The Option Investor Newsletter Wednesday 6-14-2000 Copyright 2000, All rights reserved. Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 6-14-2000 High Low Volume Advance Decline DOW 10688.00 + 66.20 10737.70 10624.70 928,995k 1,676 1,257 Nasdaq 3797.41 - 53.65 3883.34 3797.00 1,397,988k 1,796 2,233 S&P-100 790.35 + 0.92 798.01 788.49 Totals 3,472 3,490 S&P-500 1470.54 + 1.10 1483.62 1467.71 48.0% 52.0% $RUT 509.67 - 4.08 517.58 509.49 $TRAN 2748.29 - 6.58 2767.73 2743.20 VIX 24.51 + 0.14 25.17 23.69 Put/Call Ratio .57 ****************************************************************** Benign Data Met With Muted Reaction The market's reaction to the CPI number was a non-event. So what happened today on The Street? Well, it was a case of we got what was expected. Nowadays, without something extraordinary, there's really nothing to get excited about. Traders yawned at the benign CPI and after an initial euphoric pop in the morning, the DJIA flat- lined around 10700 and the NASDAQ slowly bled to close at the lows of the day. So now we sit back and scratch our heads, pondering what appeared to good news for inflation. Here's what happened. The CPI came in at +0.1% versus analysts' forecasts of +0.2%. That's good, right? Yes. The Core CPI, excluding food and energy prices, was +0.2%, right in line with expectations. A closer look at the CPI shows that food prices gained 0.5% while gas prices fell 3.5%. Sounds great, right? Well, maybe not. Some of the cautiousness on the Street comes from the fact that these May numbers were compiled prior to the most recent surge in oil prices. Therefore, there is an increased likeliness that the June CPI will have a hefty gain in energy prices. Luckily, that will be after the June 27-28 Fed meeting. Overall, these numbers proved to be benign and certainly indicate that the economy is slowing. Yet, there are a variety of inflationary concerns that haven't yet been disspelled, and it showed in today's trading session. It was a good news, bad news scenario. The Fed's Beige Book revealed signs that economic growth is slowing, yet remains "solid." It also indicated that while labor markets remain tight, they haven't intensified. A caveat to this is that wage pressures are NOT accelerating. That is great news for the economy if we maintain low unemployment and low wage inflation. Forget the Philips Curve, this is the Internet Era. Continuing to play both sides, the Fed stated that inflationary pressures are "worsening" but not "widespread." One thing we do know is that consumer spending is slowing and that's one of the first indications of a slowdown. Yet, investors hesitated to commit money as they try to discern just how much the economy will slow and how much the Fed wants it to slow. Right now, the Fed has everybody guessing. They do this by talking down the market while easing off their tightening monetary policy. No matter what you hear, the Fed watches the market. Hence, their rhetoric when investors rejoice to benign numbers. Echoing the Beige Book today, San Francisco Fed President Robert Parry said that inflationary pressures due to demand are still growing faster than productivity. Just a little something to take the air out of the CPI. Remember, the last thing the Fed will ever do is declare victory over inflation as an exuberant market reaction would only disappoint them. Further inflated stock prices are not what they want to see. So how did stocks react to all this Fed and inflation talk? After the initial pop at the open, the DJIA managed to hold on to some of its early gains as money rotated out of techs and into cyclicals. The DJIA closed at 10687, up 66.11. It was a pretty dull day on the trading floors and the DJIA's narrow range exemplifies that. Looking at the chart, the DJIA needs to break through the 10800 level convincingly in order to end its current downtrend. For this to happen, it is absolutely essential that financials lead the way. Given the perception that rate hikes may be over before the Presidential Election, financials mounted a nice rally today. Better-than-expected earnings from Bear Stearns, BSC(+1.38), fueled financials. The AMEX Broker/Dealer Index gained 3.5%. Some standouts in the sector included: GS(+4.81), LEH(+4.69), MER(+3.81), AXP(+2.25), MWD(+2.13), and C(+2.00). DJIA techs took a beating with INTC(-5.06) leading the way. Close behind was HWP(-5.00) and IBM(-3.31). Bucking the trend was MSFT, which closed at $70.50, up $2.63 on news that the District of Columbia Court of Appeals will hear Microsoft's case. The drug sector also held up well. Equally dull was the NASDAQ. While slight consolidation isn't a bad thing, it sure is boring. Yet, given the recent run-up in the techs since Memorial Day, a breather for the NASDAQ isn't surprising. After a morning pop, the techs flat-lined and then slowly deteriorated into the close. The NASDAQ closed just below the key 3800 level at 3797, down 53.63. Once again, the first thing that comes to mind is a lack of conviction. No real excitement for the real prospect that the Fed may pass on an interest rate hike in June. No real excitement on the up or downside. Volume was light at 1.4 bln shares. Notice the narrow range to which the NASDAQ is confined. As boring as it may be, there have been a handful of stocks that have performed nicely, namely the fiber-optics. So with today's CPI being the last major economic data before the Fed meeting, what's going to drive the markets? Earnings. Therefore, it is going to be a stock picker's market. Most of the tech favorites felt the profit taking today, such as RMBS(-18.75), GLW(-12.00), SDLI(-11.88), and CHKP(-11.25). All of these stocks have had healthy gains during the past month. One of the bigger losers on the NASDAQ that hasn't had healthy gains as of late is QCOM. It was on the NASDAQ most active list today as it lost 13%, or $10.88, to close at $70.50. Recently, news has not been kind to QCOM. Citing slower sales in South Korea, Bear Stearns lowered its earnings forecasts for fiscal 2001 to $1.30 per share from $1.40. This is concerning to investors as South Korea is Qualcomm's biggest market. Bigger than QCOM's woes are those of anyone involved in what was reported as "the largest securities fraud takedown in history." Today, Federal Prosecutors indicted more than 100 people on stock fraud charges. Officials said the one year investigation resulted in over $50 mln dollars in losses, mostly by elderly investors. The SEC sued 63 individuals and entities in five related enforcement actions. It was a classic pump-and-dump scheme where the