The Option Investor Newsletter Wednesday 06-07-2000 Copyright 2000, All rights reserved. 1 of 1 Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 6-07-2000 High Low Volume Advance Decline DOW 10812.90 + 77.30 10848.40 10695.20 846,093k 1,603 1,300 Nasdaq 3839.26 + 82.89 3839.37 3725.87 1,430,754k 2,296 1,697 S&P-100 791.13 + 7.74 794.13 780.94 Totals 3,899 2,997 S&P-500 1471.36 + 13.52 1474.64 1455.06 56.5% 43.5% $RUT 516.54 + 4.89 516.54 507.91 $TRAN 2797.35 + 30.81 2797.95 2762.27 VIX 25.19 + 0.05 26.42 24.84 Put/Call Ratio .44 ****************************************************************** A Battle With Boredom Ends As Markets Rally Investors were taking a Wait-and-See approach this morning to two key news items: MSFT and the PPI. The former is a surprise no longer as Judge Thomas Penfield Jackson announced his decision on whether to break up the company shortly after the close today. It was originally scheduled for 3pm EST, or an hour before the close, but, wisely, they moved it to a half an hour after the close as not to affect trading. This is what traders were waiting on all day today, creating lots of time for option traders to put a MSFT straddle together. Come on, admit it. You thought about it, didn't you? If only MSFT moved like it did in the old days, is what I was thinking. So I remained a spectator for this decision. Well, the decision was announced and MSFT was jumping around like a jackrabbit in after-hours trading. The Judge elected to order the break up of Microsoft into two companies. One segment will run the operating systems business while the other is to handle the software and Internet business. Jackson said that the US Department of Justice would have 60 days to respond to Microsoft's plan, and that Microsoft would receive another 30 days to file a rebuttal to the Justice Department response. Bill Gates responded in a taped statement that this is a new beginning to this case as they enter the appeal stage. It was already widely assumed that not only would they appeal, but also have a better chance of winning in appellate court. MSFT was halted at the time of the decision, but opened soon after and traded as high as $72. Otherwise the market remained very dull and range-bound for most of the morning as traders wait ahead of the PPI report due out Friday morning. Although, the action we have seen so far this week has been healthy. It is normal consolidation after a strong move last week. The fact that we haven't seen a big sell-off just confirms the bullish trends. I had to close out my QQQ puts this morning for a small gain, realizing the market just wasn't acting like it wanted to sell-off. It's a good thing too since the DJIA took off just after 2pm EST when Goldman came out with bullish comments on IBM. Laura Conigliaro, Goldman Sachs analyst, met with IBM today and she commented that unit server growth was picking up, which will help IBM meet top-line estimates. She also commented on strong services booking projections. Before the announcement, IBM was sitting around $112, but quickly found its way above $120 on the news. As a Dow Industrials component, the DJIA caught fire as well. Note the point of the IBM announcement in the chart below. The DJIA finished up 77 to 10,812 on volume of 850 million shares. Not only the DJIA rallied on the IBM news as buyers quickly returned to the tech sector. I think we were all waiting around for the past couple days in search of entry points and this finally put the buyers back to work. The Nasdaq shot forward after lingering around the unchanged mark all day. Look at some of the tech winners today...JNPR +23.31, VRSN +19.75, BRCD +10.75, YHOO +9.44, CHKP +15.06 and AETH +13.44. This all combined to help lift the COMPX by 82.63 to 3839. Yep, back above 3800 on a closing basis after slipping below that level yesterday. The trend still looks good and the VIX is intact at 25.18. Nothing like a good, middle-of-the- road Volatility Index to maintain a stock-pickers market, instead of a momentum frenzy. The volume was fairly light at the Nasdaq though with 1.4 billion shares traded. For the second day in a row, Fed governor Robert Parry was pounding the newswire and going on record to say that the Fed may not be done raising rates yet. He said the next few weeks economic data may not be enough to convince the Fed that the economy is slowing down. Whether or not they decide to raise rates, the Fed governors are doing their best to talk down the markets, just like Jim stated in the Wrap from yesterday. It's standard procedure for the Fed to do a little jawing instead of having to hike rates just to stop the stock market's advance. So watch out why the Feds are on the warpath against the markets, but remember, this is their best tool to corral the stock prices and is typically used when they know they shouldn't raise rates. In other news, Intel fell from the open on Wednesday based on a downgrade from ABN Ambro analyst David Wu from Buy to Outperform. This comes just one day after he upgraded INTC's competitor Altera. The move was based on uneasiness over Intel's Pentium IV (also known as the Williamette) being able to move into the PC segment. Mr. Wu was quoted as saying, "The failure of RDRAM to achieve more than a high-end niche product to date and the looming shortage in SDRAM beginning in the second half of calendar 2000 lasting through at least 2001, present Intel with a challenge for positioning Willamette competitively in mid CY2001." This dropped the stock down, but it looks more like an entry point for the split run, rather than an end of the trend. INTC finished at $128.94, down $0.63. After the bell yesterday, IMNX received an expanded FDA approval for use of its flagship drug, Enbrel. It is already used to treat patients with moderately to severely active rheumatoid arthritis. The expanded approval will now allow IMNX to market this drug for early stage treatment of the disease. IMNX expects sales of Enbrel to jump 10% in its second fiscal quarter. Last year sales of the drug totaled $367 mln. Paine Webber analyst, Elise Wang, predicts