The Option Investor Newsletter Thursday 07-13-2000 Copyright 2000, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with imbedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/071300_1.html Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 07-13-2000 High Low Volume Advance/Decline DJIA 10788.70 + 5.30 10829.70 10754.40 1.03 bln 1459/1415 NASDAQ 4174.86 + 75.27 4193.24 4111.16 1.87 bln 2124/1911 S&P 100 808.03 + 2.12 810.90 804.09 totals 3583/3326 S&P 500 1495.84 + 2.92 1501.39 1489.56 51.8%/48.2% RUS 2000 542.76 + 2.51 542.76 540.11 DJ TRANS 2888.60 + 6.58 2891.00 2865.86 VIX 22.75 - 0.33 23.29 22.27 Put/Call Ratio .42 ****************************************************************** Never look a gift horse in the mouth! If you are long it was a good day. Yesterday was even better. The positive earnings reports have proved to be a healing tonic for the weak market. The positive surprises have energized investors with hopes of "me too" results for companies that have not yet announced. The many earnings warnings had depressed expectations for tech earnings but these expectations are being beaten in almost every case. The Nasdaq is reacting with a standing ovation. The Dow is suffering from a tech deficiency as money previously resting in defensive drug and cyclical stocks has started moving into the Nasdaq. The Nasdaq has broken out of the recent trading range and has twice closed above the previous high from June of 4073 and is now actually up +2.5% for the year. The good news bad news story for the day was the sprint to new highs for the Nasdaq on strong volume of almost 1.9 billion shares. The bad news was the laggard Dow which has stalled for the last three days at 10800 on very strong volume of over one billion shares. The advance/decline line on the NYSE had been positive for the last seven days and was in danger of breaking that trend today. A last minute spurt pushed it to a positive 1459 advances to 1419 declines. Nothing to write home about but on the score board it is still a win. You would think the analysts were asleep with major companies not only beating estimates but blowing them away severely. For example JP Morgan raked in $2.90 per share when analysts were only expecting $2.45. Add in record earnings by companies like PMCS, AMCC, ARBA, GE, JNPR, GTW, etc and worries about a hard landing and slower profits were pushed onto the back burner. Positive statements like those from the AMCC CEO, "these profits will continue as far as the eye can see. We have much more business than we can handle" have built a fire under these stocks. Talk about a positive conference call! Before you start throwing money at everything with a four letter symbol you should take note that the Nasdaq big cap leaders were only "just positive" and are not taking part in the rally. Dell is maintaining momentum at $52.88 but is slowing. CSCO was the most actively traded Nasdaq stock but only managed a +1.38 for the day. Microsoft has lost momentum and appears stuck in a trading range around $80 and was negative -.38 for the day. Intel managed to gain +2 on good earnings from fellow chip stocks but closed almost -$2 off the high of the day. ORCL barely managed to close positive and SUNW only managed a +.56 on slowing gains. It is clearly a stock pickers market. Those that guess right are rewarded with stellar gains. AMCC +28, ARBA +27, but guess wrong and you are toast. PMCS announced great earnings but dropped -$14 in after hours. Same with SONS and a -$8 drop on top of -$10 for the day. XTND announced preliminary results after the close and investors did not like the outcome. After closing at $86.69 XTND traded as low as $57 in after hours for a -$30 drop. If you like living dangerously holding over an earnings report is equivalent to Russian roulette with your investment capital. If you do it, make sure it is money you can afford to lose. John Murphy got some face time today on the local stock channel with a forecast of 4450-4475 in the next two weeks but warned that Late July and August could be a little rocky. I am on your side John. With earnings coming in close to +20% it makes investors wonder what all the racket was last month. Interest rate hikes are over(?) and investors have put the slowing economy out of their mind. Sure profits will slow but still be outstanding. Now, don't let visions of sugar plums cloud your vision. Easy come, easy go. With the Nasdaq churning up a good head of frothy expectations it will only take one or two high profile disasters to burst the bubbles. Also, don't forget we have the PPI report on Friday which could put Fed dread right back on top of investor concerns. The PPI is expected to come in at a strong +.6% on the surface but only +.1% for the core rate. I don't think a