The Option Investor Newsletter Wednesday 6-28-2000 Copyright 2000, All rights reserved. 1 of 1 Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 6-28-2000 High Low Volume Advance Decline DOW 10527.80 + 23.30 10620.40 10506.40 1,059,294k 1,779 1,114 Nasdaq 3940.34 + 81.38 3974.48 3872.17 1,657,593k 2,356 1,597 S&P-100 788.00 + 3.06 795.86 785.23 Totals 4,135 2,711 S&P-500 1454.82 + 4.27 1467.60 1451.51 60.4% 39.6% $RUT 520.99 + 12.91 521.00 508.08 $TRAN 2719.86 + 38.89 2722.56 2678.28 VIX 23.58 - 1.30 25.49 22.51 Put/Call Ratio .55 ****************************************************************** Fed Rally Slides Into The Close Another day of Fed-watching, only to get what was anticipated: no rate hike. The markets rallied throughout the day right up to the Fed announcement that they would stand pat, keeping the fed funds rate at 6.5%. While this outcome was widely expected, there still was a nervousness surrounding the moments of the decision. Recall that after the last rate hike, also expected, the markets sold off fast and furiously. Being a call holder, this flashback to May 16th brought chills as the markets popped and then plunged at the first word from the Fed. But, what we got was continued move to the upside that stalled into the close. So as investors scour the economic landscape, the question is what will drive trading going forward. After the 50 basis point hike, most investors concentrated on the hawkish commentary that the Fed released, rather than the actual action. Today, maintaining deliberate ambiguity, the Fed spoke out of both sides of their mouths, leaving the door open for the August meeting. Reinforcing some of the most recent economic data, the Fed sees that "the expansion of aggregate demand may be moderating toward a pace closer to the rate of growth of the economy's potential to produce." So as supply and demand find common ground, we can be sure that the economy is slowing at this point. Yet, the Fed added that these signs "are still tentative and preliminary." And as a standard closure to their statement, the Committee believes that there are risks "that may generate heightened inflation pressures." Overall, the rhetoric was much more mild than in the past and the markets were somewhat relieved by the lack of a hawkish tone. After climbing in the morning, the markets flat-lined before the announcement. There was strength in the Biotech sector as investors poured back into the high-fliers, despite the "buy the rumor, sell the news" sell-off after Monday's human gene mapping announcement. The Biotech Index(BTK.X) added 6.18% today behind gains in MLNM(+16.50), MYGN(+12.50), HGSI(+11.38), and PDLI(+10.00). They managed to avoid the selling pressure that hit the broader markets. Also posting early gains was the Semiconductors. Yet, the SOX.X was one of the first sector to be met by the sellers and gave up its gains to close down fractionally. This general trend of profit taking in the Semis is bringing them back to levels prior to the most recent run. INTC(+1.06) led the way, selling off sharply but holding on to small change. SDLI(+10.25) continued its impressive march back to $300, brushing off the bears. BRCM(+4.69) tacked on 2.5% today on strong volume. Bringing down the Semi sector was TQNT(-9.56), which fell on negative comments about QCOM's chipset sales in South Korea. Merrill analyst Chris Danely defended TQNT, stating the there would be "little to no impact" as QCOM only represents 1% of TQNT's revenues. Investors punished TQNT but QCOM(-0.13) was spared since this news was already priced into the stock. Even though QCOM's performance today didn't reflect it, First Union downgraded the stock to a Buy from a Strong Buy. ABN Ambro and Prudential Securities cut QCOM's earnings estimates for the year. It just goes to show that sellers are quick to pull the trigger when bad news hits, especially when it goes straight to the bottomline. This type of action shows how the focus may shift from interest rates to earnings, which will be in full swing next week. Despite the late session slide, the NASDAQ managed to hold on to an 81.38 gain on decent volume of 1.6 bln shares. Briefly, after the Fed move, the index traded above the 3950 level but failed to close above that level. We won't complain with today's performance considering that the pre-Fed rally that began on Monday didn't result in a major train wreck. After the decision was released, the NASDAQ faltered but found key support at 3750 on the NASDAQ 100(NDX.X). Note in the chart below that although choppy, the NASDAQ has been making another run at 4000 after last week's fallout. A slide through the bottom of this regression channel to the sub-3900 level would be disheartening. If earnings momentum can spark any kind of tech rally, the NASDAQ could make that run to the 100-dma of 4100. When today's trading was all said and done, many techs showed impressive gains. VRSN(+14.81), RBAK(+12.50), JNPR(+10.00), and CIEN(+5.88) led the techs to a positive day. We will be watching money flow into stocks like these to indicate a broader market rally. An old NASDAQ stock that has been out of favor lately did make a move today. WCOM(+4.81) soared an amazing 12% after yesterday's news that the Justice Dept was filing a permanent injunction against the Sprint merger. WCOM investor breathed a sign of relief as the stock has been stuck in a strong downtrend. Speaking of the new focus on earnings, PALM announced earnings after the bell for its first full quarter as an independent and public company. Just one day after COMS, the former parent company of PALM, posted better-than-expected earnings, PALM earned 3 cents per share, excluding separation charges related to the spinoff. This beat Street consensus estimates of a penny per share and the previous year's EPS of 1 cent. Impressive year-over-year growth indicates that consumers and businesses are embracing the wireless solutions that PALM offers. PALM said it delivered a whopping 1.1 mln devices in the quarter. At the NYSE, the INDU built up to the Fed announcement. Although the INDU traded through the 10600 level today, profit-takers dragged the index down in the final moments of trading. Managing only a 23 point gain, INDU is looming just above the key level of 10500, currently the 10-dma. A bounce from this level would prove to be essential to a INDU recovery. Today's high of 10620 was right between two key technical levels, the 100-dma at 10606 and the 50-dma