defendants would purchase shares of micro-cap stocks and start propping the stocks to the public to increase the share price. Brokers were bribed or scheduled to receive kickbacks to promote the stocks. Once they get enough buyers to inflate the price, they begin selling their shares. This is commonly known as front-running. "The securities fraud involved in today's actions is among the most egregious witnessed in recent years," said SEC Enforcement Director Richard Walker. "These manipulations of numerous stocks were designed for the sole purpose of stealing investors' hard-earned dollars." The government wants to clean up this type of activity so that micro-cap stocks can be seen as reputable investments. Looking forward into the market crystal ball, it appears that we will have much of the same type of trading activity until the Fed meeting on June 27-28. The analysts will continue to argue about the probability of rate hikes. As of today, the June Fed Funds futures contract has a 25 basis point hike priced into it. Yet, that will probably change. What is important to remember is that the Fed has never raised rates immediately after a 50 basis point rate hike. Since the last hike in May, we have seen convincing economic data that clearly shows a slowing economy. With the earnings season right around the corner, a rally could follow. Meanwhile, trade the current range and take your profits quickly as the market can turn on dime these days. Look for the financials to remain strong if we are to have this June rally. Good luck and when in doubt, stay out. Matt Russ Research Analyst ****************************Advertisement**************************** FUN... CONTROVERSIAL... ADDICTIVE... and it's all FREE! * Like to Laugh... Like your news a little Bizarre... or do you like to be Teased, Brain Teasers that is? See why over 4,000,000 a day get their news, entertainment and fun from ShagMail! The widest selection of topics on the net. Visit: http://www.OptionInvestor.com/tracking.asp?co=PennMediaShagMail6142000 ********************************************************************** *************** ASK THE ANALYST *************** A few more pieces to the puzzle. By Eric Utley The tame CPI report Wednesday morning confirmed inflation is under control and the economy is slowing. We got a benign wholesale inflation report last week, a modest retail sales report and a good retail inflation number this week. So what more do the bulls need? It seems every time we hurdle an impediment of the market's advance, a new issue arises. The latest worries on Wall Street are the affects of rising energy prices on inflation and the question of just how much the economy is going to slow. The question remains if companies are able to increase earnings in a slowing economy with a rising cost of money. I was intrigued when I read Mary Redmond's column in Tuesday's newsletter on the similarities between the current market environment and that between 1995 and 1996, despite rising interest rates, leading companies kept making money. In the past two weeks, we have seen evidence that if their in the right businesses, companies can still increase earnings. Clearly, business is booming in the fiber optic arena, with companies such as SDLI and GLW leading the way. At the same time, we are hearing more earnings warnings. Until we see clear signs of a rally, I think the current market requires careful stock picking. I know that's not profound, but, if you place your bets carefully you can make money in this market. With the addition of Buzz Lynn's new Sector Trader column to the Sunday newsletter, we have decided to publish this column on Wednesday's only. The good news is that I will ramble less and include more of our readers' requests in the column. Continue sending your requests to Contact Support. Please put the symbol in he subject line of the e-mail. ---------------------------- MicroStrategy - MSTR Would you please evaluate MSTR? It has gone from low of 17 5/16 on May 25th to high of 62 3/4 on June 9th. Is it on its way to its old triple digit price? Thanks. - Shahab MSTR has entered the spotlight again, but this time around the story is a little more positive. Rumors began circulating early last week that MSTR was in the process of receiving a $100 mln cash infusion from a private placement. As you might recall, MSTR blew up last March when the company said it would be forced to revise its prior revenues after changing the way it accounted for sales. For a more detailed discussion on MSTR's revising of revenues, I urge you to read the excellent article written by S.P. Brown in Monday's newsletter. Although the stock nearly tripled last week fueled by speculation and rumors, I don't think MSTR is on its way to triple digit prices. The company has a long way to go to regain the respect of Wall Street. The accounting disaster has left permanent scars on the stock. If the rumors are true, and MSTR receives an investment of $100 mln, it may help the stock. But, until the accounting and legal issues are resolved, business at MSTR will probably suffer, along with the stock. The catalyst behind MSTR's massive rally last week was pure speculation. And more times than not, speculation ends badly. The stock had a series of four gaps, in conjunction with an explosive rise in volume. If you're quick enough and don't mind the risk, events such as these provide good day trading opportunities. But if you get caught holding the stock at the wrong time, (this Monday when it dropped $17) you could end up losing a lot of money. ---------------------------- American Express - AXP If you could be so kind and review AXP for me. Thanks. - Luis and Millie In an environment of rising interest rates, it is believed that leading financial stocks turn higher about 6 months ahead of the final raise of rates. Judging by the action in AXP, among other financial stocks, the Fed be should done rising interest rates sometime in August. AXP turned north in early March when the broader market took a turn for the worse. The stock subsequently fell into a trading for two months, from which it recently emerged. AXP traced a new 52-week high during Wednesday's trading after the benign CPI report earlier in the morning. Technically, AXP looks strong, and if the Fed is nearing the end of its tightening practices, the stock could continue to trace new highs. Fresh from its victory over Microsoft, the Justice Department filed a lawsuit against Visa and MasterCard, alleging they had violated antitrust laws. The antitrust trial could have a major impact on shares of AXP. Visa