The Option Investor Newsletter Sunday 6-25-2000 Copyright 2000, All rights reserved. 1 of 5 Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com Entire newsletter best viewed in COURIER 10 font for alignment ****************************************************************** MARKET STATS FOR LAST WEEK AND PRIOR WEEKS ****************************************************************** WE 6-23 WE 6-16 WE 6-9 WE 6-2 DOW 10404.75 - 44.55 10449.30 -164.76 10614.06 -180.70 +495.52 Nasdaq 3845.34 - 15.22 3860.56 - 14.28 3874.84 + 61.46 +608.27 S&P-100 781.07 - 7.67 788.74 + 9.04 779.70 - 12.99 + 56.61 S&P-500 1441.48 - 22.98 1464.46 + 7.51 1456.95 - 20.31 + 99.24 RUT 510.41 - 3.33 513.74 - 9.32 523.06 + 10.03 + 55.66 TRAN 2630.71 - 42.48 2673.19 -116.98 2790.17 - 39.19 +141.81 VIX 25.89 + 2.34 23.55 - 1.64 25.19 + 1.08 - 3.38 Put/Call .61 .53 .45 .41 ****************************************************************** Internet stocks cash burn torches Nasdaq Just another exciting day in the Internet world with yet another round of bad mouthing by the Internet analysts. The spark for the session was comments from Lehman Brothers analyst Navi Suria who questioned Amazon.com's credit worthiness. In 1999 Amazon lost an average of nearly $2 million per day. Navi claimed Amazon was burning cash at a record pace and sales were only expected to be up +2% from the first quarter of this year putting revenue at $600 million. On Thursday Goldman Sachs analyst Anthony Noto also predicted similar numbers. Lehman Brothers release a research note telling bond traders that the company's credit was "weak and deteriorating." Of the 33 firms making recommendations on Amazon 15 list it as a strong buy, 9 suggest a buy and 9 recommend a hold which is a polite way of saying "avoid." Since 1997 Amazon has received $2.8 billion in bond funding which amounts to .95 cents for every dollar of merchandise sold. Mary Meeker, Internet analyst at Morgan Stanley, said Q3 and Q4 revenues would probably not top her estimates and "there could be some modest downside." Amazon was not the only Internet scapegoat on Friday. Ebay took its share of licks as WR Hambrecht downgraded Ebay to a "buy" from "strong buy" saying that there was no compelling reason to buy the stock at this time. Ebay has had very strong growth but the space is full and growth of new auction junkies is slowing as the fad passes. While he expected Ebay to be a core holding and to post solid Q2 results of +$.03 per share he felt the story was fading. Ebay lost -$4 and closed at an eleven month low on the news. With all the negative news Nasdaq traders ran for cover as Internet stocks gave back recent gains. The Dow managed to recover some of the recent losses as tech money eased back into old economy stocks which were perceived as values after their recent drops. EK gained +1.19, KO +1.75, GM +1.44, JNJ +1.19, MCD +1.19, WMT +1.25. Even JPM got into the act with a +1.19 gain after being severely beaten up for -$15 over the last two weeks. Rambus continued to be a stellar performer on the Nasdaq after settling the suit with Hitachi. Although it closed about -$14 off its high the gain for the day was still a very respectable +$17. One analyst set a new price target for Rambus of $165 but several others are warning that all the good news may be priced in already. The settlement with Hitachi and Toshiba will give Rambus a 1%-2% royalty on about 12% of the DRAM industry. The majority share however will not be as easy to capture with over 50% of the market controlled by Samsung, Hyundai and Micron. Jeremy Lopez at Moringstar said it would be highly unlikely that Rambus could capture that share and that the Rambus risk/reward ratio was unquestionably skewed toward risk at this point. He compared RMBS rocket rise to the QCOM spike last year when it appeared CDMA would be the world winner in cellular access. As we can see from recent events the domination of the world by QCOM is far from certain just as domination of the DRAM business by RMBS is the "least likely outcome" per Jeremy. Trading still lacked conviction with lackluster volume again and the internal market factors were negative. On the NYSE there were only 25 new highs compared to 62 new 52 week lows. The advance decline ratios continued to be negative on both the Nasdaq and NYSE. The key here is still the Fed meeting next week. This is a two day meeting and while all 29 analysts that track the Fed rate policy are calling for no hike there is still the worry that the Fed would rather hike once more now instead of passing now and having to raise again just before the elections. Many feel the market has already priced in a "no hike" scenario with the rally over the last two weeks and any negative news would be met with selling. With the dog days of summer rapidly approaching the possibility of a significant rally is dwindling. If the Feds go neutral and fail to raise rates we could see a rally into earnings but the anticipation of a fall off in mid July would likely keep it from being very strong. The Dow has been stuck in a diamond pattern since April 1999 and is currently nearing a breakout. The breakout is caused by the lower highs and higher lows converging with only one winner. The current trend is down which would lead you to expect a breakout to the downside but the last 10 months of the trend has been dominated by an aggressive Fed hiking rates monthly. If the Fed trend changes with the meeting next week that could be the catalyst for a breakout to the upside. The Nasdaq appears to be forming an inverse head and shoulders pattern but it is really too early to tell. If we assume, and you know what ass-u-me stands for, that the mid July drop will make it three years in a row then the Nasdaq could retest 3500 to 3300 in mid-July. This would provide a strong consolidation base to begin a late summer rally into October earnings. (Ouch, I even hate to write October since that brings up another set of scary comparisons) The period we option traders should focus on is the next two weeks. A neutral, no hike, Fed could give us two weeks to play the long side before a possible July dip. If you are considering long calls please don't get caught thinking "I will buy November so I will have extra time in case something goes wrong." Use the 50-50-90 rule. If there is a 50-50 chance the market will dip in July, there is a 90% chance of it occurring if you go long next week. Do you really want to go long (3-4 months out) only to be locked into the position while the dog days of summer pressure stock prices and premiums OR would you like to open new positions in Late July or August if/when a summer rally really appears? I know this is heresy. You mean stay out of the market for several weeks? Yes. You mean buy all the time I want, just don't use it? Yes. Do you mean I don't have to be tied to my monitor all summer? Yes. BUT, if a summer rally does appear you will be in cash on the sidelines and ready to jump into action. The alternative is to be in options that are worth half what you paid for them and you spend every day just hoping that they get back close to what you paid for them. (been there, done that?) I hate to be so negative but if you have tried to trade during the summer for the last several years you probably lost money or at least had to fight for every dime you got. I tell people in our seminars that you should have a trading plan. The number one rule in your plan should be "to trade only when profitable." Sounds glib but why would you want to trade any other time? Summer is usually not profitable. Yale Hirsch in his Stock Traders Almanac shows that since 1950 the months of May to Oct have been very hard to trade. If you had invested $10,000 in the S&P in May of each year and withdrew it in Oct and allowed it to compound for the last 50 years you would now have $11,138. Yep! Absolutely flat and this included the last 10 years of this huge bull market. If you invested $10,000 on Nov-1st and withdrew it on Apr-30th for those same 50 years you would have over $350,000. Now, why was it that you wanted to invest over the summer months again? Now before you decide to go on a four-month vacation from trading you should remember that there are major moves in the market in almost every month regardless of the season. The key is waiting for the move. I think the key to trading in the summer is benchmarks. We should pick a benchmark like Nasdaq 3900 and let it dictate our strategy. Above 3900 we go long, below 3900 we go flat. This is a simple, end of day indicator, that is almost fool proof. Of course if the Nasdaq did retrace to 3300-3500 we would reset our benchmark depending on the market conditions. I know that 90% of our readers will continue to trade on a daily basis until we get those traders anonymous meetings started in your area. That is ok too as long as you are reactive to the market. With that in mind keep your eyes on the Fed next Wednesday and be ready to move quickly. In the last decade the week after the June triple witching Friday was down 8 of 10 years. Last week made 9 of 11. The next two weeks has historically been bullish when the Fed was not a factor. Lets hope the trend continues. Next week is the end of the quarter and some portfolio balancing may occur as well as in the first week of July. This provides the bullish bias as funds try to dress up their statements for advertising purposes. You can profit from the dog days of summer by using the time you are not trading to attend one of our regional seminars near you. We had a packed out crowd in the LA 3-day seminar last week. We had so many people who wanted to attend but couldn't that we scheduled another 3-day for Orange county on Aug-10-12th. If you are on the east coast the Washington DC 2-day seminar starts Tuesday but we still have four seats available. 100% money back! Trade smart, don't buy too soon. Jim Brown Editor *************** SEMINAR RESULTS *************** Technical Analysis, Stock and Option Seminar Three days of indepth education. The next seminar is a two day event in Washington DC on June 27-28th. We guarantee you will not be disappointed. The class size is small so you will get plenty of individual attention from Chris Verhaegh and the staff. At less than the cost of a bad trade you can learn how to analyze stocks and trade options like the pros. Don't wait, do it now. June 27-28 Washington DC 2 day July 13-15 New York 3 day July 21-23 Seattle 3 day July 27-29 Atlanta 3 day Aug 10-12 Orange County 3 day NEW !!!!!!!!!!!!!! Aug 17-19 Orlando 3 day Aug 28-29 Detroit 2 day Australia coming soon! Has the market been beating you up? Did you give back your gains from April? Would you like to understand all the technical indicators our writers use? Does the alphabet soup of technical terms like RSI, DMA, MACD, ROC, Stochastics, Bollinger bands, sound like Greek to you? You can learn from the experts how to interpret all these indicators, read charts, pick stocks and which option strategies to use on those stocks for less than the cost of one bad trade. Reserve your seat now for one of our regional seminars. Click here for more info: http://www.OptionInvestor.com/seminar/seminar.asp *************************** OptionInvestor/Optionetics Summer Seminar Series Back by popular demand! *************************** We are proud to announce the summer OptionInvestor & Optionetics seminar schedule featuring options guru, money manager and best selling author George Fontanills. The OptionInvestor/Optionetics Seminar was designed to help you gain the know-how necessary to compete in the marketplace. Over the course of the last 7 years George Fontanills has developed a series of high profit, low risk, low stress trading techniques that will empower you to systematically approach the markets. Learn how to intelligently combine options to maximize profits and minimize risk. Designed to fit the needs of novice and seasoned traders, this workshop and home study course will show you how to use managed risk options strategies in today's highly volatile markets. The seminar and home study course materials include: Delta neutral non directional trading 28 options strategies including Spread Trading, Straddles, Strangles, Condors (low risk trades), Butterflies George Fontanills' "5 Minutes a Day to find a trade" How trade volatile markets 911 Repair Strategies - what to do when a trade goes wrong trade action plan "How to get Started". With our unique tuition package you will receive: Before the event: Home Study Course with 8 digitally mastered video tapes and a 500 page manual "Trading for the 21st Century" plus your personal coach available to answer your questions. Live Seminar: 2 days of live trading with George Fontanills and Tom Gentile plus FREE partner attendance - two people for the price of one. You may bring a friend, spouse and business partner to the event for FREE. Both teachers available for our personal questions and you get a full Money Back Guarantee. Venues: George Fontanills, together with his chief options strategist Tom Gentile, will personally teach two days live trading delta neutral strategies in the following cities: July 10 & 11 Atlanta (Tom Gentile only teaching) July 16 & 17 Houston July 23 & 24 San Francisco Our Home Study Course is available for the same price if you can't make these dates and you may attend a later seminar when your schedule allows. Order today as seating is strictly limited to first come first served basis. You will receive a $5,000+ value package, but pay only the special price of $2,400 for your tuition. Please reserve your place now to not be disappointed when we sell out. Click here for more info: http://www.OptionInvestor.com/seminar ************** EDITOR'S PLAYS ************** Business interferred with trading last week and I was unable to place any trades. Had I been around a PC however I would like to have sold my NOK leaps before NOK dropped -$10. That was painful. So was the -$5 drop in Microsoft but I have two years to go on those leaps. VOD also rewarded me with a -$6 drop. (Don't even start on me with the stop loss lecture!) Instead of boring you with the same three portfolio positions I scanned the picks for this week and picked three that I thought looked especially good. I have added my comments below but you still need to make your own decisions before making an investment. BRCD - Brocade I really like the BRCD pattern. A string of long up days followed by a sharp bout of profit taking which gives us an entry point. I like BRCD because of the higher low double bottom on Friday. The Nasdaq was diving at the close and BRCD was gaining +4 off the second bottom. I think this stock should bounce on Monday if the market cooperates. RBAK - Redback Networks RBAK has a similar pattern to BRCD but instead of a sharp sell off after a decent gain it simply consolidated in place. No major pull back just a slowing. RBAK showed remarkable strength Friday afternoon with a good uptrend all day after the drop at the open. This is the kind of pattern I look for when the market is down. Good stocks caught in the downdraft but recovering in spite of the market. HGSI - Human Genome HGSI is strictly a news play. With the news on Friday that the human genome sequencing completed the next task of developing drugs based on this information will begin. This stock had a sharp pullback on the move into the Russell-1000 by 17 biotech stocks on Thursday. This took some of the profit out and gives us an entry point, market permitting. Good Luck Jim **************** MARKET SENTIMENT **************** 3Com, Cabletron, and Nike! Technology stocks stumbled into the weekend, as all of the gains that were made in the early part of the week were given back. The Internet sector led the losers Friday by posting a -6.28% loss, thanks to some negative comments on Amazon.com, which then spilled over into the rest of the sector. Regardless, the NASDAQ was not able to hold the magical 4,000 mark like we predicated earlier in the week. One figure that Pinnacle loves to watch is the put/call ratio on the NASDAQ 100. Now on Thursday, we mentioned that the P/C Ratio for the NDX was 0.11, indicating call speculating in the face of a downdraft. Friday's P/C ratio was 0.17, even though technology stocks were getting hit yet again. Now even in the face of a selloff, call speculators are betting on a rise in the NDX, which from a contrarian stand, is bearish for this index. During the major gains of the NDX during the last couple of years, it was common for the Put/Call ratio to be in the 2.50-4.50 range, which is a very bearish number, and from a contrarian stand is quite bullish. Right now it stands at 0.91. If the contrarian play is correct on this index, we have more room for downside on the NDX. Looking ahead, we obviously have the Fed meeting this week as well as a few corporate earnings, not to mention the negative pre-releases that always seem to come during the last week of June. Now currently, there is a 24% chance that the Fed will raise rates by 25 basis points. This figure is well off of the 86% figure from several weeks ago, but there is still a one-in- four chance that we may see another hike this week. Regardless, the sentiment that is being weighed on the Fed will diminish significantly, as traders and investors start focusing on the corporate earnings ahead. Now even though we are still several weeks from the major earnings run, there will be a handful of companies that are due to report their earnings. Now, below is a small list of equities (that should be reporting their earnings this next week) and our Pinnacle Index for those particular stocks. The Pinnacle Index is a proprietary product that determines current market sentiment and expectations for underlying equities and indexes, which is based upon speculation in the option markets. Also included are their expected earnings, the infamous whisper number (if available), their estimated earnings release date, as well as the put/call ratio if available. What we look for are liquid stocks/options that garner a lot of interest from the investment community. Most of the issues are high tech, and are thus more aggressive. We then filter out many of the equities, only to show stocks with excessive optimism or pessimism. From a contrarian standpoint (a high number is a good indication of extreme optimism, and a low number is a good indication of extreme pessimism) you should buy when its low, and sell when its high. Last quarter, we highlighted some stocks with a Pinnacle Index that were stratospheric (as high as the upper 20's). Needless to say, these stocks had so much pent-up enthusiasm, that after their earnings, they tanked. It is the old adage, buy the rumor - sell the news. There were also numerous companies with a Pinnacle Index less than one. However, once these companies came out with their bad quarter, the stocks rallied due to the oversupply of pessimism. Company Symbol Pinnacle Expected Whisper#: Put/Call Index(PI): Earnings: Ratio: 3Com COMS 2.43 -.22 n/a* 0.35 Cabletron CS 1.98 -.02 .01 0.38 Liberate LBRT 2.68 -.20 n/a n/a Nike NKE 0.98 +.46 +.47 0.89 *= Due to a major reorganization, earnings were greatly different and insufficient. Now last quarter, we highlighted Cabletron Systems as a high expectation stock. The Pinnacle Index for this issue last quarter was 9.77, and as you can see by the chart below, expectations were so great that once they announced earnings they got crushed. This week, none of the above stocks have high expectations. However, Nike does a low Pinnacle Index, which may indicate that the bad news is already out on the stock, and that a relief rally may be in the works. Regardless, the major earnings run is just a few weeks away, and Pinnacle is looking forward to bringing you the expectational analysis that has been very prosperous for many. Have a good week! http://members.OptionInvestor.com/archive/marketsentiment/032600_1.asp BULLISH Signs: Interest Rates (5.896): The fear of future rate hikes may now be over with. Mixed Signs: Volatility Index (25.89): The VIX has proved that the low 30's are an excellent buying opportunity, and the low 20's continue to be a great selling opportunity. BEARISH Signs: Put/Call Ratio NDX: Even in the face of a selloff, call speculators are betting on a rise in the NDX, which from a contrarian stand, is bearish for this index. During the major gains of the NDX during the last couple of years, it was common for the Put/Call ratio to be in the 2.50-4.50 range. Right now it stands at 0.91. Slowing Economy: If the economy is truly slowing down, we will start feeling the effects once corporate earnings report over the next couple of quarters. This has just occurred as Circuit City, Electronics for Imaging, Proctor & Gamble, Lands End, H&R Block, McDonalds, Electronic Data Systems, Mylan Labs, Harmonic Lightwave, NBC Internet, Wachovia Bank, Perot Systems, Xerox, Gadzoox Networks, Honeywell, Computer Sciences Corp., Carnival Cruise Lines, and Qualcomm have all warned of poorer times ahead or have had earnings cut by analysts. IPO Dilution: $58.6 billion of stock was freed up for trading in March, $67.3 billion April, and $118.3 billion in May. This is too much stock for the system to handle. Energy Prices: With the rapid rise in crude oil, everything from manufacturing to transportation will be affected by higher costs. These higher costs will be felt 1-2 quarters out, and could put pressure on profit margins. ***************************************************************** The Power of Sentiment Analysis It has often been said that the crowd is right during the market trends but wrong at both ends. Measuring and evaluating the sentiment of the crowd, therefore, can give savvy option traders a decided edge. Pinnacle Index ***************************************************************** OEX Friday Tues Thurs Benchmark (6/23) (6/27) (6/29) ***************************************************************** Overhead Resistance (805-825) 11.27 Overhead Resistance (775-800) 1.03 OEX Close 781.07 Underlying Support (745-770) 1.53 Underlying Support (715-740) 8.09 What the Pinnacle Index is telling us: Overhead is still strong (805-825), indicating that the potential for a major rally in the short term is low. Both direct overhead and support are light, indicating that the OEX continue on it's trading range ways, with a near term emphasis on the bearish side. Put/Call Ratio ***************************************************************** Friday Tues Thurs Strike/Contracts (6/23) (6/27) (6/29) ***************************************************************** CBOE Total P/C Ratio .61 Equity P/C Ratio .53 OEX Put/Call Ratio 3.04 Peak Open Interest (OEX) ***************************************************************** Friday Tues Thurs Strike/Contracts (6/23) (6/27) (6/29) ***************************************************************** Puts 790 / 5,449 Calls 880 / 6,293 Put/Call Ratio 0.87 Market Volatility Index (VIX) ***************************************************************** Major Date Turning Point VIX ***************************************************************** October 97 Bottom 54.60 July 20, 1998 Top 16.88 October 8, 1998 Bottom 60.63 January 11, 1998 Top 26.38 March 4, 1999 Bottom 28.15 May 14, 1999 Top 25.01 July 16, 1999 Top 18.13 August 5, 1999 Bottom 32.12 October 15, 1999 Bottom 32.06 January 28, 2000 Bottom 29.09 April 14, 2000 Bottom? 