stronger number will seriously dent the investor optimism immediately but just bring the storm clouds back closer to the picnic. On the positive side, if the number comes in weaker than expected the market will not only grow legs but those legs will be wearing track shoes with a swoosh on them. As evidenced by the +143 gain on Wednesday there is money on the sidelines and closing over important technical levels is all that is needed to trigger those funds. Not all was rosy on the floor today. Money came pouring out of drugs and biotechs as the formerly "safe haven" for defensive players was seen as suddenly out of vogue. Retail was also a wasteland the day before the Retail Sales Report. Bank of America helped my prediction for the sector from last week come true today with a warnings that the retail sector rally was unsustainable and cautioned investors. The stock splitters were active with ALTR announcing a 2:1 after the close. Also CDT 3:2, WAT 2:1, NMSS 2:1 and not to be left out was BBBY with a 2:1. Strangely BBBY is only trading at $42. That is only -$3 from an all time high but not normally a range known for stock splits. The ARBA earnings set fire to the B2B sector with gains not seen since March. OOPS! Hope I did not jinx that! ITWO +18, AKAM +13, CMRC +8, FMKT +9 and almost tieing the sector winner was EPNY +26.50. Of course the +27 for ARBA was not the leader! Now, would you expect a +46 two day gain to be sustainable on a $100 stock? (EPNY) Each of these with the exception of ARBA had been trading listlessly for some time. As traders we need to be profiting from this rally but with an eye on the eventual roll over possibility. With the Nasdaq up +1150 points since late May and the summer doldrums still ahead of us there is a great chance of some rocky days ahead. I am still focused on the end of next week and options expirations along with slowing earnings announcements. Once earnings lose their bloom and options expire there is nothing to keep investor attention. August, September and (shudder) October are not known as stellar investing months. I am not saying pull back into your shell and hibernate for the rest of the summer, just keep your eyes open for the next dip. Don't try to ride it out but consider it a buying opportunity for the next leg up. Just wait for the "up." We have some serious economic reports ahead and profit taking can occur at any time. Mr. Greenspan gets to entertain us with the July version of his Humphrey Hawkins Testimony next week and you never know what will happen when Alan goes to bat. The VIX is still hovering in the warning zone and the put/call ratios are moving decidedly into over bought and bearish. Trade smart and sell too soon. Jim Brown Editor Current long positions include: none *********************** Regional Seminar Series *********************** Technical Analysis, Stock and Option Seminar Three days of indepth education. The next seminar is a three day event in Seattle on July 21-23rd. 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. 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 ****************************Advertisement************************* Trade Options Online with an Established Expert! Mr. Stock has put over 20 years of experience into a site specifically designed for the most important aspects of your options trading. Our recognized, easy-to-use interface allows you to trade spreads, straddles and covered calls with one-mouse-click. Visit Mr. Stock today! http://www.OptionInvestor.com/tracking.asp?co=OIMrStock682000 ****************************************************************** **************** MARKET SENTIMENT **************** They're Dancing On Wall Street By Austin Passamonte At least that's what Maria B. reported on "Squawkbox" just before the opening bell rang today. Gee, I'd have loved to see all those suits & ties cutting the rug - coverage of that next time would be an interesting report indeed. PPI report, Fed fear, post-earnings sell off - forget about it. Someone turned on the sideline money-spigot and the shopping spree began. Reminds me of Wendy's Christmas trip to NYC, anything with a price tag is fair game. Thank heavens we live six hours away. Name the sector and it saw action over the past two sessions. Anyone bold enough to hold over earnings were handsomely rewarded on certain stocks for their panache'. Word on the street says the rally is on and the buying has just begun. Sounds good to the bulls, this has been a long time coming. All major markets and most sector leaders are showing clear strength to date. Anything other than a stunning PPI will likely be met with news waves of cash. Of interest might Be how the market closes into the weekend. Will massive gains be left on the table as everyone heads off to