and MasterCard together control about 75% of the U.S. credit card market. Visa and MasterCard are owned by the major banks that issue their cards, and the Justice Department will argue a rule known as exclusivity, which bans banks from issuing American Express. The court may rule that the major banks will have to issue both American Express and Visa, which would be a major leap for AXP. Interestingly, the case itself is the result of lobbying by AXP. ---------------------------- Cree Inc - CREE Your analysis of Cree Inc. please. Thanks. - Bill CREE developed and commercialized a unique semiconductor medium knows as silicon carbide. The company has two primary product lines. CREE makes Blue LEDs, (light emitting diode) used in stereos, cell phones and other electronic devices. CREE also manufactures wafers used by semiconductor companies to experiment with product designs. What's exciting about CREE are the future possibilities of its technology. Silicon carbide is the third hardest compound on earth, and is considered a substitute for industrial diamonds. The same compound is applied to microwave devices to cut costs and improve efficiency. CREE is also using silicon carbide to develop blue lasers to increase storage capacity in optical uses such as CD-ROMs and DVDs, the company is also developing power semiconductors which could ultimately reduce global energy consumption. CREE is expected to grow earnings by about 32% annually over the next five years, and with a PEG of 1.7, the stock is reasonably priced. If just one of its products under development go mainstream, earnings could substantially increase and the stock should too. The stock has been consolidating its prior gains for the past three months. From a long-term perspective, I think the recent basing price action bodes well for CREE. The stock has been churning between about $100 - 160. CREE attempted to break out above $160 Wednesday, but failed to close above that level. A bold move above $160 in conjunction with an increase in volume might provide a good entry point for a new long position. ---------------------------- Intertrust Technologies - ITRU Two of my friends and I purchased shares of ITRU a couple of months ago. We bought ITRU when its cost was still in the 80's. It plummeted to below 15 last week and is now only in the low 20's. What happened? We can't figure it out. Any information you can provide to us will be greatly appreciated. - Peter For investors, the Internet was filled with concepts and ideas and promises akin to the Wild West for 19th century pioneers. And like the tumultuous trek of western trailblazers, the Web has become a place of peril for many. Anything with an Internet story attracted money earlier this year, back when ITRU was trading north of $80. The Net landscape has since changed and is littered with hundreds of small cap Web stocks that have fallen 70 and 80% from their peaks. Many of the Web pioneers are now faced with dwindling cash reserves, declining margins, or worse yet, death. To answer your question Peter, ITRU has fallen along with most of the Web concept stocks due to the macro cataclysm in the Net sector. As for specific issues affecting ITRU, the company has a healthy cash position around $100 mln, but earnings are still a long ways off. And if there is one thing that will move ITRU higher it's earnings, or maybe a buyout? Now Peter, I'm not trying to make an example of you nor telling you what you should have done, but I see two warning signs on the chart. The first cautionary flag was waived when ITRU broke its long-standing support level at $80. As you already know, $80 was a major support level for nearly two months. The longer the support the level, the more crucial it is to hold. The second warning sign came in mid-March when volume began accelerating as the stock continued sliding. What's more, on April 20th, a flood of supply came to market when the IPO lockup period expired and insiders sold their shares, consequently driving the stock lower. It's easy to look back and be correct, the hard right edge of the chart is where the challenge lies. From the looks of it, ITRU is making a comeback. The stock is moving higher with increasing volume, but I don't think you'll see the $80 level again this year barring any substantial positive developments. ---------------------------- Osicom Technologies - FIBR I have been following FIBR for nearly 3 and a half years now. This company has been developing Metro DWM's before any of the larger companies (NT, LU, JDSU etc.) and it is now looking to spin off its fiber optic division named Sorrento this year. It has recently gone from an intra-day low of 26 to 67 with increasing volume. My TA indicates a rise to the 90's if the current level holds. However, I may be skewing the data to meet my wishes so I'd love to get an opinion from you on what you think of the current technicals. Thanks in advance. - Bardia FIBR is carving a niche in the lucrative fiber optic business. The company offers products which employ dense wavelength division multiplexing (DWDM). When connected to an optical fiber, a DWDM product increases that fiber's capacity to transmit information. With the growth of the Internet, the world's already-laid fiber optic networks are crowded. To meet the increased needs of users, telephone companies are using DWDM as an alternative to laying new cable. FIBR has designed its DWDM products to meet the special needs of intra-city networks. The company is betting that the need for DWDM in metro markets will be significant. If FIBR is correct in betting that the metro markets will make the company money, investors could be well rewarded. But turning revenues into profits is something FIBR has not yet been able to do. The company announced the results of their fiscal first quarter after the bell Wednesday. FIBR reported widened losses from operations. The earnings announcement Wednesday will probably have an impact on the stock, whether it's good or not depends upon how FIBR's conference call goes. The stock was down about $4 in after hours trading at the time of writing this column. To answer your question Bardia, FIBR's current technicals look good. The stock formed a lengthy double bottom over the past two and a half months, and just recently moved above $60. Like you mentioned Bardia, FIBR has made quite a run since late May. The recent consolidation was expected, and may provide a solid base for the next leg up. Before hitting your $90 price target, I think FIBR will face major resistance at $80. The coming days should be interesting after