39.33 June 25, 2000 25.89 ************** MARKET POSTURE ************** As of Market Close - Friday, June 23, 2000 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,200 11,400 10,405 Neutral 5.05 SPX S&P 500 1,350 1,500 1,442 Neutral 5.30 OEX S&P 100 725 800 781 Neutral 5.30 RUT Russell 2000 450 550 510 Neutral 5.05 NDX NASD 100 3,000 4,000 3,686 Neutral 5.30 MSH High Tech 800 1,050 995 Neutral 6.06 XCI Hardware 1,250 1,600 1,510 Neutral 5.30 CWX Software 1,050 1,300 1,219 Neutral 6.06 SOX Semiconductor 850 1,200 1,217 BULLISH 6.20 NWX Networking 900 1,100 1,160 BULLISH 6.02 INX Internet 600 650 546 BEARISH 6.23 ** BIX Banking 520 640 532 Neutral 6.09 XBD Brokerage 450 515 490 Neutral 6.22 IUX Insurance 600 650 621 Neutral 6.20 RLX Retail 900 1,000 823 BEARISH 6.09 DRG Drug 355 400 397 Neutral 4.28 HCX Healthcare 710 800 809 BULLISH 6.15 XAL Airline 140 155 158 BULLISH 5.25 OIX Oil & Gas 265 300 309 BULLISH 5.11 Posture Alert Technology shares ended the week on a sour note, as the NASDAQ got hit for -91 points thanks to weakness in the Internet sector (- 6.28%). Concerns over Amazon's credit started the selling pressure, which naturally spread to other net stocks such as Yahoo, Ebay, and America Online. With this most recent action, we have lowered the INX to Bearish from Neutral. ************* SECTOR TRADER ************* You Want Options on HOLDRS? You Want New HOLDRS Too? By Buzz Lynn With some help from both AMEX and Merrill Lynch, we bring you both starting this weekend! We know lots of you have been asking when options will be available on other HOLDRS besides the QQQ, HHH, and BBH. As of last Thursday, options are available on ALL HOLDRS (except the new ones, which we'll get to in a second). From here on out we will no longer need to list them as optionable or not optionable. That means we can now apply the leverage available in trading options for hopefully greater returns on the PPH, TTH, IAH, IIH, BHH, BDH, and SMH HOLDRS! This is great news for those that have been trading the $97/share semiconductor sector both long and short. Now, you are no longer required to shell out the $9700 +/- just to get in the game - all it takes is the price of an options contract, or roughly $700 for a slightly in the money (JUL-95) call contract. By definition, sector trading just became more affordable to the small investor. The only downside here is that due to their newness, liquidity is questionable and spreads may be large at first until more trading volume and open interests develop. By no means is that a red flag to stay away from the options though. It just means to play with a bit more caution until they get a discernable and more predictable trading personality. That will come with time, and probably not much time at that. As if options were not enough to keep us happily planted at our trading screens a while longer, two new HOLDRS were introduced on Friday too- the RKH, a basket of 20 regional banks, and the UTH, a basket of 20 utility stocks. The components will be listed next week sometime on the site. The RKH and the UTH both offer a way to play a defensive position if the hot sectors are headed south. The theory here is that their steady income streams will be in favor as profit growth shrinks in the environment of a slowing economy. Careful though. That's just a theory as bankers have now taken on the role of insurance agent, estate planner, and stockbroker. They no longer can, nor do they have to rely solely on interest income for profits (see Traders Corner, Sunday, June 4, Staging an Index by Molly Evans for more detail). Similarly, utilities no longer rely on just electricity sales for steady profits. Many like Enron (ENE) and Williams (WMB) are heavily into bandwidth development too. Neither sector is as heavily segmented or insulated as it used to be and may not behave like a "normal" defensive play of the past. Even so, we'll take a long position RKH or a UTH any day over an HHH headed south. Come to think of it, we'll take an HHH headed south too - on the put or short side! See the new play section for the latest! One thing to note about these new HOLDERS though - we will not be adding them to our play list for a while until they develop a distinguishable trading pattern. Until then we'll keep an eye on them with the intent to play them sometime in the future. Finally, a housekeeping item - I've received many e-mails asking about how to find the underlying component stocks and weighting in each HOLDR. Here's how to do it. First, go to the OIN Web site (If you aren't already doing this, and just using the e-mail version, you're missing out! You can double the effectiveness of your trading education from all that rich meaty content you won't otherwise see in the e-mail version!). After logging in, click on "Sector Trader" under the "Strategies" section. Then click on the most recent update. At the top of update you will see the daily summary of price moves for the HOLDRS, each with its own link. By clicking the link, you can then view all the components and their weights in the selected HOLDR. There you have it. For your trading pleasure, all HOLDRS now offer options, except the new ones, which we won't immediately play. With the FOMC meeting looming this week, use extra diligence in planning your trades and trading your plan. Good luck! Still have questions or suggestions? We're building this section for you. Write me at Sectortrader@OptionInvestor.com. Thanks to all who have written so far. ----- Index Last Mon Tue Wed Thu Fri Week QQQ NASDAQ-100 91.75 3.81 -0.25 1.25 -3.94 -3.50 -2.63 HHH Internet 109.63 1.13 5.63 2.50 -6.13 -7.38 -9.25 BBH Biotech 171.50 9.75 3.44 7.50 -9.44 -3.50 7.75 PPH Pharm 98.06 0.31 -1.94 1.88 -1.69 0.31 -1.13 TTH Telecom 76.25 1.56 -0.50 0.50 -0.31 -1.19 -0.94 IAH I-net Arch 89.63 4.25 -1.00 0.13 -2.25 -2.75 -1.88 IIH I-net Infr 56.50 3.00 2.88 0.19 -2.19 -3.38 0.50 BHH B2B 39.50 0.87 1.13 1.81 -2.44 -1.00 0.38 BDH Broadband 88.06 2.81 -0.63 1.44 -2.56 -1.50 -0.44 SMH Semicon 97.50 6.50 1.50 0.44 -5.19 -1.75 1.50 ************** New Plays ************** HHH - Internet $109.63 (-9.25) Headline reads, "Queen Piranha, Mary Meeker Turns AMZN Waters Red". Henry Blodget too joined in the feeding frenzy. If you missed it, both analysts, once strong AMZN supporters, stunned the dot com world Friday by stating they did not expect AMZN to show revenue growth going forward or the meet current revenue expectations. It's not a surprise then that AMZN, a big part of this HOLDR dragged down every other dot coms in this HOLDR too. But the problems aren't just restricted to AMZN. In fact, on Friday, every component closed in the red. EBAY with its own slowing growth, YHOO, and AOL with its TWX merger aren't helping. Technically, the index itself sold off below then current support ($114), thus filling the gap up from three weeks ago on volume exceeding the ADV by 25%. While there is mild support at $105, we think there is enough negative sentiment in this sector now thanks to "Mary and Hank" to send HHH back for a retest at $100. We would look for a possible put or short target shooting entry if HHH reaches back for $112, then turns down again. Otherwise, a move below $108.50 might make a good put or short play entry. Any recovery could be just a dead cat bounce. Again, you might want to treat it as a put or short entry opportunity. If a miracle happens though, and HHH breaks back above $112 (unlikely, but that's why it's called a miracle), the next point of resistance would be back at $115. At Support: BUY CALL JUL-105 HHH-GA OI= 10 at $10.00 SL=7.00 BUY CALL JUL-110 HHH-GB OI= 59 at $ 7.38 SL=5.25 BUY CALL AUG-110 HHH-HB OI= 26 at $10.38 SL=7.25 At Resistance: BUY PUT JUL-110 HHH-SB OI=376 at $ 7.13 SL=5.00 BUY PUT JUL-105 HHH-SA OI=150 at $ 5.13 SL=3.00 BUY PUT AUG-105 HHH-TA OI= 92 at $ 7.75 SL=5.50 Average Daily Volume = 1.19 mln /charts/charts.asp?symbol=HHH ************** Updates ************** QQQ - NASDAQ 100 $91.75 (-2.63) As goes NASDAQ, so goes QQQ. QQQ failed to hold its then newfound support of $95, and fell through its technical support at the 10-dma of $94.64. Did you get short at $94? It provided nice intraday resistance before QQQ sank like a stone in the final two hours. All the big leaders gave back over $1 on Friday, including MSFT, DELL, CSCO, and WCOM. Only INTC squeaked by with a fractional gain. While there is mild support at $91.50, $90 is a more solid level and should hold, barring unforeseen catastrophe. If it doesn't, consider it an invitation to buy puts or go short. In the meantime, if we don't get a move back over $95, QQQ could be stuck back in the $90 to $95 trading range like the two weeks prior to this last one. You can play it that way for now as long as fear of the FOMC keeps traders paralyzed. But a move over $95 is a clue to consider going long or buy calls again. Watch the market tone and play off support and resistance until the direction is clear. At Support: BUY CALL JUL-90 QVQ-GL OI= 2749 at $6.38 SL=4.25 BUY CALL JUL-95 QVQ-GQ OI= 5702 at $3.88 SL=2.25 BUY CALL AUG-95 QVQ-HQ OI= 108 at $6.25 SL=4.25 SELL PUT JUL-90 QVQ-SL OI=15539 at $4.00 SL=6.00, Huge OI At Resistance: BUY PUT JUL-95 QVO-SV OI= 3713 at $6.75 SL=4.75 BUY PUT JUL-90 QVQ-SL OI=15539 at $4.25 SL=2.75 BUY PUT AUG-90 QVQ-TL OI= 162 at $6.25 SL=4.25 Average Daily Volume = 27.51 mln /charts/charts.asp?symbol=QQQ ----- TTH - Telecom $76.25 (-0.94) Again, the 50-dma is acting as resistance. Helping even more is that TTH violated its 10-dma on Friday (then about $77.50), then attempted to get back through and failed. Now it has both the 50 and the 10-dma working as resistance. We would expect that to continue since AT&T (T) reported that its move to eliminate the monthly long distance access fee will cost it a penny or so at earnings time. We have to comment here too on their incredibly backward plan to INCREASE long distance rates in the process. Their focus on maintaining voice revenue is going to cost them while their competitors build out new networks and grow their data business (where the real revenue and growth is), relegating AT&T to also-ran status within a few years if it can't execute its broadband strategy more convincingly. Here's a real life case of tripping over dollars to pick up pennies that betrays T's long term weakness in our opinion. OK, off the soapbox. SBC, BEL, BLS, and WCOM are helping to drag down the index too. As noted Thursday, stochastic, RSI, and MACD are now pointing south in unison. While there is mild support at $75.75, $74 looks like the next stop to us given the sentimental weakness of the major components. If $74 can't hold, TTH too will be subject to retracing the gap up of three weeks ago, perhaps making a reach to $72.50. Consider too taking a short or put position if it claws back to $78. Either way, there is opportunity to the downside. However, should TTH get back to $78 and hold, you can consider buying calls or going long again. At Support: BUY CALL JUL-75 TTH-GO OI= 0 at $3.63 SL=2.00, no OI BUY CALL JUL-80 TTH-GP OI=12 at $1.31 SL=0.75 At Resistance: BUY PUT JUL-80 TTH SP OI= 0 at $4.75 SL=3.00, no OI BUY PUT JUL-75 TTH SO OI= 0 at $1.94 SL=1.00, no OI Average Daily Volume = 83 K /charts/charts.asp?symbol=TTH ------ BBH - Biotech $171.50 (+7.75) As suspected, the profit taking continued on Friday in overall market weakness. That may be partially related to the "buy the rumor, sell the news" mentality in anticipation of the government's and Celera's (CRA) intent to announce they have successfully mapped the human gene. Thing is CRA was one of only a handful of up issues (+$7) on Friday. HGSI also saw $12.38 of gain the news that the company outlined human clinical trials of B-lymphocyte stimulator, or BLyS, a protein that may help patients with immune system problems by stimulating the production of antibodies. Despite gains there, the 5-dma of $174.75 was violated. While there is historical support at $170, the 10-dma of $166.95 may make a better entry. This is still a sentimentally hot sector and should come back. Either way, a solid bounce with a turn around on the Dow and NASDAQ might make a good entry. However, if it violates the 10- dma to the downside, you may want to consider buying puts as the next stop would likely be $160. That said, we'll have to wait and see what happens in front of the FOMC meeting. Be watching for BBH to pick a direction soon. At support: BUY CALL JUL-165 BBH-GM OI= 100 at $15.75 SL=11.25 BUY CALL JUL-170 BBH-GN OI=1254 at $13.13 SL=10.00 BUY CALL AUG-170 BBH-HN OI= 5 at $18.38 SL=13.25, low OI At resistance: BUY PUT JUL-175 BBH-SO OI= 86 at $13.50 SL=10.25 BUY PUT JUL-170 BBH-SN OI= 116 at $10.88 SL= 8.00 BUY PUT AUG-170 BBH-TN OI= 3 at $15.38 SL=11.25, low OI Average Daily Volume = 637 K /charts/charts.asp?symbol=BBH ------ IIH - Internet Infrastructure $56.50 (+0.50) While all of the components of this HOLDR were in the red, VRSN, one of the largest components, was down nearly $12. No particular news other than that it may have been "Meekerized" or "Blodgetized" by Meeker and Blodget's unfavorable comments on the Internet sector related to AMZN. That said, investors may no longer feel the love for this segment of the Internet sector, which helps explain why expected support at $57.50 didn't hold. So why keep it? We thought that if $57.50 didn't hold, a move further down to historical support of $54 might happen. That's still our thinking since anything below $57.50 is a violation of the 10-dma and sign of weakness. Stochastic, MACD, and RSI are also nicely pointed south. A move back to $57.50 followed by a decline would be our invitation to buy puts or go short as would a descent under $54. Conversely, a bounce at $54 or renewed strength at $57.50 would suggest getting long or buying calls again. We favor the downside, but watch for Greenspasms to affect this play in either direction. At Support: BUY CALL JUL-55 IIH-GK OI= 1 at $5.25 SL=3.25, rock bottom OI BUY CALL JUL-60 IIH-GL OI= 0 at $3.00 SL=1.50, no OI BUY CALL AUG-65 IIH-HL OI= 0 at $4.50 SL=2.75, no OI At Resistance: BUY PUT JUL-60 IIH-SL OI= 0 at $6.13 SL=4.25, no OI BUY PUT JUL-55 IIH-SK OI= 1 at $3.13 SL=1.75, rock bottom OI BUY PUT AUG-55 IIH-TK OI= 0 at $4.50 SL=2.75, no OI Average Daily Volume = 301 K /charts/charts.asp?symbol=IIH ------ BDH - Broadband $88.06 (-0.44) This weekend, BDH is on the bubble and in danger of being popped - in other words, double-secret probation. We had expected the then 10-dma of $88.71 with historical support of $88.50 to hold. It didn't and the 10-dma was violated, which would normally earn it a drop from the list. However, given the minimal loss compared to the whole NASDAQ market, it had good relative strength, thanks to NT's gain of $1.56 on Friday. NT and LU are the two largest components, with SDLI, GLW, JDSU and SCMR making up some of the sexier entries in this HOLDR. These are still sentimental favorites and they held up pretty well too. CIEN was the big loser, down $11.75. Solidifying our faith in BDH though was the $1 bounce upward in the last 15 minutes of trading. We need to see the bounce continue from here (actually from $87.50) if we are to make any money. If it can't bounce, BDH is technically poised on the chart to retest $85. We can't make a strong case for going short or buying puts at this level and would look for a bounce accordingly. If it can't, we'll likely give it the boot on Tuesday. Look for a move back over $88.50 or a bounce from $85 as a potential entry. Just make sure the rest of the market is in your favor. At Support: BUY CALL JUL-85 BDH-GQ OI= 0 at $7.38 SL=5.25, no OI BUY CALL JUL-90 BDH-GR OI= 0 at $4.75 SL=3.00, no OI BUY CALL AUG-90 BDH-HR OI= 0 at $7.63 SL=5.50, no OI At Resistance: BUY PUT JUL-90 BDH-SR OI= 0 at $6.25 SL=4.25, no OI BUY PUT JUL-85 BDH-SQ OI= 1 at $3.25 SL=2.25, rock bottom OI BUY PUT AUG-85 BDH-TQ OI= 0 at $6.13 SL=4.25, no OI Average Daily Volume = 189 K /charts/charts.asp?symbol=BDH ************** Drops ************** IAH - Internet Architecture $89.63 (-1.88) IAH gets the boot. While it's been falling for four days, everything on the component list is rolling over too, including SUNW, HWP and IBM. Not only that, but this HOLDR violated its 10-dma (now $91.76) in a big way and didn't make an attempt at recovery on Friday. We look for the weakness to continue thanks to downturned technicals, but not to sink it completely. There may be some consolidation around the $89 level for a bit before the market tells us which way this one will move. The 50-dma could be the next strong support at about $86. We'll just have to wait and see. In the meantime, money can be made on other plays. Average Daily Volume = 71 K /charts/charts.asp?symbol=IAH ************** No Play ************** IAH BHH PPH SMH RKH UTH ************* COMING EVENTS ************* For the week of June 26, 2000 Monday Existing Home Sales May Forecast: 4.85M Previous: 4.88M Tuesday FOMC Meeting 8:30 a.m. ET Consumer Confidence Jun Forecast: 140.0 Previous: 144.4 Wednesday Durable Orders May Forecast: 2.8% Previous: -6.5% Thursday GDP - Final Q1 Forecast: 5.4% Previous: 5.4% GDP Chain Deflator Q1 Forecast: 2.7% Previous: 2.7% Initial Claims 06/24 Forecast: 300K Previous: 302K New Home Sales May Forecast: 900K Previous: 909K Help-Wanted Index May Forecast: NA Previous: 88 FOMC Minutes 05/16 Forecast: --- Previous: --- Friday Personal Income May Forecast: 0.3% Previous: 0.7% PCE May Forecast: 0.3% Previous: 0.4% Chicago PMI Jun Forecast: 54.5% Previous: 53.9% Michigan Sentiment Jun Forecast: 106.5 Previous: 106.8 Week of July 3rd 07/03 Auto Sales 07/03 Truck Sales 07/03 NAPM Index 07/03 Construction Spending 07/05 NAPM Services 07/05 Leading Indicators 07/06 Initial Claims 07/06 Factory Orders 07/07 Nonfarm Payrolls 07/07 Unemployment Rate 07/07 Hourly Earnings 07/07 Average Workweek ************************Advertisement************************* Tired of waiting on trades to execute? 