tee times? My guess is the last half-hour's direction tomorrow should continue on Monday. Not that I'm scanning distant skies for a cloud but two things bother me. First, the VIX just won't release from the low 20 range. Then again, if it were to dip further and release from there I'm not sure the bulls would be pleased at the result. Second, two market bell weathers are considered to be the leaders of all. Microsoft is one but their current state does not offer clear indication. The other is GE. The largest company in the world has led this historical rally from day one. They forecast record earnings for this quarter and the rest of the year (yawn) and are rewarded by selling off 7/8? Hmm. Let's chase ARBA and the ilk with four-letter symbols seems to be the mindset once again. Experts are calling for NASDAQ to hit 4,500 soon and they may be quite right. What happens after that and the end of earnings remains to be seen. The bi-weekly COT report is released tomorrow and I'm guessing commercial traders have increased their net-shorts while small specs are even net- longer. Will be interesting to see. The summer rally is in full blossom and I hope you've been up to your neck in the right call options. Enjoy the action to it's fullest and make hay while the sun shines! MARKET SENTIMENT INDICATORS --------------------------- VIX The CBOE Market Volatility Index measures certain S&P 100 option pricing to determine investor sentiment. Historically, readings near 30 signal possible market bottoms while levels near 20 indicate possible market tops. Tues 7/11 close: 22.39 Thur 7/13 close: 22.75 CBOE Equity Put/Call Ratio The CBOE equity put/call ratio is a contrarian-sentiment indicator. Numbers above .75 are considered bullish, .75 to 40 neutral and bearish below .40 ************************************************************* Tues Thurs Sat Strike/Contracts (7/11) (7/13) (7/15) ************************************************************* CBOE Total P/C Ratio .53 .42 Equity P/C Ratio .47 .37 Peak Open Interest (OEX) CBOE index put/call ratio is a contrarian-sentiment indicator. Numbers above 1.5 are considered bullish, 1.5 to .75 neutral and bearish if below .75 ************************************************************** Tues Thurs Sat Strike/Contracts (7/11) (7/13) (7/15) ************************************************************** All index options 1.16 1.16 OEX Put/Call Ratio 1.27 1.82 OEX Maximum Open Interest Strikes/Contracts: Puts 790/6,095 790/6,762 Calls 800/5,632 825/9,423 Put/Call Ratio 1.08 .72 OEX S/R (Support/Resistance) Ratio Index The OEX S/R ratio is a formula to gauge possible support or resistance based on open-interest disparity. Values above "5" considered excessive. Divergence of numbers may indicate future market direction. OEX Tues Thurs Sat Benchmark: (7/11) (7/13) (7/15) Overhead Resistance: (840 - 820) 58.88 74.99 (815 - 800) 2.8 1.87 OEX Close: 801 808 Underlying Support: (800 - 785) .86 1.10 (780 - 760) 2.59 2.84 What the S/R measure indicates: Net open-interest ratios are soaring above 815 OEX level while underlying support is very light. The OEX has mounting downside pressure from 815 with little upward support in comparison. A large move in either direction seems favored to the downside. Sustained levels above 815 may prove very difficult before July contract expiration 7/21 unless growing overhead O/I clears. 200 Day Moving Average The 200 DMA is widely considered the major benchmark for critical support in a market. DOW; 10,740 10,727 10,788 NASDAQ; 3,789 3,956 4,174 NDX; 3,505 3,744 3,956 SPX 1412 1480 1495 OEX 758 801 808 CBOT Commitment Of Traders Report: Friday 6/30 Biweekly COT report discloses positions held by small specs, large specs and commercial traders of index futures contracts on the Chicago Board Of Trade. Small specs are the general public, large specs primarily funds with commercials being financial institutions. Commercials are historically on the correct side of future trend while small specs are not. Extreme divergence between each signals a possible market turn in favor of commercial trader's direction. *Will be updated this Friday* Large Specs Small Specs Commercials DOW futures Total O/I; 7,161 8,435 28,719 Net contracts; 2,219 short 1,281 short 3,501 long %long/short; 31% short 15% short 12% long NASDAQ 100 Total O/I; 10,771 17,334 89,812 Net contracts; 4,777 long 6,423 long 11,200 short Percent S/L 44% long 37% long 12% short S&P 500 Total O/I; 35,404 215,951 613,538 Net contracts; 840 long 36,659 long 37,498 short Percent S/L; 2% short 17% long 6% short BULLISH SIGNALS Broad Market Strength: All major indices are showing strength on rally with high volume. Interest rates 5.82% on the 30-year Treasury Bond may be signaling the rate fears are over. Fed-Fund