that sales will increase year-over-year from $650 mln this year, $864 mln next year and $975 mln in 2002. According to an Immunex spokesman, currently 300,000 patients use Enbrel and this expanded approval opens up treatment to an additional 700,000 qualified patients. Investors applauded the news as IMNX gapped up today on the open, posting a 12% gain, up $3.91 to $36.25. Even though Intel was downgraded today, the Semiconductor sector did receive some good news. Lehman Brothers foresee capital spending on semiconductors in the year 2000 to exceed 1999's by over 50%. Furthermore, the brokerage firm said that given this outlook, semiconductor stocks look very attractive at current valuations. They also expect this spending cycle to continue through 2002, possibly 2003. The semiconductor sector has emerged as a market leader during the past two months of decline. On Lehman's list of companies poised to have high earnings growth are: AMAT(+4.25), KLAC(+2.81), and TER(+2.94). SG Cowen also sees chip demand to be strong in the 3rd quarter and reiterated its support for KLAC and TER as Strong Buys. The laggard today for the semiconductors was AMCC. The company announced that sales to one of its larger customers, Nortel Networks(NT), would be lower than expected for the current quarter. NT accounted for 43% of AMCC's revenues in the previous quarter. Yet, CFO William Bendush reassured that AMCC is on track for this quarter's estimates and that non-Nortel sales would make up for the shortfall. SG Cowen came to the company's defense, stating that revenues will continue to grow sequentially for both Nortel and non-Nortel sales. Regardless, AMCC shares were punished in the trading session, falling $10.19 to $96.63. So I expect more of the PPI waiting game tomorrow. Investors are taking this Wait-and-See attitude in hopes that even more benign inflation data will surely halt the Fed. The interesting thing to watch is tomorrow afternoon to see if the markets start moving. We have seen the markets move in the direction the outcome of the PPI report in the hours leading up to Thursday's close. Will it jump the gun once again? If so, resistance should be solid on the Nasdaq at 4000. A positive report could put it at that level on the open Friday. A less than favorable report may land the Nasdaq back to 3600, which technicians would say has to happen anyway to close the gap up from last Friday. Ample support should be found there. Although I wouldn't mind seeing a retreat to open some new positions, I have to side with the Bulls here. The recent money inflows are just too much. This cash has to be put to work somewhere and it has been building up for eight weeks. I still think the summer rally is for real, especially when you factor in earnings which will begin in a month. During the last few weeks, I viewed a minor market retreat as a bear trap, but am now looking at it as a time to buy. Watch the VIX and plan your trades ahead of time. Ryan Nelson Asst. Editor ****************************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 ****************************************************************** *************** ASK THE ANALYST *************** More Of The Same, Right? By Eric Utley The wait and see action by traders may approach an end in the coming days. The jury is out! Judge Thomas Penfield Jackson confirmed what Wall Street had been expecting late Wednesday. I'm sure you've already read the story or heard the headlines blasting from CNBC, so I'll spare you with the details. However, the significance of the announcement from Jackson is that investors can put their worst fears behind them, and move on! Once the trading halt was lifted Wednesday evening, investors scrambled to accumulate shares in after hours trading, figuring the worst is behind Mr. Softee, and the company might actually prevail on appeal. Noting the action in Linux based companies, namely CORL, RHAT, and LNUX, you'd think that bullishness has returned to the software giant. But not so fast. Rick Sherlund, Goldman Sachs analyst and the guy who knows the most about MSFT next to Gates, said that while MSFT probably won't move much lower from here, he doesn't see much upside in the stock until the whole mess is resolved. However, therein lies the beauty of Jackson's announcement Wednesday, and that is MSFT probably won't fall much lower from its current levels. Once the largest company in terms of market capitalization, MSFT has been a huge drag on both the DOW and the NASDAQ. If Sherlund is correct in saying MSFT's stock has stabilized at its current levels, maybe the summer rally can officially begin. Before that happens though, the market needs to get past Friday's PPI report. If the wholesale inflation gauge cooperates, we might be on our way to a rally into July earnings. Of course, it remains to be seen what the number actually is. If the Fed smells even a hint of inflation, we could face yet another round of interest rate hikes. Noting Governor Parry's comments again Wednesday, he makes it sound as if Greenspan and company have Their fingers on the trigger and ready to fire. Whether this is The beginning of the summer rally, to be quite honest, I don't know. I do, however, think that trading will be a little more exciting in the coming days and we may get a clearer picture of future prices. Be on your toes! Keep those requests coming! If you have a stock that you would like me to review, whether it's a winner or loser, send your request to Contact Support. Please put the symbol in he subject line of the e-mail. ---------------------------- Rambus - RMBS I have been a member of your community since last 3 years. I read you newsletter weekly...gives me a lot of guidance. The issue I have here is different one. I am long 640 calls on RMBS - AUG and NOV strikes so I have enough time but the stock seems to be stuck in a trading range. I have been noticing that it has lately been breaking out of that range and also the MACD indicators are probably going up today. Can you please advise me your take on technical outlook especially looking at a 6 month