OI=5022 at $10.00 SL= 7.00 BUY CALL JUN-135 YMM-FG OI=4918 at $ 7.50 SL= 5.25 BUY CALL JUL-135 YMM-GG OI=3872 at $15.88 SL=11.38 BUY CALL OCT-145 YMM-JI OI=1031 at $21.50 SL=15.50 SELL PUT JUL-125 YMM-SE OI=6439 at $10.00 SL=13.25 (See risks of selling puts in play legend) Picked on May 28th at $112.06 PE = 620 Change since picked +22.44 52 week high=$250.06 Analysts Ratings 16-13-3-0-0 52 week low =$ 55.00 Last earnings 04/00 est= 0.09 actual= 0.10 Next earnings 07-11 est= 0.10 versus= 0.05 Average daily volume = 10.2 mln /charts/charts.asp?symbol=YHOO MERQ - Mercury Interactive Corp $92.44 (+20.56) Mercury Interactive is the exterminator of the software industry. The company offers a comprehensive line of automated testing tools that address the full range of quality needs for testing complex applications throughout the business enterprise. Essentially the tools help companies build better applications, from Internet/e-business transaction systems to informational Web sites. All of its research and development is conducted in Israel, however the company is based in California. As competition continues to grow online, Mercury Interactive knows the price for not keeping your Web site up to speed can be a company's demise. And from a financial perspective, the company is doing fairly well. 1Q earnings were solid at $0.11 p/s versus $0.06 same quarter last year and revenues were up 61% from $37.6 mln to $60.4 mln. New products have also hit the market this year. Most notably was the LoadRunner Active Test, which is capable of testing a Website's entire infrastructure with a 24-hour turnaround time. Then on May 30th, the new LoadRunner 6.5 with TurboLoad was unveiled. This tool can generate more virtual users from a single user server than any other "stress test" in the marketplace. The following day the company launched the Topaz 2.0, the latest version of its web application performance management system, which can correlate end-users' performance issues to the source of the problem. Obviously, MERQ has a vital role in the world of technology. Therefore it's understandable why investors would want put their money into this crucial player, especially now that the NASDAQ is rocking. What we've got is a buyer's spree in our midst and volume indicates that MERQ is on the shopping list. The $20.56, or 28.6%, advance this week perhaps puts it into a better perspective that MERQ is experiencing a dynamic uptrend. Currently, the share price is teetering above previous resistance at $90, a level not conquered in April and May. So the more cautious may want to stay on the sidelines until MERQ blazes a trail through this level. If you're a bit more enterprising, then dips to near-term support at $84 and $85, just above the 5-dma at $82.93. MERQ showed intraday strength on Friday higher at $88 and $89 which could prove to be profitable, yet more aggressive entry. The latter is assuming MERQ stays on a tear and doesn't consolidate at a lower support level. Recently on May 24th, Mercury Interactive held its Annual Meeting of Shareholders and voted to increase the authorized shares to 240 mln from 120 mln. The stock just split in February of this year, yet MERQ is again a potential split candidate. Some would say MERQ is a hopeful as long as it trades consistently above $85, while others say $120 is a more realistic estimate. Nonetheless, MERQ is now trading within the range so we'll keep our ears tuned in for an announcement. ***June contracts expire in 2 weeks*** BUY CALL JUN- 85 RQB-FQ OI=444 at $11.13 SL=8.25 BUY CALL JUN- 90*RQB-FR OI=338 at $ 8.00 SL=5.75 BUY CALL JUN- 95 RQB-FS OI=344 at $ 5.50 SL=3.50 BUY CALL JUN-100 RQB-FT OI=161 at $ 3.75 SL=2.00 BUY CALL JUL- 95 RBF-GS OI=167 at $11.25 SL=8.25 BUY CALL JUL-100 RBF-GT OI=238 at $ 9.00 SL=6.25 Picked on June 4th at $92.44 P/E = 213 Change since picked +0.00 52-week high=$134.50 Analysts Ratings 9-2-1-0-0 52-week low =$ 16.50 Last earnings 03/00 est= 0.10 actual= 0.11 Next earnings 07-17 est= 0.12 versus= 0.09 Average Daily Volume = 1.60 mln /charts/charts.asp?symbol=MERQ ******** SOFTWARE ******** CHKP - Check Point Software $233.69 (+71.19)(+1.13) Check Point Software Technologies is a worldwide leader in securing the Internet. The company's Secure Virtual Network (SVN) architecture provides the infrastructure that enables secure and reliable Internet communications. SVN secures business-to-business(B2B) communications between networks, systems, applications and users across the Internet, Intranets and extranets. Check Point's Open Platform for Security (OPSEC) provides the framework for integration and interoperability with "best-of-breed" solutions from over 200 leading industry partners. Well, CHKP has at least partially passed the test we mentioned on Thursday, and it did so quite convincingly. If you'll remember, we wanted to see its ability to break above the 200 level, which was the top of the recent trading range. We also wanted it to stay there. Although our play was gaining momentum in the last hour of trading on Friday, the real test could come next week. CHKP and others moved higher on better-than-expected economic data on Friday, and could continue with more reports scheduled this coming week. However, a quick check with our calculator shows a jump of more than 43% in the past four sessions. We are by no means trying to place a cloud over such an outstanding play. What we are trying to point out is if you stayed on the sidelines for some reason, you may have another chance to participate if investors decide to pull some money off the table. Friday's 18.8% jump up the chart came on better volume than we've seen in the last six weeks or so, which indicates this bounce may be one we can hang our hat on. With the 5 and 10-dma back below $200, chances are pretty good we could see some profit taking or at least a consolidation in coming days. We not are suggesting you ignore further moves higher. However, keep in mind that at some point greed will set in and traders will want to bank some profits. As for a pullback, there are four levels we would keep our eye on. Intraday charts show support near $228, $218 and Friday's low at $207. The biggie like we mentioned earlier is the $200 area. Late last month, Check Point was listed as one of the top 100 Internet stocks to own for long-term investors. Most analysts following the company have it rated a Strong Buy or at least a Buy. Yet on Friday, F. Drake Johnstone at Davenport & Co. saw fit to downgrade CHKP from a Buy to an Accumulate. For now, it will stay on our or list as stock with great potential. On Tuesday, CHKP announced it had recently been awarded the "Best Partnering Alliance" across the entire software industry for its Open Platform for Security (OPSEC) Alliance. The company's OPSEC Alliance comprises almost 250 partners, including such vendors as IBM, NOK, ORCL, ARPT, BMCS and FTE. ***June contracts expire in 2 weeks*** BUY CALL JUN-210 YKE-FB OI=271 at $29.38 SL=21.50 BUY CALL JUN-220*YKE-FU OI=145 at $22.63 SL=16.50 BUY CALL JUL-220 YKE-GU OI=197 at $38.50 SL=28.00 BUY CALL JUL-230 YKE-GV OI=276 at $33.63 SL=24.50 BUY CALL OCT-250 YKE-JJ OI=569 at $46.88 SL=34.00 SELL PUT JUL-200 YKE-ST OI= 90 at $15.75 SL=21.50 (See risks of selling puts in play legend) Picked on May 25th at $160.25 PE = 200 Change since picked +73.44 52 week high=$295.00 Analysts Ratings 12-3-0-0-0 52 week low =$ 21.34 Last earnings 04/00 est= 0.35 actual= 0.40 Next earnings 07-12 est= 0.42 versus= 0.26 Average daily volume = 1.76 mln /charts/charts.asp?symbol=CHKP ******* BIOTECH ******* SEPR - Sepracor Inc $108.81 (+17.63)(-8.56)(-2.50)(-1.00)(+11.25) Sepracor develops and commercializes new, patented forms of existing pharmaceuticals by purging them of nonessential molecules. The company's products can reduce side effects, provide new uses, and improve safety, performance, and dosage. Sepracor focuses its efforts on gastroenterology, neurology, psychiatry, respiratory care, and urology. The company is also developing its own new drugs to treat infectious diseases and conditions of the central nervous system. Volume finally returned to SEPR as traders exchanged over double the stock's ADV Friday en route to an 8.5% gain. Drug stocks suffered Friday as traders moved capital into the promising biotech sector. The AMEX Biotech Index ($BTK) gained an impressive 8.3%. SEPR received praise from a prominent money manager Friday, which added fuel to its upward momentum. In an interview Friday, Richard Steinberg offered his recommendation to buy SEPR at its current levels. Steinberg pointed out that SEPR has patents on isomers for 48 of the world's best selling drugs. Steinberg went on to explain that because the company doesn't have to prove clinical efficacy for its drugs since they're improving existing products their cost of marketing is much lower than a typical biotech company. Several institutions followed Steinberg's lead Friday as several large block trades crossed the tape early in the morning as SEPR screamed higher. We are entering into the fifth week of playing SEPR, and over that time we have seen the stock trace several interesting chart patterns. Most recently, the stock emerged from its head-and-shoulders bottom last week. Now, with Friday's rally, the stock is positioned to breakout from a three-month consolidation. SEPR managed to retest its near-term high of $110.75 Friday by reaching an intra-day high of $112. With Friday's explosive volume combined with the strong rally, we might see SEPR extend its gains early next week. Watch for the heavy trading to continue and look for SEPR to breakout above resistance at $110.75. If the profit takers show up Monday consider a bounce from support at $103 for a possible entry into the play. The Annual PaineWebber Life Sciences Conference gets under way in New York City this upcoming Tuesday. SEPR is scheduled to present to analysts at the meeting. If management delivers a bullish message to Wall Street we might get a little help from the analysts which would aid SEPR in a breakout attempt. ***June contracts expire in 2 weeks*** BUY CALL JUN-105*ERU-FA OI=336 at $ 9.63 SL= 6.50 BUY CALL JUN-110 ERU-FB OI=240 at $ 7.00 SL= 5.00 BUY CALL JUN-115 ERU-FC OI=323 at $ 4.88 SL= 3.00 BUY CALL JUL-110 ERU-GB OI=156 at $13.25 SL=10.00 BUY CALL OCT-115 ERU-JC OI= 26 at $21.13 SL=15.00 Picked on May 7th at $103.25 P/E = N/A Change since picked +5.56 52-week high=$126.81 Analysts Ratings 5-4-2-0-0 52-week low =$ 27.50 Last earnings 03/00 