futures are pricing a lessening chance of one more hike, .25 basis at this time. Technical charts indicate possible strong rally for the bonds. Corporate Earnings Last quarter earnings expected to be very strong, especially for the tech sector. Major stalwarts in the Dow and NASDAQ began the three-week session this week. Many issues beating the street! IPO's Recent IPO's have been met with positive enthusiasm. Improving Dow The Dow remains above it's 200 DMA and shows signs of life after breaking 10,800 intraday and closing above 10,700. Index Option put/call ratio Recent activity showed unusual OTM put volume especially On the DJX, NDX and SPX, suggesting buyers hedging for a market slide. Contrarian nature considers this a bullish development. ****** BEARISH SIGNALS VIX Today's close near 22.75 warns of impending market top danger. Energy Prices Prices are still too high. It will be difficult to curb inflation with gas and oil prices remaining high. Ultimately, this affects profit margins. August Crude closed $30.39 today amid mixed reports of more production. Seasonal energy patterns typically bottom by late summer. COT Report Latest updated figures show small spec traders heavily long S&P 500 contracts while commercial positions remain at several-year lows, net short. Divergence suggests possible market turn in favor of commercials. Update coming Friday Equity Put/Call Ratio Equity option ratio has slipped into bearish zone ************** MARKET POSTURE ************** As of Market Close - Thursday, July 13, 2000 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,450 10,850 10,788 Neutral 7.09 SPX S&P 500 1,435 1,500 1,495 Bullish 7.13 ** OEX S&P 100 775 812 808 Bullish 7.13 ** RUT Russell 2000 470 545 542 Bullish 7.13 ** NDX NASD 100 3,450 4,000 3,956 Neutral 5.30 MSH High Tech 965 1,060 1,050 Bullish 7.13 ** XCI Hardware 1,440 1,600 1,555 Bullish 7.13 ** CWX Software 1,160 1,300 1,263 Neutral 6.06 SOX Semiconductor 1,060 1,200 1,189 Neutral 6.29 NWX Networking 1,150 1,340 1,331 Neutral 7.13 ** INX Internet 470 560 547 BEARISH 5.30 BIX Banking 520 565 545 Neutral 7.09 XBD Brokerage 480 590 577 BULLISH 7.11 IUX Insurance 610 660 643 Neutral 6.20 RLX Retail 860 960 925 Neutral 7.09 DRG Drug 380 430 402 BULLISH 7.11 HCX Healthcare 795 880 827 BULLISH 7.11 XAL Airline 152 176 173 BULLISH 5.25 OIX Oil & Gas 280 320 293 Neutral 7.13 ** Posture Alert Many indicators turned positive Wednesday, breaking horizontal resistance. Look for pullbacks on profit taking in the lower end of trading ranges. Drugs and Healthcare are recent examples of profit taking. Snug up stops on stocks which have made big moves. Posture Changes: Neutral to Bullish (SPX,OEX,RUT,MSH,XCI) Bullish to Neutral (NWX,OIX) *********** OPTIONS 101 *********** How about a review? By Lee Lowell After being away from the market for awhile, it's always good to review some basics. If any of you out there have a newborn and work from home like I do, then you have to know how hard it is to do anything, let alone sit in front of the computer during market hours watching your real-time quote vendor. It's almost impossible! If you've read Marty Schwartz's book, "Pit Bull", he sums it up pretty well: ". don't trade too heavily the month before and two months after your wife gives birth." It's so true! What should you have in your arsenal before you actually put on a trade? First off, you should definitely have some kind of options calculator that will compute fair value. The CBOE has a useful calculator on their website that you can use for free. You should also have access to either delayed or real-time quotes. If you are a more active investor/trader, you might want to pay up for a streaming datafeed. When deciding on a data vendor, make sure they have good volatility data in their option chains. The next step is to find a good options broker with decent commissions. This may take some time and you might want to open a few small accounts to see which one you like the best. Many traders will argue for their favorite, but I look for a brokerage that allows option spread trading online. Now that you've got your datafeed, software, and brokerage account set up, what's next? Do some research and find an option to trade. Start with the well-researched picks within this newsletter. There is definitely a potential trade for all types of strategies and scenarios. Once you've keyed on a trade, you can do further research if you like. I want to expand on a few subjects which are the most vital to me before I place any trade. My number one criteria is to check the historical and implied volatilites of the underlying stock and options. If any of you have read some of my previous articles, you know that I view volatility as a key ingredient to option trading