at 10632. Both will provide resistance going forward. A break through the 50-dma could indicate a mild recovery to the recently ill INDU. After the initial post-Fed pop, the INDU slid into the close. But a gain is a gain, no complaints. Leading the charge were NYSE Biotechs, Techs, and Financials. CRA(+9.50) recovered today from a two day slide following its landmark genetic mapping on Monday. HWP(+7.19) got a boost today from Lehman Brothers, who included the tech giant on its Uncommon Value List, a top-ten list that has regularly outperformed the market since 1949. KO(+2.13) surprisingly posted a 3.72% gain, continuing its recent uptrend. Today, KO said it expects its earnings to rise in line with Wall Street's expectations. On the weaker side of the NYSE, phone stocks stumbled as investors digested the blocked merger of WCOM-FON. FON(-5.59) lost almost 10% today on the fallout. It appears that FON is still on the auction block as consolidation is far from over in the telecom sector. In sympathy, other phone stocks fell: T(-1.13), USW(-3.06), Q(-1.94), and BEL(-1.03). Food, airline, and some retail stocks were sold as investors shifted their focus towards the biotech and tech holdings. Lastly, a piece of bizarre news regarding business espionage. Today, ORCL chairman Larry Ellison admitted to hiring a private investigator to look into "covert activities" of MSFT during the ongoing anti-trust suit. He passed it off as ORCL doing its "civic duty." Reported today in both the WSJ and NY Times, Ellison said that the detective work turned up evidence that MSFT paid the Independent Institute of Oakland, CA, and the National Taxpayers Union of Arlington, VA, to influence public opinion in MSFT's favor during the Federal trial. No illegal actions are thought to have occurred but it goes to show how deep these competitive feelings run between two of the most powerful and richest men in big business. Looking forward, tomorrow will be a very telling day for the markets. Holding on to the gains today in the face of the the Fed decision is encouraging. Yet, investor sentiment will be confirmed with tomorrow's trading session. Focus is now shifting to the heart of earnings season and we may be poised to rally into the weekend. Money managers will be looking to add strong stock performers to their end-of-the-quarter books during "window dressing." Expect volatility and choppy trading like we have seen and remember to take your profits when they are in front of you, as this market can turn on a dime. Matt Russ Research Analyst *************** ASK THE ANALYST *************** Fly fishing is one of my passions. By Eric Utley The other, of course, is trading stocks. In the summer months, I must alter my fishing tactics and strategies in order to catch trout. After gorging themselves during the spring, trout spend the summer basking in the sun, and, occasionally rising to the surface to eat a bug, floating on top of the water. The rivers where I live run quite low during the summer, and that requires me to navigate the water in stealth mode in order not to scare the fish. I have a plethora of fur and feathers in little boxes from which I can choose from to lure a lazy trout. My casting must be light and delicate in order to not spook the fish. And I must, absolutely have to, be adaptable to the environment. Fishing during the summer has its rewards, the weather is usually pleasant, and a lot of bugs are emerging from the water, and fluttering above the surface enticing the trout. But, the real action on the water is during the spring and fall. That's when the fish are real hungry and real aggressive. Now that I think about it, fishing reminds me of the stock market. Sure the spring and fall provide fireworks in the financial markets, but you can still catch fish, I mean make money, during the summer. To expand on what Jim wrote in his column Tuesday, money can be made during the summer months, it just requires an altering of your trading strategies. Just don't forget to pack your poncho in case of a summer thunderstorm. If you have a fish story you would like to share, or more importantly, a stock you would like me to review, send your requests to Contact Support. Please put the symbol in the subject line of the e-mail. ---------------------------- Motorola - MOT Please comment on MOT (Motorola). Thanks. - Jeannie Please give me your opinion and analysis on (MOT). Has it been unfairly punished for its lowered earnings expectations? - Glen MOT's downward spiral began in early April when the company told analysts that its second quarter earnings would come in slightly below estimates. The company cited lower profit margins on its wireless phones in part from component shortages and falling average selling prices due to tough competition from NOK and ERICY. The earnings shortfall tarnished MOT's reputation on Wall Street. To emphasize that point, Lehman Brothers cut their price target to $55 from $67 just this Monday, citing concerns over slowing growth in MOT's handset business. There is no doubt that MOT is positioned in high-growth industries with solid product lines. The question is whether or not MOT can execute well enough to earn back Wall Street's respect and build some earnings momentum. With that said, you might considering waiting for MOT to prove itself over its next two or three quarters. The stock is trading at a discount now, but it's down for a reason. To part from the doom and gloom speak for a change, there is a possible catalyst that may lift MOT from the mire. MOT operates in three distinct divisions: Integrated Electronic Systems, Semiconductor Products, and Communications Enterprise. I point this out because MOT's individual businesses have a lot of value that is currently unrecognized by the market. Furthermore, there has been recent speculation that MOT is contemplating a restructuring of the company to unlock its hidden value. Another bullish item I should make note of is that while MOT's handset business may be slowing, there product offerings in the broadband and chip markets are doing quite well. Something the market may have overlooked when it sank MOT's ship. Turning to the chart, it appears MOT has found bottom at its current levels. Until we get positive news that fundamentally changes MOT's outlook, the stock will probably churn around its current levels. ---------------------------- Advanced Digital Information - ADIC I bought some ADIC after a glowing write up in OIN. I