est= -0.96 actual= -0.76 Next earnings 07-24 est= -0.55 versus= -0.56 Average Daily Volume = 1.09 mln /charts/charts.asp?symbol=SEPR PDLI - Protein Design Labs $125.13 (+25.07) Protein Design Labs develops human and humanized monoclonal antibodies to prevent and treat diseases. The FDA approved the company's first humanized antibody product, Zenapax (daclizumab), for the prevention of kidney transplant rejection and there are seven other antibodies in the developmental pipeline. Global patents have been issued for the PDLI's humanization technology and currently they have business agreements with Eli Lilly and Genentech. PDLI's chart paints a rosy picture of its resurrection and clearly reveals the intensifying momentum. The money flowing back into the biotechs drove the share price up 25.1%, or $25.07 in just four trading days. By Wednesday PDLI cleared the technical hurdles and was trading above the converged 5, 10, & 30-dmas, all of which are in the vicinity of $110 to $113. Mid- week, Andrew Milne at Dain Rauscher Wessels began coverage with a Neutral rating, but it wasn't until Friday that PDLI really reached for the stars. However, the impressive 12-point gain was not backed by strong volume. Historically, that's not too unusual for this stock. In general, PLDI rises on low to moderate volume and descends quickly when volume peaks above the ADV. All in all, let's not pull the wool down over our eyes. This is purely a momentum play. Earnings aren't until early August so we've got to pay close attention to market sentiment and the stock's daily nuances. Near-term support is firm at $110 and $115, but let's look for $120 to develop as a launching point to confirm the trend. Overhead the first line of resistance is at $135, which isn't too far away, but the real test will be for PDLI to breakout above $140. But what's this - possibly a hidden treasure? On June 15th, shareholders will vote on a proposal to increase the number of authorized shares from 40 million to 90 million at the company's Annual Meeting of Shareholders. An approval would clear the way for the BOD to announce a stock split in the near future. While there aren't any guarantees, PDLI looks like a good candidate at the $150 price level. ***June contracts expire in 2 weeks*** BUY CALL JUN-120*PQI-FU OI=515 at $16.13 SL=11.50 BUY CALL JUN-125 PQI-FV OI= 29 at $13.50 SL=10.00 BUY CALL JUN-130 PQI-FW OI= 33 at $11.25 SL= 8.50 BUY CALL JUL-125 PQI-GV OI= 0 at $23.75 SL=18.50 BUY CALL JUL-130 PQI-GW OI=260 at $15.00 SL=11.00 Picked on June 4th at $125.13 P/E = N/A Change since picked +0.00 52-week high=$338.00 Analysts Ratings 2-2-3-0-0 52-week low =$ 18.25 Last earnings 03/00 est=-0.04 actual= 0.04 Next earnings 08-04 est= 0.19 versus=-0.14 Average Daily Volume = 1.41 mln /charts/charts.asp?symbol=PDLI ********************************* CALLS - CONTINUED IN SECTION FOUR ********************************* ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************************* SEE DISCLAIMER IN SECTION ONE
The Option Investor Newsletter Sunday 6-4-2000 Sunday 4 of 5 ***************** CALLS - CONTINUED ***************** **** MISC **** CPN - Calpine Corp $111.31 (+10.31) Calpine is an independent power producer. The company is the world's top geothermal operator, and it owns the largest producing geothermal resource, The Geysers, in northern California. Calpine has a net generating capacity of about 900 MW from geothermal plants, the company has additional capacity through its gas-fired plants. The company has 238 bln cubic feet of proved reserves, of which 90% are natural gas. Investors fled the utilities sector Friday, chasing shares of tech stocks higher. However, CPN held its ground and even managed to tack on a modest gain, displaying its amazing relative strength. Like we mentioned in Thursday's write-up, CPN is not your typical utility stock. The stock trades at a relatively high multiple of 57, but then again, growth doesn't come cheap. And, the stock is a darling on Wall Street. Over 500 institutions own the stock, representing nearly 95% of the ownership in CPN. While the long-term fundamentals are in place for CPN, we'll turn our attention to the near-term, and the upcoming 2-for-1 stock split. The last time the company split its shares was back in October of 1999. The stock made a nice run into the split, and we're looking for history to repeat itself. The payable date for the split is scheduled for this Thursday. While we would have like to seen heavier volume during Friday's trading ahead of the split, we'll take the gain nonetheless. After clearing yet another resistance level during Friday's rally, CPN is in a good technical position for a run. The stock has one more near-term resistance level at $113.81 to clear before moving substantially higher. In light of CPN's impressive showing Friday, despite the relative weakness in the utilities sector, we'll want to watch the stock closely Monday morning to see if the buyers continue accumulating. Watch for a bold move above resistance at $113.81 and confirm a breakout with healthy volume. However, if the selling in the utilities sector catches up with CPN, look for the stock to find support at the $110 level and watch for a bounce. In the news recently, CPN said it plans to build and operate a 540-megawatt(MW) natural gas-fired electric generating plant in Ohio. The company said the plant will be capable of generating over 700 MW of electricity during periods of high demand (1 MW is enough to power about 500 homes). Morgan Stanley upped the stock to a Strong Buy from a Neutral after the announcement. ***June contracts expire in 2 weeks*** BUY CALL JUN-105*CPN-FA OI= 65 at $ 9.00 SL= 6.25 BUY CALL JUN-110 CPN-FB OI=123 at $ 6.00 SL= 4.00 BUY CALL JUN-115 CPN-FC OI= 65 at $ 3.63 SL= 1.75 BUY CALL JUL-110 CPN-GB OI= 98 at $ 9.50 SL= 6.50 BUY CALL OCT-115 CPN-JC OI= 16 at $15.13 SL=11.00 Picked on June 1st at $109.06 P/E = 57 Change since picked +2.25 52-week high=$123.00 Analysts Ratings 6-4-1-0-0 52-week low =$ 24.56 Last earnings 03/00 est= 0.28 actual= 0.27 Next earnings 07-31 est= 0.42 versus= 0.33 Average Daily Volume = 888 K /charts/charts.asp?symbol=CPN PGR - Progressive Corp. $93.13 (+0.63) Traditionally a leader in non-standard, high-risk personal auto insurance, PGR has moved into standard-risk and preferred auto insurance, as well as other personal use vehicle coverage, such as motorcycles and recreational vehicles. The company's property-casualty insurance products protect its customers against collision and physical damage to their vehicles and liability to others for personal injury or property damage. Thanks to a timely downgrade, PGR gave us another nice entry point on Friday. Credit Suisse First Boston downgraded shares of the insurance company from Strong Buy to Buy, and the price quickly dropped back to test the $91 support level. Buyers were waiting with cash in hand and spent the afternoon bidding the price back up. While the stock lost $4.56 on the day, it was encouraging to see the strong recovery off the lows, which was accompanied by increasing volume. Friday's weak employment report strengthened the belief that the Fed's string of interest rate hikes is starting to have their desired effect and the economy is slowing. This increases optimism that we may be nearing the end of tightening monetary policy, and financial stocks are one of the key beneficiaries. Insurance stocks had a rough time moving higher on Friday, but as the economy slows and the markets recover, PGR should float higher with the rising tide. Consider new entries on renewed bounces near support, but make sure that volume is confirming the move. Resistance still sits near $98, so tighten up your stops as PGR approaches this level. Once the stock clears $105, the move could get another boost as investors work to fill the gap left last September. Building out its online presence, on May 26th, PGR introduced the first-ever online insurance program for boats and personal watercraft. Adding to their online image, last Tuesday the company was granted a license to display the BetterWeb Seal on its website. This informs consumers that the site complies with the BetterWeb disclosure standards for sales terms, privacy, and security policies. On May 16th, PGR received an upgrade from Market Perform to Outperform by Goldman Sachs. ***June contracts expire in 2 weeks*** BUY CALL JUN- 90*PGR-FR OI=184 at $6.25 SL=4.25 BUY CALL JUN- 95 PGR-FS OI= 50 at $3.75 SL=2.25 BUY CALL JUN-100 PGR-FT OI= 50 at $2.00 SL=1.00 BUY CALL JUL- 95 PGR-GS OI= 19 at $7.88 SL=5.75 BUY CALL JUL-100 PGR-GT OI= 37 at $5.75 SL=3.75 Picked on June 1st at $97.69 P/E = 51 Change since picked -4.56 52-week high=$152.13 Analysts Ratings 3-3-16-0-0 52-week low =$ 45.00 Last earnings 04/00 est= 0.14 actual=-0.50 Next earnings 07-18 est= 0.42 versus= 1.32 Average Daily Volume = 675 K /charts/charts.asp?symbol=PGR ***** LEAPS ***** By Mark Phillips Contact Support If it looks like a rally, and acts like a rally, it must be a rally, right? The NASDAQ had an incredible week, tacking on over 600 points and clearing resistance at 3800 on Friday. The VIX confirmed the change of direction as it fell below 25 for the first time since early April, ending the week at 24.16. All of the old favorites participated, as we saw strong gains in Semiconductors, Networking, Internets, Financials and Biotechs. So why the dramatic recovery? Simply put, it's the economy. Housing starts, automotive sales, and retail sales all showed signs of slowing and the frosting on the cake was the weak Employment Report on Friday. We finally saw unemployment rise, and new job creation was anemic, to say the least. So should you back up the truck on Monday and buy all the LEAPS your account can hold? I wouldn't, and here is my thinking. With the huge gains from last week, a pullback has got to be just around the corner. We've been talking for months about the importance of good entry points and using strong gains as an opportunity to take profits on the winners. The past 2 weeks have provided some incredible entry points on virtually every play in the LEAPS portfolio. Most of these plays are up huge from where they were only a week ago. JDSU is up 37%, XLNX gained 33%, TXN added 28%, and VSTR tacked on 33%; all in the last week. Prudent investors will take advantage of the opportunity to lock in profits by closing out some winning positions or at least moving their stops up. That way, when the inevitable profit taking occurs, you