success. Check the archives of this site under the "options 101" section. To re-cap, there are a few types of volatilities. "Historical volatility" is a number that measures the magnitude of the underlying stock's movement over some period in the past. The movement can be in both directions. The standard time periods that are widely measured by the trading community are 20-day, 50 or 60-day, 90 or 100-day,etc. You can measure any period you want. Some believe that you should measure a time frame that coincides with the amount of time to expiration of your option. The more erratic the underlying stock has been, the higher the volatility reading will be. "Implied volatility" is a number that is derived from the option itself. You can solve for this number by working backwards thru the Black-Scholes model by inputting the option's current price instead of a volatility guess. Implied volatility is a guess by the market participants of what the future range of the stock will be before expiration of the option. The market players are in a sense telling you what the historical volatility is going to be before it becomes history. Get it? The higher the IV, the fatter the option premiums will be. An erratic stock will have bigger premiums and a stable "Old Economy" stock will have paltry option premiums. In most cases, HV and IV will be different. Since everyone has a different idea of what the stock's volatility should be and because everyone's time frame may be different, this is what can lead to trading opportunities. The way to use HV and IV to your advantage is to look at its past behavior. Looking at historical HV and IV charts is a good way to tell whether your stock's option premiums are at the high or low end of its range. The historical HV and IV charts will usually move in tandem with each other but either one can be higher or lower than the other at any point in time. You'll want to stick with option buying strategies when the volatility is at its low end and look for option selling strategies when volatility is at its high end. This is extremely important. If you buy options when volatility is high, the odds are greatly against you. Not only will your directional bias have to be correct, but the timing and magnitude of the move will have to be even more precise. The other concepts that play an integral part in determining which option trades to make are the option's "delta" and its "probability of profit". These two items can really give you a heads up on the chances of you making some money on your trade. The delta of an option tells you how much the premium will go up or down in response to a $1 move in the underlying. An at-the- money option typically has a delta of .50. This means that if the underlying stock moves up or down $1 in price, your call or put option will gain or lose approximately $.50 (all other factors being equal). The delta can also be looked at the "chance of your option being in-the-money at expiration." An option with a .50 delta tells you that you have approximately a 50% chance of your option finishing ITM (in-the-money). Now that doesn't mean you'll automatically have a profit if your option is ITM. If you bought a $40 call option for $5, and the stock closes at $41 on expiration day, you'll still lose money even though the $40 call closed ITM. That brings me to my next concept - probability of profit. This little number is a better way of knowing your chances of success before you put on a trade. But in order to know your chances, you'll need to run the numbers through a simple probability calculator. It's a simple tool that can tell you the chances of the underlying security being below, at, or above a certain threshold by a specified date. The threshold levels that you use are going to be your breakeven points. This will tell you exactly your chances of finishing at breakeven or for a profit. Just remember, based on statistical theory, your chances of finishing with a profit if you buy options, will never be higher than 50%. That's because on any given expiration day, the stock could close higher or lower than the strike price. Most likely, your option buying success will fall in the range of 20-35%. Try to aim for the higher probability number if you're going to buy options. This is why the sellers of options are usually the winners, because their probability of profit is the opposite of the buyers. Always subtract from 100% and you'll get the sellers probability. Example: If you are buying a call option with a 15% probability of profit, the seller's probability of winning will be 85%. Yes, buying options can lead to unlimited profits, but the odds are not always that great. Yes, the seller has unlimited risk (unless doing spreads), but the odds are totally in his/her favor. I hope