chart. Thanks. - Sunil Thank you for your loyalty Sunil, I enjoy hearing from our devoted, long-time readers. Unfortunately, I cannot comment on specific strategies nor positions. I can, however, give you a technical outlook for RMBS and discuss a few fundamental factors that may affect the stock price going forward. For our readers who don't know, RMBS operates in the cyclical semiconductor business and develops chip-to-chip interface technologies used in a wide range of computer, consumer and communications systems. The stock took a hit Tuesday when Intel, a chief RMBS customer, delayed shipments of its new Timna chipset which calls for Rambus dynamic random-access memory (RDRAM). Due to the short supply of RDRAM, Intel has been forced to use an alternative technology. While demand is currently high for RDRAM, RMBS has the luxury of charging high prices for its technology. Analysts agree that RMBS will have to lower its prices to compete with a new technology known as DDR, developed by AMD among others. The company is expected to grow at a healthy rate over the next five years, but with a forward-looking P/E of roughly 350 and a PEG of 3.6, it's an expensive stock and very volatile. The stock is far from its 52-week high of $471, traced last spring after the infamous short-squeeze. The technical outlook for RMBS improved last Friday when the stock broke away from its string of lower highs. I think it is critical for RMBS to trade above its support level if the stock is going to move substantially higher. RMBS will split its shares 4-for-1 on June 15th. The split may act as a catalyst and move RMBS away from its trading range. The solid bounce from support last week was strong enough to push the stock through resistance. As you well know, OIN added RMBS to the call list about a week ago after it rallied off its support level. The chart looks good as it is, but would look better if RMBS cleared a few of its resistance levels. ---------------------------- Powerwave Technologies - PWAV Could you review PWAV? Thanks. - MM Powerwave is an exciting tech company that makes radio frequency (RF) amplifiers for use in wireless applications. The company is doing very well with the explosive growth in the building of wireless communications systems. PWAV recently signed a five year deal with Motorola to supply RF amplifiers. The company has substantially surpassed earnings estimates over its last five quarters. And this upcoming quarter should be no different noting the continual upward revisions of estimates by analysts. Profits are expected to grow over 30% for the next five years and the company's balance sheet is very strong. PWAV has virtually zero debt and a nice cash position of around $84 mln. The company's strong fundamentals have helped the stock hold onto much of its gains from earlier in the year. PWAV traced an all-time high in late April of $74, in the face of the bear market I might add. For the past month, the stock has been consolidating its gains. PWAV has attempted to retest its 52-week high on two separate occasions during that time. Most recently, last Monday PWAV ran to $70 before fading back to support at $60. There are two trading ranges that I can see on the chart. One between $60 - $74 and the other between $40 - 60. If the stock holds above $60, which it has so far this week, we might see a retest of its high in the coming days. However, if support at $60 fails, the stock could fall back into its range between $40 - 60. A breakout above $74 combined with healthy volume might be a good place to look for an entry for a new long position. ---------------------------- Akamai Technologies - AKAM - Peter AKAM is in the business of making the Internet a bigger, better, and faster place. They provide Web sites with content services and protection against crashes. The stock is a long way from its lofty high around $345. The dot com rally turned into a dot com disaster for many of the leading Internet stocks, AKAM included. However, there does appear to be a light at the end of bear market tunnel for some of the Net stocks. Many analysts see a wave of consolidation sweeping through the Internet sector, especially in the e-commerce services sector in which AKAM operates. Consolidation would create synergies which in turn could reduce costs and ultimately lead to higher profits, which Wall Street so desperately wants from the Internet group. Also worth mentioning, the influential Morgan Stanley Internet analyst, Mary Meeker did her part last Friday by telling clients that the worst was over in the Web stocks, and to expect a rally into the fall. Additionally, a lesser known brokerage house initiated coverage on AKAM Wednesday with a Buy rating. So Wall Street is starting to warm up to the Net sector again. While the Street has turned bullish on the sector once again, AKAM has a long ways to go before reaching its old highs. I don't think it is very likely for AKAM to reach its previous highs, at least not this year. But the technical picture is improving, and the stock may have some upside in the near-term. For the past month-and-a-half, AKAM has been basing after its steep sell-off. The formation on the chart below is beginning to look like a cup-with-handle. The volume patterns have been indicative of that very formation. Note the climax of selling when the stock hit bottom in mid-April, volume then tapered off as the stock found support, and trading once again picked up as the stock began to rally. If support around $80 holds, (the gap from last Friday) we may see the handle portion formed, whereupon you might look for a breakout above $110. ---------------------------- 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. *********** OPTIONS 101 *********** Analysts By David Popper In my next life, I want to be an analyst. When you are an analyst, you get paid for giving vague advice before a market event. The advice is vague enough so that absolutely no one can trade on it. It is also vague enough so that you may claim victory no matter which way the market turns. Analysts, however, become remarkably