have cash in your account and can take advantage of the next set of entry points. LEAPS allow you to buy more time, mitigating the need to be right on timing your plays, but that doesn't mean that you have to use all the time you bought. It looks like the much- anticipated Summer rally has arrived, but we are unlikely to take a vertical ride back to 5000 on the NASDAQ. Much of the euphoria that accompanied our first trip to that level has dissipated, and the recovery will likely be more orderly. This means gains, and then consolidations, providing vigilant LEAPS investors with repeated opportunities to profit. Pick your entry points wisely and then wait for them to come to you. Current Plays SYMBOL SINCE LEAPS SYMBOL PICKED CURRENT RETURN EMC 11/07/99 JAN-2001 $ 80 EMB-AP $15.38 $57.50 273.86% JAN-2002 $ 90 WUE-AR $19.00 $62.63 229.63% IBM 11/07/99 JAN-2001 $100 IBM-AT $13.63 $20.50 50.40% JAN-2002 $110 WIB-AB $16.50 $26.50 60.60% CSCO 11/14/99 JAN-2001 $ 40 CYQ-AH $ 9.56 $28.75 200.73% JAN-2002 $ 45 WIV-AI $11.00 $31.38 185.27% NT 11/28/99 JAN-2001 $37.5 ZOO-AU $11.13 $24.63 121.29% JAN-2002 $37.5 WNT-AU $15.13 $32.13 112.36% TXN 12/12/99 JAN-2001 $ 55 TNZ-AK $11.13 $36.50 227.94% JAN-2002 $ 60 WGZ-AL $14.25 $40.63 185.12% SUNW 12/19/99 JAN-2001 $ 80 SUX-AP $17.63 $22.50 27.62% JAN-2002 $ 90 WJX-AR $22.00 $29.88 35.82% CY 01/16/00 JAN-2001 $ 40 ZSY-AH $ 9.13 $19.00 108.11% JAN-2002 $ 40 WSY-AH $12.63 $24.63 95.01% ERICY 01/30/00 JAN-2001 $16.3 RQC-AO $ 4.94 $ 8.50 72.06% JAN-2002 $16.3 WRY-AO $ 6.75 $10.88 61.19% NSM 02/27/00 JAN-2001 $ 70 ZUN-AN $18.50 $16.00 - 8.11% JAN-2002 $ 70 WUN-AN $24.25 $26.88 10.85% AOL 03/12/00 JAN-2001 $ 60 AOO-AL $14.00 $ 9.63 -31.21% JAN-2002 $ 65 WAN-AM $18.63 $15.38 -17.44% AXP 03/12/00 JAN-2001 $43.3 AXP-AP $ 7.25 $16.88 132.83% JAN-2002 $46.6 WXP-AQ $ 9.33 $19.38 107.72% WM 03/19/00 JAN-2001 $ 25 WM -AE $ 5.00 $ 9.00 80.00% JAN-2002 $ 30 WWI-AF $ 5.38 $ 8.63 60.41% QCOM 03/26/00 JAN-2001 $150 AUA-AJ $39.25 $ 4.75 -87.90% JAN-2002 $160 XQO-AL $52.88 $13.00 -75.42% AMD 04/16/00 JAN-2001 $ 70 AMD-AN $17.50 $33.38 90.74% JAN-2002 $ 70 WVV-AN $26.00 $43.63 67.81% CMGI 04/16/00 JAN-2001 $ 50 ZB -AJ $21.50 $21.25 - 1.16% JAN-2002 $ 55 WCK-AK $27.75 $29.50 6.31% JDSU 04/16/00 JAN-2001 $ 80 XJU-AP $27.50 $45.38 65.02% JAN-2002 $ 80 YJU-AP $39.63 $60.75 53.29% VSTR 04/16/00 JAN-2001 $ 90 ZTB-AR $23.88 $59.25 148.12% JAN-2002 $ 90 WWP-AR $35.00 $75.13 114.66% YHOO 4/30/00 JAN-2001 $140 YMM-AH $32.13 $30.75 - 4.30% JAN-2002 $140 WYZ-AH $46.38 $48.75 5.11% MOT 5/14/00 JAN-2001 $33.3 MOT-AY $ 6.58 $ 9.00 36.78% JAN-2002 $36.6 WMA-AZ $ 9.54 $12.75 33.65% NOK 5/21/00 JAN-2001 $ 50 NZY-AJ $10.25 $15.50 51.22% JAN-2002 $ 50 IWX-AJ $17.25 $22.50 30.43% HD 5/28/00 JAN-2001 $ 50 ZHD-AJ $ 6.25 $10.25 64.00% JAN-2002 $ 50 WHD-AJ $11.38 $16.00 40.60% XLNX 5/28/00 JAN-2001 $ 70 ZIZ-AN $14.63 $28.63 95.69% JAN-2002 $ 70 WXJ-AN $23.38 $39.38 68.43% To review the play description on any of our current plays, go to the LEAPS section for the date the play was added. Option Selection: Notice that many of our LEAP plays have moved considerably since initially being picked. The listed options may therefore be deep in the money and very expensive. When entering a new position, look to buy LEAPS according to your suitability level, but note that we typically initiate strikes that are slightly out of the money from the stock's current price. Leap of the Week CMGI - CMGI Inc. $58.50 After being taken out to the woodshed and beaten with the rest of the Internets, CMGI is beginning to recover. Tagging a low of $43 a week ago, the Internet incubator firm has started moving nicely higher, gaining over 30% last week. Signs of a slowing economy is lending support to the theory that the Fed may be almost done with its latest series of interest rate hikes. Money is flowing back into the NASDAQ, and the Internets were one of the big winners last week (along with Networking and Semiconductors). There was even a technology IPO (ONIS) that managed a triple-digit gain on its first day of trading. Seems like old times, doesn't it? Friday's strong gains pushed CMGI through the $55 level, which had looked like it might create some overhead resistance. Volume and price increased right up to the close, making our play look strong going forward. But let's step back a minute. The NASDAQ was up over 600 points last week, and CMGI was up over 30%. After such a strong run, a pullback seems likely. Hopefully the gyrations of the past few months have gotten your attention and you can see the rewards of waiting for the right entry point. Look to initiate open positions on a pullback to $55 or even $50. Let the market tell you where it is ready to bounce and then jump in when the move is confirmed by increased buying volume. BUY LEAP JAN-2001 $60.00 ZB -AL at $17.25 BUY LEAP JAN-2002 $60.00 WCK-AL at $28.00 New Plays None Drops None ********* PUT PLAYS ********* Put plays can be very profitable but have a larger risk than call plays. When a stock is falling the entire investment community (except the shorts) is hoping it will reverse and start back up. The company management is also doing everything they can to shore up their stock price. The company issues press releases, brokers talk it up, analysts try to put a positive spin on everything. Then of course there is the death knell, the "buy recommendation" simply because the price has dropped to some level that analysts feel attractive again. Buyers who like the stock wait until it appears a bottom has been reached and then jump on it in a feeding frenzy. They may already have a large position and are averaging down. Many factors can stop a free falling stock in mid drop. **** CL - Colgate Palmolive $54.50 (-1.25) 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. CL benefited from the broad market rally Friday. But it could get a lot more interesting for shareholders of CL in the coming weeks. The story is a bit complicated and this is how it goes. Gillette (G) is trying to streamline its operations and get rid of its weakest business lines. G is reportedly in talks to sell its stationery products business to Newell (NWL). Salomon Smith Barney came out with a research note Friday stating that the deal makes G look much more attractive to CL as a possible buyout. Salomon analysts noted that CL has a ton of cash on hand and that the company has made few acquisitions in the last three years. Consequently, analysts expect the two stocks to be active in the near future. The merger rumors could have a positive or negative impact on our play, depending upon how traders view the deal. We'll see in the coming days how investors' perception of a possible merger affects the stock. Additionally, with the resurgence in the tech sector we could start to see some money leave the consumer staples sector. The rally in stocks such as CL, that began in early March, may be nearing its end as technology stocks continue to build momentum and draw money from the defensive sectors. Although CL rallied Friday, the stock is still trading below its descending 10-dma. If CL continues to edge higher, watch for a bump against resistance at the 10-day (currently at $55.25) for a possible entry point. A conservative trader might wait for the stock to fall below support at $54 before considering entry into the play. While its still early, watch for the merger talks to develop and pay close attention to how traders react to any news concerning a buyout offer from CL. ***June contracts expire in 2 weeks*** BUY PUT JUN-60*CL-RL OI= 61 at $5.75 SL=3.75 BUY PUT JUN-55 CL-RK OI=1865 at $2.19 SL=1.00 Average Daily Volume = 2.23 mln /charts/charts.asp?symbol=CL MRK - Merck & Co $68.94 (-5.63) Merck & Co., Inc. is a global, research-driven pharmaceutical company that discovers, develops, manufactures and markets a broad range of human and animal health products, directly and through its joint ventures, and provides pharmaceutical benefit services through Merck-Medco Managed Care. Merck's cholesterol drugs Zocar and Mevacor, and its hypertension drugs Vasotec and Prinivil are their top sellers. They main competition comes from Aventis, Bristol-Myers-Squibb and Novartis. Our play in Merck kicked off with a drop of just under 5% on Friday. On a day when the major indices were making gains of 6% or so, MRK and the drug sector was seeing selling like it had not experienced in quite some time. What's the reason for the change? Several things. First we are seeing a change in investor sentiment. The drug companies are typically known as safe haven in rough times, primarily due to their steady earnings potential. In the last couple of months, MRK has climbed about 44% from its low near $52. As one analyst put it, the market is now moving from a defensive posture to a very aggressive investing posture. With money going into the tech sector, it has to come from somewhere. It will either be "new" money coming into the market or current investors selling what they own now. It is probably a combination of both. Other analysts point to the upcoming Presidential elections as a contributing factor to the weakness seen in MRK and the drug stocks. Apparently, some investors are concerned with future plans for Medicare and the drug companies should a Democrat be elected. We are in no way endorsing or agreeing with the above scenario, simply reporting what is being said in the press. The third item we mentioned on Thursday was the class action suit brought against BMY. Again, MRK is in no way involved in the suit, but investors sometimes become skittish towards the whole sector when class action lawsuits make the headlines. So how do we nurture this new play? Technically, Merck is just coming off an overbought condition, with most indicators pointing further south. A look at the intraday charts shows our play could be due for a bit of a bounce. Support for Merck is found near $66.50 with its 50 and 100-dma sitting at $68.49 and $67.63. Resistance shows up at $71, $72 and $73.50. The recent selling has come with strong volume indicating this could become the current trend for a while. We would look for bounces up to resistance as a chance to enter new plays or add to existing positions. ***June contracts expire in 2 weeks*** BUY PUT JUN-75 MRK-RO OI=1017 at $6.13 SL=4.00 BUY PUT JUN-70 MRK-RN OI=5031 at $2.31 SL=1.25 BUY PUT JUL-70*MRK-SN OI=8719 at $3.88 SL=2.38 Average daily volume = 6.24 mln /charts/charts.asp?symbol=MRK CAH - Cardinal Health $63.56 (-1.19) Cardinal Health is the second largest