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The Option Investor Newsletter Sunday 6-25-2000 Sunday 2 of 5 ************** TRADERS CORNER ************** There is No Holy Grail By Molly Evans The hardest part about being anything other than a "buy and forget about it" investor is determining one’s own system for investing and then sticking to it. Before I discovered this whole new world of active trading, I had purchased shares of INTC, CSCO, C, and PFE with the intent that I'd look at it again sometime when I was an old lady. Sometimes I wonder if that still wasn't the best plan. The problem with that was this style of investing didn’t fit my personality. I wanted to look. I wanted to learn more and be an active participant in the market. After holding that INTC stock for 18 months I had close to a 60% return. "Great! Super! This is a lot better than that mutual fund I had for three years!" Then came a fateful day that an options trader talked me into selling my INTC stock and putting that money into LEAPS. I had a double in two months. Tell me, who wouldn't absolutely love that? At that point, it didn't faze me a bit to blow out the CSCO to do the same thing and to just plain throw out those snail paced C and PFE shares. "Give me tech! Give me front month calls! That 60% INTC appreciation was just child’s play. This is wonderful!" Yes, it must be so embarrassingly obvious that I began my true options education in earnest just last November. You wondered why I whined so much about this correction?. Here you go...and "poof" it was gone. So I admit it. The love bug bit me on my first play. Of course I am no seasoned trader but I do now have a much healthier respect for the nuances of the market and of options trading in particular. A screaming bull market makes a genius of any fool. Yet, we all know the truth; if this were easy, everyone would do it and anyone could make a fortune. It's simply not like that. I’ve had to do a lot of quiet thinking and reflection about what I want to accomplish in the market. I believe this is the first question one must ask of himself. What is it that you are trading for? Are you doing this to build your nest for retirement? Are you trying to raise cash for your kids’ college tuition? Are you planning to make a living off your earnings? You might think of this exercise as if you were writing a business plan. What is your mission? Is it realistic? What kind of a return on your money do you need to achieve in order to reach that goal? Is that also realistic? In Jack Schwager’s Market Wizards, famed trader Ed Seykota said, "Everybody gets what they want out of the market." Schwager recounts in his follow-up book, The New Market Wizards how that statement came back to haunt him. Schwager told Ed how he had wanted to wind down his trading and be out of the market during a time that he was too busy to be trading. "Why didn’t you close the account?" Ed had asked. Schwager went on to explain that he had to keep trading as he had been on a winning streak and had he closed out the account, he’d have always wondered if he would have hit the really BIG money. He just couldn’t pass up that opportunity. Ed, at that point, suggested to Schwager, "In other words, the only way you could stop trading was by losing. Is that right?" Dig deeply and ask yourself what you really want with regards to your trading. If you have only a vague notion of where you are going, it’s likely that you’ll end up somewhere else. Next, you would need to take into account the amount of your trading capital. How much do you have at your disposal and how much of that can you bear to lose? You need to be honest with yourself. Can you really stand to lose 30% of that capital? How about 50%? When I take a hit, I really don’t get too upset about the monetary loss. I lost $3500 in a trade last week and then simply entered it into my minus side of the ledger and intended to move on. That’s certainly not the biggest hit I’ve ever taken but as I looked at and thought about it, I realized that $3500 was not petty change for me. I would never leave my purse just laying around with $3500 in my billfold just waiting to be picked off. This made me question that perhaps my loss tolerance was too lax for myself. While I had considered the ill timing and execution of the trade to be the far more important issue, and it still is, it did, nevertheless, give me pause to wonder about what I was doing and where my own risk tolerance should be placed. (Just for the record, it should be said that yes, there is a profit column to my ledger too. I squawk only about the bad guys.) Limiting your downside and defining your risk tolerance is a whole topic in itself. What is important here is your amount of raw capital and your gut reaction to losing a portion of that. If you can’t afford to lose it, you shouldn’t risk it. Bad things happen when you expose sacred money to stock market risk. The fear of losing will make you display terrible judgment. You’ll jump out of a good position at the first downtick, and then watch the stock run higher. On the other hand, fear will lead to a fatal indecisiveness on a trade gone wrong. Should you or shouldn’t you jump? Oh I can hear you, I’ve heard myself, "Ohhhh, dangit! I know if I sell right now it will be the absolute low and I’ll hate myself! An hour later, Curses! Why didn’t I dump this junk pile when I wanted to? I can’t believe I’m so stupid! The truth is, you should not trade when you’re feeling anything but confident and eager to execute a well constructed plan. Fear and low capital risk tolerance is a debilitating disease in this business. So how do I get that confidence? someone asks. Confidence comes on the heels of self-study and dedication of time and effort to the craft. To just throw money at the market and expect that it will reward you is ludicrous. I did that. I got rewarded initially yes, but it didn’t last. I only got lucky in the beginning. However, luck runs out in the market and the meek do not inherit the earth. Only the strong survive. You must devote the time and energy to studying what it is that you’re putting dollars at risk for. There are innumerable opportunities for profit in the stock market but you have to find them. There’s no Holy Grail or grand secret to be found. The road to prosperity lies within one’s self. It all goes back to devising that business plan. What is your mission? How do you expect to achieve it? Within the confines of that, what are your own rules to live by? Does the methodology fit your personality and tolerance level? Ask the questions and write the answers. The methodology is the fun part of the business plan. This is where you determine the income. Based upon your mission, and risk tolerance, the methods should practically write themselves into that section. As previously stated, there’re so many ways to profit (and lose) in the market. One can scalp for fractions of points and clear the books each day, buy calls, buy puts, put on spreads and straddles, write covered calls, write naked puts, buy breakouts, short gaps, on and on and on. Nothing says you can’t try all of them. This is where I’m at now. I don’t want to be a one trick pony but I don’t want to get myself all mixed up and then have no real plan at all either. I’ve done the daytrading thing and loved the quick coup. Then, what was supposed to be a quick trade turned against me and I refused to take the loss. I rationalized that I didn’t have to lock in a loss as it’s long stock and not melting in my hands like an option. It’ll come back. Ok, so I’ve already blown one of my rules within a methodology. I guess I really don’t like that plan. I ended up writing covered calls on the stock and am now ahead. I’m tickled pink but that did defeat the system of clearing the books each night. I’m still experimenting with what is going to end up being my system of trading. While I know and love the call and put buying based upon charting, the market has to be right for that activity and I’m just not convinced that it is at this time. The spreads are wide and the premiums are so inflated with volatility. I’m happy with a few entries of calls but they’re melting as the time passes and we have this up and down thing going every other day. Unless you’re a superb stock picker and timer, your portfolio gyrates right along with the market and that can be quite unsettling to a number of people. I think an options buyer in this market is brave. The volume is unconvincing and the swings in sentiment vary daily. I love a good thunderstorm but I’m always on the lookout for funnel clouds. Shoulda, woulda, coulda is alive and well for not heeding the sell signal warnings. Had I had a set system in place, I think that I actually would have sold those calls Wednesday. The thought was there and things were looking toppy and lacking in conviction but I held tight to be there for that summer rally. Fear and greed, they’ll get ya every time. Investing and trading can be a lot of fun but should not be viewed as a hobby. You and your hard earned money deserve a fair chance to profit from the market. Investing is a serious endeavor and should be approached as seriously as if you were setting up business. The goal of a business is so grow assets and quite bluntly, not go broke. How you accomplish that is determined by your personality and risk tolerance profile. I urge you to give your system some serious thought in the coming days. What are you doing right? What are you doing wrong? How can you improve that? Is it time to set back and simply study more? If so, go to 100% cash, take time away and do that. Summer is a great time to do it. The market and many more opportunities will be here when you get back. For those of you who will be doing so, may you enjoy profitable trading in the coming week! Good luck. Contact Support ****** Theta and Delta in Leaps By Mary Redmond If you think the market is going to rally over the next several months, you might consider buying leaps on some of your favorite stocks. In order to trade leaps successfully you need to have an understanding of many of the characteristics of options, including theta (rate of time decay) and delta (rate of change in option price for every point change in stock price). Leaps can often give you the leverage of options with less risk. The theta is the rate of time decay of an option. The rate of time decay in not linear. A one year leap has a much slower theta than an option which will expire in one or two months. If you buy a Jan 02 leap you have 18 months before the leap will expire. For the next four to six months the leap will probably retain most of its time value if the stock stayed in the same range. For example, if you bought a QCOM Jan 02 at the money leap at $28, and the stock stayed the same price for the next six months the leap would most likely remain above $26-$27. When the leap has twelve months before expiration it will start to lose time value slowly. You might lose a small percentage each month if the stock stayed at the same price. When the leap has nine months to expiration it will start to lose time value a little more quickly, and from there it will accelerate based on the square root of the time remaining. For example, a two month option will decay twice as fast as a four month option. You must also consider the delta, or the rate of change in option price per rate of change in stock price when deciding when to buy or sell leaps. An at the money leap or option will usually move approximately half a point for every point the stock moves up or down. A deep in the money leap or option will generally move approximately one point for every point change in the stock price. In addition, many other factors can influence the price of options. For example, if the stock price increases, and the demand for the option or leap you own increases dramatically the option price may increase by a larger percentage due to the increased volatility in the stock price. For example, if QCOM went up to $100 before the end of the year then the $70 leap might increase to over $60 or $70, depending on the public's perception of whether the price would keep increasing at the same rate. If you remember December of 1999 when Qualcomm had made huge gains on a daily basis the one month at the money options were often priced at a 30 to 40% premium to the stock. This is partly because the options were priced on the assumption that the stock price would keep increasing at the same rate. The Dec $270 SDLI options were priced at $78.5 on Friday, in part because the stock has just made an fast upward move of over 50%. The best time to buy a leap is usually when the volatility is lower than the historical volatility. There are a number of stocks which made huge gains last year, and have not moved much this year. If the stocks started to move in the same pattern it moved last year the leaps could show huge gains. Eventually historical volatility can change if the stock's trading pattern makes a permanent change, as it is similar to a moving average of the historical trading pattern of the stock. Many analysts had expressed concern that the amount of stock which was issued in initial and secondary public offerings in 1999 drained a significant amount of liquidity from the market, and is still continuing to present a problem. I think it is important to note that some of the tech ipos which were issued last week experienced a strong gain on the first day of issuance. This may be an optimistic sign. It indicates that institutional and retail investors still have an interest in the technology ipo market. If the institutions were bearish, they would probably not buy technology ipos. However, it seems likely that the public may be more selective when investing in ipos for a long time to come. There is still tremendous growth potential on the internet. However, in 1999 may internet ipos went public which were run by people who had little or no technical experience. We have found that it takes a lot of technical expertise to run an internet based business successfully. The investment bankers will probably be much more discriminating in selecting future internet related ipos. According to last week's Barron's the ipo pricings were in the range of $2 billion. It is possible that if we were to see ipo pricings in this range for an extended period of time that this could potentially free up liquidity to be invested in the market. AMG Data Services reported a net outflow of $100 million from equity funds last week. This is a minor outflow. Growth sector funds still experienced a net inflow and most of the outflow was from emerging market funds. The investment company institute reported a huge outflow from money market funds last week. Retail money market funds experienced a net outflow of $7.71 billion to $969.11 billion. Institutional money market funds experienced a net outflow of $2.88 billion to $702.94 billion. It seems likely that this money may be going into the stock market, as volume on the NYSE and Nasdaq has increased, and almost all of the margin call related selling is over. Contact Support ************* READERS WRITE ************* Concerning Debit Straddles Dear OIN: With the market-wide volatility in options beginning to return to normal levels, I am planning to participate in more debit straddles. I have been quite successful with some of your past positions and was wondering if you would consider sharing the techniques used to find these candidates. Thanks JM ------ Regarding the OIN "Combos" section - Straddle candidates... The majority of positions for my section come from news articles on options activity (increased volume), volatility searches and scans, and proprietary software programs that provide candidate lists based on premium disparity algorithms. Most of the straddle positions are based on current implied vs. historical volatility rankings and these lists can be found on a number of sites and in various software programs. Probability calculators and charting programs are also helpful in sorting through the large number of possible issues to identify the most undervalued options and make assumptions about future movements in the underlying security. Profitable debit straddles are relatively simple to uncover and there are three rules to identifying favorable conditions for a straddle purchase. First, the trader should select options that are undervalued (cheap). Next, the underlying security must have the potential to move (high or low) enough to make the straddle profitable. Finally, the underlying stock should have a history of multiple movements through a sufficient range in the required amount of time to justify the overall risk/reward of the position. There are many sources of information on the Internet and one of the best ways to find new candidates for combination positions is to follow the mainstream activity. News articles on extremes in option trading volume and volatility are listed at many sites (Yahoo, The Street.com, and CBS Marketwatch are some examples) and the major exchanges; The CBOE, PHLX, and AMEX have excellent resources for historical and statistical option pricing. When you find a candidate that appears to have all the attributes of a favorable position, it probably has a good chance of being profitable. The key is to use all the sources available to find these candidates and participate when they meet your skill level, risk-reward tolerance and portfolio outlook. Good Luck! ************* DAILY RESULTS ************* Index Last Week Dow 10404.75 -44.55 Nasdaq 3845.34 -15.22 $OEX 781.07 -7.67 $SPX 1441.48 -22.98 $RUT 510.41 -3.33 $TRAN 2630.71 -42.48 $VIX 25.89 2.34 Calls ABGX 138.03 23.53 The Biotechs were set ablaze on Friday QLGC 67.56 16.63 New, court ruling brings back old momentum RBAK 135.50 16.50 Rebounded Friday as our Play of the Day ARBA 88.56 14.50 New, held nicely despite the market LNUX 47.13 14.38 Not $300, but heading the right direction HGSI 145.38 11.88 Human Genome announcement moves stock 9% BRCD 156.00 11.06 Had a good week despite the bad markets PDLI 172.63 8.63 The Biotechs refuse to lose MSFT 77.69 5.13 Been awhile since MSFT moved like this AETH 191.00 5.06 Hanging on by its teeth...$180 the key AGIL 61.69 4.50 Good relative strength late last week MERQ 94.56 4.25 New, only three days for the S&P addition JDSU 123.44 3.25 Holding up well as merger nears PMCS 186.81 2.75 Dropped, it couldn't hold the breakout CIEN 145.44 0.19 Dropped, it was great while it lasted MRVC 55.00 -0.38 Rumors of a spinoff are the main driver NT 65.19 -2.00 Ready to rebound with the markets LLTC 64.69 -4.75 Dropped, investors say goodbye for now GLW 240.00 -8.31 Still holding above that $240 level SEBL 145.13 -11.94 Dropped, Nasdaq pressure was too much VRSN 149.25 -15.31 Dropped, fell through key $160 support YHOO 125.31 -15.63 Can it recover for an earnings run?? Puts AMZN 33.88 -12.13 Warnings from key analyst propel our play WY 43.50 -3.06 New, the sector continues to be punished UTX 57.06 -1.81 Dropped, not enough action last week DCLK 37.63 -0.88 Amazon disaster rippled through sector NKE 37.06 -0.19 Be watchful of earnings this Thursday STOCKS ADDED TO THE PICK LIST ***************************** Calls MERQ - Mercury Interactive ARBA - Ariba Inc QLGC - QLogic Inc Puts WY - Weyerhauser ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS PMCS $186.81 (+2.75) PMCS just isn't performing up to par. Thursday's back-fill to support at $190 was understandable, but that was the proverbial line drawn in the sand. PMCS crossed over that line in Friday's session. The intraday high at $195.44 should've instead been the share price's near-term support level. And the stock's close just a fraction away from the daily low coupled with a 10-dma infringement added more salt to the wound. Perhaps this potential splitter will rise to the occasion as its earnings' approaches next month, however at the moment, there's no play. The company is expected to report around July 13th. SEBL $147.13 (-9.94) SEBL fell for the second day in a row Friday. The stock bounced along support at $150 for a good part of the day, but plunged below that level in the final hour of trading. It appears the late day buyers we've come to know left early for the weekend, leaving the sellers to wreak havoc on our play. Traders blamed SEBL's decline on profit taking. We're wondering what profits they were taking. What's disconcerting about SEBL's slide Friday is the stock violated its pattern of higher lows. Furthermore, SEBL has been falling through key support levels like a rock. We don't want to hang to see more support levels give way. CIEN $145.44 (+0.19) As far as we can tell, the buyers hit the beach early Friday, leaving the sellers free reign. CIEN plunged right from the opening Friday morning, finding support at $150. The stock attempted to rally in midday trading, and actually climbed back above resistance at $155. That's as far as CIEN made it Friday, as the bears came back from lunch growling, and erased nearly all of CIEN's gains from earlier in the week. While CIEN didn't suffer major technical damage Friday, we did notice that the selling accelerated in the final moments of trading with a surge in volume, which doesn't bode well for CIEN early next week. LLTC $64.69 (-4.75) The "Big MO" is gone and investors in LLTC seem to have forgotten why they were bidding shares of the company higher just a few short days ago. Weakness in the Semiconductors, along with generalized fears about the economy and declining profits was more than LLTC could handle and shares of the company gave back all of its recent gains on Thursday as the 10-dma (then at $68.44) got shattered on the way down. After an aborted recovery during amateur hour on Friday, LLTC rolled over at the 10-dma and headed lower for the balance of the day. Until conditions improve, we are dropping LLTC like a hot potato this weekend. VRSN $149.25 (-15.31) After spending nearly 2 weeks in a trading range between $160 and $180, VRSN investors gave the international sign of surrender and sold shares of the Internet security firm with gusto. The last 3 days saw more than a $25 drop in price on robust volume and Friday’s selling shattered the previous support at $158-160. The Internet sector really never recovered on Friday after Mary Meeker’s bearish comments on Amazon.com, and VRSN was punished along with the sector. There was no negative news on VRSN, but the guilt-by-association selling was enough to kick it off our play list this weekend. We’ll step aside and wait for better plays to materialize. PUTS UTX $57.06 (-1.81 last week) UTX has gotten a bit bullheaded the past few sessions. Could it be a sign the bulls are about to take control again? We really aren't sure, however the lack of any follow-through selling at support has caused us to pull this one from the line-up. A pattern of higher lows is beginning to develop, forming an ascending triangle. This consolidation pattern, can be considered bearish in a market heading south. After dropping to $55.13 on Tuesday, the bears have tried unsuccessfully for three straight days to push UTX lower. Our play is loosing its momentum, and with the $55 area of support seemingly doing its job, we may begin to see a bargain hunters emerge. For traders wanting to continue on, we would need to see UTX break below $55 with better than average volume to restore our confidence. For now we will concentrate our efforts elsewhere. STOCKS WITH UPCOMING SPLITS *************************** We don't list all splits available, only those we feel may have play possibilities. Symbol - Stock Splits/Date NVDA - NVIDIA Corp. 2:1 06-26-00 ex-date 06-27 MRCL - Micrel Inc. 2:1 06-27-00 ex-date 06-28 BRL - Barr Lab. 3:2 06-28-00 ex-date 06-29 GMH - Hughes Elec. 3:1 06-30-00 ex-date 07-03 REMC - REMEC, Inc. 3:2 06-30-00 ex-date 07-03 AMFC - AMB Financial 3:2 06-30-00 ex-date 07-03 ABGX - Abgenix, Inc. 2:1 07-07-00 ex-date 07-10 TQNT - TriQuint Semi. 2:1 07-11-00 ex-date 07-12 BFCI - Brauns Fashions 3:2 07-11-00 ex-date 07-11 IWOV - Interwoven 2:1 07-13-00 ex-date 07-14 FITB - Fifth Third Banc 3:2 07-14-00 ex-date 07-14 XETA - Xeta Corp 2:1 07-17-00 ex-date 07-18 FII - Federated Invest.3:2 07-17-00 ex-date 07-17 TBL - Timberland Comp. 2:1 07-17-00 ex-date 07-18 TIF - Tiffany and Co. 2:1 07-20-00 ex-date 07-21 INTC - Intel Corp. 2:1 07-28-00 ex-date 07-31 AIG - American Intl. 3:2 07-28-00 ex-date 07-31 AUTN - Autonomy Corp. 3:1 08-01-00 ex-date 08-01 STII - Silicon Storage 3:1 08-11-00 ex-date 08-11 POS - Catalina Mktg. 3:1 08-17-00 ex-date 08-18 For a complete list of all the coming splits check out the "split calendar" on the side of the online edition newsletter page. ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* LNUX - VA Linux Systems Inc. $47.13 (+14.38 this week) See details in sector list Chart = /charts/charts.asp?symbol=LNUX Put play of the day: ******************** DCLK - DoubleClick, Inc. $37.63 (-0.88 last week) See details in sector list Chart = /charts/charts.asp?symbol=DCLK *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. TP/P= True premium or Time premium RRR = Risk/Reward/Ratio ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ********************************** CALLS - CONTINUED IN SECTION THREE ********************************** ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** **************************** SEE DISCLAIMER IN SECTION ONE