confess, I did not watch it well, and it has taken a huge tumble. It's hovering around 16. My question is, do you expect this to be a good long term hold or should we get a divorce? Thank you. -Steven I really like how you put that Steven, "should we get a divorce". As you well know, ADIC manufactures data storage products and implements software management applications. The demand for storage of digital information on network computer systems is growing at 100% per year. ADIC's products are used over a broad range of industries. Banks, hospitals, Web sites, and even film producers all have a need for ADIC's products. The stock is selling at a discount, relative to its expected earnings growth over the next year. Up until January of this year, ADIC had been increasing its EPS at a healthy clip. But, for the last two quarters it appears ADIC's EPS has topped out at 14 cents per share. In fact, the company is expected to earn that number when it reports again in August, making it possibly three quarters in a row with flat earnings. While ADIC met its earnings estimates, it fell a little short on revenues in its last two quarters. The sales short-fall combined with a terrible Tech sector led to the stock's steep decline last spring. If the company can get its earnings momentum back, the stock might be a good buy or hold at its current levels, at least that's what ADIC insiders believe. Back in May, four insiders accumulated a total of 182 K shares of ADIC, between the prices of $11 and $13. I have to admit, they did a good job in picking the bottom. Management at ADIC recently told analysts that they expect sales to accelerate in the second half of this year, which should boost earnings. I don't see a real catalyst in the stock to move it higher in the next month or so. ADIC's earnings report in August will be the event to watch for. If the company shows Wall Street that it can continue to grow earnings, the stock will rise. After all, ADIC is a market leader in an industry that is growing 100% per year. Additionally, the company is expected to grow earnings by 27% over the next five years. Not too bad! ---------------------------- Georgia Pacific - GP I am a very "hard-studying" potentially good options trader. I get a lot from your info. I have been watching Georgia Pacific (GP). It looks like it is about to turn around. I am thinking that this stock will make a good options play - calls. I am also considering buying some for my portfolio. What's your take? Thanks for the great educational material. - Roger I love your attitude Roger, I'm sure you're going to be a great options trader. You're definitely on the right path, hard study and work is what it's all about! I give you my best wishes in becoming a successful trader. Onward to your request. GP is a manufacturer of building products and pulp and paper. The operative words in the preceding sentence are - building products. As you well know, rising interest rates and a slowing economy are a bad combination for the housing industry. However, the real paradox with the US economy is that housing starts are not slowing. The National Association of Realtors said Monday that home sales rose 4.3% in May. That's up from the previous month. Alas, we must remember, the market usually discounts six months ahead. And the market has been doing a lot of discounting in GP lately. All of the stocks in the Housing sector are hovering around their 52-week lows. Take a look at WY, IP, and USG. Plain ugly! The group is influenced by macro economic and fiscal events. And until Mr. Greenspan changes his ways, GP is likely to stay discounted. But, that may not be a bad thing if you're a long-term investor, and I do mean long-term. GP's current levels might be a good entry point if you don't mind holding the stock for two or three years. Analyzing GP's fundamentals, one word comes to my mind, value! The stock has a trailing P/E of 6, and a PEG of 0.34. While GP's earnings growth estimates are a mere 7% over the next five years, the stock does have some inherent value. I know value is an ugly word for most traders, but GP might be a good addition to a long-term portfolio. Once interest rates stabilize, and if the economy remains healthy, GP should rebound very quickly. I've seen the rallies in paper stocks, and I remember them as being quite impressive. In fact, early last year, GP nearly doubled in less than six months. I know that's not the 200% or 300% gain some traders are looking for, but I would sure take a double this year. ---------------------------- CMGI - CMGI CMGI ---- Where do thy goeth? - PB Shakespeare once said, "All Internet stocks goeth upward." Okay, maybe he didn't. But I think ole' Bill would have owned a few shares of Net stocks. Let me first examine what it is that CMGI exactly does, and therein, we'll find the answer to your question PB. CMGI is in the business of creating and managing Internet companies. CMGI is made up of a network of companies that hold leadership positions in Internet related businesses. I think the number of companies CMGI currently holds is around 60. I like to think of CMGI as the first Internet mutual fund. CMGI made investors a ton of money by taking companies such as ENGA, UBID, and CPTH, into the public markets, along with a host of others. But, the turmoil in the capital markets last spring all but killed investors' thirst for IPOs. It got so bad for CMGI that the company had to scrap its plans of its highly anticipated IPO of AltaVista. Thereafter, AltaVista fired a large part of its workforce. Without IPOs, CMGI doesn't have a lot left. You could argue that CMGI has a host of companies operating in a variety of segments within the Internet. But, how many of those companies are making money? Not many! One of example of CMGI's failing businesses is the Web site portal known as Furniture.com. Furniture bought over the Internet? From what I gather, the business at Furniture.com is not so good. Now I don't want to be too pessimistic, I'm actually an optimist at heart. David Wetherell, Chairman and CEO of CMGI, is one of the most brilliant business men working in the Internet arena. And if it's one thing he and CMGI can do successfully is innovate. So, I wouldn't count CMGI completely out just yet, the company has a ton of cash on hand and one of the best management teams in business. But, until the IPO market really heats up again, I don't see a major catalyst to move CMGI higher. Of course, the stock is