precise after the fact. They analyze what had already happened as if the market's direction was obvious before the event. In short, analysts are paid for adding to the confusion. If they were attorneys or physicians, their advice would often generate claims for malpractice - especially that analyst who gave QCOM a $1,000 pre-split price target. Million of Americans turn to market analysts for guidance. In March, the guidance was don't worry about the pull back, do not sell and instead buy the dips. Investors who followed that advice have paid the price. The wonderful "buying opportunities" have turned out to be fool's gold. In March, the NASDAQ fell on heavy volume several times. Selling on heavy volume indicates institutional selling, yet many analysts kept claiming that a "buying opportunity" might exist. How does an investor know what advice is sound and what is not? The best course of action is not to listen to opinions, but to listen to the markets. Follow the charts of major averages (Dow, NASDAQ, S&P) and leading stocks (CSCO, EMC, SUNW and ORCL, etc.). When the averages and leading stocks show selling on higher volume over several days, then it is time to begin to back off margin and move into cash. When your stocks hit the predetermined sell points, it is time to sell. Those who followed this advice in March would still have most of their portfolio intact. Unless you have the time to follow the markets hour by hour, do not try to guess bottom. Wait for a "follow-through day" to confirm a new market rally. In other words, wait for a market bottom to be defined by a bounce on heavy volume which lasts at least two to three days. If you are a position trader, as opposed to a day trader, do not back up the truck until the bottom is well defined. In April and May, we have had several failed rallies. The telling sign was a lack of volume. Be willing to miss out on picking an ultimate bottom while waiting for the market itself to send out an all clear signal. You may miss the gains of a potential snap back, but when you do buy, you will have a much better sense of the real market bottom. Think about it a moment. The last time the market hit a bottom was on October 18, 1999. If you waited for definite confirmation and did not trade until November 1, you would still have massive gains with a lot less risk. The bargain hunters who purchased in September and early October were annihilated. Many did not have the cash when the real rally started. Yes, you will miss the first bounce, but you will have a much more reliable entry point. The bottom line is that the NASDAQ remains in a downtrend. This downtrend will continue until institutions begin buying. If the institutions begin to buy in earnest, the volume will surge along with the averages. If the rally has legs, money will initially flow to the leading stocks. The charts of the averages and leading stocks should demonstrate break outs on heavy volume. In other words, the market will tell you when it is time to enter. Until the market tells you, by showing successive days of gains on higher volume that it is safe to jump in, any entry point is high risk and more akin to gambling than trading. Contact Support ****************** OPTION CLUB UPDATE ****************** Update from Salt Lake City DATE: THURSDAY, JUNE 8, 2000 TIME: 6:30 PM TO 8:30 PM AGENDA: CANDLESTICK CHARTING LOCATION: SANDY EXTENSION -- UNIVERSITY OF UTAH 9875 SOUTH 240 WEST, ROOM #127 If you are a TC2000 user, please e-mail me if you can help me set up a scan for a 13 week high and go back 5 days. I already e-mailed TC2000 and received a reply but am not sure it is working correctly the way I set up the scan. Also, I need some help at the meeting to adjust settings on TC2000 for charts I'm using. At our last meeting Mike Lundquist, Optioninvestor research analyst, gave us "A Strategy for Success". It was well worth our time as Mike presented some great information on how to identify and play fear, greed and uncertainly in this market. One of the things that he suggested was that we learn to read candlestick charts. Consequently I'm putting together a presentation on this technique. Please let me know if you are interested in sharing your knowledge on this subject. I have a great CD that shows the different patterns. If you have a trade that you played based on candlestick technique, please bring info and share with us. One member suggested that we spend some time each meeting sharing our plays. A great idea. I'm not sure if we will have time for many this time as the candlestick charting info will take about 1:30 but let's plan on that for future meetings. DIRECTIONS: Go to Yahoo, Maps, enter address in "Map a new address", then Get Map. From State St. turn West on West Sego Lily Drive (10000 South). Then North or RH on 240 West. There are 2 large parking lots for the Sandy city complex on the East side of the road. Then you will see the Univeristy building. Parking to the South, North and East. Room is in middle of building so any lot or door is fine. Hope to see you Thursday June 8th at 6:30 PM. Our July 13th meeting will be scheduled for the downtown area. Once you become familiar with the campus it is quite easy to find the meeting room. I NEED AN AGENDA & SPEAKER FOR THE JULY MEETING! If you have any ideas for an agenda or want to do a presentation, please let me know. I could really use some help in this area. I volunteered to organize the meetings and keep our list current, but our group was formed to learn from one another and the idea is for us all to participate in this process. I'm open for suggestions and would love to share some of the responsibility of organizing the meetings. My thanks to the many people who have already helped or done a presentation. P.S. If you are coming from the West side, you can get under I-15 at 100th South. The interchange at 90th is closed completely. Carol Mortensen SLC Organizer ********************** PLAY OF THE DAY - CALL ********************** GLW - Corning Inc. $211.25 -6.00 (+2.38 this week) Corning provides communications technology at light speed. The