The Option Investor Newsletter Sunday 6-25-2000 Sunday 3 of 5 ********** CALL PLAYS ********** HARDWARE ******** BRCD - Brocade Communications $156.00 (+11.06 last week) Brocade Communications 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. The company’s family of SilkWorm switches enables companies to cost-effectively manage growth in their storage capacity requirements and improve the performance between their servers and storage systems. This provides the ability of increasing the size and scope of a company’s SAN, while allowing them to operate data-intensive applications, such as data backup and restore, and disaster recovery on the SAN. Someone was bound to blink, and this time it was the bears. Investors got tired of waiting for the outcome of the FOMC meeting (scheduled for this Tuesday and Wednesday), and bid shares of BRCD sharply higher on Monday. The $15 gain was enough to push the share price through resistance as $145 and $155, and by Wednesday BRCD was trading north of $165. Alas, the market ran out of momentum and shares of BRCD settle back into consolidation mode over the past 2 sessions. Volume has dropped off considerably, and BRCD managed a nice late-day bounce at the 10-dma ($150.25) and closed out the week above the all important $155 level. With plenty of positive press to keep the bulls happy, (see below), the decline over the past 2 days looks like simple profit taking. We need to see the upward trend resume in the next few days in order to keep the momentum alive. Look for a bounce from the $150 level (10-dma) on increasing volume to signal your entry. More cautious traders will wait for the price to tick back over the $160 level before playing. In either case, it might be prudent to wait for the outcome of the FOMC meeting and the corresponding market reaction before playing. It’s hard to argue with good news, and BRCD had a bunch on Wednesday. The Fibre Channel Standards Committee selected the company’s new Fabric Shortest Path First (FSPF) Routing Protocol as the standard for multi-vendor switch interoperability. Adding strength to the move this week were positive comments form AG Edwards on Wednesday. The firm initiated coverage of the stock with a Buy rating. As if that wasn’t enough, Bear Stearns included BRCD in its list of the Best Internet Infrastructure Stocks. Analyst Shaw Wu calls BRCD “my favorite in the space” and issued a price target of $175 per share. BUY CALL JUL-150*UBZ-GJ OI=4452 at $16.38 SL=11.75 BUY CALL JUL-155 UBZ-GK OI=1340 at $13.88 SL=10.50 BUY CALL JUL-160 UBZ-GL OI=1547 at $10.75 SL= 8.00 BUY CALL AUG-160 UBZ-HL OI= 52 at $18.63 SL=13.50 BUY CALL AUG-165 UBZ-HM OI= 34 at $16.75 SL=12.00 BUY CALL OCT-165 UBZ-JK OI= 141 at $28.75 SL=21.50 SELL PUT JUL-150 UBZ-SJ OI= 151 at $ 8.13 SL=11.00 (See risks of selling puts in play legend) Picked on June 6th at $138.88 P/E = 726 Change since picked +17.13 52-week high=$185.00 Analysts Ratings 8-4-2-0-0 52-week low =$ 18.75 Last earnings 05/00 est= 0.08 actual= 0.11 Next earnings 08-14 est= 0.13 versus= 0.01 Average Daily Volume = 3.24 mln /charts/charts.asp?symbol=BRCD NT - Nortel Networks $65.19 (-2.19 last week) Nortel Networks is a leading global supplier of data and telephony network solutions and services. Covering all the bases, its business consists of the design, development, manufacture, marketing, sale, financing, installation, servicing and support of networks for both carrier and enterprise customers. With a presence in over 150 countries, NT serves local, long-distance, personal communications services and cellular mobile communications companies as well as cable television companies, Internet service providers and utilities. Declining volume throughout the week was our first signal that NT was due for some profit-taking. After 6 up days in a row, and 5 days of gains on the NASDAQ, it was time for a little consolidation. The drop was a little more than we would have liked to see, as NT dropped through its 10-dma at $65.25 on Thursday. Fortunately, we got a nice solid bounce at $64, and the stock held its ground on Friday. This is particularly encouraging as the NASDAQ had another bad day, dropping down to close below 3900 again. With the June FOMC meeting looming just around the corner and the price of crude oil still above $30 a barrel, investors are understandably nervous as we approach July earnings. The drop over the past 2 days has brought us right back to the $64 support level and another bounce here looks buyable for new entries as long as it is confirmed by increasing volume. If you are looking for some confirmation before playing, wait for NT to move back above the 10-dma (currently $65.81) on strong volume. Further market weakness could produce a drop to the next support level at $62 before buying resumes in earnest. A bounce there would make for a more attractive entry point, but make sure it bounces before you buy. Violation of support at $62 would be very bad for our play, and we would stand aside at that point and wait for the dust to settle. NT made waves at the Wireless Internet summit in Paris, announcing a strategic alliance with Hewlett-Packard to develop end-to-end Wireless Internet solutions and mobile e-services to deliver profitable, seamless, high-speed access to information anytime, anywhere. Then on Tuesday, UBS Warburg added NT to its “Global Tech Focus List” with a Buy rating. Warburg said the outlook for NT’s optics and wireless business appears very robust and expects the company to continue its leadership in both areas. BUY CALL JUL-60*NTV-GL OI=5965 at $7.00 SL=5.00 BUY CALL JUL-65 NTV-GM OI=6634 at $3.75 SL=2.00 BUY CALL JUL-70 NTV-GN OI=6827 at $1.75 SL=1.00 BUY CALL AUG-70 NTV-HN OI= 822 at $3.63 SL=1.75 BUY CALL AUG-75 NTV-HO OI= 332 at $2.13 SL=1.00 BUY CALL SEP-70 NTV-IN OI=4522 at $4.88 SL=3.00 Picked on June 15th at $67.00 P/E = N/A Change since picked -1.81 52-week high=$72.09 Analysts Ratings 19-11-3-1-0 52-week low =$19.91 Last earnings 04/00 est= 0.19 actual= 0.23 Next earnings 07-25 est= 0.14 versus= 0.14 Average Daily Volume = 9.92 mln /charts/charts.asp?symbol=NT RBAK - Redback Networks $135.50 (+16.60 last week) Founded in 1996 and headquartered in Sunnyvale, Calif., Redback Networks is a leading provider of advanced networking solutions that enable carriers, cable operators, and service providers to rapidly deploy broadband access and services. The company's market-leading Subscriber Management Systems (SMSs) connect and manage large numbers of subscribers using any of the major broadband access technologies such as Digital Subscriber Line (DSL), cable, and wireless. To deliver integrated transport solutions for metropolitan optical networks, Redback's SmartEdge multi-service platforms leverage powerful advances in application-specific integrated circuit (ASIC), IP, and optical technology. With this product portfolio, Redback Networks is the first equipment supplier focused exclusively on developing integrated solutions for the New Access Network. This past week saw Redback continuing its steady pattern of breakout and consolidation. During the previous two weeks RBAK traded in range between $105 to $120, providing aggressive options traders with many opportunities to play the range. $120 was a formidable obstacle indeed but on Monday, RBAK finally broke through the $120 resistance level on heavy volume, tacking on almost 15% in gains on the heels of a strong day for the telecom sector. Since then the stock has been consolidating, trading in a range between $129 to $145 where there is formidable resistance. For the past number of weeks, RBAK's stock has moved in sync with the Nasdaq but on Friday, on a day when the Nasdaq was selling off on low volume, RBAK displayed strength in the weak market moving up $3.25, albeit on low volume. but closing right on its 5-dma at $135.50. Average daily volume has been steadily rising however lending strength to RBAK's cycle of consolidation and breakout. For those looking to play the range $129-130 is the target to shoot for. The stock has bounced strongly off of 129 twice in the last two trading sessions. RBAK may however decide to test its former resistance level, now support at $124. The past six weeks has proven the 10-dma to be the launching pad for any rallies. Bounces off this line, currently at $125.92 may also provide an excellent opportunity for entry. On the news front, Tuesday saw news of a strategic alliance with Internet infrastructure provider AsiaInfo in a broadband initiative in China. On Wednesday analyst Bob Hirschfeld of Bear Stearns made positive comments about Internet infrastructure stocks, giving a thumbs up to RBAK, calling it the leader in DSL/cable aggregation. BUY CALL JUL-125 BKK-GE OI= 175 at $22.13 SL=18.25 BUY CALL JUL-130*BKK-GF OI= 340 at $19.38 SL=13.75 BUY CALL JUL-135 BKK-GG OI=1172 at $16.88 SL=12.25 BUY CALL JUL-140 BKK-GH OI=1425 at $14.75 SL=11.25 BUY CALL OCT-155 BKK-JK OI= 77 at $27.13 SL=24.25 SELL PUT JUL-120 BKK-SD OI= 434 at $ 7.63 SL=10.00 (See risks of selling puts in play legend) Picked on May 28th at $72.06 P/E = N/A Change since picked +63.44 52-week high=$198.50 Analysts Ratings 9-3-1-0-0 52-week low =$ 20.00 Last earnings 04/00 est= 0.03 actual= 0.05 surprise=33% Next earnings 07-12 est=-0.06 versus=-0.05 Average Daily Volume = 3.06 mln /charts/charts.asp?symbol=RBAK ************* SEMICONDUCTOR ************* QLGC - Qlogic Corp $67.56 (+16.63 last week) QLogic Corporation is the leading manufacturer of fibre channel bus adaptors. The company is also a designer and supplier of semiconductor and board level input/output (I/O) components They've been designing and marketing SCSI-based (small computer system interface) products for over 12 years and sells its products to server, workstation, and date peripheral makers. Blue-chip clients include Compaq, Dell, Hitachi, IBM, and Quantum Corporation. They say whispers can move mountains. Well there must have been a few buzzing around the Street this week. Early Tuesday morning, QLGC took off like a flash. Over the next few days, it continued to rise up in a straight run. But the major breakout to the upside occurred on Thursday after it was reported that the Federal Trade Commission and Department of Justice granted early termination of the Hart-Scott-Rodino (H-R-S) waiting period for QLogic's previously announced agreement to acquire Ancor Communications (ANCR). Respective shareholder meetings to consider the deal are expected to be held on August 1st. The news brought much cheer and applause from investors. ANCR is a provider of high-performance Fibre Channel switches for storage area networks (SANs) and this union enhances QLGC's arsenal of products; thus keeping them on the leading edge of the industry. The chart looks quite nice too. Coming off Monday's lows of $49, QLGC steadily rose through the staunch resistance levels at $60 and $65. With the exception of the ostensible 200-dma (currently at $78.28), this momentum surge was supported by moves through the other technical lines and should continue to the upside going forward. A break through the 200-DMA line would be considered even more bullish. QLGC hasn't seen the tiptop of this technical since early May; although the first line of opposition is at $72.25, Thursday's intraday high. Firm support should easily hold up above $56. Momentum players however are looking for upward moves off shorter-term support at $65 and the 50-dma ($66.08). Earnings are also on the horizon for next month. The company is expected to report around July 17th, after the bell. Separately on Thursday, Qlogic announced a supportive affiliation for Network Appliance's (NTAP) Direct Access File System (DAFS). This new memory-to-memory protocol is designed to enhance storage network applications. BUY CALL JUL-60 QLC-GL OI=1290 at $11.63 SL= 8.50 BUY CALL JUL-65*QLC-GM OI=1127 at $ 8.63 SL= 6.00 BUY CALL JUL-70 QLC-GN OI=1035 at $ 6.38 SL= 4.50 BUY CALL JUL-75 QLC-GO OI= 461 at $ 4.63 SL= 2.75 BUY CALL AUG-60 QLC-HL OI= 152 at $14.38 SL=10.75 BUY CALL AUG-65 QLC-HM OI= 176 at $11.75 SL= 8.75 Picked on June 25th at $67.56 P/E = 97 Change since picked +0.00 52-week high=$203.25 Analysts Ratings 3-4-0-0-0 52-week low =$ 30.94 Last earnings 04/00 est= 0.21 actual= 0.24 Next earnings 07-17 est= 0.24 versus= 0.15 Average Daily Volume = 3.22 mln /charts/charts.asp?symbol=QLGC ************ FIBER-OPTICS ************ GLW - Corning Inc. $240.00 (-6.00 last 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. GLW survived another week to remain on the OIN call list. It turns out a relative strength rating of 97 helps a lot on days like last Friday. In retrospect, GLW's action was fairly constructive last week given the stock's mammoth rally the week prior. While the stock didn't suffer major technical damage, like we cautioned in Thursday's newsletter, it didn't make much progress either. But, last week's consolidation may be the base that lifts GLW for its next leg up. The downgrade early last week was the primary culprit in snuffing GLW's momentum. With a fresh beginning next week, we may see that momentum return. GLW recently told analysts to raise their earnings estimates, so investors have priced in the positive profit picture. An item that may bring momentum back to GLW is the company's new dense wavelength division multiplexer (DWDM) it recently launched. The new fiber optic product is the top of the line, carrying 160 channels. The new DWDM will increase bandwidth of standard fiber optic cable, and aid in boosting GLW's bottom-line even further. GLW traded in typical fashion Friday by bouncing in its new found trading range between $240-248. To see GLW's support at $240 hold strong was encouraging. For the risk takers among our readers, you might consider playing a bounce off $240 early next week. However, be very cognizant of the $248 level. GLW failed to hurdle that level three times last week. With that said, watch for a breakout above $248 for a more conservative entry point. The gap above $250 is still unfilled, and with the Fed looming in the shadows next week, one might consider waiting for GLW to cross that level before entering into the play. In a muted news release last week, CoreComm Limited, a competitive telecom provider, said it had selected GLW to be the preferred supplier for optical fiber for deployment in a highly advanced broadband network for residential Internet users. The announcement was a small landmark since the new optical network is the first effort to bring the power of fiber optic networks directly to the home user. BUY CALL JUL-230 GRJ-GF OI=2745 at $22.38 SL=16.25 BUY CALL JUL-240*GRJ-GH OI= 755 at $16.50 SL=11.75 BUY CALL JUL-250 GRJ-GJ OI=1012 at $12.00 SL= 9.00 BUY CALL AUG-240 GRJ-HH OI=2499 at $25.88 SL=18.75 BUY CALL NOV-250 GRJ-KJ OI= 548 at $37.75 SL=27.50 Picked on June 6th at $217.25 P/E = 128 Change since picked +22.75 52-week high=$257.19 Analysts Ratings 8-5-0-0-0 52-week low =$ 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 = 2.93 mln /charts/charts.asp?symbol=GLW JDSU - JDS Uniphase $123.44 (+3.00 last week) JDSU makes laser subsystems and equipment for fiber optic telecommunications, signal processing, and laser-based semiconductor analysis. The company's products include source lasers and passive components for modifying signals. JDSU also sells equipment for testing optical components. The company sells to manufacturers including CIENA, Lucent, Nortel, and Siemens. About 60% of sales come from outside North America. After announcing it had received approval for its proposed merger with ETEK Thursday night, JDSU was greeted with a host of positive analysts comments Friday morning. PaineWebber was the first out on the wires Friday morning reiterating its Buy rating on JDSU, raising its price target to $220, and increasing its earnings estimates. Merrill Lynch, Piper Jaffray, ABN AMRO, and a host of others followed suit by reiterating either a Buy or Strong Buy rating, and raising the respective price targets. Despite the praise from Wall Street, JDSU finished Friday with a modest loss. The stock traded back and forth between positive and negative territory, but was unable to hold onto its gains due to the broad sell-off in the Tech sector. Going forward, the completion of the merger may catalyze our play. ETEK shareholders are scheduled to vote on the proposal next Wednesday, and if approved, JDSU may get a lift. Additionally, second quarter earnings season is fast approaching. While JDSU didn't pre-announce better than expected earnings, like we hoped, investors will be looking for stellar numbers from the fiber optic equipment maker. Independent of the ETEK merger, analysts have been touting JDSU recently, stating that the company is relatively immune to the rising interest rate environment, and should continue to enjoy robust demand into the end of the year. With the FOMC meeting next week trading should be interesting, and we should expect to see volatility in JDSU. If JDSU's slips Monday, look for an entry if the stock bounces from support at $120. Otherwise, wait for JDSU to resume its ascent, and look for entry points if it clears resistance at $128, or above at $131. The approval of the merger didn't lift JDSU as much as we expected Friday in part from the Department of Justice's stipulation that ETEK had to dispose of its contractual rights to thin-film filters, a key technology for separating light in fiber optic systems. However, JDSU recently acquired OCLI who is a leading thin film maker. Making the disposition of ETEK's rights rather trivial in the scheme of the merger. BUY CALL JUL-120*UCQ-GD OI=6905 at $12.00 SL= 9.00 BUY CALL JUL-125 UCQ-GE OI=4360 at $ 9.38 SL= 6.50 BUY CALL JUL-130 UCQ-GF OI=7739 at $ 7.38 SL= 5.25 BUY CALL AUG-125 UCQ-HE OI= 541 at $14.88 SL=11.00 BUY CALL SEP-130 UCQ-IF OI=3317 at $17.00 SL=12.25 Picked on June 13th at $121.38 P/E = 366 Change since picked +2.06 52-week high=$153.38 Analysts Ratings 20-13-2-0-0 52-week low =$ 16.75 Last earnings 03/00 est= 0.10 actual= 0.11 Next earnings 07-26 est= 0.12 versus= 0.06 Average Daily Volume = 19.0 mln /charts/charts.asp?symbol=JDSU MRVC - MRV Communications $55.00 (-0.38 last week) MRV Communications, Inc. is a world-class leader in optical network components and systems. The company has leveraged its early leadership in fiber optic transmission into a well-focused range of solutions, integrating switching, routing, access servers and optical transmission systems. MRV has initiated and funded cutting edge start-up companies including Zaffire, Inc., Charlotte's Networks, Hyperchannel, Zuma Networks and most recently RedC Optical Networks, Inc., Optical Crossing and All Optical, Inc. The plot could be thickening in our play on MRVC. First of all, let's examine what we know for sure. Investors took some more money off the table on Friday, with MRVC giving back another 5.2%. The volume on the move down the past three days averaged about 2.5 million shares per day, compared to the 4.3 million traded on both Monday and Tuesday. On Thursday we mentioned support could come into play between $54 and $55, which for now it did. Since the beginning of the month the company has gained about 128% and has fallen back about 30% from its recent high. These are the facts, as we know them. There has been no company news to speak of since the first of the month, and there could lie the problem. Traders drove the price of MRVC stock higher in anticipation of a spin-off of the company's Luminent division. According to participant's in the chat room's that follow the company religiously, MRVC could be in their "quiet period", prior to announcing the actual spin-off. Well folks the native's are getting restless, with several beginning to question whether or not a spin-off will take place. We are NOT suggesting anyone enter or exit a play based on chat room conversation, but it certainly makes a play that has had no news or events a bit more interesting. For our purposes we will stick with what we know. MRVC did close near its low of the day on Friday, and just below its 10-dma at $55.42. That would suggest last week's pullback may continue. If the sellers return with blood in their eye, there could be support at $52, $50, however don't forget the gap back at $48.50 as a possible entry for a new play, as long as a bounce is accompanied by solid volume. On the other hand, last week's action could have been nothing more than pure profit taking. If the current levels continue to provide support and investors begin adding MRVC to their portfolios in strong numbers, we would certainly consider adding new positions as well. Other than speculation of a spin-off, MRVC is well positioned in the fiber industry and benefited from its recent strength. Continued