US wholesaler of pharmaceuticals, surgical and hospital supplies. The healthcare service provider offers these products and services to independent and chain drugstores, hospitals, alternate care centers, and the pharmacy departments of supermarkets throughout the United States. The company also offers support services including computerized order entry and confirmation systems. Through its subsidiary, Pyxis Corporation, CAH develops, manufactures, leases, sells and services systems that automate the distribution, management, and control of medications and supplies in healthcare facilities. The techs are back and everybody knows what that means. Money that had been parked in "safer" stocks, like pharmaceuticals and cyclicals, is moving back into the NASDAQ. With the strong showing on the tech-heavy index late last week, the momentum of many safety plays began to wane. After moving up more than $20 since mid-April, CAH ran out of buyers and rolled over at the $67 resistance level. Given the strength across all the major indices, it was clear where the money was coming out of. Pharmaceuticals bore the brunt of the selling, and on heavy volume too. Big losers on Friday included MRK, WLA, LLY, and of course our play CAH. The decline began early and continued right into the close, putting in a loss of over $3 on 30% greater volume than the daily average. Support at $64 failed to hold, which opens the door for a retest of the $60 level, last seen on May 19th. A good sign for continued weakness will be a failure to move back up through the $64 level. Better entries may be had if CAH tries to rally back to resistance at $64, or even $67, but given the deteriorating picture for the sector, we may have to content ourselves with entering as the stock continues down below $63, which is the next level of support. ***June contracts expire in 2 weeks*** BUY PUT JUN-70*CAH-RN OI=205 at $7.00 SL=5.00 BUY PUT JUN-65 CAH-RM OI= 0 at $3.25 SL=1.50 Wait for OI! Average Daily Volume = 1.23 mln /charts/charts.asp?symbol=CAH BUD - Anheuser-Busch Co. $72.69 (-8.63) Anheuser-Busch Companies, Inc.'s operations and resources are focused on beer, adventure park entertainment and packaging. Anheuser-Busch subsidiaries include the world's largest brewing organization, Anheuser-Busch, Inc., the brewer of some 30 beer brands, including Budweiser and Bud Light, the world's largest selling beers. Other subsidiaries include one of the nation's largest theme park operators and one of the country's largest manufacturers of aluminum beverage containers. Other interests range from real estate development to creative services. This BUD may or may not be for you. It certainly wasn't the company of choice on Wall Street this past week. The company said earlier this year that the outlook for 2000 was the best it's been in over a decade. That may be true as earnings have not only been on track, but have come in ahead of analysts' estimates. The current shift in investor sentiment seems to be taking its toll on BUD and many of the consumer related issues. Whether it will last is anyone's guess, but for now investors are dumping BUD and putting their money to work elsewhere. When investors left for the holiday weekend last week, BUD was making a run at its 52-week high of $84, set last September. Traders returned this week with one thing in mind, SELL. At this time, 18 of the 20 brokers following the company have it rated either a Buy or Strong Buy. The most recent comments came a week ago Thursday. David A. Goldman, at Sun Trust Equitable Securities, initiated coverage with a Buy rating and a price target of $85. The point here is that a company can have all the Strong Buy ratings in the book, but if your industry has fallen out of favor due to a shift in broad market sentiment, it will do little to bring buyers to the table. BUD didn't get much help from a report issued yesterday concerning an S&P scorecard. BUD topped the list as the Worst Performing stock for the week. Not exactly a list most companies are trying to get in on. The apparent swing in the psychology of the markets was evident on Friday as BUD fell about 6.5%, with just under 3 mln shares changing hands. The last time BUD saw that kind of volume was in the middle of March, as came off its lows of the year. Technically, BUD is a bit oversold on an intraday chart, which could indicate a small bounce soon. Resistance is seen at $74 and near $77.50. Support could come into play between $69 and its 200-dma at $70.28. A bounce early in the week followed by further weakness could provide a good entry for our new play. ***June contracts expire in 2 weeks*** BUY PUT JUN-75*BUD-RO OI=415 at $3.38 SL=1.75 BUY PUT JUL-80 BUD-SP OI=108 at $8.38 SL=6.00 BUY PUT JUL-75 BUD-SO OI=180 at $4.75 SL=3.00 Average daily volume = 1.50 mln /charts/charts.asp?symbol=BUD ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***************************** SEE DISCLAIMER IN SECTION ONE *****************************
The Option Investor Newsletter Sunday 6-4-2000 Sunday 5 of 5 ************* COVERED CALLS ************* Success Basics: Investor or Trader? A well-known stock market expert once said, "There may be as many different investment goals as there are investors." Indeed that is a true statement and determining how best to profit from the market is one of the most difficult obstacles that inexperienced investors must overcome. Our recent article on the pitfalls of the "buy and hold" concept discussed many of the problems with long-term portfolio positions. However, there is merit to this type of investing when it is incorporated into a balanced approach to financial security and it is still the most successful theory today in all financial markets. Most experts say that a combination of investments will provide the best balance of risk and reward in a long-term portfolio. A diverse group of long-term issues is a good foundation for any novice investor and a qualifying retirement account can help defer taxes. Those who need current income can choose from a vast number of dividend paying securities, many of which also have an excellent record of share price growth. Investors who choose to avoid certain types of business activity (based on ethical or financial principles) can still find many value-based stocks that meet their investment objectives. Those who wish to achieve the same performance as an individual industry or sector can purchase mutual funds and other financial instruments that mirror specific groups of stocks. More aggressive traders can apply value-investing principles to blue chip companies; buying stocks that are undervalued and selling those that are overvalued. As a portfolio matures, investors can also diversify into bonds or treasury instruments to benefit from market and interest rates fluctuations. While strategy is important, it is also imperative to approach investment activities with the right attitude and expectations. Trying to achieve too much from a portfolio can put the account in the red quickly (greed can lead to terrible decisions), and accepting returns that barely surpass current inflation rates will prevent a portfolio from growing. "Buy and hold" has worked very well throughout the last quarter of the century but it is still important to be proactive with your core holdings. While most investors who make the effort to learn about the stock market are not satisfied to achieve the same return as the Dow or the S&P 500, others will actively seek mediocrity. Just look at the number of index funds that are sold to investors who then are relegated to losing what the market loses and gaining no more than the market gains. Today's modern trading forums provide a vast number of profit opportunities and there are numerous stock and options strategies for the average investor. The key to success is to follow a carefully planned approach with precision and discipline. So how do you determine a reasonable expectation? Most investors who participate in historically profitable strategies will easily average 15%-20% return on an annual basis. In the long-term, 10% a year is the typical return for broad market stocks in general. In comparison to a rigid investing plan, the Dow's performance is just what it's described as; Average, and yet Warren Buffett made his fortune (Berkshire Hathaway is worth over a billion dollars), by focusing on a mere 15% annual return on assets. His primary goal however, was to maintain a substantial margin of safety in all of the portfolio's holdings. From a long-term viewpoint, that approach is valid even today as the recent activity suggests the protracted "bull" market may finally be coming to an end. Benjamin Graham has long been the master for investors who ascribe to the "buy and hold" mentality but Charles Dow may have said it best, "The man who is prudent and careful in carrying on a store, factory or real estate business seems to think that totally different methods should be employed in dealing with stocks. Of course nothing could be further from the truth." Good Luck! SUMMARY OF PREVIOUS PICKS ***** NOTE: Using Margin doubles the listed Monthly Return! Stock Price Last Call Strike Price Profit Monthly Symbol Picked Price Month Sold Picked /Loss Return PSSI 9.50 9.59 JUN 7.50 2.63 *$ 0.63 10.0% FHS 11.38 12.31 JUN 10.00 2.13 *$ 0.75 8.8% CYBS 14.94 16.94 JUN 12.50 3.00 *$ 0.56 6.8% EGOV 15.44 20.69 JUN 12.50 3.50 *$ 0.56 6.8% CENT 11.81 11.63 JUN 10.00 2.50 *$ 0.69 6.4% SMRT 8.53 7.88 JUN 7.50 1.50 *$ 0.47 5.8% WGR 22.50 21.94 JUN 20.00 3.25 *$ 0.75 5.6% CWST 12.63 13.06 JUN 10.00 3.00 *$ 0.37 5.6% CAIR 22.88 24.00 JUN 17.50 6.38 *$ 1.00 5.3% BEAM 12.44 18.56 JUN 10.00 3.00 *$ 0.56 5.2% ANET 12.94 13.56 JUN 12.50 1.13 *$ 0.69 5.1% AAS 22.00 25.25 JUN 20.00 2.88 *$ 0.88 5.0% WGR 21.00 21.94 JUN 17.50 4.13 *$ 0.63 4.1% LPNT 20.63 19.88 JUN 17.50 3.75 *$ 0.62 4.0% PXD 14.06 14.31 JUN 12.50 1.88 *$ 0.32 3.8% ADAC 17.38 20.31 JUN 15.00 2.75 *$ 0.37 3.7% CCCG 13.50 9.59 JUN 10.00 4.00 $ 0.09 1.0% No Lower DRIV 18.81 13.88 JUN 15.00 4.75 $ -0.18 0.0% Closing *$ = Stock price is above the sold striking price. Comments: Pss World Medical (PSSI) has recovered from last Friday's low. Act Networks (ANET) is rallying in conjunction with Clarent (CLRN) and has moved up steadily from Friday's low. Digital River (DRIV) offered a break-even exit this week and therefore we will show the position closed. Rolling down to the July $12.50 strike was another alternative for those investors with a long term outlook. Ccc Information (CCCG) dropped on Wednesday and is threatening the April low as well as long-term technical support. The action is very bearish in light of the recent market-wide rally and CCCG is probably a candidate for early exit if it moves any lower. Positions Closed: Boise Cascade (BCC) - Paper Sector downgrade. NEW PICKS ********* Sequenced by Company ***** Stock Last Call Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return HSIC 18.25 JUN 17.50 HQE FW 1.31 138 16.94 14 7.2% ITXC 40.06 JUN 35.00 UXI FG 6.75 146 33.31 14 11.0% MENT 18.31 JUN 17.50 MGQ FW 1.25 272 17.06 14 5.6% NERX 14.75 JUN 12.50 XUO FV 2.69 9 12.06 14 7.9% STAA 13.50 JUN 12.50 SQT FV 1.38 183 12.12 14 6.8% ALSC 26.88 JUL 22.50 ASU GX 5.88 207 21.00 49 4.4% MED 9.44 JUL 7.50 MED GU 2.69 0 6.75 49 6.9% Sequenced by Return ***** Stock Last Call Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return ITXC 40.06 JUN 35.00 UXI FG 6.75 146 33.31 14 11.0% NERX 14.75 JUN 12.50 XUO FV 2.69 9 12.06 14 7.9% HSIC 18.25 JUN 17.50 HQE FW 1.31 138 16.94 14 7.2% STAA 13.50 JUN 12.50 SQT FV 1.38 183 12.12 14 6.8% MENT 18.31 JUN 17.50 MGQ FW 1.25 272 17.06 14 5.6% MED 9.44 JUL 7.50 MED GU 2.69 0 6.75 49 6.9% ALSC 26.88 JUL 22.50 ASU GX 5.88 207 21.00 49 4.4% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MR-Monthly Return. ***** HSIC - Henry Schein $18.25 *** Digital Dentistry *** Henry Schein is a distributor of healthcare products and services to office-based healthcare practitioners in North America and Europe. They sell products and services to over 400,000 customers, primarily dental practices and dental laboratories, as well as physician practices, veterinary clinics and institutions. After reporting favorable earnings at the beginning of May, showing revenue growth and an increase in operating cash flow, Henry Schein announced the acquisition of California-based Integra Medical at the end of May. Integra Medical is reported to be the number one rated manufacturer of digital imaging software and technology products for dentists. The acquisition should enhance Henry Schein's position in digital dentistry. Investors appear to agree with the move as the current rally has good volume support. We favor a cost basis near support on this two-week play, that has a long-term bullish outlook. JUN 17.50 HQE FW LB=1.31 OI=138 CB=16.94 DE=14 MR=7.2% Chart = /charts/charts.asp?symbol=HSIC ***** ITXC - Itxc Corporation $40.06 *** Time To Rally? *** ITXC is a service provider for voice on the Internet. ITXC WWeXchange Service provides phone-to-phone wholesale call completion for carriers and resellers and has been chosen by ten of the top 12 United States facilities-based carriers, leading European competitive carriers and PTTs worldwide to complete their customers' calls. ITXC webtalkNOW! Service enables portals, ISPs and communications Websites to offer PC-to-phone calling to their customers under their own brands. Intel recently announced it is licensing its Internet telephony software technology to ITXC. The technology improves the quality of voice communication when making calls from PC to phone, and the deal allows ITXC to incorporate the software into its webtalkNOW! ServiceSM. ITXC offers the service to Web portal and Internet telephony device customers, who can easily integrate it into their existing Web pages and other applications. These companies can then offer Web-to-phone capabilities right from a user's browser. With the close above the May high, ITXC appears to be completing a short term bottom. A favorable play on a technically bullish issue. JUN 35.00 UXI FG LB=6.75 OI=146 CB=33.31 DE=14 MR=11.0% Chart = /charts/charts.asp?symbol=ITXC ***** MENT - Mentor Graphics $18.31 *** New Multiyear High! *** Mentor Graphics is a world leader in electronic hardware and software design solutions, providing products and consulting services for the world's largest electronics and semiconductor companies. Mentor Graphics is one of the few companies whose stock rallied after reporting favorable earnings May 1. Mentor Graphics beat the street by almost double with strong revenue, gross margin, and a record level of backlog. The company continues to forge new contracts, partnerships, and acquisitions and recently regained the number one position in the printed circuit board design market. What better way to welcome a downgrade (from Market Outperform to Market Perform) by Goldman Sachs than close at a new multi-year high. MENT did not weaken after-hours and the February high should provide new technical support. A short-term play with a favorable long-term outlook. JUN 17.50 MGQ FW LB=1.25 OI=272 CB=17.06 DE=14 MR=5.6% Chart = /charts/charts.asp?symbol=MENT ***** NERX - NeoRx $14.75 *** Drug Speculation *** NeoRx develops innovative therapeutic biopharmaceuticals primarily for the treatment of cardiovascular and inflammatory diseases, as well as cancer. Their scientists have developed expertise and technologies that permit radiation, and other toxins, to be targeted preferentially to tumor cells. The stock exploded in March when a peer-reviewed manuscript in the Proceedings of the National Academy of Sciences, reported that a single dose of NeoRx's proprietary Pretarget® technology cured established human lung (10/10 animals), colon (10/10 animals) and breast cancers (8/10 animals) implanted in mice. NeoRx has also started clinical trials for Skeletal Targeted Radiotherapy. In May, Stephens Inc. and Adams Harkness initiated coverage with a "buy" and a "strong buy" rating, respectively. We simply favor the technical stage I base. Although this is a short-term play, due diligence is required. JUN 12.50 XUO FV LB=2.69 OI=9 CB=12.06 DE=14 MR=7.9% Chart = /charts/charts.asp?symbol=NERX ***** STAA - STAAR Surgical $13.50 *** Wanted, a New CEO? *** STAAR Surgical is a developer, manufacturer and distributor of products used by eye care professionals to improve or correct vision in patients suffering from cataracts, glaucoma and refractive conditions. Among their main products are their Implantable Contact Lenses and Toric Intraocular Lens, for use in correcting conditions such as myopia, hyperopia and astigmatism; and the Wave Phacoemulsification Machine, used for restoring vision adversely affected by cataracts. STAAR Surgical's Board of Directors removed John R. Wolf from his positions as Chairman, President and Chief Executive Officer, naming the COO, William C. Huddleston as President and CEO in the interim. This appears to have been forthcoming as the stock actually rallied after the announcement. The message boards continue to speculate on a possible buyout or merger. A two-week play for speculators! JUN 12.50 SQT FV LB=1.38 OI=183 CB=12.12 DE=14 MR=6.8% Chart = /charts/charts.asp?symbol=STAA ********** July Plays ********** ALSC - Alliance Semiconductor $26.88 *** Sector heating up? *** Alliance Semiconductor develops and markets high performance memory and memory intensive logic products to the personal computer, networking, telecommunications and instrumentation industries. They are actively pursuing a variety of initiatives to create a range of embedded-memory products that combine logic and memory on a single chip. Alliance Semiconductor recently announced its intention to enter the networking semiconductor market. Alliance has rallied from its April low on favorable earnings showing strong revenue and income. Several upgrades and Strong Buy recommendations have helped push Alliance to a new multi-year high. The heavy volume is bullish and the high option premiums offer a conservative entry point in a bullish issue. JUL 22.50 ASU GX LB=5.88 OI=207 CB=21.00 DE=49 MR=4.4% Chart = /charts/charts.asp?symbol=ALSC ***** MED - e-MedSoft.com $9.44 *** Stage I base *** e-MedSoft has developed the first subscription-based healthcare management system available for delivery through the Internet. Users of the software are charged a small up-front installation fee, and an ongoing subscription fee based on transaction volume. The medical software is a complete healthcare management system. e-MedSoft also operates the e-Net Technology group of companies, which includes e-Net Systems Ltd. (formerly Relay Business Sys.), IFA Systems, and e-Net Software. The group focuses on removing the complexity of Web-enabling business processes by providing a complete range of Internet Managed Services and Information Tech solutions, and by utilizing strategic partners Sun Microsystems, Oracle Corporation and Cisco Systems Ltd. e-MedSoft has lots of news out on new contracts, exhibits, acquisitions, and patents, as it forms a stage I base. The heavy volume during rallies is bullish, and the technicals suggest an upward resolution of the recent consolidation phase. JUL 7.50 MED GU LB=2.69 OI=0 CB=6.75 DE=49 MR=6.9% Chart = /charts/charts.asp?symbol=MED ************************* NAKED PUT PERCENTAGE LIST ************************* By Ryan Nelson Stock Stock Strike Option Option Margin Percent Support Symbol Price Price Symbol Price At 25% Return Level AMCC 128.81 120 AZV-RD 6.00 3220 19% 110 AMD 89.56 85 AMD-RQ 3.00 2239 13% 85 BLDP 81.25 80 DFQ-RP 2.94 2031 14% 75 BRCD 134.00 120 UBZ-RD 3.38 3350 10% 120 CHKP 233.69 220 YKE-RU 7.38 5842 13% 220 CIEN 138.31 130 UEE-RF 5.38 3458 16% 130 CMTN 88.94 85 KUA-RQ 4.25 2224 19% 85 EXDS 87.13 170 DUB-RP 3.13 2178 14% 80 GLW 208.88 200 GRJ-RT 5.13 5222 10% 200 ITWO 129.13 120 QYJ-RD 5.13 3228 16% 120 JNPR 214.50 210 JUY-RB 10.63 5363 20% 205 KLAC 61.50 60 KCQ-RK 3.25 1538 21% 55 MLNM 105.88 100 QMR-RT 4.63 2647 17% 100 PDLI 125.13 120 PQI-RU 8.75 3128 28% 115 PEB 64.44 60 PEB-RL 2.13 1611 13% 60 PHCM 87.00 80 UGE-RP 2.94 2175 14% 80 PMCS 188.25 170 SZI-RN 4.88 4706 10% 170 RBAK 112.56 110 BUK-RB 7.88 2814 28% 100 RMBS 217.38 210 BYQ-RB 16.00 5435 29% 210 SCMR 110.00 100 QSM-RT 3.75 2750 14% 102 SDLI 260.38 240 QJV-RH 11.00 6510 17% 240 SEBL 138.94 130 SGW-RF 3.50 3474 10% 130 SNDK 72.94 70 SWQ-RN 3.50 1824 19% 65 SSTI 101.88 100 SSU-RT 6.00 2547 24% 100 TQNT 114.38 110 TNN-RB 5.25 2860 18% 100 VRTS 134.50 125 VUQ-RE 3.63 3363 11% 128 VRTX 83.00 75 VQR-RO 2.13 2075 10% 80 YHOO 134.5 125 YMM-RE 3.63 3363 11% 120 VRTX AGGRESSIVE SELL PUT JUN-75 VQR-RO at $ 2.13 = 10% MODERATE SELL PUT JUL-80 VQR-SP at $12.38 = 60% CONSERVATIVE SELL PUT JUL-75 VQR-SO at $ 9.50 = 46% GLW AGGRESSIVE SELL PUT JUN-210 GRJ-RB at $9.50 = 18% MODERATE SELL PUT JUN-200 GRJ-RT at $5.13 = 10% CONSERVATIVE SELL PUT JUN-195 GRJ-RS at $3.63 = 7% JNPR AGGRESSIVE SELL PUT JUN-220 JUY-RD at $15.75 = 29% MODERATE SELL PUT JUN-210 JUY-RB