a good candidate for a swing trader or a momentum play as you've probably seen CMGI on the OIN call list a few times. Before buying the stock for a long-term investment, I think CMGI needs to prove its business model can consistently generate profits going forward. If there's one thing Wall Street loves it's profits! ---------------------------- Sawtek - SAWS I would be interested in your analysis of this volatile stock. Intra-day swings in Sawtech are quite large, but the pattern seems to be up. Your thoughts? Thanks. - Brian SAWS got its name from its surface acoustic wave (SAW) technology. SAWS manufactures electronic signal processing components using its SAW technology, which are used in a variety of systems, most notably Code Division Multiple Access (CDMA). CDMA might sound familiar, it's the thing that made QCOM famous last year. Essentially, SAWS makes a little chip that goes into cell phones. A lot of SAWS success hinges on the acceptance of CDMA technology as the wireless standard. And as you might have noticed with QCOM lately, the acceptance of CDMA is a hot topic on Wall Street right now. But, SAWS success doesn't completely rest upon the further deployment of CDMA. The company has several products which are used in the building of GSM stations, and used in a variety of radio frequency applications. Additionally, the company offers custom designs to both the military and space markets, which can be a lucrative job. For a high-flying tech concern, SAWS fundamental are great. The company has virtually zero debt, and healthy cash position on its balance sheet. What's more, SAWS has shown consistent earnings growth for its last six quarters. The company is expected to grow its bottom-line by nearly 29% over the next five years. Given its expected earnings growth rate, SAWS is trading at an attractive level right now. The risk, of course, is what becomes of the CDMA debate. Looking at SAWS chart, you can see the stock broke away from its up-trend when the QCOM debacle began. Investors, may have oversold SAWS, but you might want to wait for the stock to cool off before jumping in. ---------------------------- DISCLAIMER: This column is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The Ask the Analyst picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable, but is not guaranteed as to its accuracy. *********** OPTIONS 101 *********** The Lazy Man's Way By David Popper A Barron's TV commercial shows a man laying on a float in a pool. The commentator says "the market goes up, you make money." "The market goes down, you make money." The implication is that if you buy Barron's you will learn "THE SECRET." Guess what, I have read Barron's for three years and have never learned this secret. In fact, I have never found tradable information in Barron's or in the Wall Street Journal, Fortune, Business Week or most other publications. The only way that I have received timely tradable information is by reading OIN, other sites and reading Investor's Business Daily. These aids, however, are only aids. They will give you an understanding as to which stocks are currently moving and give you an idea of the economy. Even these aids cannot substitute for your own hard work. At times, I do not have the time to spend all day exclusively on the market. Therefore, during these times, I lower my expectations and place myself in a position where I can truly make money if the market goes up or down. How can I do that? When I know that I will be very busy for an extended period of time, I employ a system that has four parts: 1. Build 2. Cover 3. Scrape 4. Wait Below, I will describe the system: 1) Build. Suppose I realize that I will be too busy to watch the market for the next six months. I would select great stocks (high relative strength, high earnings) and write a six month call on the stock. Typically, I will get a 25% premium. For example, I bought CHKP at $220 per share and wrote a January 2001 $220 call (YKEAU for $60). This means that I have downside protection to $160 and even if I am called out, it will be the same as if I sold the stock at $280. Furthermore, I am not stuck in the play until January because if the stock really roars, the extrinsic value of the call will evaporate quite rapidly. At that point, I would be able to buy the call back and begin a new play. 2) Cover. Instead of buying the stock back at that point, I may instead choose to cover my position by buying a $220 put for a small amount of money. Once that put is in place, there is no longer any downside risk. The profit I make will be the difference between the call premium and the put premium. For example, if CHKP were to run to $300, the $220 put may be worth $12 to $15. By buying the put, I have locked in the difference between $60 (the price in which I sold the call) and $15 (the price in which I bought the put) and have eliminated absolutely all of the downside risk at that point. The advantage of having the put in place is that markets these days tend to be quite volatile. The put insures not only downside protection but allows you to be profitable in the event we have the typical late summer dive that has occurred over the past two years. Obviously, there is any number of ways to play it if the market were to tank after the July earning run. You could buy back the call on a dip and wait for the stock to rebound. You could sell a put on a dip and wait to buy it back on a rebound. You could do both. In other words, in this scenario, if the market goes up, you will make money. If the market goes down, if played properly, you will make money. 3) Scrape. If you are trading in the market to obtain current cash flow, once the put is in place, you have the opportunity to scrape your now risk free profits off of the top and use that money any way you choose. 