momentum in the industry could also help our play get back on track. BUY CALL JUL-45 VQX-GI OI=1796 at $12.75 SL= 9.50 BUY CALL JUL-50 VQX-GJ OI=1504 at $ 9.25 SL= 6.50 BUY CALL JUL-55 VQX-GK OI=1126 at $ 6.50 SL= 4.50 BUY CALL AUG-55*VQX-HK OI= 30 at $ 9.63 SL= 6.75 BUY CALL OCT-50 VQX-JJ OI= 898 at $16.25 SL=11.75 SELL PUT JUL-55 VQX-SK OI= 120 at $ 5.50 SL= 7.75 (See risks of selling puts in play legend) Picked on Jun 11th at $46.00 PE = N/A Change since picked +9.00 52 week high=$97.44 Analysts Ratings 1-1-0-0-0 52 week low =$ 5.88 Last earnings 04/00 est=-0.01 actual= 0.03 Next earnings 07-27 est= 0.03 versus= 0.01 Average daily volume = 2.02 mln /charts/charts.asp?symbol=MRVC ******** INTERNET ******** YHOO - Yahoo! Inc. $125.31 (-15.63 last week) Yahoo! Inc. is a global Internet communications, commerce and media company that offers a comprehensive branded network of services to more than 145 million individuals each month worldwide. As the first online navigational guide to the Web, www.yahoo.com is the leading guide in terms of traffic, advertising, household and business user reach, and is one of the most recognized brands associated with the Internet. The company also provides online business services designed to enhance the Web presence of Yahoo!'s clients, including audio and video streaming, store hosting and management, and Web site tools and services. The company's global Web network includes 22 local World properties outside the United States. To some our play may be looking a bit grim. However it could be setting up to provide traders with another golden opportunity. Ok, let's get the negative's out of the way first. After running smack dab into resistance at the 50-dma on Tuesday, YHOO finished the week with an 11% loss. On Wednesday, Holly Baker, of Lehman Brothers started the ball rolling when she initiated coverage of YHOO with a mere rating of Neutral. Merrill Lynch analyst, Henry Blodget, followed up saying he expects a "strong but slightly less robust" second-quarter compared to the first. Blodget said in his report, that advertising sales may have lost some momentum in the second quarter. We rounded out the week with a loss of -6.38 on Friday, after analysts expressed concerns about AMZN. In question were revenue growth, dwindling cash reserves and the company's credit status. The AMZN report dragged not only YHOO but the entire NASDAQ lower on Friday. Granted, YHOO closed below its 50-dma at $128.19, not to mention its 200-dma back near $139. In fact the decline that began mid-week may not be over yet. Technically the decline on Friday brought us within $0.25 of filling the gap created back on June 2nd. Depending on the decision and the rhetoric coming out of the FOMC meeting next week, the major indices could begin to rally, and take YHOO along for the ride. Yahoo! reports second-quarter results on July 11th, so we could still see an earnings run develop. The Web giant is also expected to unveil a new corporate portal next week, called "YES", or Yahoo Enterprise Solutions. It will offer corporations a package of software tools for creating customized versions of Yahoo's Web portal. This will help the company broaden their revenue stream by getting into the potentially lucrative corporate arena, which could please both investors and the analysts. While YHOO could bounce early in the week, we would be somewhat cautious unless the participation is better than average. We see support at $122, near $116 and back at $110. YHOO, may need to cook for a while, but traders with patience, could be rewarded quite nicely. YHOO has relied heavily on advertising revenues. By diversifying into YES, mentioned above, the company will create something akin to a software sales division. According to one source, YHOO will sell YES to corporations based on how many users and how much customization is required. BUY CALL JUL-120 YMM-GD OI=2885 at $13.38 SL=10.00 BUY CALL JUL-125*YMM-GE OI=1773 at $10.88 SL= 8.25 BUY CALL JUL-130 YMM-GF OI=1600 at $ 8.38 SL= 6.00 BUY CALL JUL-135 YMM-GG OI=4468 at $ 6.75 SL= 4.75 BUY CALL AUG-125 YMM-HE OI= 13 at $14.75 SL=10.75 BUY CALL OCT-130 YMM-JF OI= 557 at $19.38 SL=14.00 SELL PUT JUL-125 YMM-SE OI=5130 at $ 9.50 SL=12.50 (See risks of selling puts in play legend) Picked on May 28th at $112.06 PE = 570 Change since picked +13.25 52 week high=$250.06 Analysts Ratings 16-14-3-0-0 52 week low =$ 55.00 Last earnings 04/00 est= 0.09 actual= 0.10 Next earnings 07-11 est= 0.10 versus= 0.05 Average daily volume = 10.1 mln /charts/charts.asp?symbol=YHOO MERQ - Mercury Interactive $94.56 (+4.19 last week) Mercury makes testing software for enterprise resource planning applications, client/server software, and e-business applications. The company's products perform such tasks as analyzing and eliminating Web site performance bottlenecks, and automating quality assurance testing. Customers include AOL, American Airlines, Citigroup, and ETrade. Mercury is looking for the growing demand for e-commerce to fuel its business. It turns out that it's pretty easy to make money from the Web. Of course, you have to be in the right business. As the B-2-C companies are proving, it's harder than once thought to turn a profit on the Internet. On the flip side are the companies that provide hardware, and the software and services, such as MERQ. The so-called pick and shovel providers are cashing in on the boom in e-business services. There is a great demand growing for the products and services that MERQ supplies. The company adjusted its business strategy a while back, and the result has been a more consistent stream of revenues and growing profits. Wall Street has welcomed the idea of profits. MERQ has enjoyed a host of analyst praise going into the company's second quarter earnings report. Most recently DB Alex Brown reiterated its Strong Buy rating on MERQ and told clients to expect a healthy profit report in three weeks. Also worth noting, Standard and Poor's said last Wednesday that is was adding MERQ to the S&P 500 at the close of trading on June 28th. MERQ has surpassed earnings estimates in its last three quarters. Investors will be looking for another surprise this quarter, which could drive the stock higher. MERQ has been on a steady climb upward since rebounding from its early April lows. The stock has been tracing a series of higher highs in an attempt to return to its spring highs. Despite the tech meltdown late last week, MERQ is in a strong technical position to extend its rally. The stock found support right at its 10-dma Friday, currently at $91.38. Consider an entry at current levels if the Tech sector rallies Monday. Or, wait for MERQ to move back above the ever-important $100 level for a more conservative entry into the play. The possible earnings run, addition to the S&P 500, and the fact that MERQ is a split candidate is enough to catch our attention. MERQ last split its shares back in January of this year when the stock was trading around $87. The company has plenty of shares to authorize a split after shareholders approved the proposal at the company's last annual meeting. BUY CALL JUL- 90 RQB-GR OI=589 at $13.63 SL=10.00 BUY CALL JUL- 95 RBF-GS OI=388 at $10.75 SL= 7.50 BUY CALL JUL-100 RBF-GT OI=486 at $ 8.75 SL= 6.25 BUY CALL AUG- 95*RBF-HS OI= 15 at $13.63 SL=10.00 BUY CALL OCT-100 RBF-JT OI=276 at $17.75 SL=12.75 Picked on June 25th at $94.56 P/E = 215 Change since picked +0.00 52-week high=$134.50 Analysts Ratings 9-2-1-0-0 52-week low =$ 16.88 Last earnings 03/00 est= 0.10 actual= 0.11 Next earnings 07-13 est= 0.12 versus= 0.09 Average Daily Volume = 1.56 mln /charts/charts.asp?symbol=MERQ ARBA - Ariba Inc. $88.56 (+14.50 this week) As a leading provider of B2B solutions and services to leading companies around the world, including more than 20 of the FORTUNE 100, Ariba helps companies cut through the complexity of opportunities presented by the new economy. Ariba provides the most comprehensive and open commerce platform to build B2B marketplaces, manage corporate purchasing, and electronically enable suppliers and commerce service providers on the Internet. Made up of a complete set of integrated commerce solutions and open network-based commerce services, the Ariba B2B Commerce Platform™ offers a single system for managing buying, selling, and marketplace eCommerce processes. Whether automating enterprise-wide procurement processes, building state-of-the-art B2B exchanges, or bringing new commerce services online, the Ariba B2B Commerce Platform delivers the fastest time to market, the most comprehensive solution, and the greatest long-term flexibility and scalability. Since putting in a double bottom over the previous two months at the $50 level, Ariba has rallied throughout the month of June. Connecting the local highs and local lows since late May, it is clear to see that ARBA has been trading in a channel with a range of about 25 points from top to bottom. After a short consolidation during the previous week, this past week saw ARBA blasting through previous resistance at $84 and moving up on strong volume. Finding strong resistance at the psychological $100 level, Thursday and Friday saw profit taking in light of weakness on the Nasdaq. With earnings a little over two weeks away on July 12th, we expect upward momentum in ARBA to continue as ARBA has had a history of beating earnings estimates. As resistance becomes support once broken, ARBA has support at $84-85 which it has already twice tested successfully. This may prove to be an ideal entry point. The bottom of the current up channel is at $77.68 but expect it to move up quickly. The 20-dma and 200-dma are both currently sitting at $75, though we expect the $84 support level to hold. As mentioned, there is resistance at $100 and a break above this point on strong volume will find $110 as the next level of resistance. BUY CALL JUL-85 IUR-GO OI=1078 at $12.13 SL=9.00 BUY CALL JUL-90*IUR-GR OI=1819 at $ 9.25 SL=6.25 BUY CALL JUL-95 IUR-GS OI=1996 at $ 7.13 SL=5.00 BUY CALL AUG-95 IUR-HS OI= 607 at $11.25 SL=8.25 SELL PUT JUL-70 IUR-SP OI= 720 at $ 3.38 SL=5.50 (See risks of selling puts in play legend) Picked on Jun 25th at $88.56 PE = N/A Change since picked +0.00 52-week high=$183.31 Analysts Rating 13-12-1-0-0 52-week low =$ 15.25 Last earnings 3/00 est=-0.08 actual=-0.06 Next earnings 7-12 est=-0.09 versus=-0.12 Average Daily Volume = 6.92 mln /charts/charts.asp?symbol=ARBA ********* SOFTWARE ********* AGIL - Agile Software Co $61.69 (+4.50 last week) Agile develops and markets product content management software, which is software that enables companies to collaborate over the Internet by interactively exchanging information about the manufacture and supply of products and components. Agile's collaborative suite of software products is designed to improve the ability of all members of the manufacturing supply chain. Since their start in 1996, they have licensed their products to approximately 300 customers including Gateway, Texas Instruments, Philips Mobile Computing, Lucent Technologies, Solectron, GE Marquette Medical Systems and FSI International. About 40% of sales come from additional material procurement applications, consulting, implementation, support, and training services. Waiting to exhale? No, no, it's the other way around. Waiting in desperation for a run through resistance. After beginning a steadfast recovery this month, AGIL took in a breath of fresh air and made a charge in late afternoon trading on Wednesday. It cracked the nearly impregnable 200-dma at $61 and broke to the upside on increasing volume. Southwest Securities couldn't have timed their new coverage for AGIL any better. They stepped in with a new Buy rating and $86 price target. Analyst Bradley Whitt initiated the coverage citing "the stock deserves a premium valuation due to its accelerating software growth, high gross margins, leadership status, exceptional execution, scalable business model, and financial security". The boost of adrenaline propelled AGIL out of its tight trading range of $56 and $59. The run was further ignited on Thursday after the company announced its partnership with Symix Systems, which was formed in order to provide mid-market manufacturing customers with extended supply chain collaboration capabilities. The companies' technologies will work in conjunction to deliver comprehensive e-business-driven supply chain and collaboration solutions. The collaboration should take the market by storm. The share price peaked at $66.19 and volume remained robust at more than double the ADV. There was some late day profit taking however, which extended into Friday's session. Good news is that the 200-dma at $61 held up as short-term support. Additional support comes into the play lower at $57 and $58, so the upward bounces off Friday's daily low at $60.63 were definitely bullish. But keep an eye out for stronger volume to confirm a legitimate breakout. And don't look for an earnings' announcement to generate any excitement. The company isn't due to report until late August. For now, play the trend for what it is - a technical breakout powered by momentum. Last week AGIL received a positive reiteration by analyst Michael Micciche at DLJ. He restated a Buy recommendation and also issued a $100 price target. BUY CALL JUL-55 AUG-GK OI=117 at $10.38 SL=7.50 BUY CALL JUL-60*AUG-GL OI=211 at $ 7.38 SL=5.00 BUY CALL JUL-65 AUG-GM OI=165 at $ 5.25 SL=3.25 BUY CALL JUL-70 AUG-GN OI= 81 at $ 3.50 SL=1.75 BUY CALL AUG-60 AUG-HL OI= 0 at $10.75 SL=8.00 BUY CALL AUG-65 AUG-HM OI= 0 at $10.00 SL=7.00 Picked on June 22nd at $63.63 P/E = N/A Change since picked -1.94 52-week high=$112.50 Analysts Ratings 3-6-0-0-0 52-week low =$ 17.13 Last earnings 03/00 est= -0.06 actual= -0.02 Next earnings 08-26 est= -0.04 versus= -0.09 Average Daily Volume = 704 K /charts/charts.asp?symbol=AGIL MSFT - Microsoft Corp $77.69 (+5.13 last week) Microsoft is the #1 software company in the world. They develop, manufacture, license, and support a broad range of software products including Windows operating systems, server applications, the popular MS Office suite, and a Web Browser. As most of you know, the company is presently involved in anti- trust issues with the government. CEO and co-founder, Bill Gates still owns 15% of Microsoft. Judge Jackson ruled on Tuesday that he is indeed sending the anti-trust case directly to the Supreme Court, bypassing a federal appeals court where Microsoft preferred to go next. But in a surprising twist, he also granted Microsoft a stay, or freeze, of the conduct remedies he imposed until the higher court rules. The "remedies" were set to take effect of September 5th. The impact of the surprise Restrictions Stay became immediately evident right from the get go on Wednesday. MSFT opened up $2 at $77 and tacking on an overall $5.75, or 7.7% for a strong finish. And there was heavy trading to boot. Volume topped 80.2 mln shares in comparison to the ADV of 39.2 mln. While the volume wasn't quite as impressive on Thursday, 43.7 mln shares exchanged isn't anything to sneeze at either. And there was good reason for the vivacious excitement. Microsoft unveiled its blueprint for the future. Over the next few years the company plans on developing software to connect PCs, the Internet and smaller devices such as cell phones and handheld computers; thus setting the stage for the standards of this leading edge technology. Their ".net" strategy faces competition from the likes of Sun MicroSystems and Oracle who also want to dominate this evolving niche. It also signals an important shift in the company's business model. Instead of licensing fees for stand-alone products, Microsoft will reap monetary benefits from the subscription of software services that's delivered over the Internet. During his long-awaited presentation, Mr. Gates poignantly quoted, "you could say we're betting the company on this strategy". So in summation, while MSFT continues to make the headlines with its legal battles, the company is certainly not down and out. This is clearly reflected in the recovering share price. Just take a peak at a daily chart for visual confirmation. MSFT has drastically improved its share price from a 52-week low of $60.38 set in late May to intraday highs topping $82 this week. We're betting that no matter what the courts through at Microsoft, the stock will reign. And importantly, we believe the investors are turning their attention back to the company's prosperous future. Conservative entries into this recovery play can be found on upward moves off the current level at the 5-dma ($77.39), which so far is serving as a launching platform on the upswing. If you're a bit more daring, then try target shooting on dips near the ascending 10-dma (now at $73.75). On Thursday, CIBC World Markets upgraded MSFT to a Buy from a Hold and issued an $89 price target. Analyst Melissa Eisenstat cited her upgrade was based on the sentiment that investor focus is shifting away from the ongoing antitrust trial with the Justice Department - right in line with our thinking! Intel president and CEO, Craig Barrett also told a news conference during a tour of Europe that he doesn't "think there will be a big impact on the computer industry if Microsoft is split up". He figures that "the horizontal breakup of Microsoft that has been proposed, that is an operating system company and an applications company, is relatively consistent with the horizontal structure of the computer industry". So again, all the cards appear to be on the table. Still it's important to pay attention to the stock's daily nuances and the market's overall direction. BUY CALL JUL-70 MSQ-GN OI=31224 at $ 8.88 SL=6.25 BUY CALL JUL-75*MSQ-GO OI=32851 at $ 5.25 SL=3.25 BUY CALL JUL-80 MSQ-GP OI=49735 at $ 2.56 SL=1.25 BUY CALL AUG-75 MSQ-HO OI= 511 at $10.13 SL=7.00 BUY CALL AUG-80 MSQ-HP OI= 880 at $ 6.88 SL=5.00 BUY CALL AUG-85 MSQ-HQ OI= 3296 at $ 4.13 SL=2.50 Picked on June 15th at $72.38 P/E = 47 Change since picked +5.31 52-week high=$119.94 Analysts Ratings 11-15-3-0-0 52-week low =$ 60.38 Last earnings 03/00 est= 0.41 actual= 0.43 Next earnings 07-19 est= 0.42 versus= 0.40 Average Daily Volume = 39.3 mln /charts/charts.asp?symbol=MSFT AETH - Aether Systems, Inc. $191.00 (+5.06 last week) Aether Systems, Inc., is a leading provider of wireless and mobile data services allowing real-time communications and transactions across a full range of devices and networks. Using its engineering expertise, its Aether Intelligent Messaging (AIM) software platform, its ScoutWare family of products and its customer service and network operations center, Aether Systems is a one-stop source for corporations seeking comprehensive, technology-independent wireless and mobile computing solutions. Aether's wireless and mobile data services can increase efficiency and productivity for companies in a wide variety of industries, including: financial services; transportation logistics; health care and field sales. It wasn’t pretty the past couple of days, but AETH is still in the game. What looked to be a continuation of a breakout earlier in the week was quickly thwarted in a bout of heavy selling on the Nasdaq. Support has looked good at the $190s (even better at $180 too) and that was an entry point so now here is the chance again. It’s got a great story and is doing well as a company, but in the stock market, that sometimes just doesn’t matter if the broader market is selling off. AETH was sold down on light volume on the closure of both Thursday and Friday, but we were encouraged to see it bounce back both days to critical moving average points. On Thursday it stopped on the 5-dma and on Friday it came right back up to the 10-dma on good volume. Sure, we’d like to have our entry here but we’re already in and are sticking by it with an objective view to drop the play if it doesn’t behave itself. Traders will want to study the conviction in the early part of next week. If the stock is selling down on high volume, then its time to give AETH its walking papers. As stated previously, AETH is a volatile stock and can reap sweet rewards for a great entry, but...proceed with caution. The newswire for the company was pretty sparse this week. Aether Systems does have the largest stake in OmniSky, which is a company created by the former executives of handheld pioneer device PALM. OmniSky markets a wireless modem and companion internet service for users of Palm's sleek Palm V handheld computer. OmniSky this week came out with a new IPO, HAND, which opened at $20 and zoomed up more than 30% to close at $26 15/16 on its first day. BUY CALL JUL-190*HEX-GR OI=186 at $19.75 SL=14.50 BUY CALL JUL-195 HEX-GS OI= 44 at $17.38 SL=12.50 BUY CALL JUL-200 HEX-GT OI=414 at $15.25 SL=11.00 BUY CALL AUG-190 HEX-HR OI= 62 at $32.13 SL=25.00 BUY CALL AUG-200 HEX-HT OI= 83 at $29.50 SL=23.00 Picked on June 20th at $205.19 PE = NA Change since picked -14.19 52-week high=$345.00 Analysts Ratings 6-3-0-0-0 52-week low =$ 16.00 Last earnings 04/00 est= -1.14 actual= -1.13 Next earnings 07-26 est= -2.78 versus= N/A Average Daily Volume = 1.36 mln /charts/charts.asp?symbol=AETH LNUX - VA Linux Systems Inc. $47.13 (+14.38 this week) Linux is poised to become more than just a fringe player in corporate computing. Firms employing Linux for print-n-file, e-mail, and Web services are offering encouraging reports of the operating system's high reliability, performance, and scalability. There are also firms using clustered Linux systems for intensive tasks on large data sets. Within the Global 2000, Linux is picking up speed, moving forward as a legitimate alternative OS for both server and desktop. Certainly not hurting its chances of deployment is the fact that information systems departments can significantly cut budgets in the per-server and per-client licensing fees arena by electing this Unix-like OS. Linux formed a nice bottom pattern earlier this month and the news this week helped pull the company out of the doldrums. It also delivered what has the potential to be a darn good play. We kicked this one off on Friday with a gain of only $1.94. The recent strength for LNUX has come from several areas. The previous week investors began to perk up when IBM said it would pre-install its version of Linux on its ThinkPad portables. Dell Computer said it is upgrading Red Hat Linux to the same status as Microsofts's Windows and Novell's NetWare operating systems have within Dell. That means Linux is no longer a fringe alternative software at Dell, and will become one of their three strategic operating systems. Investors certainly applauded the move at DELL, but really didn't get excited until this week, when Intel entered the picture. On Thursday, INTC unveiled a limited function computer for e-mail and surfing the Internet. On the announcement from Intel, Linux gapped up $3 and by the end of the session had gained $6.94. The demand for the Web appliances product is expected to be huge in the next two years, which may have helped LINUX find new life. So how do we treat our play? Momentum is a funny thing. The volume on Friday slowed a bit, but was still almost five times better than the norm. With the Fed meeting ahead we wouldn't be surprised to see our play consolidate early next week, although investors could go home this weekend and re-examine their positions and come back hungry to buy more. If that's the case resistance is seen at $50 and again between $52 and $53. After that there is little on the radar screen until the $66 level. Intraday support shows up near $45, although the $42 area could also bring buyers back to the market should we see any profit taking. Whether the bulls return or the bears resurface, we would consider adding new plays in either case. Conservative traders may prefer to wait for investors to digest the Fed decision before entering. Another reason for the popularity of Linux among hardware makers is it's free. Dell is the number two supplier of Linux servers. Companies have a much greater profit opportunity on a Linux server than one based on Windows, since they have to pay a licensing fee to Microsoft. BUY CALL JUL-40*NUU-GH OI=218 at $ 9.88 SL= 7.00 BUY CALL JUL-45 NUU-GI OI= 51 at $ 7.38 SL= 5.25 BUY CALL JUL-50 NUU-GJ OI= 22 at $ 5.13 SL= 3.00 BUY CALL AUG-40 NUU-HH OI= 52 at $12.13 SL= 9.00 BUY CALL NOV-40 NUU-KH OI=110 at $16.38 SL=11.75 SELL PUT JUL-40 NUU-SH OI= 36 at $ 2.69 SL= 4.25 (See risks of selling puts in play legend) Picked on Jun 22nd at $45.19 P/E = N/A Change since picked +1.94 52-week high=$320.00 Analysts Ratings 0-4-0-0-0 52-week low =$ 26.88 Last earnings 05/00 est=-0.23 actual=-0.13 Next earnings 08-22 est=-0.13 versus= n/a Average Daily Volume = 663 K /charts/charts.asp?symbol=LNUX ********************************* CALLS - CONTINUED IN SECTION FOUR ********************************* ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. 