the report of larger losses Wednesday. If support at $55 holds, FIBR should be alright, but the market has been punishing stocks with widening losses lately. ---------------------------- 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 *********** A Little Bit Can Go a Long Way By David Popper Is it a bear market, or is it the start of a bull market? Will the Fed raise rates? If the Fed raises rates, will it be the last time this year? How does the election affect the market this year? Are stocks setting up for a run or is this another bear trap? Will the earnings season prove to be profitable or will there be earnings disappointments? How much money is on the sidelines? What about the Barron's article predicting a huge bear market? Which "play of the day" will I play? Jim says the Nasdaq is forming a bullish wedge. How do I play it? Indeed, there are huge cross currents in the market right now. One currently guarantees smooth sailing, while the other currently promises disaster. The problem for those of us who do not trade for a living and cannot watch the computer all day is that it is difficult to predict at this point which will prevail in the short run. Many tech stocks appear to be setting up for a bull run, but the Fed still looms. So how do you play a market that has the potential to explode either way? Very carefully. One way to play the sideways market is to trade only market leaders with good chart patterns and to trade less amounts of the stock than you would normally would trade. For example, this week I have chosen to trade CHKP. It successfully broke above resistence at $200 eight sessions ago and has bounced off $200 two times during these past eight sessions. The stock has encountered resistence at approximately $236 and thus, has been range bound in a $36 range for the past two weeks. Range bound stocks present great trading opportunities. Trading 100 shares of CHKP may yield $500 to $1,000 a day. Purchasing CHKP toward the bottom of its trading range and holding until it returns to the upper end of the trading range could yield $2,000 to $3,000 per week - and with less risk. This would be poor performance for someone trading for a living, but for the person using the market to supplement his income, it is good income. Yeah, you might miss a breakout, but there is always tomorrow. The market offers opportunities every day. If you miss one wave, you can always catch the next. The point is you must treat the market as a business and only take reasonable business risks. You must trade in light of your risk parameters and time limitations. You must trade in light of reasonable goals and not in light of a fantasy mega return. You do not have to heavily invest until the conditions are right. It is better to make a decent second income without major risks and wait for a trend to be established before a major investment is made. Again, if your account does not allow you to buy 100 shares of CHKP, check out EMC, JDSU, TQNT, CMTN or a host of others. In short, range trading during sideways markets provides the trader with the opportunity to make a consistent income, while waiting for the major trends to be established. I am confident that there are many people that have the time and experience to invest heavily in this market. They may be rewarded handsomely, or maybe not. I, for one, simply do not have the time to monitor a large position when conditions are uncertain and therefore, it is better to trade within these limitations. For me, it is better to make a decent second income without major risks until a definitive market direction is established. After all, I am looking for a predictable second income over the long haul. Contact Support ************** TRADERS CORNER ************** Confessions Of A Trader By Austin Passamonte I've come to realize that the worst thing about sharing strategies is I should adhere to them myself. Join me for a bit of trading history the past couple of weeks and see where I went wrong. Most of May treated me pretty good. Seems like everything I bought made money or got stopped at my entry on trailing stops. Calls & puts on the OEX, QQQ, Disney, PDLI, GE all padded the account nicely. Being flush with cash and on a roll is not always a good thing, however. On Wednesday May 23rd markets failed to follow through the prior day's strong rally on heavy volume. Instead we had a quiet session on very light volume as all the media sure expounded. I figured it was just a little relief rally after a heavy sell off the week before and decided to enter some downside plays to capture a pullback. I placed a buy order for June 740/730 put debit spread @ 2.5 when the ask was 3.75 and filled in the afternoon. I also sold some June SPX 1375/1400 call credit spreads for a premium of 20 on a maximum risk of 25. That means each spread expiring against me would be limited in loss to $500 maximum. I liked the chances for time decay in my favor, and actually planned on buying them back for any decent profit when the markets retreated. In case you haven't noticed the equities thumbed their noses at me, rallied and didn't look back until this week. Those bearish spreads went so far underwater the Titanic rests above them. The beauty of a spread however, is it's staying power. The OEX debit spreads dropped to a value of 3/8th each and I bought back the short 730 puts for .125 apiece to leg out of the spread. That means I still own the June 740 puts at a cost of about 3 each when you add the 2.5 initial spread, .125 cover on the shorts and commissions. The 740 puts were selling for 15 - 17 points if memory serves correct, so I would have lost at least 12 points each to date just on a buy & hold of straight puts without closing out. If the OEX continues to drop by Friday I may have the chance to exit at a slight loss to solid profits but that's a long way to go from current market close of 790. Had I sold OEX credit spreads instead, the chance of early exercise could have taken me out of the action at the highest rise in profit which would have been near 9+ points to the buyer whom I sold to. That's why I stick to the SPX and it's European-settled options for credit spreads. Even though my chances of profit are slim, hope still springs eternal. If I'm out all that capital I sure want to get my money's worth of entertainment. Speaking of the SPX, my 1375 short/1400 long call credit spread added 20 points per contract to my account. Alas, it must fall to close at 1395 by Thursday night for me to at least break even on the 5 point difference in the spread. To be completely clear, someone