4) Wait. Once both the put and the call are in place, you are now profitable. There is no need to press the market, just simply wait for the next extreme move either to the high side or the low side to take your next action. Again, this is just one of many strategies that are employable. This strategy still maintains a healthy return in light of the effort required to implement it. Obviously, if you have more time, more aggressive strategies could be more lucrative. Contact Support ********************** PLAY OF THE DAY - CALL ********************** TIBX - TIBCO Software $104.75 +5.81 (+15.69 this week) TIBCO's ActiveEnterprise enables businesses to connect resources with customers and automatically deliver event-driven information across networks and the Web in real-time. The company also offers e-commerce, consulting, and support services. Customers license the software to integrate, personalize, and distribute content. TIBCO is enhancing its business-to-business trading capabilities. Reuters owns more than 60% of the company, and Cisco holds a minority stake of 7%. Most Recent Write-Up Some analysts argue that the B-2-B sector is fading. TIBX likes to think otherwise. TIBX has been on rally since bottoming in early May, and is showing few signs of letting up. Of course, surpassing earnings estimates by 300% helps the cause for a company's stock price. And that's exactly what TIBX did last Wednesday when the company reported its second quarter results. TIBX reported 30% sequential revenue growth, and told analysts to raise their estimates for this year and the next. Wall Street took the cue from TIBX as a slew of analyst upgrades and upward earnings revisions hit the wires the next day. It's is no small feat for a business services company to surpass estimates by such a wide margin, especially while many of its B-2-B brethren languish in losses. The current market is saying, "Show me the money". And for the companies that deliver, Wall Street rewards accordingly. On top of TIBX's earnings momentum, the stock received further fuel Monday when Yahoo unveiled its new corporate information portal. The new venture will enable corporate users to integrate content from their intranets with news and information from Yahoo. TIBX said it had deepened its standing agreement with Yahoo, and will provide services and software to create the new portal. The announcement caused TIBX to gap higher Monday morning, and to continue to rally into Tuesday. Despite the overwhelming weakness in the broad Net sector, TIBX marches higher. Look for an entry point if TIBX clears the ever-important $100 level Wednesday morning. If the profit takers return from hibernation,look for TIBX to find support first at $95, and lower at $90. Consider a bounce off support for a possible entry. Comments The good news continues for Tibco. Today they announced both new products and new alliances. This helped propel the stock up above $100 on good volume with a great trend. That trend is what has driven us to make TIBX the Play of the Day. We want to capitalize on this move. Of course, we have seen big gains this week so prepare to exit when TIBX breaks its recent uptrend line. Fortunately, there is no resistance in site for awhile as you will note on the chart. BUY CALL JUL- 90 PIW-GR OI=256 at $19.25 SL=14.25 BUY CALL JUL- 95 PIW-GS OI=160 at $16.00 SL=12.00 BUY CALL JUL-100 PIW-GT OI=477 at $12.00 SL= 9.00 BUY CALL AUG-100*PIW-HT OI=378 at $17.50 SL=13.00 BUY CALL NOV-105 PIW-KA OI= 14 at $24.00 SL=17.25 SELL PUT JUL- 95 PIW-SS OI= 11 at $ 5.00 SL= 7.25 (See risks of selling puts in play legend) Picked on June 27th at $98.94 P/E = N/A Change since picked +5.81 52-week high=$147.00 Analysts Ratings 4-0-1-0-0 52-week low =$ 6.56 Last earnings 05/00 est= 0.01 actual= 0.04 Next earnings 09-21 est= 0.12 versus= -0.01 Average Daily Volume = 1.74 mln /charts/charts.asp?symbol=TIBX ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** As fear of the Fed wanes, earnings take center stage! The market rallied today amid a recovery in leading technology issues and renewed strength in blue chip stocks. Networking, computer software and hardware and biotech issues dominated the bullish activity even as the Federal Open Market Committee was completing its two-day meeting to determine the country's cost of borrowing. The Federal Reserve's decision to leave interest rates unchanged generated optimism among investors that the current policy of monetary tightening may have ended for the short term. As expected, the central bank left the overnight funds rate at 6.5%, 175 basis points above the level from which the FOMC initially began its policy of inflation-fighting rate hikes in June 1999. Unfortunately, in the report released at the conclusion of the meeting, the Fed said economic risks are still weighted toward inflation pressures. The stock market's historical pattern of bearish activity after Fed meetings will also weigh heavily on traders as we move into the core of the earnings season. The question is whether the trend will repeat, after today's solid performance, when it becomes obvious to investors that another rate hike is inevitable. Summary of Previous Picks: Covered Calls: (Margin would double the listed Monthly Return) Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return ELON JUL 60 54.69 60.25 $5.31 6.7% ENZ JUL 50 46.25 72.44 $3.75 6.7% ABSC JUL 55 50.75 68.81 $4.25 5.8% SDLI JUL 210 193.81 287.94 $16.19 5.8% NEWP JUL 65 60.87 108.25 $4.13 5.6% IWOV JUL 70 66.38 94.25 $3.62 5.5% HGSI JUL 90 83.38 145.38 $6.62 5.5% AETH JUL 180 170.88 201.00 $9.12 5.4% Naked Puts: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return ENZ JUL 45 42.50 72.44 $2.50 14.0% ELON JUL 50 47.75 60.25 $2.25 9.1% TECH JUL 95 92.94 140.00 $2.06 7.9% NEWP JUL 55 53.31 108.25 $1.69 7.7% AFFX JUL 140 137.12 171.75 $2.88 7.0% PDLI JUL 105 102.12 171.00 $2.88 6.9% ABSC JUL 45 43.44 68.81 $1.56 6.9% BRCD JUL 105 101.75 173.00 $3.25 6.8% PDLI JUL 125 122.37 171.00 $2.63 6.8% HGSI JUL 75 72.62 145.38 $2.38 6.4% RBAK JUL 78 75.12 159.69 $2.38 6.4% IWOV JUL 60 58.81 94.25 $1.19 6.3% SDLI JUL 170 164.87 287.94 $5.13 6.3% AETH JUL 150 147.25 201.00 $2.75 6.2% MLNM JUL 80 77.81 134.00 $2.19 6.0% GLW JUL 200 195.87 264.72 $4.13 5.5% NVDA JUL 55 54.03 68.50 $0.97 5.4% Adj 2-1 Split CHKP JUL 145 142.00 215.78 $3.00 5.3% Naked Calls: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return AMCC JUL 140 142.50 92.81 $2.50 9.7% RFMD JUL 150 151.75 84.38 $1.75 7.8% BRCM JUL 220 222.00 188.00 $2.00 5.2% New Candidates: This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. *************** BULLISH PLAYS - Covered Calls & Naked Puts *************** BRCM - Broadcom $188.00 *** On The Rebound! *** Broadcom develops highly integrated silicon solutions that enable broadband digital data transmission to the home and within the business enterprise. Their products enable the high-speed transmission of data over existing communications networks, most of which were not originally intended for digital data transmission. Using proprietary technologies and advanced design methodologies, Broadcom has designed and developed