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The Option Investor Newsletter Sunday 6-25-2000 Sunday 4 of 5 ***************** CALLS - CONTINUED ***************** BIOTECH ******* PDLI - Protein Design Labs $172.63 (+8.63 last 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. Ok let's step back and take a look at the big picture. For those of you following this play, you know the givens. OIN initiated coverage on PDLI earlier in the month on June 4th strictly as a high-risk momentum play. PDLI had resurrected itself from the depths of $93 and $95 seen at the end of May to rise through the resistance levels at the then converged 5, 10, & 30 DMAS, which were all in the vicinity of $110 to $113. Using a lowest to highest spectrum, PDLI more than doubled its share price in about four week's time. The return of big money flowing back into the biotechs was the fire that fueled the momentous run. Can you say WOW!? The impressive gains however weren't backed by exceptional volume. Historically that's not too unusual for this stock. Typically, PLDI rises on low to moderate volume and descends quickly when volume peaks above the ADV. So keep a close watch on this vacillating level. While PDLI is considered a pure momentum play, there's another potential variable to consider as well. The company recently held its Annual Meeting on June 15th and shareholders voted on a proposal to increase the number of authorized shares from 40 mln to 90 mln. From a technical perspective, PDLI is a split candidate at $150. Therefore the light is green for stock split announcement. This kind of news would surely give PDLI a big shot of adrenaline. If an earnings' release was however to be the trigger event, then we've got a bit of time to wait. The company isn't expected to report until the beginning of August. At present PDLI is testing our nerves. On Monday, PDLI pumped up the biotech's velocity with an $18, or 11% increase and penetrated the formidable resistance at $165. But the volatility and wide spreads that followed were not for the faint of heart. On Wednesday for example, PDLI rocketed up to $191.75 only to crash through near-term support at $173-$176 and the 5- dma (now at $176.06) by Thursday's end. Even though PDLI steadied itself in Friday's session, it'd be prudent to wait for upward confirmation before adding positions. If you can keep some restraint on those itchy trigger fingers, look first for PDLI to move back through $180 and make a charge for overhead resistance. It crossed the wire that Celera Genomics (CRA) is planning to announce a major breakthrough in DNA sequencing this week. This type of competitive news could send others in the sector on a downward spiral, so be aware of the potential pitfall. Human Genome Sciences (HGSI) also said it would begin clinical trials in humans of B-lymphocyte stimulator, or BlyS, a protein that may help patients with immune system problems. BUY CALL JUL-165*RPV-GM OI= 39 at $26.50 SL=20.75 BUY CALL JUL-170 RPV-GN OI=110 at $23.88 SL=18.50 BUY CALL JUL-175 RPV-GO OI= 11 at $20.38 SL=14.50 BUY CALL JUL-180 RPV-GP OI=205 at $18.00 SL=13.00 BUY CALL AUG-170 RPV-HN OI= 56 at $31.25 SL=24.25 BUY CALL AUG-180 RPV-HP OI= 48 at $25.13 SL=19.50 Picked on June 4th at $125.13 P/E = N/A Change since picked +47.50 52-week high=$338.00 Analysts Ratings 2-2-3-0-0 52-week low =$ 20.88 Last earnings 03/00 est=-0.04 actual= 0.04 Next earnings 08-04 est= 0.19 versus=-0.14 Average Daily Volume = 1.26 mln /charts/charts.asp?symbol=PDLI ABGX - Abgenix Inc $138.06 (+23.56 last week) Abgenix uses genetically engineered mice to develop antibody theraputics for inflammatory and autoimmune disorders, cancer, and transplant-related conditions. The company's four antibody products use the XenoMouse technology, which Abgenix bought from Japan Tobacco. Treatments for disorders, cancer, and psoriasis are in clinical trials. The company has alliances with Millennium Pharmaceuticals, Pfizer, and Amgen. The Biotech sector was set a blaze with volatility Friday. Fortunately, the wide intraday price swings in ABGX turned in our favor. We have been mentioning that ABGX is greatly affected by the overall movements in the Biotech sector, patricularly that of the genomic related issues. The news that sparked the momentum in the group Friday was that HGSI said it was entering clinical trials in humans for a protein that may help patients with immune system problems. The further development of new drugs by leading biotech firms translates into profitability, and Wall Street likes that! We may see the momentum in ABGX build as early as Monday, when scientists from the Human Genome Project are expected to reveal the first rough draft of the completed human genetic code. The completion of the human genome is just the beginning, scientists have a long ways to go to decipher the genetic jigsaw puzzle. For our intents and purposes, the announcement could set the Biotech sector a light. ABGX was teetering on the brink of a breakdown after last Thursday's massacre in the Biotech sector. But, given the late day lift skyward on Friday, ABGX is well onto the road to recovery. In case you missed it, ABGX exploded nearly $8 higher in the final ten minutes of trading Friday. If that heavy buying interest returns Monday morning, look for an entry as ABGX clears resistance at $140. Above that level, ABGX will once again face congestion around the $145 area. A more conservative trader might wait for ABGX to clear $145 before entering the play. Once again, ABGX tends to follow the general biotech trend, make sure to confirm direction in the sector before entering the play. The Frank Russell Company, famous for its mid-cap indices, will be moving 17 stocks from the Russell 2000 to the Russell 1000 Index next week. More than half of the companies making the move are biotech stocks, including ABGX. The Russell 1000 is used by money mangers as a performance reference. The addition of ABGX to the index may give our play a subtle boost as mutual fund managers tend to align their portfolios with the Russell 1000. BUY CALL JUL-135*AXY-GG OI=55 at $17.75 SL=13.00 BUY CALL JUL-140 AXY-GH OI=82 at $16.00 SL=11.50 BUY CALL JUL-145 AXY-GI OI=12 at $14.50 SL=10.75 low OI BUY CALL AUG-140 AXY-HH OI= 0 at $23.63 SL=17.00 Wait for OI! BUY CALL OCT-145 AXY-JI OI=11 at $32.50 SL=23.50 low OI Picked on June 8th at $112.00 P/E = N/A Change since picked +25.56 52-week high=$206.50 Analysts Ratings 3-3-0-0-0 52-week low =$ 7.38 Last earnings 03/00 est= -0.11 actual= -0.09 Next earnings 07-27 est= -0.05 versus= -0.11 Average Daily Volume = 821 K /charts/charts.asp?symbol=ABGX HGSI - Human Genome Sciences $145.38 (+11.88 last week) Human Genome Sciences, Inc., founded in 1992, is a pioneer in the use of genomics, the study of all human genes, and the development of new pharmaceutical products. They are a leader in moving these genomics-based drugs into patient-based clinical trials. In 1999, three HGS drugs were tested in patients. Their goal is to become a global pharmaceutical company that discovers, develops, manufactures and sells our own genomics-based drugs. Talk about a play that was saved by the bell. The bell we are referencing was the opening bell on Friday, as traders began the day bidding shares of HGSI sharply higher. Our play may not be out of the woods yet, however Friday's 9% move gave it some breathing room. By now you've probably heard the strength came from an announcement by the genomics company, that said it's ready to start testing a treatment that could boost production of antibodies in people with immune systems disorders. A protein known as BLyS, will be tested in people suffering from a defect of the immune system. If BLyS shows promise, then Humane Genome may test the drug in patients suffering from certain forms of blood cancers. Lance Willsey, a physician and founding partner of DCF Capital, which invests in biotechnology said, "there is still a long way to go, but this is a critical first step." The initial phase of this testing will involve about 100 patients and would take up to a year to complete. As we've said before investors view many of the companies in the genomics and biotech fields differently when it comes to earnings and revenues. They are obviously willing to buy shares of a company on hope rather than concentrate on the bottom line and valuations. For now, that's a definite plus for our play. The next challenge on the horizon will be for HGSI to maintain the momentum from Friday. The high of the day at $150 was reached in the very early minutes of trading. HGSI did bounce off its 10-dma at $136.70 after profit taking set in during the first hour. It formed support near $143 as well. For now we will use those two levels as a gauge for entry points into new plays. Continued moves higher could also be considered. However, we would still use caution, as a move through $150 or last weeks high at $157.25, escorted by strong volume would be necessary for HGSI to regain its footing. According to the FDA, only about 20% of the drugs that enter human testing move successfully through advanced trials and win U.S. Food and Drug Administration approval. In commenting about the BLyS studies a company spokesman said, "the drug looked in pre-clinical studies to be very well tolerated, and we really couldn't identify any acute side effect in animals." BUY CALL JUL-140*HHA-GH OI=335 at $18.88 SL=13.75 BUY CALL JUL-145 HHA-GK OI=102 at $16.63 SL=12.00 BUY CALL JUL-150 HHA-GL OI=569 at $14.38 SL=10.75 BUY CALL AUG-140 HHA-HH OI= 10 at $27.38 SL=20.00 BUY CALL OCT-140 HHA-JH OI 124 at $38.88 SL=28.00 SELL PUT JUL-135 HHA-SG OI=136 at $10.13 SL=13.25 (See risks of selling puts in play legend) Picked on June 8th at $117.56 PE = N/A Change since picked +27.81 52 week high=$232.75 Analysts Ratings 1-5-2-0-0 52 week low =$ 19.38 Last earnings 04/00 est=-0.33 actual=-0.35 Next earnings 07-27 est=-0.20 versus=-0.05 Average daily volume = 1.87 mln /charts/charts.asp?symbol=HGSI ***** LEAPS ***** The Leaders Pause And We’re Stuck In The Middle Again By Mark Phillips Contact Support The recent NASDAQ breakout came on the backs of the Wireless, Semiconductor, and Networking sectors; all of which decided to take the last few days off. Whether it is apprehension about next week’s FOMC meeting, concerns about corporate profits, trepidation about the sky-high price of Crude Oil, or a combination of all of them, the net effect was to drag the NASDAQ back below the key 3900 level on Friday. The declines from Thursday and Friday served to push the VIX back into the absolute center of its historical range, with a weekly close at 25.57. The big question is whether the market is ready to run into July earnings, or if the combination of the recent interest rate hikes, expensive Crude Oil, and an apparently slowing economy will produce a sustained downtrend in the equity markets. This market is difficult to trade, with few definable trends that last more than a few days at a time. There is no shame in sitting this round out. If you don’t feel comfortable, then by all means, leave your account in cash. But if you are looking for a relatively safe way to leverage your trading account, some of our LEAPS plays may be just the ticket. Here lies the beauty of LEAPS. You can pick those strong stocks with good business models (and profits), and wait for the market to drag them down to reasonable levels. Many of the stocks on our playlist have gotten pushed down to good support levels and look to be providing nice entry points. NT, TXN, CY, VSTR (Spotlight Play), NOK, NXTL, and even good old EMC are either at or near major support levels. Given the long time frame available (some stocks now have expirations all the way out to January 2003), once you pick a solid stock, you have plenty of time to be right before the monster we know as time decay rears its ugly head to take a bite out of your account. This is when you want to have cash in hand so you are prepared to buy the inevitable dips. Especially in this sideways market, it doesn’t pay to chase stocks higher - exercise a little patience and you will be rewarded as the plays you have chosen come back to you. Notice that this is the second week in a row with no new LEAPS plays. Nothing looked really good, so we decided to stand aside this week and at least wait for the interest rate picture to clear up before jumping into anything new. Rest assured, we will take a careful look throughout the week and promise to bring you something juicy next weekend. Current Plays SYMBOL SINCE LEAPS SYMBOL PICKED CURRENT RETURN EMC 11/07/99 JAN-2001 $ 40 EMB-AH $ 7.69 $37.75 390.90% JAN-2002 $ 45 WUE-AI $ 9.50 $41.13 332.95% IBM 11/07/99 JAN-2001 $100 IBM-AT $13.63 $22.25 63.24% JAN-2002 $110 WIB-AB $16.50 $28.13 70.48% CSCO 11/14/99 JAN-2001 $ 40 CYQ-AH $ 9.56 $26.38 175.94% JAN-2002 $ 45 WIV-AI $11.00 $28.75 161.36% NT 11/28/99 JAN-2001 $37.5 ZOO-AU $11.13 $30.63 175.20% JAN-2002 $37.5 WNT-AU $15.13 $35.25 132.98% TXN 12/12/99 JAN-2001 $ 55 TNZ-AK $11.13 $26.25 135.85% JAN-2002 $ 60 WGZ-AL $14.25 $34.38 141.26% SUNW 12/19/99 JAN-2001 $ 80 SUX-AP $17.63 $19.75 12.02% JAN-2002 $ 90 WJX-AR $22.00 $26.50 20.45 CY 01/16/00 JAN-2001 $ 40 ZSY-AH $ 9.13 $16.25 77.98% JAN-2002 $ 40 WSY-AH $12.63 $22.25 76.17% ERICY 01/30/00 JAN-2001 $16.3 RQC-AO $ 4.94 $ 5.25 6.28% JAN-2002 $16.3 WRY-AO $ 6.75 $ 8.38 24.15% NSM 02/27/00 JAN-2001 $ 70 NSM-AN $18.50 $16.38 -11.46% JAN-2002 $ 70 WUN-AN $24.25 $27.88 14.97% AOL 03/12/00 JAN-2001 $ 60 AOO-AL $14.00 $ 6.63 -52.64% JAN-2002 $ 65 WAN-AM $18.63 $12.25 -34.25% AXP 03/12/00 JAN-2001 $43.3 AXP-AP $ 7.25 $14.00 93.10% JAN-2002 $46.6 WXP-AQ $ 9.33 $16.88 80.92% WM 03/19/00 JAN-2001 $ 25 WM -AE $ 5.00 $ 5.88 17.60% JAN-2002 $ 30 WWI-AF $ 5.38 $ 5.75 6.88% AMD 04/16/00 JAN-2001 $ 70 AMD-AN $17.50 $30.13 72.17% JAN-2002 $ 70 WVV-AN $26.00 $41.38 59.15% CMGI 04/16/00 JAN-2001 $ 50 ZB -AJ $21.50 $13.25 -38.37% JAN-2002 $ 55 WCK-AK $27.75 $20.13 -27.46% JDSU 04/16/00 JAN-2001 $ 80 XJU-AP $27.50 $54.50 98.18% JAN-2002 $ 80 YJU-AP $39.63 $69.63 75.70% VSTR 04/16/00 JAN-2001 $ 90 UVT-AR $23.88 $49.88 108.88% JAN-2002 $ 90 WWP-AR $35.00 $66.38 89.66% YHOO 4/30/00 JAN-2001 $140 YMM-AH $32.13 $23.00 -28.42% JAN-2002 $140 WYZ-AH $46.38 $40.88 -11.86% MOT 5/14/00 JAN-2001 $33.3 MOT-AY $ 6.58 $ 5.88 -10.64% JAN-2002 $36.6 WMA-AZ $ 9.54 $ 9.75 2.20% NOK 5/21/00 JAN-2001 $ 50 NZY-AJ $10.25 $12.25 19.51% JAN-2002 $ 50 IWX-AJ $17.25 $19.75 14.49% HD 5/28/00 JAN-2001 $ 50 HD -AJ $ 6.25 $ 6.00 - 4.00% JAN-2002 $ 50 WHD-AJ $11.38 $11.25 - 1.14% XLNX 5/28/00 JAN-2001 $ 70 ZIZ-AN $14.63 $29.00 98.22% JAN-2002 $ 70 WXJ-AN $23.38 $37.63 60.95% NXTL 6/11/00 JAN-2001 $ 60 FZC-AL $12.25 $10.00 -18.37% JAN-2002 $ 60 YFG-AL $19.25 $16.75 -12.99% C 6/18/00 JAN-2001 $ 65 ZRV-AM $ 7.63 $ 6.88 - 9.83% JAN-2002 $ 65 WRV-AM $13.75 $13.25 - 3.64% Spotlight Play VSTR - VoiceStream Wireless $120.81 When we began playing VSTR in mid- April, it was bouncing at the $80 support level and flirting with the 200-dma. After putting in one more bounce at the end of April it was off to the races. VSTR quickly ran up to resistance at $117-118 and fell back. After the third attempt in late May, VSTR broke above resistance and has used that level as support ever since. Strength in the Wireless sector helped to fuel the recent NASDAQ gains and VSTR ran as high as $143 before encountering significant resistance. The entire Wireless sector has had a rough time over the past few days, as leaders like NOK and VSTR have given back some of their gains to profit taking. Don’t look now, but Friday’s drop brought the stock right back to support at $118-120, now the site of the 30-dma ($119.56), and it was encouraging to see the stock’s refusal to break under $119.88 all day. The other nice thing is the way volume ramped up in the final hour, pushing the stock up off its lows. Wait for the buying volume to ramp back up and then consider new entries at current levels. If investors get nervous again next week, current support could give way to a market downdraft, so confirm market and sector direction before playing. BUY CALL JAN-2001 $130.00 BWU-AF at $28.38 BUY LEAP JAN-2002 $130.00 WWP-AF at $51.88 New Plays None Drops None ********* PUT PLAYS ********* Put plays can be very profitable but have a larger risk than call plays. When a stock is falling the entire investment community (except the shorts) is hoping it will reverse and start back up. The company management is also doing everything they can to shore up their stock price. The company issues press releases, brokers talk it up, analysts try to put a positive spin on everything. Then of course there is the death knell, the "buy recommendation" simply because the price has dropped to some level that analysts feel attractive again. Buyers who like the stock wait until it appears a bottom has been reached and then jump on it in a feeding frenzy. They may already have a large position and are averaging down. Many factors can stop a free falling stock in mid drop. **** NKE - NIKE Inc. $37.06 (+0.31 last week) NIKE is the world's #1 shoe company and controls more than 45% of the US athletic shoe market. The company designs and sells shoes for just about every sport. NIKE also sells Cole Haan dress and casual shoes and a line of athletic wear and equipment. In addition, it operates NIKETOWN shoe and sportswear stores. The company sells its products to about 20,000 US accounts, in about 110 other countries, and on the Internet. The Footwear sector is a cyclical one, which has been on a downward spiral since 1997. NKE's business has suffered from slowing orders by retailers, partly from rising interest rates and a slowing economy, more importantly, from slowing demand from consumers. Blame it on Michael Jordan. Since NKE's marquee marketing man retired, sales of its "Air Jordan" shoes have suffered. And as sales have slowed, NKE has had to cope with another problem, rising inventories. With all the extra sneakers on hand, NKE had to dramatically slash prices, which in turn, lowered its margins. The idea of lower profits prompted a slew of downgrades by several leading brokerage houses. As you might imagine, NKE's chart isn't the prettiest of pictures. The stock has been on a wild ride this year, with a definite downward bias. The stock enjoyed a brief rally last spring as investors fled the Tech sector to find temporary solace in the Retail sector. But, with the resurgence of technology issues over the past two weeks, investors have ran from NKE once again. The stock did enjoy some press on CNBC Friday after staging a modest rally. However, what the reporters failed to mention is that NKE ran smack into resistance at its descending 10-dma, at $37.44. Furthermore, the rally Friday came on less than impressive volume. For those of us on the short side, Friday's rally may prove to be a good entry point. For the aggressive