materials pioneer is one of the world's top makers of fiber-optic cable, which it invented more than 20 years ago. Corning's Telecom unit (about 50% of sales) makes optical fiber and cable and photonic components. The company's Advanced Materials unit makes industrial and scientific products, including semiconductor materials. Its Information Display segment makes glass products for TVs, VCRs, and flat-panel displays. The company operates 40 plants in 10 countries. Most Recent Write-Up Despite the market meltdown beginning in early March, GLW has held its ground. The stock is trading near its all-time high of $226.44, revealing investors' insatiable appetite for companies operating in the fiber optic arena. With expanding profits, investors have been rewarded with GLW. And with the announcement Tuesday, GLW's bottom-line may grow even more. The company said Tuesday that Marconi Communications, a supplier to 80% of the world's telecom organizations, will use GLW's PurePath technology in Marconi's next generation systems. The announcement helped GLW to buck the tech weakness Tuesday. Also, the highly anticipated SuperComm 2000 conference commenced Tuesday. GLW is a headline presenter at the gathering of leading-edge telecom companies where investors await good news. With the resurgence of the tech sector last week, GLW broke out from a two month trading range between $160 - 200. After gapping above the $200 level last Friday, the stock hasn't looked back. Volume has steadily increased over the past five trading days as GLW has rallied. Despite the deteriorating conditions in the tech sector Tuesday, GLW managed to hold onto much of its early day gains. The stock did run into resistance at $220 as the day wore on. In the coming days, look for a bold move above $220 combined with healthy volume for an entry point, if GLW can clear that level we could see a retest of its 52-week high. If, however, the weakness in the broad market brings GLW down, the stock has minor support at $215 and major support at $210. These are the levels we will be watching tomorrow for a chance to jump aboard. Comments Within the first hour, GLW gravitated to support around $210 where it traded near throughout the day. It was a day of consolidation for GLW which bodes well for this play. We could see a rally in the market tomorrow, given that the PPI will be released on Friday and we typically rally the day before. If we see a pullback in GLW, support under $210 can be found at $200. A bounce from there could provide a good entry. On the upside, the stock will bump into resistance at $220. If we shoot right out of the gates tomorrow, look to jump on board after amateur hour. Remember support and resistance levels when entering and exiting. ***June contracts expire in 1 week*** BUY CALL JUN-200*GRJ-FT OI=1539 at $15.38 SL=12.00 BUY CALL JUN-210 GRJ-FB OI= 801 at $ 9.13 SL= 6.75 BUY CALL JUN-220 GRJ-FD OI=1067 at $ 4.88 SL= 3.25 BUY CALL JUL-220 GRJ-GD OI= 606 at $16.50 SL=12.75 BUY CALL AUG-230 GRJ-HF OI= 312 at $18.75 SL=14.50 Picked on June 6th at $217.25 P/E = 113 Change since picked -6.00 52-week high=$226.44 Analysts Ratings 8-5-0-0-0 52-week low =$ 54.56 Last earnings 04/00 est= 0.55 actual= 0.64 Next earnings 07-24 est= 0.67 versus= 0.49 Average Daily Volume = 2.97 mln /charts/charts.asp?symbol=GLW ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** Waiting For The Hammer To Drop The market drifted higher today in a quiet session as investors awaited a decision on Microsoft's antitrust case. U.S. District Judge Thomas Penfield is expected to issue his ruling on whether to split the computer software company into separate businesses after the close of trading today. In early April, Jackson held that the software giant engaged in anti-competitive conduct in violation of federal laws. Now the Justice Department wants Microsoft divided into two companies, one to market and produce Windows, and the other to handle applications software and the Internet "Explorer." Microsoft's lawyers have said they would appeal any order to break-up the company and in a recent filing, they asked Jackson to include previously suggested language that would give a divided Microsoft more freedom to negotiate with software developers and computer makers. Bases on comments from government officials, it appears there is little chance they will give Microsoft additional freedom in licensing and marketing its products. After all, that's what got them into trouble in the first place. Summary of Previous Picks: Covered Calls: (Margin would double the listed Monthly Return) Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return NVDA JUN 100 96.13 122.00 $3.87 7.7% Splits 6/27 BRL JUN 50 48.38 56.81 $1.62 6.4% Toppy ARBA JUN 55 51.63 80.75 $3.37 5.4% Ahh...rebound NVDA JUN 90 85.50 122.00 $4.50 5.3% Splits 6/27 NEWP JUN 37 34.81 74.00 $1.78 5.2% Adj 3-1 Split RFMD JUN 90 87.62 130.19 $2.38 5.2% LLTC JUN 55 53.56 61.69 $1.44 5.1% Consolidating RFMD JUN 95 90.50 130.19 $4.50 5.0% Naked Puts: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return BRL JUN 50 48.44 56.81 $1.56 15.4% Toppy RFMD JUN 85 83.25 130.19 $1.75 14.0% LLTC JUN 55 53.50 61.69 $1.50 13.5% Consolidating ARBA JUN 50 48.00 80.75 $2.00 10.6% NEWP JUN 32 30.66 74.00 $1.00 9.5% Adj 3-1 Split PLCM JUN 65 64.12 100.06 $0.88 9.5% NVDA JUN 85 83.81 122.00 $1.19 9.4% Splits 6/27 NVDA JUN 80 77.87 122.00 $2.13 8.9% Splits 6/27 RFMD JUN 85 82.94 130.19 $2.06 8.3% SDLI JUN 140 136.75 258.06 $3.25 7.3% YHOO JUN 115 112.75 144.50 $2.25 6.6% Finally, relief! SDLI JUN 165 163.44 258.06 $1.56 6.3% AFFX JUN 105 102.94 166.75 $2.06 6.1% Breathing room CHKP JUN 150 148.87 221.00 $1.13 5.5% Naked Calls: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return JNPR JUN 270 272.13 224.69 $2.13 6.1% Splits 6/16 New Candidates: This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. *************** BULLISH PLAYS - Covered Calls & Naked Puts *************** ABSC - Aurora Biosciences $70.88 *** New Deal! *** Aurora Biosciences develops and designs proprietary drug discovery systems and technologies to accelerate