integrated circuits for some of the most significant broadband communications markets, including the markets for cable set-top boxes, cable modems, high-speed networking, digital broadcast satellite and terrestrial digital broadcast and xDSL. The Broadcom recovery began on June 20, following the broadband specialist's addition to the Standard & Poor's 500 Index. The developer of broadband digital transmission of voice, video and data, will represent the technology sector on the index. The issue replaces GTE, a company in the communications services sector, which is being acquired by Bell Atlantic. The date of BRCM's inclusion in the index was not announced but the share value is expected to rise because funds that track the S&P 500 must adjust their core holdings to reflect the issues in the index. BRCM - Broadcom $188.00 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put JUL 140 RDW SH 617 1.38 138.62 4.7% Sell Put JUL 145 RDW SI 641 2.13 142.87 7.1% *** Sell Put JUL 150 RDW SJ 1063 2.69 147.31 8.8% Sell Put JUL 160 RDU SK 412 3.88 156.12 10.0% Chart = /charts/charts.asp?symbol=BRCM ***** CIEN - Ciena $162.94 *** On The Move! *** CIENA operates in the optical networking equipment market. They offer products for telecommunications service providers worldwide. CIENA's customers include long distance carriers, competitive local exchange carriers, Internet service providers and wholesale carriers. CIENA's LightWorks architecture enables next-generation optical services and increases the efficiency of service-provider networks by simplifying the network and reducing the cost to operate it. Networking issues are HOT and the recent Ciena rally began last month after the company announced they agreed to a new multi-year contract with Qwest (Q). Ciena officials said Qwest will buy equipment that improves the capacity and management of its network, including an optical transport system and optical core switch. A spokesman for the company said the pact could be worth hundreds of millions of dollars over the next 18 to 24 months. Analysts are bullish on the deal and PaineWebber initiated coverage of Ciena with a "buy" rating; price target $175. The brokerage issued a very positive report with bullish forecasts and the technical history agrees with the fundamental outlook. CIEN - Ciena $162.94 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put JUL 125 UEE SE 371 1.06 123.94 4.2% Sell Put JUL 130 UEE SF 438 1.69 128.31 6.5% *** Sell Put JUL 135 UEE SG 360 2.56 132.44 8.5% Chart = /charts/charts.asp?symbol=CIEN ***** IDPH - Idec Pharmaceuticals $126.63 *** Biotechnology Binge! *** IDEC Pharmaceuticals is a biopharmaceutical company engaged in the research, development and commercialization of targeted therapies for the treatment of cancer and autoimmune and inflammatory diseases. Their initial commercial product, Rituxan, and its most advanced product candidate, Zevalin are used in the treatment of certain B-cell non-Hodgkin's lymphomas. They are also researching drugs for the treatment of various other diseases (such as psoriasis, rheumatoid arthritis and lupus). Idec Pharmaceuticals rallied $11 today after the company said it has signed an agreement with Japan's Taisho Pharmaceuticals to collaborate in developing antibody therapeutics for the treatment of inflammatory and autoimmune diseases. The multi-year agreement is valued at $35 million and IDEC will work to develop monoclonal antibodies with the intent to complete Phase I and II trials. The collaboration allows the company to expedite global development of anti-MIF antibodies of steroid-dependent diseases, such as asthma and glomerulonephritis. The news comes in the wake of two recent upgrades from Dain Raushcer Wessels and Banc of America Securities. Last week, Dain Raushcer Wessels raised its 12-18 month target on IDEC Pharmaceuticals to $150. Biotechnology analyst Andrew Milne believes that growth for the company's Rituxan cancer treatment will continue to fuel revenues going forward and he also sees supplemental label approvals coming during the second half of the year. Our opinion is simply that Idec Pharmaceuticals is an industry leader and a biotechnology stock we would love to have in our long-term growth portfolio. IDPH - Idec Pharmaceuticals $126.63 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put JUL 95 IDK SS 231 1.13 93.87 5.6% Sell Put JUL 100 IDK ST 85 1.88 98.12 9.1% Sell Put JUL 105 IDK SA 38 2.88 102.12 11.9% Chart = /charts/charts.asp?symbol=IDPH ***** ISSX - ISS Group $93.94 *** Trading Range? *** ISS Group is a worldwide provider of e-business security management solutions. Their Adaptive Security Management approach to information security protects distributed computing environments, such as internal corporate networks, inter-company networks and electronic commerce environments, from attacks, misuse and security policy violations, while ensuring the confidentiality, integrity and availability of proprietary information. ISS delivers a comprehensive security management solution through its SAFEsuite security management platform coupled with 24 hour remote security monitoring through their managed security services offerings, consulting and education services. The Internet security industry is growing exponentially and based on new research from Frost & Sullivan, "Network Security Markets: Intrusion Detection Systems," the potential market is expected to explode from $62 million in 1999 to $1.7 billion in 2006. The expansion will come from the use of the Internet for communication and commerce. Fortunately, Internet Security Systems is one of the leading providers of intrusion detection solutions for the world wide web and the company is poised to benefit from the future growth of the industry. Internet Security Systems was recently awarded one of the top honors for companies that demonstrate the diligence, perseverance and dedication required to develop a successful business plan and excel in the increasingly competitive global marketplace. The award also highlights their ability to provide businesses and government agencies the tools to conduct e-business safely and protect digital assets. Technically, the issue appears to be successfully completing a consolidation phase and we expect the share value to benefit significantly from the next market rally. ISSX - ISS Group $93.94 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call JUL 80 ISU GP 107 17.13 76.81 5.5% *** Sell Put JUL 70 ISU SN 