traders, consider an entry at current levels Monday if NKE rolls over. For a more conservative entry, wait for the stock to fall past resistance at $35. NKE is expected to announce reduced earnings this Thursday, consider exiting the play before then to avoid risk. BUY PUT JUL-40*NKE-SH OI= 791 at $4.50 SL=2.75 BUY PUT JUL-35 NKE-SG OI= 572 at $1.81 SL=1.00 Average Daily Volume = 1.11 mln /charts/charts.asp?symbol=NKE DCLK - DoubleClick, Inc. $37.63 (-0.88 last week) Providing comprehensive Internet advertising solutions for advertisers and Web publishers, DoubleClick wants to double how many times you click on online banner ads. The company has two principal service offerings, the DoubleClick Network and DART Service. The DoubleClick Network consists of highly trafficked Web sites grouped together by DCLK in defined categories of interest. The DART Service provides Web publishers, advertisers, and ad agencies with the ability to control the targeting, delivery, measurement and analysis of their online marketing campaigns. This is all done in real-time by dynamically targeting and delivering ads to Web users based on pre-selected criteria. As the pain increases for DCLK investors, so do our profits. Although the government has advocated self-regulation by Internet ad-server companies on the privacy issue, DCLK has been unable to move higher. The Clinton administration has endorsed the industry-developed privacy platform (P3P), but despite being involved with the project, DCLK shares have continued to suffer. Then on Monday, Robertson Stephens analyst Lowell Singer lowered 2000 and 2001 revenue projections and issued a cautious note that dwindling advertising dollars (can you say slowing economy?) could hurt DCLK’s performance in the short term. The effect was immediate as the stock traded as low as $32.88 before recovering to close back above $37. Then we had a slight rally in DCLK that took the price right up to the point where we would have bailed out. As we said on Tuesday, $45 was as far as we could let the price go and still keep the play. Well, after running up to $44.88, it became clear that we were just getting one more entry point before heading south again. After the weakness in the Internets over the past 2 days, DCLK is right back where it began last week, below the $40 support level, and looking like there might be more declines ahead. There is long-term support between $33-35, but if that fails to hold, look for a decline to the $26-27 level. The best entries can be had on mini-rallies to resistance, currently at $40 (with the 10-dma now down to $40.63). Consider new positions as the price rolls over, or wait for the breakdown through support to provide confirmation that DCLK has further to fall. BUY PUT JUL-40*QWE-SH OI=1406 at $5.75 SL=3.75 BUY PUT JUL-35 QWE-SG OI=2676 at $3.13 SL=1.50 Average Daily Volume = 4.01 mln /charts/charts.asp?symbol=DCLK AMZN - Amazon.com $33.88 (-12.13 this week) Amazon.com opened its virtual doors in July 1995 with a mission to use the Internet to transform book buying into the fastest, easiest, and most enjoyable shopping experience possible. Today, Amazon.com is the place to find and discover anything you want to buy online. Over 17 million people in more than 160 countries have made them the leading online shopping site. Earth's Biggest Selection of products, including free electronic greeting cards, online auctions, and millions of books, CDs, videos, DVDs, toys and games, and electronics. In addition to its US Web site, the Company currently has two internationally focused Web sites located at www.amazon.co.uk and www.amazon.de. The Company also has invested in and developed strategic commercial relationships with a number of selected e-commerce companies. There is only one word to describe this beautiful put play. Prescient. When we opened this play on Thursday, we were expecting downside but who could have expected that on Friday AMZN would gap down right at the open and begin trading at $36.69, down $5.31 and end the day just off to its lows of $32.47. And while it did close with strengthening volume and some buying interest at the end of the day, it was nothing compared to the whopping number of shares traded during the huge downdraft. With average daily volume at roughly 7.27 million, to see the stock trade over 51.84 million in one session is nothing short of unbelievable. We mentioned that if AMZN were to break its support of $40.50 on good volume there would be little resistance left to the downside. The volume was there and the support was broken with ease. For those looking to kick AMZN while its down, the stock has used the 5-dma to ride its way down, currently way up at $42.41. What was once support at $40.50 will not be resistance. Use any failed rallies above this level as a opportunity to go in. So what was the reason for AMZN's swandive? Critical words from Lehman Bros. analyst Ravi Suria early in the morning when he noted, "Amazon has one of the best-established brands in the B2C space. However, from a bond perspective, we find the credit weak and deteriorating." The company was also criticized for a weak balance sheet, poor management of working capital, and massive negative operating cash flow which according to Suria, is a recipe for disaster. BUY PUT JUL-35*QZN-SG OI=1154 at $5.13 SL=3.00 BUY PUT JUL-30 ZQN-SF OI= 42 at $2.94 SL=1.50 Average Daily Volume = 7.27 mln /charts/charts.asp?symbol=AMZN WY - Weyerhaeuser Co. $43.50 (-3.06 last week) Weyerhaeuser Company one of the world's largest integrated forest products companies, was incorporated in 1900. In 1999, sales were $12.3 billion. It has offices or operations in 13 countries, with customers worldwide. Weyerhaeuser is engaged in the growing and harvesting of timber; the manufacture, distribution and sale of forest products; and real estate construction, development and related activities. The company has grown through acquisitions, including Canada's MacMillillan Bloedel and US-based Trus Joist MacMillan. Their competition comes from Georgia-Pacific Group and International Papaer. Talk about a company that can't seem to buy a break. Since the beginning of the new millennium Weyerhaeuser has been on a steep slide. What may have began as profit-taking back near the $75 level in early January turned into all out selling after a downgrade from Merrill Lynch back on January 7th. They missed the boat as far as earnings in January which only added fuel to the fire. In April the paper products company beat estimates handily, but downgrades continued to plague WY. We only mention the past six months history to show how tough it can be to put the breaks on a stock that's headed south. The company even initiated a 12-million share buyback plan in February, which could normally help prop up the price in a declining market. Last Tuesday WY authorized the repurchase of another 10 million, or 4.3% of its outstanding shares. Earlier this month Standard and Poors placed its rating for Weyerhaeuser on CreditWatch, with negative implications. This is not a huge deal, but another reason for investors to think twice before placing buy orders. Other hurdles have begun to appear for WY as the slowing economy has put a crimp in the housing sector. While 11 of the 16 brokers still have the company rated a Strong Buy or Buy, 5 have placed a hold on the stock. The most recent comments came in late May as Deutsche Banc Alex Brown downgraded WY from a Buy to a Market Perform. On Thursday the folks at Goldman Sachs lowered earnings estimates on Georgia-Pacific Corp and Louisiana- Pacific Corp, which could cast a cloud over Weyerhaeuser as well. WY is closing in on a two year low near the $37 area and has little in the way of support until then. Technically the stock is sitting in oversold territory. A pop back up to the $45-$46 area followed by more weakness could provide a good entry point. Don't discount continued moves lower when considering an entry for our new play, as a downhill slide is not only ugly it can be tough to stop. BUY PUT JUL-50*WY-SJ OI=448 at $6.38 SL=4.25 BUY PUT JUL-45 WY-SI OI=124 at $2.75 SL=1.50 Average daily volume = 1.21 mln /charts/charts.asp?symbol=WY ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***************************** SEE DISCLAIMER IN SECTION ONE *****************************
The Option Investor Newsletter Sunday 6-25-2000 Sunday 5 of 5 ************* COVERED CALLS ************* Covered-calls: Portfolio Objectives... One of our readers requested that we discuss our outlook for the covered-write strategy and explain the guidelines used to identify favorable candidates. The primary objective of covered writing for most investors is increased income though stock ownership. The amount of downside protection and the return on investment are both very important considerations in determining which play to choose. Friday's market-wide correction offered a great example of why we focus on conservative, "in-the-money" covered writing and a consistent return on investment. Writing a covered call consists of the sale of a call while simultaneously owning the underlying security. The seller of the call (the writer) is generally neutral to bullish on the underlying stock. If the issue rises, he may not participate fully in its appreciation. However, he now has protection if the stock declines in price. If the underlying issue remains relatively unchanged, he will profit from the premium-reduced cost basis. This simple benefit of writing calls has convinced many fund managers and institutions that the technique offers a favorable method of hedging conservative stock portfolios. There are a number or reasons why professional option writers use the covered-call strategy to achieve above-average returns. The motivation to sell call options comes from the fact that they are generally overpriced. Whether due to supply and demand factors or simple speculation, it's common for traders to pay more for call options than they are worth. When options are expensive, option writers benefit by receiving larger time values. Even a relatively small difference in premium can result in a 3% to 5% increase in the annual returns from this strategy. The basic techniques institutional investors use when implementing this strategy can be beneficial to retail traders as well. One of the most common traits is selling short-term options to obtain higher relative time values. In most cases, longer-term series have much less premium (proportionally) in the option price due to a smaller demand from traders. Fund managers and pension-plan buyers generally select high-quality stocks and write in-the-money options for increased probability of assignment. When compared to outright ownership, this conservative method is almost equal to "pre-selling" the issue at a profit. To identify favorable covered-write candidates, we concentrate on "return not called." This is the return on investment that one would achieve even if the stock price were unchanged at option expiration. A trader can compare potential plays more fairly using this approach since no assumption is made about an upward movement in the stock price. In this conservative option writing strategy, we look for plays that return a minimum of 3%-5% per month with a downside margin at least 10% (of the current stock price). The overall position that is constructed using these guidelines will be a relatively low risk play (regardless of the volatility of the underlying stock) since the levels of protection will be large and there is still the expectation of a reasonable return. Based on our historical success, it appears this may be the safest way to consistently outperform all but the most aggressive techniques in the majority of market conditions. Good Luck! SUMMARY OF PREVIOUS PICKS ***** NOTE: Using Margin doubles the listed Monthly Return! Stock Price Last Call Strike Price Profit Monthly Symbol Picked Price Month Sold Picked /Loss Return FSII 18.25 19.44 JUL 17.50 2.63 *$ 1.88 10.5% FHS 13.13 12.81 JUL 12.50 1.63 *$ 1.00 7.6% MED 9.44 8.63 JUL 7.50 2.69 *$ 0.75 6.9% LYNX 32.63 39.75 JUL 25.00 9.75 *$ 2.12 6.7% CYTO 7.97 9.69 JUL 5.00 3.38 *$ 0.41 6.5% RHAT 25.00 31.38 JUL 20.00 6.38 *$ 1.38 6.4% CEGE 25.56 27.63 JUL 20.00 6.88 *$ 1.32 6.1% BCGI 14.56 14.44 JUL 12.50 2.88 *$ 0.82 6.1% GENE 27.75 29.75 JUL 20.00 9.25 *$ 1.50 5.9% CAIR 25.50 25.25 JUL 20.00 6.63 *$ 1.13 5.2% TGEN 12.25 12.25 JUL 7.50 5.25 *$ 0.50 5.2% IBC 14.94 14.38 JUL 12.50 3.25 *$ 0.81 5.0% ALSC 26.88 28.38 JUL 22.50 5.88 *$ 1.50 4.4% PGO 19.00 18.13 JUL 17.50 2.25 *$ 0.75 3.9% ZD 11.38 9.50 JUL 10.00 2.25 $ 0.37 2.9% *$ = Stock price is above the sold striking price. Comments: Fsi International (FSII) is retreating to support after failing to move above the March high. Monitor Foundation Health (FHS) as the issue may test its 30 dma. Alliance Semiconductor (ALSC) still appears somewhat toppy - watch for further indications. You may consider exiting the Ziff-Davis (ZD) position early, if the stock continues to move lower. NEW PICKS ********* Sequenced by Company ***** Stock Last Call Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return ARQL 13.88 JUL 12.50 ARQ GV 2.44 180 11.44 28 10.1% BCRX 27.00 JUL 22.50 BIU GX 5.63 23 21.37 28 5.7% CYTO 9.69 JUL 7.50 UOR GU 2.94 736 6.75 28 12.1% GLGC 38.75 JUL 30.00 CGU GW 10.00 166 28.75 28 4.7% IFCI 23.13 JUL 20.00 IQD GD 4.00 1512 19.13 28 4.9% TGEN 12.25 JUL 10.00 GNU GB 3.00 168 9.25 28 8.8% TSEM 30.69 JUL 25.00 TWQ GE 6.50 544 24.19 28 3.6% Sequenced by Return ***** Stock Last Call Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return CYTO 9.69 JUL 7.50 UOR GU 2.94 736 6.75 28 12.1% ARQL 13.88 JUL 12.50 ARQ GV 2.44 180 11.44 28 10.1% TGEN 12.25 JUL 10.00 GNU GB 3.00 168 9.25 28 8.8% BCRX 27.00 JUL 22.50 BIU GX 5.63 23 21.37 28 5.7% IFCI 23.13 JUL 20.00 IQD GD 4.00 1512 19.13 28 4.9% GLGC 38.75 JUL 30.00 CGU GW 10.00 166 28.75 28 4.7% TSEM 30.69 JUL 25.00 TWQ GE 6.50 544 24.19 28 3.6% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MR-Monthly Return. ***** ARQL - ArQule $13.88 *** Technical Breakout! *** ArQule is engaged in the production and development of chemical compounds with commercial potential in the pharmaceutical, biotech, bioseparations and agrochemical industries. The company primarily manufacture arrays of synthesized compounds for delivery to their customers for use in lead compound generation and lead compound optimization activities. They also offer other R&D services and have established a number of joint drug discovery programs with biotech companies and academic institutions, and are pursuing a limited number of their own internal drug discovery programs. No news since early May yet ArQule started to rally in June and has surpassed last month's high. Somebody appears to be interested in this stock and the move above the 150 dma is technically bullish! JUL 12.50 ARQ GV LB=2.44 OI=180 CB=11.44 DE=28 MR=10.1% Chart = /charts/charts.asp?symbol=ARQL ***** BCRX - BioCryst Pharmaceuticals $27.00 *** Trading Range *** BioCryst Pharmaceuticals is a biopharmaceutical company focused on the development of pharmaceuticals for the treatment of infectious, inflammatory and cardiovascular diseases and disorders. BioCryst, which reported favorable earnings in April, has been relatively news free, even with the recent excitement in biotechs. The stock has been stuck in a trading range for over a year and the current technicals suggest the trend will continue. We favor a cost basis near the lower end of the channel to take advantage of BioCryst's neutral trend. As always, due-diligence is a must with drug and biotech issues! JUL 22.50 BIU GX LB=5.63 OI=23 CB=21.37 DE=28 MR=5.7% Chart = /charts/charts.asp?symbol=BCRX ***** CYTO - Cytogen $9.69 *** Another Biotech! *** Cytogen is a biopharmaceutical company engaged in the development and marketing of products to improve diagnosis and treatment of cancer and other diseases. Their diagnostic imaging agents, used in cancer detection, include ProstaScint and OncoScint CR/OV. They also market Quadramet, a proprietary cancer therapeutic agent for pain relief in patients with metastatic bone lesions. The Biotech sector is HOT and appears to be the "current" growth industry of choice for many investors and institutions. This week Cytogen's subsidiary, AxCell Biosciences announced that it had completed the first stage of its proteomics automation. Cytogen has continued its stage II rally and has now taken out the April high. Favorable speculation on a bullish issue with a conservative cost basis. JUL 7.50 UOR GU LB=2.94 OI=736 CB=6.75 DE=28 MR=12.1% Chart = /charts/charts.asp?symbol=CYTO ***** GLGC - Gene Logic $38.75 *** Biotechs Galore! *** Gene Logic is a leading genomics and bioinformatics company, that develops proprietary information products, software, and provides research services for the global pharmaceutical and life science industries. Gene Logic's information products combine software tools with large-scale gene expression information, which specifies the degree to which genes are active in a broad range of normal, diseased, and treated conditions. The company's broad range of products and services enable customers to accelerate the discovery and development of drugs, diagnostics, and agricultural products. Yes, another conservative entry point into an excellent biotech issue with bullish technicals and a reasonable cost basis. JUL 30.00 CGU GW LB=10.00 OI=166 CB=28.75 DE=28 MR=4.7% Chart = /charts/charts.asp?symbol=GLGC ***** IFCI - International FiberCom $23.13 *** Enough Biotechs! *** International FiberCom is a leading end-to-end solutions provider for the telecommunications industry, offering a broad range of engineering-based solutions designed to enable and enhance voice, data and video communications through fixed and wireless networks. The company designs, deploys, and manages internal and external networks infrastructure for leading wireline, wireless and broad- band telecommunications providers in the U.S. IFCI reported favorable earnings last quarter with revenue doubling and net income up over 50%. Several new contracts and the acquisition of Premier Cable should position International FiberCom to continue to outpace the competition. The technicals remain bullish as IFCI has completed a "double-bottom" formation. We favor a conservative cost basis on this bullish issue. JUL 20.00 IQD GD LB=4.00 OI=1512 CB=19.13 DE=28 MR=4.9% Chart = /charts/charts.asp?symbol=IFCI ***** TGEN - Targeted Genetics $12.25 *** Ok, One More Biotech! *** Targeted Genetics develops gene therapy products and technologies for the treatment of acquired and inherited diseases. The company now has two lead products in clinical trials for treating cystic fibrosis and treating cancer. They are engaged in preclinical product development activities in the areas of hemophilia, rheumatoid arthritis, cardiovascular disease and HIV vaccines. Targeted Genetics is in a burning hot sector and recently reported favorable Phase I clinical trial results on tgAAV-CF, the company's gene therapy product for the treatment of cystic fibrosis. As for the technicals, TGEN is consolidating at resistance after breaking out of a stage I base on heavy volume. Targeted Genetics offers another favorable Biotech position to add to our current selection. JUL 10.00 GNU GB LB=3.00 OI=168 CB=9.25 DE=28 MR=8.8% Chart = /charts/charts.asp?symbol=TGEN ***** TSEM - Tower Semiconductor $30.69 *** Own This One! *** Tower Semiconductor is an independent manufacturer and service provider of semiconductor integrated circuits on silicon wafers. As a foundry, Tower provides IC design, manufacturing and turnkey services and is specializing in providing solutions for embedded non-volatile memory devices and CMOS image sensors. Tower broke out of its short-term stage I base shortly after announcing that it had completed QS-9000 quality certification with The Standards Institution of Israel. Achieving this certificate pre-qualifies Tower as a quality supplier for the automotive segment of the semiconductor industry, as well as for other markets that demand strict quality control. Tower has resumed its stage II climb on heavy volume and has now taken out the April high. We favor a conservative entry point near technical support that still offers a reasonable return. JUL 25.00 TWQ GE LB=6.50 OI=544 CB=24.19 DE=28 MR=3.6% Chart = /charts/charts.asp?symbol=TSEM *********************** CONSERVATIVE NAKED PUTS *********************** Stock Ownership - Mastering the Market Mentality... There are a number of ingredients that must be present in any successful investment portfolio. The inventory of resources that one needs to stay ahead of the market can be daunting to new traders. Most novice participants become overwhelmed with the vast amount of information and ideas that must be absorbed before consistent profits can occur. The best way to begin is to focus on those strategies and techniques that have a proven history of generating a prosperous outcome. Today we will discuss the effects of public sentiment in the stock market. The first thing that new investors must learn when they enter the market is the importance of human psychology in the buying and selling of stocks. This emotional component has absolutely nothing to do with the fundamentals of the company, but it does have an overwhelming affect on the share value. Of course, the idea that emotion determines stock prices may contradict the opinions of many valuation investors but when you understand the changes produced by public sentiment, it becomes much easier to discern the broader, more technical movements in the market. The primary unwritten rule is that rumors are one of the prime movers of stock prices. It's amazing how quickly speculation of upcoming events can change the character of the current trend. The market anticipates the movement of the economy and shows us in advance what