and enhance discovery of new medicines by the biopharmaceutical and pharmaceutical industries. They are developing a proprietary biology and high technology platform comprised of a portfolio of proprietary functional genomics technologies, and a highly automated ultra-high throughput screening system(UHTSS), known as the UHTSS Platform. Aurora shares rallied last week after the company announced a new drug discovery collaboration with the Cystic Fibrosis Foundation. The foundation will fund the agreement through technology access fees, and Aurora said it expects committed funding and project progress payments to total about $30 million over the course of the collaboration. Aurora and the foundation also agreed to a revenue-sharing arrangement for drugs resulting from the program. The partners said they expect to develop clinical candidates for the treatment of cystic fibrosis and the pact includes development of an assay for the CF transmembrane conductance regulator, a new protein that is defective in cystic fibrosis patients. Following the news, analysts at UBS Warburg initiated coverage of the company with a "buy" rating and a $70 price target based on a a smoothing out in Aurora's revenue stream as service charges and licensing fees become a larger percentage of revenues relative to large-scale instrument placements. ABSC - Aurora Biosciences $70.88 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call JUL 55 UDA GK 86 20.13 50.75 5.8% *** Sell Put JUL 45 UDA SI 10 1.56 43.44 6.9% *** Sell Put JUL 50 UDA SJ 20 2.63 47.37 10.8% Sell Put JUL 55 UDA SK 0 4.25 50.75 15.9% Chart = /charts/charts.asp?symbol=ABSC ***** BRCD - Brocade Communications $149.63 Brocade Communications Systems is a provider of Fibre Channel switching solutions for Storage Area Networks (SANs), which apply the benefits of a networked approach to the connection of computer storage systems and servers. Their family of SilkWorm switches enables companies to cost-effectively manage growth in their storage capacity requirements, improve the performance between their servers and storage systems and increase the size and scope of their SAN, while concurrently allowing them to operate data intensive applications. They sell their SAN switching solutions through leading storage systems and server original equipment manufacturers and through system integrators. There have been a number of favorable announcements since the downgrade back in May took BRCD on a big slide. New products and agreements and a bullish outlook from another industry analyst. Fundamentally, the company is on track but our position is based on the positive technical outlook. The stock has climbed steadily from a recent low, moving to a new, 3-month high and the current rally shows little signs of weakening. BRCD - Brocade Communications $149.63 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put JUL 100 UBF ST 663 2.25 97.75 4.8% Sell Put JUL 105 UBF SA 199 3.25 101.75 6.8% *** Sell Put JUL 110 UBZ SB 90 4.00 106.00 8.2% Chart = /charts/charts.asp?symbol=BRCD ***** ELON - Echelon $74.44 *** Momentum Play! *** Echelon Corporation develops, markets and supports a family of hardware and software products and services that enables original equipment manufacturers and systems integrators to design and implement open, interoperable, distributed control networks. Control networks are an alternative to the traditional approach of centralized control. They offer lower cost of installation and maintenance, and the ability to implement multi-vendor systems, thereby increasing competition while providing expanded features, flexibility and functionality. They offer a set of over 80 products and services under the LonWorks brand name. The Controls and Automation industry is HOT and investors can't get enough of this unique company. The growth in wireless is also helping the rally as mainstream America gets ready to run their homes and business not only with Internet links but also with cellular phones. Echelon's partners have been building this new technology into their products for many years and now they are ready for the mass market. As these new products become available to the general public, demand should increase exponentially. We like the technicals for Echelon but based on the recent BIG rally, we favor a conservative entry into this momentum-based speculative position. ELON - Echelon $74.44 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call JUL 60 EUL GL 92 19.75 54.69 6.7% *** Sell Call JUL 65 EUL GM 466 16.75 57.69 8.8% Sell Put JUL 45 EUL SI 105 1.31 43.69 5.6% Sell Put JUL 50 EUL SJ 124 2.25 47.75 9.1% *** Sell Put JUL 55 EUL SK 16 3.63 51.37 13.6% Sell Put JUL 60 EUL SL 89 5.25 54.75 17.6% Chart = /charts/charts.asp?symbol=ELON ***** HGSI - Human Genome Sciences $116.13 *** Bio-tech Binge! *** Human Genome Sciences researches and develops novel compounds for treating and diagnosing human diseases based on the discovery and understanding of the medical usefulness of genes. They have used automated, high speed technology to discover the sequences of chemicals in genes and generate a large collection of partial human gene sequences. They possess one of the largest databases of the genes of humans and microbes, and have used this database to create a broad assortment of product opportunities. They now primarily focus on the research and development of proteins for the treatment of human disease. Bio-techs are on the move and news that gene-researcher PE Corp Celera Genomics (CRA) has reached another milestone in the race to map the human gene gave a boost to a number of companies involved in gene research. Last week's announcement involved technology in mapping more than a billion base pairs of the compounds that link up to make the DNA of a mouse. Now the race to explore the discovery is underway and the companies at the leading-edge of the technology will dominate the industry. The company also received a boost this week from a brokerage upgrade. Merrill Lynch Analyst Todd Nelson raised his long-term rating on the stock to "buy" from "accumulate." Nelson said