owns that 20 point credit spread I sold as a 20 point DIM debit spread they bought. Maximum profit is $500 to them which as a risk 4 to earn 1 play seems terrible to me but is looking favorable as we speak. That $500 per will come out of my account along with the 20 points credited if the S&P 500 closes at or above 1400 by Thursday night. Just about a lead- pipe lock that play bit the dust! For every index point below 1495 the SPX may close I get to keep $100 of that $2000 credit. A huge market slide to 1375 or less would buy the Jeep Cherokee Limited Wendy has pined over for so long, but we pretty much know the results by now. Where did I go wrong? It's easy. I bought too soon! Had I tuned out the "low trading volume" nonsense and paid attention to my charts it should have been clear that an upside move was far from over. Didn't we cover that in the stochastics discussion? Not well enough for me to internalize. I could have bought & sold similar spreads much higher in strike prices for the same credit and debit amounts had I waited mere days. While we're on the subject, light or heavy volume only indicates whether an extreme move has lasting power. I think we can all relate to low volume days that moved much further than we'd like. That's why I rely on stochastics. they eliminate the weakness of volume watching on light trading that kills. Think of it this way; volume tells us how many soldiers are on the battlefield while stochastics measure the magnitude of their firepower. Even on days when few soldiers are marching if they wield heavy artillery the battle lines will advance. Doesn't mean they will hold the ground for long but it will be theirs until retreat. Stochastics allow you follow the soldiers while volume lulls one into waiting for the major assault force. Trust me, the lead Marines can either save or eliminate you long before that. Keep volume measures in perspective, I continually repeat to myself. Today I had a dental appointment scheduled that wrenched me out of the office fifteen minutes past the opening bell. Based on "Market Posture" section by Capital Advisors in OIN showing heavy open interest above 800 for the OEX, I hoped to buy some June 790/780 put debit spreads if I could have them for 2.5 points or less. We entered a buy-limit order for 2.5 when the ask price was 3.375 and rushed out the door. Got filled on the index rise to 798 before bouncing off. If the OEX trades near 770 soon or expires below 780, this play will break me even for my earlier buy-too- soon decision. A close above 790 won't break the bank, so it's a trade I can live with. On a side note for those who question taking put plays on a rising market via Skybox bearish 798 trigger today, look how cleanly the index hit that resistance and broke down. Even during times when option prices are too high for entry you will notice this reversal behavior at benchmarks of resistance quite frequently. Now for some housekeeping. Many have asked how to change stochastic settings on charts. I use Qcharts highest-level service which allows all sorts of interactive tools. There are other services out there as well. For months I simply used the live chart applet via Qcharts provided free by OIN in the "Tools" column at left. The default settings are 21 and 14, but I switch them to 14 - 3. Smoother settings of 10(3)5 as noted in Monday's article really perform best on charts that have three selections instead of 2. A number of people inquired about books that fully explain stochastics. To be honest, I learned to use them years ago from paper chart services. I would strongly suggest the book, "Technical Analysis From A to Z" by Steven Achelis in the OIN bookstore. I haven't read it yet but a friend has and tells me it's excellent. One stopped-out trade could pay for every book in the library and then some. Books not read won't help you or me either. Come to think of it I'd best order a copy myself. I really can't complain. May was a solid month and I've reduced my positions to a handful of options at a time. The days of 30 - 40 contract plays will wait until the Fed lifts their foot off our necks and clear sailing is abreast. I'm just having fun, polishing up my skills and collecting some decent spare change along the way. More than anything else, I hope you are too! Contact Support ************ OPTIONS CLUB ************ Update from Orange County Monday 6PM June 19th, 19200 Von Karman, Irvine, 5th Floor. Speaker will be our own new internet personality and "market expert" Dave Baker. David Baker was a professional equities and options trader. Each day, David's focus is to identify and provide you with the best intraday setups in the technology sector. David is a graduate of University of California at Irvine. We have been fortunate in that Dave has added value to many of our meetings with his "pithy" (yes I spelled it right) comments. We are going to ask him to concentate on chart formations useful to Swing Traders. Note: If you have been to any of our meetings in the past, you know that they are SRO. The reason we never have enough chairs is that only about half the attendees RSVP. So I never know how many to plan for. Also don't forget to bring your $5. Our committee will tell us more about how we are going to enjoy our $5 meeting dues. ********************** PLAY OF THE DAY - CALL ********************** PDLI - Protein Design Labs $158.13 +3.00 (+7.44 this week) 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. Most Recent Write-Up Waiting to exhale, and exhale it did on Monday. PDLI cast off 8.8% or in monetary terms, a hefty $14.56, although the volume was light. The downdraft continued in this morning's session. However it was evident that when PDLI hit $140 the temptation was too much for buyers to ignore! And let's keep this all in perspective. The pullback to the first two levels of support was healthy. Take into consideration the astonishing gains (+78%) in mere weeks and you really can't scold traders for taking some cash off the table. Plus the downdraft provided a multitude of entry points to get your foot in the door for another momentum rush. On Thursday the shareholders will vote on a proposal to increase the number of authorized shares to 90 mln at the company's Annual Meeting of Shareholders. If it's approved then we've got a potential splitter in our midst! Comments The Biotech sector was down slightly with the market today, but did rebound from the Monday sell-off. PDLI continues to creep up the chart, albeit on light volume. That is what we will be watching, volume. A move over $164 on better volume