39 1.00 69.00 6.7% *** Sell Put JUL 75 ISU SO 60 1.88 73.12 12.0% Sell Put JUL 80 ISU SP 37 3.13 76.87 15.5% Chart = /charts/charts.asp?symbol=ISSX ***** MERQ - Mercury Interactive $94.44 *** Own This One! *** Mercury Interactive is a provider of integrated performance management solutions that enable businesses to test and monitor their Internet applications. Their software and hosted services help e-businesses improve the user experience by enhancing the performance, availability, and reliability of their Web sites. By using Mercury Interactive's solutions to identify and assess performance problems, e-businesses can increase their ability to attract and retain customers, and improve their competitive advantage. A wide range of businesses use their products, including America Online, Jobs.com, Ariba, Cisco Systems, Ford Motor Co. and Walmart. Mercury Interactive is another issue that began to rally after Standard & Poor's said it would add the Internet software testing company to its closely watched S&P 500 market index. Mercury Interactive is replacing Milacron (MZ), which will take its place on the S&P Small-Cap 600. The effective date for the move is after the close of trading today, June 28. Based on the recent trend, our outlook for the issue is neutral to bullish and the current upward momentum should propel the share value well clear of our target cost basis. In the event of further consolidation, this company would certainly be a candidate for any long-term portfolio. MERQ - Mercury Interactive $94.44 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put JUL 70 RQB SN 49 0.88 69.12 5.9% Sell Put JUL 72.5 RQB ST 50 1.19 71.31 7.8% *** Sell Put JUL 75 RQB SO 128 1.63 73.37 10.5% Sell Put JUL 80 RQB SP 146 2.88 77.12 14.5% Chart = /charts/charts.asp?symbol=MERQ ***** RBAK - Redback Networks $159.69 *** Internet Software *** Redback Networks is a provider of advanced networking systems that enable carriers, cable operators and service providers to rapidly deploy high-speed access to the Internet and corporate networks. Their Subscriber Management System (SMS) connects and manages large numbers of subscribers using any of the major high speed access technologies including digital subscriber line, cable and wireless. Redback sells its products through a direct sales force,resellers and distribution partners. Redback became the latest network telecom company to enter the industry's metropolitan sector, announcing new plans to begin shipping technology acquired from its subsidiary, Siara Systems. Redback is hoping to utilize its network expertise in from high speed, broadband connection equipment and subscriber management systems in the metropolitan networks for residential customers. Siara makes technology that ties older metro networks to Internet services, speeding the plentiful fiber-optic connections in most major cities. Analysts say the market for new, metropolitan area networking equipment could reach $5 billion in the next few years and Redback intends to be part of that growth. Redback Networks also recently announced a strategic alliance with Internet infrastructure provider AsiaInfo (ASIA) to speed up the roll-out of broadband services throughout China. Redback plans to integrate its subscriber management system with AsiaInfo's customer management and billing software. Together they will offer carriers, Internet service providers and cable operators in China a product that enables them to acquire and manage broadband subscribers and to speed up broadband providers' ability to introduce and test new services for consumers. RBAK - Redback Networks $159.69 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put JUL 110 BUK SB 350 1.06 108.94 4.2% Sell Put JUL 115 BUK SC 190 1.50 113.50 5.9% *** Sell Put JUL 120 BKK SD 530 2.06 117.94 8.0% Chart = /charts/charts.asp?symbol=RBAK ***** TIBX - Tibco Software $104.75 *** An OIN Favorite! *** Tibco Software produces e-Business infrastructure software products that enable business-to-business, business-to-consumer and business-to-employee solutions. Tibco's software products enable businesses to link internal operations, business partners and customer channels in real-time. Their software allows multiple distinct applications, Web sites, databases and other content sources to be integrated and managed within a common framework. Their products also enable enterprises to extend their information technology infrastructures and business processes across the Internet to conduct all forms of electronic business using the Internet. TIBX is enhancing its business-to- business trading capabilities and Reuters owns more than 60% of the company. One of our fellow research analysts suggested that we include this issue in our section. The stock is currently listed in the "calls" section of the newsletter and we have reprinted the original narrative on the company for your benefit. Some analysts argue that the B-2-B sector is fading. TIBX likes to think otherwise. TIBX has been on rally since bottoming in early May, and is showing few signs of letting up. Of course, surpassing earnings estimates by 300% helps the cause for a company's stock price. And that's exactly what TIBX did last Wednesday when the company reported its second quarter results. TIBX reported 30% sequential revenue growth, and told analysts to raise their estimates for this year and the next. Wall Street took the cue from TIBX as a slew of analyst upgrades and upward earnings revisions hit the wires the next day. It's is no small feat for a business services company to surpass estimates by such a wide margin, especially while many of its B-2-B brethren languish in losses. The current market is saying, "Show me the money". And for the companies that deliver, Wall Street rewards accordingly. On top of TIBX's earnings momentum, the stock received further fuel Monday when Yahoo unveiled its new corporate information portal. The new venture will enable corporate users to integrate content from their intranets with news and information from Yahoo. TIBX said it had deepened its standing agreement with Yahoo, and will provide services and software to create the new portal. The announcement caused TIBX to gap higher Monday morning, and to continue to rally into Tuesday. Despite the overwhelming weakness in the broad Net sector, TIBX marches higher. Look for an entry point if TIBX clears the ever-important $100 level Wednesday morning. If the profit takers return from hibernation, look