the current fundamentals underlying the company's prospects are increasingly positive and over the next twelve months, they expect significant news flow related to the company's development pipeline and new potential collaborations. HGSI - Human Genome Sciences $116.13 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call JUL 90 HHA GR 600 32.75 83.38 5.5% *** Sell Call JUL 92.5 HHA GZ 3 31.00 85.13 6.0% Sell Put JUL 75 HHA SO 186 2.38 72.62 6.4% *** Sell Put JUL 77.5 HHA SW 60 2.88 74.62 7.6% Sell Put JUL 80 HHA SP 453 3.38 76.62 8.8% Sell Put JUL 82.5 HHA SX 21 3.88 78.62 9.9% Sell Put JUL 85 HHA SQ 137 4.50 80.50 11.2% Chart = /charts/charts.asp?symbol=HGSI ***** MLNM - Millennium Pharmaceuticals $115.50 Millennium Pharmaceuticals is engaged in the development of breakthrough drugs, or therapeutics, and predictive medicine products using an integrated approach that the company calls "gene to patient." Millennium has established numerous strategic alliances with major pharmaceutical and biotechnology companies to discover, develop, and commercialize a range of therapeutic and predictive medicine products. The company has three fields of major emphasis: cancer, metabolic diseases (and obesity) and inflammation. Millennium also has significant programs in infectious diseases, cardiovascular diseases and diseases of the central nervous system. They seeks to discover disease-related genes, produce validated drug targets and drug leads, and develop new, proprietary drugs to treat major human illnesses. Millennium is one of the big winners in the volatile technology group and among institutional Bio-tech investors, it is also one of the top holdings. This year alone, the stock has gained almost 100% in value, even with the recent massive sell-off. The current technical outlook is favorable and our conservative position offers a way to participate in the issue with relatively low risk. MLNM - Millennium Pharmaceuticals $115.50 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put JUL 80 QMR SP 13 2.19 77.81 6.0% *** Sell Put JUL 85 QMR SQ 2 3.13 81.87 8.2% Sell Put JUL 90 QMR SR 25 4.50 85.50 11.3% Chart = /charts/charts.asp?symbol=MLNM ***** RBAK - Redback Networks $117.31 *** Internet Software *** Redback Networks is a provider of advanced networking systems that enable carriers, cable operators and service providers to rapidly deploy high-speed access to the Internet and corporate networks. Their Subscriber Management System (SMS) connects and manages large numbers of subscribers using any of the major high speed access technologies including digital subscriber line, cable and wireless. Redback sells its products through a direct sales force, resellers and distribution partners. Redback became the latest equipment company to enter the network industry's metropolitan sector, announcing new plans to begin shipping technology acquired from its subsidiary, Siara Systems. Redback is hoping to utilize its network expertise in from high speed, broadband connection equipment and subscriber management systems in the metropolitan networks for residential customers. Siara makes technology that ties older metro networks to Internet services, speeding the plentiful fiber-optic connections in most major cities. Analysts say the market for new, metropolitan area networking equipment could reach $5 billion in the next few years and Redback intends to be part of that growth. RBAK - Redback Networks $117.31 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put JUL 75 BUK SO 54 2.00 73.00 5.4% Sell Put JUL 77.5 BUK SW 4 2.38 75.12 6.4% *** Sell Put JUL 80 BUK SP 240 2.81 77.19 7.4% Sell Put JUL 82.5 BUK SX 0 3.38 79.12 8.7% Sell Put JUL 85 BUK SQ 35 4.00 81.00 10.1% Chart = /charts/charts.asp?symbol=RBAK ***** SDLI - SDL Inc. $258.06 *** On The Move! *** SDL, Inc. is a provider of solutions for optical communications and related markets. Their products power the transmission of data, voice, and Internet information over fiber optic networks to meet the needs of telecommunication, dense wavelength division multiplexing (DWDM), cable television and metro communications applications. Their solutions enable customers to meet the need for increasing bandwidth by expanding their fiber optic networks more quickly and efficiently than by using conventional electronic and optical technologies. Its revenue comes from two principal markets: fiber optic communications and industrial laser products. Last week's announcement that JDS Uniphase extended a contract with SDLI lifted the company's share value significantly. JDS Uniphase and SDL said the contract extension through 2001 more than doubles the base quantities called for in the previous contract. Under the terms of the deal, SDL supplies pump lasers to JDS Uniphase for JDS Uniphase's fiber amplifiers, which are used in operation of high-speed telecommunications networks. SDLI also recently announced it would acquire Photonic Integration Research for $1.8 billion in cash and stock. SDL plans to use a silicon chip made by Photonic that allows more information to be channeled through a single fiber. The unique device would replace several components inside SDL's products and allow SDL to produce cheaper, more reliable and better-performing network systems. The move is viewed as a strategic acquisition in a rapidly growing market and very complimentary to their present business. Photonic will add to SDL's earnings immediately and based on their quarterly revenue of $20 million, it will account for over 20% of sales and profits in the combined company. Analysts agree with the company's positive future and investors have pushed the issue up $80 in just two weeks. Our cost basis allows a conservative position in an industry-leading company with a bullish technical outlook. SDLI - SDL Inc. $258.06 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call JUL 210 QZL GB 120 64.25 193.81 5.8% *** Sell Call JUL 215 QZL GC 203 60.88 197.18 6.2% Sell Put JUN 195 QZL RS 169 1.06 193.94 6.8% *** JUNE Sell Put JUN 200 QZL RT 1400 1.13 198.87 7.2% JUNE Sell Put JUL 170 YAL SN 91 5.13 164.87 