would signal a breakout and is worth a look for bullish plays. BUY CALL JUL-155*RPV-GK OI=65 at $25.25 SL=20.25 BUY CALL JUL-160 RPV-GL OI=20 at $24.75 SL=19.50 BUY CALL JUL-165 RPV-GM OI=31 at $22.75 SL=16.00 BUY CALL JUL-175 RPV-GO OI=68 at $24.63 SL=19.25 Picked on June 4th at $125.13 P/E = N/A Change since picked +31.44 52-week high=$338.00 Analysts Ratings 2-2-4-0-0 52-week low =$ 19.25 Last earnings 03/00 est=-0.04 actual= 0.04 Next earnings 08-04 est= 0.19 versus=-0.14 Average Daily Volume = 1.45 mln http://www.optioinvestor.com/charts/charts.asp?symbol=PDLI ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** Pandora's Box: A weaker economy is good...or is it? Blue-chip stocks rallied today amid strength in a number of well known financial and drug stocks. Concerned investors received favorable economic news and the buying interest gathered momentum after the positive CPI report filtered through the market. The consumer price index rose 0.1% in May, well below the expected 0.2% increase. Analysts said the benign CPI data gives equity markets a "green light" to rally now that the Fed is relatively certain to avoid another rate hike at the next FOMC meeting in late June. Experts believe there is simply no reason to raise interest rates with the economy showing signs of reduced growth. The bullish inflation data failed to impress technology traders after Tuesday's impressive gains. Investors sold for profits in biotech and computer shares even as the effects of the economic report were bolstering the Dow. Some analysts believe there is still the possibility of a negative inflationary impact from the recent rise in energy prices and many of the institutional buyers will remain on the sidelines until that outcome is known. Our outlook is one of cautious optimism and until the Nasdaq breaks through the resistance at the upper end of its trading range, we will continue to offer "in-the-money" positions with low risk and a high probability of success. 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 96.13 126.81 $3.87 7.7% Splits 6/27 BRL JUN 50 48.38 57.88 $1.62 6.4% Holding up ARBA JUN 55 51.63 74.09 $3.37 5.4% NVDA JUN 90 85.50 126.81 $4.50 5.3% Splits 6/27 NEWP JUN 36.6 34.81 82.00 $1.78 5.2% Adj 3-1 Split RFMD JUN 90 87.62 105.75 $2.38 5.2% Watch Closely! LLTC JUN 55 53.56 65.00 $1.44 5.1% Consolidating RFMD JUN 95 90.50 105.75 $4.50 5.0% Watch Closely! ELON JUL 60 54.69 65.06 $5.31 6.7% ABSC JUL 55 50.75 71.75 $4.25 5.8% SDLI JUL 210 193.81 271.31 $16.19 5.8% HGSI JUL 90 83.38 129.75 $6.62 5.5% Naked Puts: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return BRL JUN 50 48.44 57.88 $1.56 15.4% Holding up RFMD JUN 85 83.25 105.75 $1.75 14.0% Watch Closely! LLTC JUN 55 53.50 65.00 $1.50 13.5% Consolidating ARBA JUN 50 48.00 74.09 $2.00 10.6% NEWP JUN 31.6 30.66 82.00 $1.00 9.5% Adj 3-1 Split PLCM JUN 65 64.12 87.38 $0.88 9.5% NVDA JUN 85 83.81 126.81 $1.19 9.4% Splits 6/27 NVDA JUN 80 77.87 126.81 $2.13 8.9% Splits 6/27 RFMD JUN 85 82.94 105.75 $2.06 8.3% Watch Closely! SDLI JUN 140 136.75 271.31 $3.25 7.3% SDLI JUN 195 193.94 271.31 $1.06 6.8% YHOO JUN 115 112.75 139.50 $2.25 6.6% Earnings soon SDLI JUN 165 163.44 271.31 $1.56 6.3% AFFX JUN 105 102.94 177.25 $2.06 6.1% CHKP JUN 150 148.87 217.38 $1.13 5.5% ELON JUL 50 47.75 65.06 $2.25 9.1% ABSC JUL 45 43.44 71.75 $1.56 6.9% BRCD JUL 105 101.75 138.13 $3.25 6.8% HGSI JUL 75 72.62 129.75 $2.38 6.4% RBAK JUL 77.5 75.12 113.50 $2.38 6.4% SDLI JUL 170 164.87 271.31 $5.13 6.3% MLNM JUL 80 77.81 103.94 $2.19 6.0% Naked Calls: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return JNPR JUN 270 272.13 226.63 $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 *************** CHKP - Check Point Software $217.38 *** Internet Security *** Check Point Software Technologies is the worldwide leader in securing the Internet. Their Secure Virtual Network (SVN) architecture provides the infrastructure that enables secure and reliable Internet communications. Secure Virtual Network secures business-to-business communications between networks, systems, applications and users across the Internet, intranets and also extranets. Check Point's Open Platform for Security provides the framework for integration and interoperability with solutions from nearly 250 leading industry partners, including IBM, Compaq, Nokia, and many others. Check Point is a dominant company in the Internet Security group. In May, the company announced that Software Business magazine had awarded Check Point the "Best Partnering Alliance" across the entire software industry for its Open Platform for Security (OPSEC) Alliance. It also received the Network Computing 2000 Well-Connected Award in the category of Best Firewall for its VPN-1/FireWall-1. Recognized for its intuitive interface, high performance, highest level of security, extensive logging and reporting and enterprise wide policy management capabilities, VPN-1/FireWall-1 also provides the security foundation for Check Point's VPN-1 product family. CHKP has moved into a relatively stable range near $165-$170 and our position offers an excellent reward potential at the risk of owning this industry-leading issue at a favorable cost basis. CHKP - Check Point Software $217.38 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put JUL 145 YKE SI 4 3.00 142.00 5.3% *** Sell Put JUL 150 YKE SJ 128 3.63 146.37 6.3% Sell Put JUL 155 YKE SK 65 4.25 150.75 7.3% Sell Put JUL 160 YKE SL 88 5.00 155.00 8.5% Chart = /charts/charts.asp?symbol=CHKP *************** ENZ - Enzo Biochem $61.00 *** New Discoveries! *** Enzo Biochem is engaged in research, development, manufacturing and marketing of diagnostic and research products based on genetic engineering, biotechnology and molecular biology. Their products are used in the diagnosis of and/or screening for infectious diseases, cancers, and genetic defects. Enzo is conducting research on therapeutic products based on their technology platform of genetic modulation and immune modulation. They also operate a clinical reference laboratory that provides diagnostic medical testing services to the health care community. Enzo shares soared this week after the drug developer said that clinical trials of its HGTV-43 anti-HIV-1 gene therapy treatment showed unprecedented results. The company said a new engineered cell survived eight months in an HIV-infected individual used in the trial. Enzo also reported today that it was commencing Phase II clinical trials of its proprietary medicine, EHT899, to treat patients with chronic hepatitis B virus (HBV) based on successful and highly encouraging