for TIBX to find support first at $95, and lower at $90. Consider a bounce off support for a possible entry. With its impressive rally over the past week, TIBX charged right into split territory. The company has more than enough shares to announce a split. If the stock continues on its ascending path, we may be hearing from the Board of Directors in the coming weeks. With a stellar earnings report, and a new contract with Yahoo, a split could be the catalyst to take our play to the next level. TIBX - Tibco Software $104.75 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put JUL 80 PIW SP 173 1.06 78.94 6.4% *** Sell Put JUL 85 PIW SQ 116 1.94 83.06 10.6% Chart = /charts/charts.asp?symbol=TIBX *************** BEARISH PLAYS - Naked Calls *************** SSTI - Silicon Storage Tech $78.50 *** Failed Rally? *** Silicon Storage Technology is a supplier of flash memory semiconductor devices for the digital consumer, networking, wireless communication and Internet computing markets. Flash memory is nonvolatile memory that does not lose data when the power source is removed and is capable of electrically erasing selected blocks of data. Silicon Storage offers over 40 products based on its SuperFlash design and manufacturing process technology. Licensees of its SuperFlash technology include IBM, Motorola, Samsung, and Seiko-Epson, as well as many others. These companies primarily use this technology in semiconductor devices that integrate flash memory with other functions on a single chip. The majority of leading technology stocks have performed very well in the period prior to the Fed's decision on interest rates but there are few issues that failed to rally during the bullish activity. SSTI was one of those issues and there is a significant amount of technical damage to repair before a new recovery can begin. Silicon Storage Tech is certainly one of the top companies in the Semiconductor group but for now the issue is simply trying to find solid footing in this volatile market. We will use the current consolidation period to benefit from overpriced option premiums with these relatively conservative, bearish positions. The probability of the share value reaching our sold strikes appears rather low but there is always the possibility of a recovery rally so monitor the position daily for changes in technical character. SSTI - Silicon Storage Tech $78.50 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call JUL 110 SSU GB 541 2.81 112.81 20.1% Sell Call JUL 115 SSU GC 352 2.25 117.25 16.6% Sell Call JUL 120 SSU GD 984 1.81 121.81 13.7% Sell Call JUL 125 SZZ GE 115 1.38 126.38 10.7% *** Sell Call JUL 130 SZZ GF 436 1.00 131.00 7.9% Chart = /charts/charts.asp?symbol=SSTI *********** IN THE NEWS *********** WorldCom Considers Exiting the Long-Distance Biz By Matt Paolucci After yesterday's U.S. Department of Justice suit to block the proposed $115 billion merger between the nation's second (WorldCom) and third (Sprint) largest long-distance providers, sources say WorldCom is considering ridding itself of the consumer long-distance business entirely. The sale or spin off WorldCom's long-distance consumer unit would certainly cement the Company's decision not to get into the wireless business, a concern the DOJ had before rendering its decision. At the same time, a spin off would also remove one of AT&T's main competitors in the consumer business. This may not be what the DOJ wants, especially if it's trying to create a more competitive playing field. AT&T already has a 53 percent share of the long-distance market. One option is that WorldCom's consumer business may end up being sold to another company that still provide stiff competition for AT&T. Potential buyers include Germany's Deutsche Telecom (DT), which has been looking for ways to enter the U.S. market. France Telecom (FTE) and America Online (AOL) are names that have also been bantered around as possible suitors. Exiting the long distance market would definitely boost WorldCom's future growth rate. Consumer long-distance revenue, which comprise only $8 billion of the company's $37 billion in annual revenue, has grown at a measly 1 to 2 percent per year. Yet another reason to eliminate the consumer business is so WorldCom can focus on its corporate-oriented data, Internet and international sales, which bring in some $18 billion in annual revenue and have been growing more than 30 percent annually. The company's overall growth rate, which has been dragged down since the MCI acquisition, would most likely increase to over 15 percent per annum. Sure, the main reason WorldCom wanted to merge with Sprint was to get into the wireless business, but there are other fish in the sea. Among the names of companies with wireless assets include VoiceStream Wireless (VSTR) and Nextel Communications (NXTL). Keep in mind, wireless has always been a highly capital intensive business. It wouldn't be the craziest idea in the world. Many analysts have long expected WorldCom CEO Bernard Ebbers to get out of the consumer business, where most pundits expect the price per minute of long distance eventually will reach zero. WorldCom, at this point, is better suited to go after the more lucrative business customer market, whose demands include bundled and more specialized services, such as high-speed data access and 800-number services. How a spin off of WorldCom's long-distance would be structured is not clear. One possibility, WorldCom would keep ownership of its long-distance network (not the customers) and sell the MCI brand name and its customer base to another company, allowing WCOM to exit the business as a retail seller of long-distance services, and operate as a wholesaler. Perhaps WorldCom would give the buyer of its long-distance business a discount for sending their traffic through WorldCom's network, allowing WCOM to maintain high amounts of network traffic throughout the day, instead of only during business hours. According to people close to the company, the best bet for WorldCom is probably to further position itself to capitalize on the higher-margin markets for data, Internet and international traffic. The company has already spent billions building its own networks in Europe and Asia. Shares of WorldCom, down more than 30 percent for the year, were solidly higher in afternoon trading, up $5.06 at $44.75. ************************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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