6.2% *** Sell Put JUL 175 YAL SO 28 6.13 168.87 7.3% Sell Put JUL 180 QZL SP 129 6.88 173.12 8.1% Chart = /charts/charts.asp?symbol=SDLI *********** IN THE NEWS *********** Quick and Dirty, Nice and Easy By S.P. Brown If you're like me and are a proponent of the KISS principal (keep it simple, stupid), valuing options can be a head- scratching, migraine-inducing exercise. Let's face it, the Black-Scholes pricing model can be an arduous calculation, particularly if done by hand. For the majority of folks, it's best left to a Black-Scholes calculator. However, many option investors don't have access to a Black- Scholes calculator, which makes valuing options all that more frustrating. There's no need to fret, though. For those traders lacking this tool, there's the single-period binomial model. And unlike Black-Scholes, the binomial model involves only a few algebraic machinations that are simple enough for a first-year algebra student to execute (if I can do it, you can do it). Like Black-Scholes, the binomial model is predicated on first determining the value of a call in a riskless hedge scenario, which is a relatively easy task. To do so, we'll first need to set some limiting parameters, such as stock price, exercise price on the underlying call option, time until the call expires, the risk-free rate (T- bill rate) and a range of possible prices for the stock over the time frame the call is "alive." For example, let's say ABC Corp. is trading at $24 a share. We want to value a call option on ABC with a strike price of 20, an expiration of three months and a range of possible returns over the three months of plus or minus $6 (here, you can use standard deviation or beta to arrive at a range estimate). The T-bill rate is 5 percent. Now, let's determine the hedge ratio on a fully hedged position consisting of one share of ABC stock, plus a certain number of options on ABC that will produce the same wealth position at the end of the period, regardless if ABC's stock is trading at $30 or $18. To do this, we'll take the ending high stock price, $30, add the ending high intrinsic options price, in this case $10 (the intrinsic value of option is the high stock price minus the strike price). Then we'll set these variables equal to the ending low stock price plus the ending low options price. This would be $20 plus zero (there is no ending value on the low-end option). Here's how the equation looks. 30 + 10X = 18 + 0X Obviously, we need to solve for X. 12 = -10X Now, divide both sides by 12, and X, which is the hedge ratio, becomes -1.2. This means that 1.2 call options must be sold short against each share of ABC stock in order to produce a perfect hedge. The next step is to hedge the ending wealth value to its present value using the risk-free rate as the discount rate. Here, we can use either the high or the low ending stock price possibility and its corresponding call option price, since they lead to identical answers. For our example, we'll use the high ending stock price. We'll take the ending stock price minus the ending option price times the number of options shorted. Then, we'll divide that figure by 1 plus the T-bill rate raised to the value of the time period (in this case, three months, or a quarter of a year). Here's the equation in numerical form. Present value of ending wealth = $30 - $10(1.2) / (1.05)^.25 = $18 / 1.0123 = $17.78 Finally, we can determine the value of the call option based upon the current price of the stock. This is done by setting the present value of the ending wealth equal to the current price of ABC stock minus the number of calls shorted multiplied by c (call option). $17.78 = $24 - 1.2(c) -$ 6.22 = -1.2(c) Once negative $6.22 is divided by negative 1.2, we find the value of our ABC call option to be $5.18. But here's the cool part. Once we know the call option price, the put option price can be inferred using put-call parity, which is also based on a riskless hedge. In other words, owning one share of stock, plus a put on one share and being short a call on one share (with the strike prices and expiration dates of both options being equal) will guarantee an ending wealth value at the expiration date of the options equal to the strike price of the options, plus any dividends earned on the stock during the time the options are active. Here's the put-call parity equation. Stock price + put option - call option = [strike price / (1 + the T-bill rate) to the raised to the time until expiration] + [dividends during the period / (1 + the T-bill rate) raised to the time until expiration]. In less convoluted terms, S + p - c = K/(1 + r)^t + D/(1 + r)^t To simplify matters, we'll assume ABC doesn't pay any dividends. So, our put-call parity equation becomes, $24 + p - $5.18 = $20/(1 + .05)^.25 $18.82 + p = $19.76 Based on this equation, we find the put option in our example to be worth $0.94 ($19.76 - $18.82). A nifty feature of the put-call parity equation is that once any three of the four variables are known (assuming no dividends), the value of the unknown variable can easily be determined. Moreover, a trader can see first-hand how the Greek letters of option valuing (delta, gamma, vega, rho and theta) change in response to changes in the variables of the binomial and put- call parity models. In other words, by changing either the stock price, price range, time until expiration or risk-free rate, a trader can see the magnitude of these changes on the call and put option prices. The primary difference between the binomial model and the Black-Scholes model is that the binomial model is a discrete function, meaning the model must be broken into discrete blocks of time while the Black-Scholes model is a continuous function. Therefore, theoretically, Black-Scholes is the better model. Then again, security valuation has never been an exact science. Sometimes all a trader needs is a good "close enough" approximation to successfully execute a trade. Contact Support ************************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. 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