results of its Phase 1 trial. Enzo said that in clinical trials in which 15 patients were given EHT899 orally, the medicine significantly alleviated the disease and related symptoms with no adverse effects noted in any patients. The company reported that its immune enhancement therapy resulted in a favorable response in 80% of the patients and if the data holds true in the broader trial now getting underway, EHT899 will be the medicine of choice for treating chronic hepatitis B virus. ENZ - Enzo Biochem $61.00 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call JUL 45 ENZ GI 742 18.00 43.00 3.8% Sell Call JUL 50 ENZ GJ 557 14.75 46.25 6.7% *** Sell Put JUL 40 ENZ SH 199 1.31 38.69 8.0% Sell Put JUL 45 ENZ SI 206 2.50 42.50 14.0% *** Sell Put JUL 50 ENZ SJ 159 4.13 45.87 19.4% Chart = /charts/charts.asp?symbol=ENZ *************** GLW - Corning $237.00 *** Merger Rumors! *** Corning Incorporated is a global, technology-based corporation which operates in three broadly based business segments. Telecommunications handles optical fiber and optical hardware. Advanced Materials manufactures customized products using glass, glass ceramic and polymer technologies. Their Information Display segment manufactures glass panels and funnels for televisions and CRTs, liquid crystal display glass for flat panel displays. Corning and its subsidiaries manufacture products at approximately 40 plants in 20 countries. Earlier this week, Corning projected that second-quarter earnings would easily beat Wall Street's estimates. The shares jumped on the bullish forecast, hitting a new 52-week high in the process. Now the rumors are flying that Corning will acquire optical-parts rival SDL Incorporated (SDLI) as it seeks to keep pace with sector leader JDS Uniphase (JDSU). The company spent almost $7 billion last year to achieve dominance in the optical-fiber business and it appears they are ready to make another big move. Corning is one of the premier companies in the high profile group of communications companies and a number of analysts are bullish on its long-term outlook. The recent trading range near $175-$200 defines this position as a relatively safe entry into the volatile networking sector. Our position offers a low risk cost basis with a reasonable expectation of profit. GLW - Corning $237.00 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put JUL 195 GRJ SS 26 3.25 191.75 4.8% Sell Put JUL 200 GRJ ST 168 4.13 195.87 5.5% *** Sell Put JUL 210 GRJ SB 90 6.75 203.25 7.4% Chart = /charts/charts.asp?symbol=GLW *************** NEWP - Newport $82.00 *** Own This One! *** Newport Corporation, together with its consolidated subsidiaries, is a global supplier of high precision components, instruments, micro-positioning and measurement products and systems to the fiber optic communications, computer peripherals, semiconductor equipment and scientific research markets. The company designs, manufactures and markets components and systems that enhance productivity and capabilities of automated assembly and test and measurement for high precision manufacturing and engineering applications. Newport also provides sophisticated equipment to commercial, academic and governmental research institutions worldwide. The company operates in three business segments, two comprising domestic operations, Components and Subassemblies, and Instruments and Systems. The third business segment is comprised of the Company's Europe operations. In early April, Newport reported first-quarter profits that more than tripled, easily beating analyst's expectations, as sales to the optical communications and semiconductor equipment markets soared. The company's sales rose 55% on strength in the fiber optic and chip sectors. Looking ahead, Newport said it expects revenue in the second quarter to rise sequentially based on its current backlog and anticipated sales in their target markets. In addition, the stock recently underwent a 3-for-1 split and the trend was completely unaffected by profit-taking. Now the issue is on the move and with a new "buy" rating from ABN Amro, there is little chance for a major setback in the near future. Analysts agree with the company's positive future and investors have pushed the issue up $30 in just two weeks. Our cost basis allows a conservative position in an industry-leading company with a bullish technical outlook. NEWP - Newport $82.00 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call JUL 65 NZZ GC 2 21.13 60.87 5.6% *** Sell Call JUL 70 NZZ GD 127 17.88 64.12 7.5% Sell Put JUL 55 NZZ SK 103 1.69 53.31 7.7% *** Sell Put JUL 60 NZZ SL 8 2.75 57.25 11.8% Sell Put JUL 65 NZZ SC 29 4.50 60.50 17.7% Chart = /charts/charts.asp?symbol=NEWP *************** PDLI - Protein Design Labs $158.13 Protein Design Labs is a leader in the development of humanized monoclonal antibodies for the prevention and treatment of disease. They have licensed rights to its first humanized antibody product, Zenapax (daclizumab) to Hoffmann-La Roche Inc. and its affiliates, which markets it in the U.S., Europe and other countries for the prevention of kidney transplant rejection. They have several other humanized antibodies in clinical development for autoimmune and inflammatory conditions, transplantation and cancer. Bio-techs are on the move and the recent 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. The announcement involved technology in mapping more than a billion base pairs of the compounds that link up to make the DNA of a mouse. With a complete sequencing of the human genome, the top drug makers aim to identify genes linked to diseases and develop medicines to stop them. Now the race to explore the new discovery is underway and the leading companies in this technology will dominate the industry. Protein Design Labs is one of the leaders in the volatile Biotech Group and among institutional investors, it is also one of the top holdings. The current technical outlook is favorable and our conservative position offers a way to participate in the issue with relatively low risk. PDLI - Protein Design Labs $158.13 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put JUL 100 PQI ST 17 2.06 97.94 5.0% Sell Put JUL 105 PQI SA 0 2.88 102.12 6.9% *** Sell Put JUL 110 PQI SB 2 3.63 106.37 8.5% Sell Put JUL 115 PQI SC 12 4.88 110.12 11.0% Chart = /charts/charts.asp?symbol=PDLI *************** BEARISH PLAYS - Naked Calls *************** AMCC - Applied Micro Circuits $92.88 *** Going Down? *** Applied Micro Circuits designs, develops, manufactures and markets high-performance, high-bandwidth silicon solutions for the world's