we can expect with regard to corporate health, unemployment, interest rates and other financial trends. When investors and analysts begin to discuss bearish trends, the market generally reacts negatively because the public believes it is destined for a downturn. In contrast, when an upcoming financial report is rumored as favorable, the market erupts far in advance of the actual announcement. Understanding the many subtleties of the media's affect on the stock prices is one of the basic prerequisites for long-term success. As strange as it may seem, the common trait among professional traders is they rarely go along with the crowd. That is the primary reason institutional investors are so successful when stock values are ruled by emotion. History suggests the first indication of a potential bull-market correction is a period of euphoria. That occurs when risk is no longer discussed and previous losses are forgotten. As the bullish trend becomes prominent and well-defined, the investing public grows more comfortable with higher price-earnings ratios and historically low yields. The idea that "this time it will be different" becomes an accepted theme. Monetary greed drives undisciplined buyers to purchase stocks near the market top and when the inevitable correction finally occurs, they are unable to accept the truth. Fear eventually pushes the same investors to sell near the market bottom, at the worst possible time. The key is to avoid the impulse to buy near the height of the rally just because the market is up and everyone is talking about their successes. You must fight the fear that would draw you into the stampede. Unfortunately, resisting the impulse to sell amid panic is only half the battle; the even tougher challenge is to buy during this hysteria, when it appears the market is at its worst. Of course, that is indeed the case, and it is the one reason you should be buying while everyone else is selling. When large numbers of traders act the same way at once, a classic climax ensues, bringing opportunities for those who are adept enough to recognize the activity. The central basis for this type of thinking is the requirement to approach the stock market from a contrarian viewpoint; one that opposes the views of the collective majority. Only in this manner can you avoid the tendency to react emotionally in the heat of the moment rather than using a sound and sensible investment method based on proven strategies. Good Luck! *** WARNING!!! *** Occasionally a company will experience catastrophic news causing a severe drop in the stock price. This may cause a devastatingly large loss which may wipe out all of your smaller gains. There is one very important rule; Don't sell naked puts on stocks that you don't want to own! It is also important that you consider using trading STOPS on naked option positions to help limit losses when the stock price drops. Many professional traders suggest closing the position when the stock price falls below the sold strike or using a buy-to-close STOP at a price that is no more than twice the original premium from the sold option. SUMMARY OF PREVIOUS PICKS ***** Stock Price Last Put Strike Price Profit Monthly Symbol Picked Price Month Sold Picked /Loss Return FSII 18.25 19.44 JUL 15.00 0.75 *$ 0.75 13.6% EFCX 10.56 13.00 JUL 7.50 0.44 *$ 0.44 12.5% CAMP 29.00 34.88 JUL 22.50 0.81 *$ 0.81 10.6% GENE 26.13 29.75 JUL 17.50 0.63 *$ 0.63 9.3% NSS 20.13 18.38 JUL 15.00 0.44 *$ 0.44 8.6% FSII 16.00 19.44 JUL 12.50 0.50 *$ 0.50 8.4% PILT 15.31 14.25 JUL 10.00 0.38 *$ 0.38 8.0% CREAF 28.00 24.25 JUL 22.50 0.69 *$ 0.69 7.8% CAIR 25.50 25.25 JUL 17.50 0.44 *$ 0.44 6.9% OMKT 19.00 13.44 JUL 12.50 0.38 *$ 0.38 6.6% MPPP 19.19 14.19 JUL 10.00 0.38 *$ 0.38 6.5% CLEC 28.13 24.50 JUL 20.00 0.44 *$ 0.44 6.3% SYMM 20.00 20.56 JUL 15.00 0.38 *$ 0.38 6.3% CEGE 27.25 27.63 JUL 17.50 0.44 *$ 0.44 5.4% IMNX 44.69 50.38 JUL 30.00 0.56 *$ 0.56 5.1% *$ = Stock price is above the sold striking price. Comments: Fsi International (FSII) could be just "filling the gap" after Wednesday's strong move. The slump in Ns Group (NSS) appears to have halted at its 30 dma. Pilot Network (PILT) has made one successful test of the May low as it continues to form a stage I base. Monitor Creative Technology (CREAF) as the issue tests its 150 dma. Open Market (OMKT) is consolidating towards the May highs - check daily. Friday's downward move on heavy volume is a bearish signal for Us Lec (CLEC) and the position should be closely monitored. Symmetricon (SYMM) continues to act "toppy" and appears somewhat overextended. NEW PICKS ********* Sequenced by Company ***** Stock Last Put Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return IMG 18.31 JUL 15.00 IMG SC 0.56 57 14.44 28 13.3% MRVT 19.50 JUL 15.00 SQD SC 0.44 50 14.56 28 11.0% OAKT 20.94 JUL 17.50 KAU SW 0.44 68 17.06 28 8.9% SCUR 15.88 JUL 12.50 UQU SV 0.38 113 12.12 28 11.6% SIPX 27.25 JUL 20.00 UQX SD 0.31 0 19.69 28 5.8% TSEM 30.69 JUL 25.00 TWQ SE 0.69 120 24.31 28 10.3% VITR 48.13 JUL 30.00 TKU SF 0.56 7 29.44 28 6.0% Sequenced by Return ****** Stock Last Put Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return IMG 18.31 JUL 15.00 IMG SC 0.56 57 14.44 28 13.3% SCUR 15.88 JUL 12.50 UQU SV 0.38 113 12.12 28 11.6% MRVT 19.50 JUL 15.00 SQD SC 0.44 50 14.56 28 11.0% TSEM 30.69 JUL 25.00 TWQ SE 0.69 120 24.31 28 10.3% OAKT 20.94 JUL 17.50 KAU SW 0.44 68 17.06 28 8.9% VITR 48.13 JUL 30.00 TKU SF 0.56 7 29.44 28 6.0% SIPX 27.25 JUL 20.00 UQX SD 0.31 0 19.69 28 5.8% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MR-Monthly Return. ***** IMG - Intermagnetics $18.31 *** Stock Dividend! *** Intermagnetics is a leading developer and manufacturer of super- conducting materials, radio-frequency coils, magnets and devices utilizing low- and high-temperature superconducting wire, cable and tape, and related refrigeration equipment. The company's current revenues are derived primarily from applications within magnetic resonance imaging for medical diagnostics and cryogenic applications for vacuum and related processes. In early June, IMG announced a 3% stock dividend (to be distributed 8/25 to shareholders of record on 8/4) and a contract with the DOE for a 3 year, $4.5 million project to commercialize the manufacturing process for second generation high-temperature superconductors. We favor the bullish movement up and out of a stage I base (on heavy volume) and the position provides an opportunity to be paid for trying to own IMG at a reasonable cost basis. JUL 15.00 IMG SC LB=0.56 OI=57 CB=14.44 DE=28 MR=13.3% Chart = /charts/charts.asp?symbol=IMG ***** MRVT - Miravant Medical $19.50 *** New Developments! *** Miravant Medical Technologies specializes in both pharmaceuticals and devices for photoselective medicine. Miravant Medical is developing its proprietary PhotoPoint procedure for serious eye and skin conditions, cancer and cardiovascular disease. Miravant is looking forward to follow-up data on their macular degeneration clinical trials and as of early May, a data safety-monitoring board (they review the data every 3 months) had not identified any significant safety issues. Last week McDonald Investors initiated coverage with a "buy" rating. Miravant has completed a "double-bottom" formation (which tested a long-term trendline) and Friday's move suggests higher prices are forthcoming. The late April high should now provide support and that is exactly where we will enter this bullish position. JUL 15.00 SQD SC LB=0.44 OI=50 CB=14.56 DE=28 MR=11.0% Chart = /charts/charts.asp?symbol=MRVT ***** OAKT - Oak Technology $20.94 *** A New All-time High! *** Oak Technology designs, develops and markets high performance integrated semiconductors, software and platform solutions to original equipment manufacturers that serve the optical storage, consumer electronics and digital imaging equipment markets. The company's products consist primarily of integrated circuits and supporting software designed to store and distribute digital content, thereby enabling its customers to deliver cost-effective, powerful systems for the home and enterprise. Oak contracts with independent foundries to manufacture all of its products and their target markets include optical storage, digital imaging equipment and consumer electronics. The company's current goal is to build on their state-of-the-art technology in the digital imaging and optical storage markets, capitalizing on the high growth rates projected for the CD-RW and digital versatile disk markets. Based on the recent technical performance of the issue, investors agree with OAKT's approach to financial success. JUL 17.50 KAU SW LB=0.44 OI=68 CB=17.06 DE=28 MR=8.9% Chart = /charts/charts.asp?symbol=OAKT ***** SCUR - Secure Computing $15.88 *** A Big Day! *** Secure Computing develops and sells computer software products and services designed to provide secure extranets for business organizations engaged in electronic business. Their extranet solutions combine impenetrable perimeter defense for business networks with scalable, authenticated Web and application access control so that an organization may conduct business safely with growing numbers of customers, employees, partners and suppliers. The company's main security products are Sidewinder, SafeWorld and SmartFilter. The upcoming earnings report is generating speculation on this issue and based on consensus estimates, the results should be favorable. Institutions have also began to participate in the stock with a number of block "buy" orders occurring during Friday's rally. With the technical momentum from a new 3-month high, this issue is poised for further gains. JUL 12.50 UQU SV LB=0.38 OI=113 CB=12.12 DE=28 MR=11.6% Chart = /charts/charts.asp?symbol=SCUR ***** SIPX - Sipex $27.25 *** Merger Target? *** Sipex designs, manufactures, and markets high performance analog integrated circuits. Sipex sells its products across the analog semiconductor market and has targeted high-growth sectors that it believes are especially compatible with the company's design and process capabilities. Applications for their products include telecommunications, cellular telephones, networking, computers and peripherals, notebook and desktop computers, instrumentation, aerospace, and military. The Texas Instruments' proposed buyout of Burr-Brown is expected to trigger a wave of consolidation in the industry and the sympathetic speculation along with a surge in the overall sector has helped Sipex's stock rally during the last week. Our position offers a favorable way to participate in the future movement of this potential merger candidate. JUL 20.00 UQX SD LB=0.31 OI=0 CB=19.69 DE=28 MR=5.8% Chart = /charts/charts.asp?symbol=SIPX ***** TSEM - Tower Semiconductor $30.69 *** Own This One! *** Tower Semiconductor is an independent manufacturer and service provider of semiconductor integrated circuits on silicon wafers. As a foundry, Tower provides IC design, manufacturing and turnkey services and is specializing in providing solutions for embedded non-volatile memory devices and CMOS image sensors. Tower broke out of its short-term stage I base shortly after announcing that it had completed QS-9000 quality certification with The Standards Institution of Israel. Achieving this certificate pre-qualifies Tower as a quality supplier for the automotive segment of the semiconductor industry, as well as for other markets that demand strict quality control. Tower has resumed its stage II climb on heavy volume and has now taken out the April high. We favor a conservative entry point on this bullish issue. JUL 25.00 TWQ SE LB=0.69 OI=120 CB=24.31 DE=28 MR=10.3% Chart = /charts/charts.asp?symbol=TSEM ***** VTRA - Vitria Technology $48.13 *** More Earnings! *** Vitria is a leading provider of eBusiness infrastructure software. Their primary product BusinessWare, provides the infrastructure which enables incompatible information technology systems to exchange information over corporate networks and the Internet. BusinessWare enables this exchange to take place automatically, without human intervention. This eliminates manual entry of information into multiple IT systems, and eliminates the need to manually exchange information with customers and business partners using phone, facsimile or mail. BusinessWare is also designed to provide business managers with a software infrastructure that gives them complete control and visibility of their business operations, enabling them to reduce time to market, rapidly respond to change, and manage the growing complexity of business interactions with partners and customers. Earnings are driving the market and VTRA is expected to report a loss of $0.02 per share (for the quarter) on Monday. The fundamental outlook for the company is favorable but there will likely be some profit-taking after the announcement. Our plan is to "target shoot" the position for a slightly higher premium ($0.68-$0.75) and hope for a brief sell-off followed by a resumption of the bullish trend. JUL 30.00 TKU SF LB=0.56 OI=7 CB=29.44 DE=28 MR=6.0% Chart = /charts/charts.asp?symbol=VITR ************************ SPREADS/STRADDLES/COMBOS ************************ Debit Straddles - Pricing, Potential and Probability... Last week's exuberant, "no holds barred" trading of the Lennox (LII) debit-straddle suggests we need to continue our review of this common strategy. ****************************************************************** - DEBIT STRADDLES (PART II) - ****************************************************************** Note: While the COMBOS editor is on hiatus from the market, we will further explore one of his favorite, low risk option-trading techniques. Position outlook: The debit straddle is an appropriate strategy for occasions in which one suspects that the price of the instrument will move substantially but does not know in which direction it will go. This "delta-neutral" technique can work very well in situations where important news is about to be released and it is expected to be either very favorable or extremely detrimental. Corporate earnings announcements, new drug approvals, merger or takeover speculation, and annual board meetings (splits/spin-offs) are just a few common examples of situations in which uncertain information will be released on or near a specific date. Option trading is generally very active in these cases and participants expect the issues to move significantly after the announcement. However, trading straddles on these occasions is certainly not without risk. When investors already know or expect the event, options will be overpriced (relatively high implied volatility) and the price of the underlying stock may not move enough to make the position profitable when the announcement occurs. If this happens, the worst thing a trader can do is to hold on to a previously purchased straddle in the faint hope that some other, unanticipated news will be released before the options expire. The most important thing to remember when evaluating a straddle is to understand that the greater uncertainty associated with the previous examples are known by everyone. The options will often be priced according to a higher stock volatility, making the play unfavorable. The most attractive straddles will be those in which the trader is confident that the underlying issue will be more volatile than everyone else. Time-value characteristics: The first subject we must discuss is often considered the most important component of option pricing: time value. As most of you know, option premium consists of two components: Intrinsic Value and Time Value. Assume that a current stock's price is equal to the strike price. In this case, an option's premium for the call and put does not have any intrinsic value, only time value. The main factors that influence Time Value include: 1) The number of days until expiration 2) Implied Volatility 3) How far the option is in or out-of-the-money. At-the-money options have the highest time value. As the option starts moving in or out-of-the-money, the time premium begins to drop in value. The closer the option is to expiration, the more its premium will shrink (per unit time) due to time decay. This gives us a guideline in selecting a straddle. We should pick an expiration month so that the price of the straddle will not be too high (too far from expiration). However, it must also provide enough time for the stock to perform as expected, before we have to exit the trade to preserve capital. One important fact to remember; the highest increase in time decay for at-the-money options occurs in the last 30 days before expiration. That means we should rarely hold a straddle position to expiration. When you understand that time decay is working against you, you can begin to choose trades in which other beneficial components will help your position profit, even as time passes. Pricing components: Now you've learned that time decay is working against us in the straddle. What other factors can help us to achieve the goal of selling at a higher price in the future? Two components; Implied Volatility and Intrinsic Value. Implied volatility is a characteristic of an option's time value. The higher the implied volatility, the higher the option's time value is. When you find a situation where implied volatility is statistically low (probability dictates that it should start to move higher), you can occasionally make a profit by selling your straddle at a higher price, even if the underlying stock price doesn't move significantly. Obviously, any increase in implied volatility will boost the time value of your position and move your trade closer to a profitable outcome. (Editors note: If you do not have a thorough knowledge of Implied Volatility, please review that subject before you participate in these types of positions. It is important that you understand the concept and how it relates to option pricing before you spend money on strategies expected to profit from changes in volatility.) Another basic component that can help us profit in a straddle is Intrinsic Value. Once again, assume that the underlying price is equal to the strike price; this means that our straddle does not have any intrinsic value. When the stock starts moving in either direction, one of our options will become "in-the-money." This will cause the intrinsic value to expand in that option. But, in contrast, the time value of both positions begins to decrease as the underlying moves away from the at-the-money strike. Remember, the further the option is in or out-of-the-money, the less time value it contains. The rate of change for both of these values is very important. Intrinsic value has a rate of change equal to one; if the stock price moves one point into the money, intrinsic value increases by one point. Time value is obviously much more complex. The rate of change depends on how far away the option is from the strike price; the further the option is in or out-of-the-money, the smaller the rate of change on a one point move in the underlying issue. With that concept in mind, it is easy to see that when the underlying issue's price moves away from the strike price, we gain more in intrinsic value than we lose in time value. That’s one way in which a debit straddle achieves profits. Keep in mind, the measurement of the underlying issue's move is statistical volatility and we look for straddle positions on instruments where we expect that component to increase. Making the strategy work: To construct profitable straddle positions, it is important to be aware of the effects of all these components. A theoretical edge in one or two of these factors can make a position favorable but it is better to have the majority of them on your side. If one were to review trading histories, the most common mistake among new traders is the purchase of short-term straddles. You can profit from these positions but generally that occurs only when the underlying starts moving immediately after the play is opened. Of course it appears attractive because the straddle does not have a large amount of time value and the small movement required for profit seems very probable. The problem is, if the underlying doesn’t move right away, time decay will start to increase rapidly and your position will suffer regardless of the (eventual) stock price movement. Most experienced traders agree that two to three months should be the minimum time frame for (debit) straddles. If you have a choice between two different series of expirations and the implied volatility for the longer-term options are lower, you should consider the position with the greater time value because those options are likely to be theoretically cheaper. Always remember to look for volatility that is low with respect to its historic levels. The reason is the tendency for volatility to return to its former range or median value. The concept is often called the "Rubber Band" effect and it basically means there is a high probability that when volatility is pulled too far in one direction, it will eventually reverse, moving the opposite way. This pattern of behavior is the primary reason why experienced traders use volatility-based positions to make money. They try to construct plays that take advantage of the future volatility of an issue - when the current value is high or low compared to recent historical trends. Volatility is a predictable and powerful component for derivatives traders and understanding this concept is paramount for consistent profits in the options market. More information on this and other spread/combination techniques can be found in Sheldon Natenburg's book, "Option Volatility and Pricing Strategies", available in the OIN bookstore. Good Luck! ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***************************** SEE DISCLAIMER IN SECTION ONE *****************************
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