at $10.63 = 20% CONSERVATIVE SELL PUT JUN-200 JUY-RT at $ 6.75 = 13% *********************** CONSERVATIVE NAKED PUTS *********************** Option Pricing: Fundamentals Are Important! Option pricing is a complex and often misunderstood subject that usually requires a great deal of study to understand completely. The trader who perseveres will find there is a simple logic to most of the concepts. These knowledgeable traders earn the right to have less money at risk and greater potential for profits. As one becomes familiar with the components of pricing theory, he can he begin to formulate potentially profitable strategies. One of the primary considerations for most traders is risk versus reward. In the derivatives market, buyers of options have limited risk and unlimited reward while sellers of options have limited reward and unlimited risk. With this single perspective in mind, it's obvious why most retail traders simply 'buy' options. Most investors would never consider a position with unlimited risk and yet few understand that almost any trade that isn't fully hedged entails enormous speculation. A violent adverse move, which does not allow time for adjustments, can quickly reduce any position to a fraction of its initial value. With this in mind, it's hard to understand why traders would take outright long or short positions under any circumstances. The only possible explanation is they believe the probability of catastrophic loss is very small and the potential for profit is worth the risk. The most important issue successful option traders understand is that risk/reward characteristics of a position are not the only considerations. Equally important is the probability of profit or loss. When one evaluates a prospective position, the likelihood of each possible outcome must be factored into the assessment. Is the reward, even a limited one, sufficient to offset the risk? An successful trader will always seek to improve the risk/reward characteristics of his position by looking for the trade with the greatest possible margin for error. In order to achieve this goal, a trader must be able to accurately assess an option's value. One of the most important components of option pricing is the concept of time decay. Time value and time decay are actually two of the easiest aspects of option pricing to understand. The time value of any option can be simply understood as everything but the intrinsic value. Time costs money and more time equals more money. The amount of time value in an option's price decays each day it is in existence. The closer the option gets to expiration, the faster it decays. In a strictly mathematical sense, time value decays at its square root and this rate of decay is known as Theta. Time is a commodity and there is one very important concept that merchants of time (option writers) must understand; the laws of option pricing dictate time value is highest in the at-the-money (ATM) option. Time value decreases as the strike prices move in and/or out of the money (ITM or OTM). Strike prices that are deep in and/or out of the money have the lowest time value of all options. Option buyers (as well as sellers) need to have a firm grasp of pricing theory. Remember, the main attraction of options to most traders is they provide the buyer with leverage; one can realize a large percentage gain with only a modest change in the stock price. The concept of delta proves that OTM calls offer greater reward potential if the stock moves substantially while ITM calls will perform better if the stock only moves moderately. Choosing the correct time frame of a position requires another difficult decision because the time closest to expiration costs the most and yet the less time remaining in the option, the greater the movement. With options, more time does cost more money, but the cheapest way to avoid time decay is to buy the most available. All of these variables must be clearly understood for a trader to profit on a consistent basis. One of the best ways to understand the geometric value of time is to study LEAPS. LEAPS are simply long-term options with expiration dates that are months or even years in the future. Time decay occurs very slowly for LEAPS, so buying LEAPS is an effective way to benefit from a stock's price movement without incurring the risk associated with an outright stock purchase. One of the easiest (and most popular) strategies associated with LEAPS is the covered call (calendar spread) with the LEAP position. But, that's another subject... Good Luck! *** WARNING!!! *** Occasionally a company will experience catastrophic news causing a severe drop in the stock price. This may cause a devastatingly large loss which may wipe out all of your smaller gains. There is one very important rule; Don't sell naked puts on stocks that you don't want to own! It is also important that you consider using trading STOPS on naked option positions to help limit losses when the stock price drops. Many professional traders suggest closing the position when the stock price falls below the sold strike or using a buy-to-close STOP at a price that is no more than twice the original premium from the sold option. SUMMARY OF PREVIOUS PICKS ***** Stock Price Last Put Strike Price Profit Monthly Symbol Picked Price Month Sold Picked /Loss Return ADAC 17.38 20.31 JUN 15.00 0.56 *$ 0.56 15.8% ADVP 16.75 18.88 JUN 12.50 0.38 *$ 0.38 14.8% MSM 22.06 23.00 JUN 17.50 0.50 *$ 0.50 14.7% BBSW 17.00 28.63 JUN 12.50 0.38 *$ 0.38 14.6% ADEX 19.56 16.31 JUN 15.00 0.69 *$ 0.69 13.0% TMAR 9.25 10.50 JUN 7.50 0.25 *$ 0.25 12.3% MATK 18.88 18.75 JUN 15.00 0.31 *$ 0.31 11.0% YRK 25.94 28.44 JUN 22.50 0.56 *$ 0.56 10.8% UNM 20.19 23.94 JUN 17.50 0.56 *$ 0.56 10.2% ADVP 17.13 18.88 JUN 12.50 0.31 *$ 0.31 9.0% GZMO 17.19 12.63 JUN 10.00 0.31 *$ 0.31 9.0% CLPA 29.38 21.50 JUN 15.00 0.63 *$ 0.63 8.4% WLV 16.94 17.06 JUN 15.00 0.50 *$ 0.50 8.1% CLPA 27.19 21.50 JUN 15.00 0.44 *$ 0.44 8.1% NGH 20.88 21.25 JUN 17.50 0.38 *$ 0.38 7.7% VRTL 17.00 14.75 JUN 10.00 0.31 *$ 0.31 7.3% NGH 21.19 21.25 JUN 17.50 0.25 *$ 0.25 7.2% ALL 26.75 27.94 JUN 22.50 0.44 *$ 0.44 6.9% XTO 17.69 20.88 JUN 15.00 0.38 *$ 0.38 6.9% VRC 20.81 21.75 JUN 17.50 0.38 *$ 0.38 6.1% New ticker TRMB 36.00 45.00 JUN 25.00 0.44 *$ 0.44 5.0% *$ = Stock price is above the sold striking price. Comments: Ade Corp. (ADEX), Genzyme Molecular (GZMO), and Vertel (VRTL) all made successful tests of their recent lows. They are not out of the woods yet, but a successful outcome appears probable. Cell Pathway's (CLPA) tape has become bearish with the drop below the 150 dma and the position should be watched closely. The rebound on Friday should help with some follow-through next week. TBI or Tuboscope, completed its merger with Varco International, taking the new name and now trading under the new symbol; VRC. NEW PICKS ********* Sequenced by Company ***** Stock Last Put Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return ADAC 20.31 JUN 17.50 QAB RW 0.44 0 17.06 14 16.6% BBSW 28.63 JUN 22.50 UUO RX 0.63 41 21.87 14 21.5% BFO 65.13 JUN 55.00 BFO RK 1.00 2289 54.00 14 12.8% ITXC 40.06 JUN 30.00 UXI RF 0.69 126 29.31 14 17.2% MED 9.44 JUN 7.50 MED RU 0.38 103 7.12 14 36.4% MRVC 35.56 JUN 25.00 VQX RE 0.50 170 24.50 14 14.3% FSII 16.00 JUL 12.50 FQH SV 0.50 0 12.00 49 8.4% Sequenced by Return ****** Stock Last Put Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return MED 9.44 JUN 7.50 MED RU 0.38 103 7.12 14 36.4% BBSW 28.63 JUN 22.50 UUO RX 0.63 41 21.87 14 21.5% ITXC 40.06 JUN 30.00 UXI RF 0.69 126 29.31 14 17.2% ADAC 20.31 JUN 17.50 QAB RW 0.44 0 17.06 14 16.6% MRVC 35.56 JUN 25.00 VQX RE 0.50 170 24.50 14 14.3% BFO 65.13 JUN 55.00 BFO RK 1.00 2289 54.00 14 12.8% FSII 16.00 JUL 12.50 FQH SV 0.50 0 12.00 49 8.4% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MR-Monthly Return. ***** ADAC - ADAC Laboratories $20.31 *** Entry Point! *** ADAC Laboratories is the world market-share leader in nuclear medicine and radiation therapy planning systems, and a technology leader in providing clinical workflow solutions, management information and knowledge systems to healthcare organizations in North America. Lots of news on ADAC Labs: earnings improvement, new contracts, products, and the company has received the first order for its nuclear medicine camera. Cedars-Sinai Center in Los Angeles will purchase the Skylight system as well as a C-PET positron emission tomography system and three Forte gamma cameras. Technically, the stock has climbed steadily from last year's low, recently moving to a new 52 week high. The outlook continues to improve and strengthen and this new position offers reasonable speculation on a bullish stock. JUN 17.50 QAB RW LB=0.44 OI=0 CB=17.06 DE=14 MR=16.6% Chart = /charts/charts.asp?symbol=ADAC ***** BBSW - Broadbase Software $28.63 *** On The Move! *** Broadbase Software is a leading provider of customer-focused analytic and marketing automation applications that analyze customer data from multiple touch points, and utilize that information to execute marketing campaigns, improve online merchandising and content, increase site stickiness and personalize all customer interactions. Broadbase applications are designed for rapid time to value and they can be installed quickly. The company provides e-commerce infrastructure to customers such as ADP, BEA Systems, Cisco, Fidelity Investments, Hewlett-Packard, Kodak, LoanCity.com, Mercata.com, The Sharper Image and United Airlines. Broadbase also has a major global presence with locations around the world. This unique software company recently announced more than 30 new global customers, a number of strategic resale contracts, and they are planning a significant International expansion. The issue is beginning to rally and $22 is a favorable cost basis for a two-week position. JUN 22.50 UUO RX LB=0.63 OI=41 CB=21.87 DE=14 MR=21.5% Chart = /charts/charts.asp?symbol=BBSW ***** BFO - Bestfoods $65.13 *** Unilever Buy-out! *** Bestfoods is among the largest U.S. consumer food companies with operations in more than 60 countries of North America, Europe, Latin America, Asia, the Middle East, and Africa and products sold in about 110 countries. Bestfoods markets various leading food brands, and operates over 115 plants around the world through retail outlets and its foodservice business. Of course they are known for their Mayonnaise but Bestfoods is also the largest fresh premium baker in the United States. The world's second largest consumer products group, Unilever