communications infrastructure. Their products are designed to respond to the growing demand for high-speed networking applications for established WAN standards such as SONET/SDH and ATM and emerging LAN standards such as Gigabit Ethernet, ATM, and Fibre Channel. They also market and sell IC products that address the needs of the automated test equipment, broadcast HDTV, high-speed computing and military markets. This play is simply based on the current price or trading range of the underlying issue and its recent technical history. The AMCC price trend reflects a negative divergence from the long-term moving average (200-day) line and the recent downtrend has endured successively lower highs and lower lows, on increased selling pressure. With this week's drop, the issue has again failed to recover after a recent consolidation and for now it appears the stock has little chance of reaching our sold positions. AMCC - Applied Micro Circuits $92.88 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call JUL 130 AZV GF 110 3.50 133.50 13.0% Sell Call JUL 135 AZV GG 84 3.00 138.00 11.4% Sell Call JUL 140 AZV GH 489 2.50 142.50 9.8% *** Chart = /charts/charts.asp?symbol=AMCC *************** BRCM - Broadcom $148.75 *** Looking For A Bottom! *** Broadcom develops highly integrated silicon solutions that enable broadband digital data transmission to the home and within the business enterprise. Their products enable the high-speed transmission of data over existing communications networks, most of which were not originally intended for digital data transmission. Using proprietary technologies and advanced design methodologies, Broadcom has designed and developed integrated circuits for some of the most significant broadband communications markets, including the markets for cable set-top boxes, cable modems, high-speed networking, digital broadcast satellite and terrestrial digital broadcast and xDSL. Although the majority of well-known technology stocks have fared better than the broad market in recent sessions, there remains a significant amount of technical damage to repair before the sector leaders can recover. Broadcom is certainly one of the top companies in the Semiconductor (and also Communications) group but for now the issue is simply trying to find solid footing in this volatile market. We will use the current consolidation period to benefit from overpriced option premiums with these relatively conservative, bearish positions. The probability of the share value reaching our sold strikes appears rather low but there is always the possibility of a recovery rally so monitor the position daily for changes in technical character. BRCM - Broadcom $148.75 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call JUL 200 RDU GT 597 3.88 203.88 9.5% Sell Call JUL 210 RDU GB 83 2.88 212.88 7.3% Sell Call JUL 220 RDU GD 47 2.00 222.00 5.2% *** Chart = /charts/charts.asp?symbol=BRCM *********** IN THE NEWS *********** Vivendi Back in Talks with Seagram By Matt Paolucci Nothing quite compares to great American pastimes such as baseball, hot dogs, cut-off jeans, and apple pie. But if you asked Seagram CEO Howard Bronfman, you may get answers like mixed drinks and media. In case you haven't heard, a French utility-gone-media conglomerate by the name of Vivendi is back in talks to combine with Montreal-based beverage giant Seagram Co. (VO), which happens to own the world's largest music company as well as Universal Studios. The companies hope to create an 800-pound gorilla in the global media arena, boasting combined 1999 revenues of roughly $53 billion. In actuality, it would be a three-way deal, involving Vivendi subsidiary Canal Plus, a major player in the European film and cable TV industry. In addition, Vivendi is a stakeholder in British satellite TV company BskyB (BSY), which provides pay TV services in the UK and Ireland, not to mention AOL France, an Internet service provider. "I'm not surprised that a deal is imminent," said Barry Hyman, chief market strategist at Ehrenkrantz, King, Nussbaum. "Because it really is a function of the need for Seagram to become a bigger player, and to finally come to the realization that either they go on as a niche player, or try to become a global force." According to sources familiar with deal, it would be structured as an acquisition of Seagram by Vivendi and Canal Plus for roughly $75 a share in stock, which would value Seagram at about $32.7 billion. Talks had fallen apart earlier in the year due to price and management issues. Vivendi declined comment, but reports suggest that the French conglomerate would also have to digest approximately $9 billion in Seagram debt, vaulting the total price of the transaction to almost $42 billion. If the acquisition were to come to fruition, it would create a multinational media conglomerate with a combined market capitalization in excess of $100 billion and revenues in excess of $65 billion per year. Seagram, which confirmed that talks were in progress, cautioned, "discussions are not completed and there is no certainty that an agreement will be reached or a transaction consummated." Many analysts equate the combination of Vivendi and Seagram to January's announced merger between Internet giant America Online Inc. (AOL), the universe's largest Internet service provider, and Time Warner Inc. (TWX), the solar system's largest media content provider. In order to streamline operations while bolstering its media portfolio, Seagram has sold off several beverage divisions, including Tropicana and champagne makers Mumm and Perrier-Jouet. In addition to the Universal Music Group, Universal Studios and a stake in USA Networks, Seagram also owns several theme parks. Both companies have been moving to reshape themselves as media players, trying to move above and beyond their core businesses. For Vivendi, those core competencies include water treatment, electricity and construction; for Seagram, it's all about liquor. Shares of the Canadian beverage behemoth were up $7.25 at $60.25 in late afternoon trading, while in Paris, Vivendi and Canal Plus shares fell slightly. Canal Plus is 49 percent owned by Vivendi. For those who are looking for some merger arbitrage opportunities, the most active contracts on the call side were the July 55 and August 60 strikes. Looking at the puts, the July 50 and 55 contracts were also quite actively traded. The deal, as mentioned above, is reportedly valued at $75 per Seagram share. ************************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. 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