is trying to get Bestfoods officials to negotiate a deal and on Friday a WSJ news report suggested that Unilever had quietly raised its bid for BFO to $70 a share, or nearly $20 billion. That compares with their earlier offer of $66, which Bestfoods management has rejected as financially inadequate. The downside risk for this position is relatively small as there is little chance the issue will trade much below its current price in the next two weeks. JUN 55.00 BFO RK LB=1.00 OI=2289 CB=54.00 DE=14 MR=12.8% Chart = /charts/charts.asp?symbol=BFO ***** ITXC - Itxc Corporation $40.06 *** Time To Rally? *** ITXC is a service provider for voice on the Internet. ITXC WWeXchange Service provides phone-to-phone wholesale call completion for carriers and resellers and has been chosen by ten of the top 12 United States facilities-based carriers, leading European competitive carriers and PTTs worldwide to complete their customers' calls. ITXC webtalkNOW! Service enables portals, ISPs and communications Websites to offer PC-to-phone calling to their customers under their own brands. Intel recently announced it is licensing its Internet telephony software technology to ITXC. The technology improves the quality of voice communication when making calls from PC to phone, and the deal allows ITXC to incorporate the software into its webtalkNOW! ServiceSM. ITXC offers the service to Web portal and Internet telephony device customers, who can easily integrate it into their existing Web pages and other applications. These companies can then offer Web-to-phone capabilities right from a user's browser. With the close above the May high, ITXC appears to be completing a short term bottom. We favor the support above the sold strike at $30. JUN 30.00 UXI RF LB=0.69 OI=126 CB=29.31 DE=14 MR=17.2% Chart = /charts/charts.asp?symbol=ITXC ***** MED - e-MedSoft.com $9.44 *** Stage I base *** e-MedSoft has developed the first subscription-based healthcare management system available for delivery through the Internet. Users of the software are charged a small up-front installation fee, and an ongoing subscription fee based on transaction volume. The medical software is a complete healthcare management system. e-MedSoft also operates the e-Net Technology group of companies, which includes e-Net Systems Ltd. (formerly Relay Business Sys.), IFA Systems, and e-Net Software. The group focuses on removing the complexity of Web-enabling business processes by providing a complete range of Internet Managed Services and Information Tech solutions, and by utilizing strategic partners Sun Microsystems, Oracle Corporation and Cisco Systems Ltd. e-MedSoft has lots of news out on new contracts, exhibits, acquisitions, and patents, as it forms a stage I base. The heavy volume during rallies is bullish, and the technicals suggest an upward resolution of the recent consolidation phase. JUN 7.50 MED RU LB=0.38 OI=103 CB=7.12 DE=14 MR=36.4% Chart = /charts/charts.asp?symbol=MED ***** MRVC - MRV Communications $35.56 *** On The Rebound! *** MRV Communications is a world-class leader in optical components and network infrastructure systems. The company has leveraged its early leadership in fiber optic transmission into a well- focused range of solutions, integrating switching, routing, access servers and optical transmission systems. Over the past 2 years, MRV adopted a business model of creating and managing several start-up companies as well as forming independent business units such as Luminent and iTouch. MRVC recently announced the acquisition of Switzerland-based CES. CES manufactures solutions for real-time data acquisition systems. Applications of this technology by CES have included ATM network controllers, nuclear and particle physics and aeronautical flight test equipment. They have applied the same principles to achieve packet-by-packet processing of IP-based transactions in wireless broadband networks. This technology enhances service providers' ability to quickly and profitably market and bill new value-added services. A new company, iTouch Communications, is being formed to combine the complementary strengths of MRV's routing, WAN and IP expertise with that of CES's, to allow for faster development of more feature-rich, high-speed data acquisition and management systems. The bullish activity after the recent 2-for-1 split suggests the issue is poised for further upside movement. JUN 25.00 VQX RE LB=0.50 OI=170 CB=24.50 DE=14 MR=14.3% Chart = /charts/charts.asp?symbol=MRVC ***** ***** - July Plays - ***** ***** FSII - FSI International $16.00 *** Own This One! *** FSI International is a leading global supplier of processing equipment used in key areas of the production of microelectronics. FSII develops, manufactures, markets and supports products used in the technology of micro-lithography, surface conditioning and spin-on dielectrics. FSI recently announced that it has received orders totaling $8 million for its POLARIS 2500 Microlithography Clusters from two major thin film head manufacturers. The systems will perform DUV processing used in next-generation thin film head technology. The company's ability to support varied processing requirements of thin film head customers continues to give them leadership in their industry niche. Our outlook is bullish, based on sound company fundamentals and the recent change in technical character. JUL 12.50 FQH SV LB=0.50 OI=0 CB=12.00 DE=49 MR=8.4% Chart = /charts/charts.asp?symbol=FSII ************************ SPREADS/STRADDLES/COMBOS ************************ A Great Way To End The Week! ****************************************************************** - MARKET RECAP - ****************************************************************** Friday, June 2 The market roared today after a tame employment report boosted investor confidence that inflation is under control. A slowing economy may keep the Fed from raising rates later this month. The Dow closed up 142 points at 10,794 and the Nasdaq rose 230 points to 3813. The S&P 500 Index added 28 points to 1477. Volume on the NYSE hit reached 1.18 billion shares with advances beating declines more than 2-to-1. Trading volume on the Nasdaq was heavy at 1.9 billion shares, with advances ahead of declines 3-to-1. In the bond market, the 30-year Treasury moved up 1/32 pushing its yield down to 5.94%. Thursday's new plays (positions/opening prices/strategy): Xilinx XLNX JUN65P/JUN70P $0.00 credit bull-put Hadco HDC JUN80P/JUN85P $0.00 credit bull-put Hyperion HYSL JUL30CC/25NP $25.62 debit CC/NP Combo Our new plays offered little chance for favorable entries with the broad market rally. Both Hadco and Xylinx gapped higher at the market open and neither position traded near our target credit. Hyperion moved in a relatively small range during the morning session and when the stock fell below $33, there was a brief opportunity to enter the bullish combination. Portfolio plays: Stocks rallied across the board amid optimism that growth in the economy may be slowing. Investors applauded the benign employment data and went on a buying spree in anticipation of a strong summer rally. Technology stocks posted impressive gains with Internet, chip and biotech shares sharply higher. Cyclical and Finance companies also participated in the upside activity and our recent credit spread candidate, J.P. Morgan (JPM) led the group of interest-rate-sensitive issues. Our short position at $140 is in jeopardy but first the issue must successfully overcome resistance near that price. A close above that range on increasing volume will suggest a change in character and the resulting trend should provide an opportunity for a relatively easy "roll-out." Money flowed out of defensive stocks like Oil and Major Drugs, into more aggressive sectors. One of our new long-term stocks, Johnson & Johnson (JNJ) led the losers on the Dow, falling over $3 to $84.50. Those of you concerned with the possibility of a slump in this group should remain at or below the $85 strike through next month's expiration period. Another sad performance was turned in by Boston Scientific (BSX). The stock turned downward on Thursday after the company agreed to buy assets pertaining to the field of embolic protection devices (for use in procedures that treat blocked blood vessels) from privately held EMBOL-X. Today's morning slump confirmed the new trend and we were forced to exit the play at a small loss. The short option at $30 is open but there is little chance the issue will rise to that price anytime soon. The majority of our Oil Industry positions are profitable but there was a big change in the outlook for that group. While most of the plays are expected to remain positive until the June expiration, there is one position that may need attention. Falcon Drilling (FLC) moved from a $0.50 profit in the morning session to a small loss at the end of the day. A timely (and successful) exit would have been during the initial stages of this week's rally but those of you that held along with us would probably be happy just to finish with a break-even cost basis. Oddly enough, two stocks in the Drug industry, MedImmune (MEDI) and Sepracor (SEPR) led our portfolio. Sepracor is one of our long-term positions and the issue has far exceeded our initial expectations. In just a two months the stock has climbed $25 and our Covered-calls with LEAPS spread is trading at maximum profit. Our new position in MedImmune is a Credit-Strangle and as we commented in the original narrative, the current outlook is bullish. However, if the issue climbs too far we will have to cover the short options (at $190). A successful move above the current technical resistance near that price will be the key indication of a new trading range. Another issue with the same outlook is Benchmark Electronics (BHE). Today the stock enjoyed an incredible recovery rally and with our short position at $40, the issue warrants attention. Once again, a close above the recent resistance near that price (on increasing volume) should signal a change in character. We will plan to roll-out of the bearish credit spread if that movement eventually occurs. Now for the good news! There were some incredible rallies in the portfolio today. Ciena (CIEN) and Scm Microsystems (SCMM) both had big gains amid strength in technology group but the big surprise was Covad Communications (COVD). This volatile issue jumped $5 to close near $30 on no news and the potential for a continued upside move is excellent. A number of other hi-tech portfolio issues participated in the bullish activity including Andrew (ANDW), Cabletron (CS) and Network Associates (NETA). Our recent picks in the small-cap finance group have been outstanding. Golden State Bank (GSB) and U.S. Bancorp (USB) both returned favorable profits in under one week and all of the other positions are performing very well. Spreads in Allstate (ALL), Bank One (ONE), Keycorp (KEY) and Summit Bancorp (SUB) are all in-the-money. Our plays in the Media - Communications sector, AM/FM (AFM) and Clear Channel (CCU) remain profitable and one of our older debit straddles has reached the break-even point. Liposome (LIPO) which became a play on Elan (ELN) as the company completed its acquisition of all of Liposome's outstanding shares in a tax-free, stock-for-stock transaction. The position was somewhat difficult to track as Liposome stockholders agreed to receive 0.3850 of an Elan ADS plus one contingent value right for each share of Liposome common stock. Based on the recent movement in ELN, it appears that the position would have achieved at least a neutral cost basis. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** GSPN - Globespan $104.62 *** On The Move! *** GlobeSpan is a worldwide developer of advanced digital subscriber line (DSL) integrated circuits, which enable high-speed data transmission over the existing network of copper telephone wires known as the local loop. The Company's products, when deployed with copper telephone wires, enable data transmission at rates over 100 times faster than today's commonly deployed modem technologies, which transmit data at 56 kilobits per second. The company sells its integrated circuits as chip sets to a number of major manufacturers of DSL equipment for incorporation into products that are sold to telecommunications service providers and end users. Globespan's products target the rapidly growing market for high-speed data transmission applications such as Internet access, telecommuting and networking between branch offices. The company's core engineering team includes individuals who were early developers of DSL technology at AT&T Bell Labs, in addition to experts in VLSI design, communications algorithms, IP routing and switching, ATM protocols and Voice over DSL system software. These core competencies enable GlobeSpan to deliver complete DSL system integrated circuits and offer a broad suite of standard based integrated DSL chipset solutions for ADSL, SDSL, SHDSL, HDSL, and HDSL2 applications utilizing DMT, 2B1Q, PAM and CAP line codes. To date, the company has shipped millions of DSL chipsets representing a considerable share of this emerging market. DSL is HOT and Globespan has been on the move since a slew of broker upgrades earlier this month. Globespan was reiterated a "buy" by analyst Charles F Boucher at Bear, Stearns & Co and the 12-month target price was raised to $140 per share. The opinion was backed by Robertson Stephens and Thomas Weisel Partners. It appears that investors agree! PLAY (conservative - bullish/debit spread): BUY CALL JUN-80 GHY-FP OI=32 A=$27.12 SELL CALL JUN-90 GHY-FR OI=237 B=$18.62 INITIAL NET DEBIT TARGET=$8.25 ROI(max)=20% B/E=$88.25 Chart = /charts/charts.asp?symbol=GSPN ***** PWJ - Paine Webber Group $49.19 *** A New 52-Week High! *** Paine Webber Group along with its operating subsidiaries, is a full-service securities and commodities firm. PWJ offers a wide variety of products and services, consisting of those of a full service broker-dealer, primarily to a domestic market, through its two operating segments: Individual and Institutional. The Individual segment offers brokerage services and products, asset management and investment advisory and portfolio management products and services, and execution and clearing services for transactions originated by individual investors. Paine Webber's Institutional segment principally includes a number of capital markets products and services such as securities dealer activities and investment banking. The Financial Services group has recovered substantially in the past week and on Friday, shares in Paine Webber spiked to a new 52-week high. The stock is poised to move into a higher trading range and investors are participating in the rally with options. A small disparity in Implied Volatility in call options will allow us to speculate on the outcome of the current trend with a favorable debit spread position. This play is based on recent increased activity in the stock and underlying options. The position offers favorable risk/reward potential but it should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. PLAY (conservative - bullish/debit spread): BUY CALL JUL-40 PWJ-GH OI=468 A=$10.12 SELL CALL JUL-45 PWJ-GI OI=2066 B=$5.88 INITIAL NET DEBIT TARGET=$4.00 ROI(max)=25% B/E=$44.00 Chart = /charts/charts.asp?symbol=PWJ ***** CDNW - Cdnow $4.88 *** Cheap Speculation! *** CDnow, Inc. is a leading retailer of CDs and other music-related products through its online retail store. Since its launch in 1994, CDnow has grown rapidly and their online store offers broad selection, information, easy-to-use navigation and search capabilities, a high level of customer service, competitive pricing and personalized merchandising. Customers may choose from thousands of CDs and other merchandise. The CDNW store also assists music buyers with approximately 430,000 music samples and 160,000 product notes, reviews, editorials and related articles, including reviews and articles from Rolling Stone, MTV/VH1, CMJ and CDnow's editorial staff. CDnow also offers more than 325,000 CDs, 40,000 movies, and 10,000 music videos. Additional products include T-shirts, DADS and CD-ROMS. CDNW jumped over $2 Friday after officials at the company said it expected to announce a deal with a merger partner or investor this month. CDNW has compiled a short list of prospective investors and merger partners from more than two dozen companies that have expressed interest in buying their future. CDNow said in March that it was seeking a merger partner or investor. That month the company said it might not have enough cash to make it through the year, and set up a cost-cutting plan to trim operating expenses by more than $12 million a quarter. Now they are ready to sell and in a statement on Friday, the CEO said he expected to announce a deal with a merger partner by June 30. Let's hope that is the eventual outcome! PLAY (speculative - bullish/debit spread): BUY CALL JUL-5.00 NWQ-GA OI=124 A=$1.38 SELL CALL JUL-7.50 NWQ-GU OI=0 B=$0.56 INITIAL NET DEBIT TARGET=$0.68-$0.75 ROI(max)=233% B/E=$5.75 Chart = /charts/charts.asp?symbol=CDNW ****************************************************************** - TECHNICALS ONLY - These plays are based on the current price or trading range of the underlying issue and the recent technical history or trend. The probability of profit from these positions is also higher than other plays in the same strategy based on disparities in option pricing. Current news and market sentiment will have an effect on these issues. Review each play individually and make your own decision about the future outcome of the position. ****************************************************************** NOVT - Novoste $38.50 *** Trading Range! *** Novoste has developed the Beta-Cath System, a hand-held device designed to deliver beta, or low penetration, radiation to the site of a treated blockage in a coronary artery to decrease the likelihood of restenosis. Restenosis, the renarrowing of a previously treated artery, and also is the major limitation of percutaneous transluminal coronary angioplasty, a procedure used by interventional cardiologists to open blocked coronary arteries. Novoste is currently conducting pivotal clinical trials of the Beta-Cath System and assuming positive results, expects to receive an initial pre-market approval application with the FDA in the near future. This position was discovered with one of our primary scan/sort techniques; identifying potentially failed rallies on issues with bullish options activity. In this case, the premiums for the (OTM) call options are slightly inflated and the potential for a successful (technical) recovery is significantly affected by the resistance at the sold strike price; a perfect condition for a bearish credit spread. PLAY (conservative - bearish/credit spread): BUY CALL JUN-50 QOH-FJ OI=18 A=$0.43 SELL CALL JUN-45 QOH-FI OI=49 B=$0.81 INITIAL NET CREDIT TARGET=$0.50 ROI(max)=11% B/E=$45.50 Chart = /charts/charts.asp?symbol=NOVT ****************************************************************** - STRADDLES AND STRANGLES - ****************************************************************** WLP - Wellpoint Health $74.88 *** Consolidation Period *** WellPoint Health Networks is a managed health care company. WLP offers network-based managed care products, including preferred provider organizations (PPOs), health maintenance organizations (HMOs) and point-of-service (POS) and other hybrid and indemnity plans to the large and small employer, individual and senior markets. The company markets its products in California under the name Blue Cross of California and under the name UNICARE in the rest of the United States. In addition, Wellpoint offers managed care services for self-funded employers, including underwriting, actuarial services, network access, medical cost management and claims processing. The company also provides a broad array of specialty and other products and services, including pharmacy products, dental plans, life insurance, mental health plans, utilization management, disability plans, long-term care insurance and workers' compensation managed care services. The majority of Health and Drug companies have managed to avoid the sell-off earlier this year and the health services group is performing very well. We favor this company for a bullish play and have decided to sell premium for credit and use the earned income to offset any losses on the downside, in the event we accept assignment of the issue. If the share value moves through the resistance area near $78, we will simply buy the stock to cover our sold options. PLAY (aggressive - neutral/credit strangle): SELL CALL JUN-80 WLP-FP OI=96 B=$1.31 SELL PUT JUN-70 WLP-RN OI=0 B=$1.12 INITIAL NET CREDIT TARGET=$2.50 ROI(max)=10% UPSIDE B/E=$82.50 DOWNSIDE B/E=$67.50 Chart = /charts/charts.asp?symbol=WLP ************************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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