this article has given you a few ideas of how to get your- self up and running with your options trading business. Remember, always do a little volatility analysis and probability calculations, and you'll increase your chances of success. Contact Support ************** TRADERS CORNER ************** Yahoo! Take the Money and Run By Molly Evans Our favorite bull has found his vigor eh? On the backs of stellar corporate earnings, a rally has been sparked giving investors and traders alike something to cheer about. Well good. It feels a bit like the old days. Buy a sexy one and ride the train to a higher ground. We're even seeing the rotations like before; they're moving that money around. Internuts and the other techs are back into vogue and biotechs and pharmas are tossed away. However! There's got to be a "however." Take your profits regularly and go. I like a rally as well as the next guy, but I would be reluctant to fancy settling into any "positions." The market has been looking for an excuse to rally and we're there baby. There's no telling how long it will last. I'm not trying to rain on anyone's parade here. You all know the game. You make the money dollar by dollar and when the market wants it back it takes it out in tens. Let's do it better this time around. Let's think in terms of defensive posturing and risk control. I'll take notes on what I write here so that I might do better at this too! It's one thing to know what you're supposed to do and another to actually do what you're supposed to do. Controlling losses is the cornerstone for staying in the game. There's just no other way. You are going to have winners AND losers. No one can predict analyst downgrades, when bad news is going to hit or the market is just simply turning on you. Controlling your losses is one of the ONLY things that you CAN personally control. The first rule in this is to limit your position size. Do not bet a sizable portion of your portfolio in any one sector and certainly not in any one stock. This is hard to do when you just know that XYZ is a sure thing. It's never a sure thing. It's not! Don't fall in that trap. Taking a 30 - 50% portfolio position is not trading, it's gambling. Go to Vegas. You'll have a lot more fun losing your money there than here in the market. When you have a big position in any one trade, you don't think with your head anymore. You're playing on your gut and with your heart. It hurts to be wrong and you're bound to be a lot more emotional about it when you've got so much at stake. If you happen to have a winner on your hands, you'll be inclined to do the opposite and take the profits too soon because you know you're risking a lot. You don't cut your winners short and let your losses run. It's the opposite. Home run trades on huge positions are for the most part a fantasy. We should all be allowed one in our lives but then again we should all be young and beautiful forever too. Yes? Bottom line: a smaller size is a lot easier to be objective about. Build up your portfolio in baby steps, not giant leaps. It's bound to stay with you longer. How much is it acceptable to lose? I don't want to lose any. I tend to take it personally and beat myself up for being such a doof to let it happen in the first place. I blame myself for a stupid entry or not checking out the news first before initiating the trade or trying to be a contrarian again. Sometimes that's the case and shame on us for not following the proper discipline in opening the trade. Do look at the chart and identify the entry point. Don't chase. Wait. So hard to do when you want it, I know. At the very least, check out the news before you open also. There may be a very big reason that your shiny star is falling. It works both ways though. The other thing is trying to be a contrarian. That's me. Ugh. I see a stock running yahoo-ish and I think, "Well, that's just ridiculous. That stock has a PE of 10,000 now. And look, there's a doji. I'm going to buy puts on that crazy thing." Oh please! Don't do this. I've done this, I continue to do this and I rarely win. It's a constant battle. The left hand has to smack the right one to keep its fingers off the keyboard. The market is a psychological study of the masses and when the masses are running, don't throw yourself up in their way. So, the original question was: how much is it acceptable to lose? The pros say it's two percent. No more than two percent of your portfolio should be lost on any one trade. Do the math. That's your limit and it includes commission and slippage. If you'd follow the rule of position size, the two percent doesn't seem so restricting. The two percent rule is excellent for novice traders as it allows them to stay in the market longer to learn from their mistakes. The mistakes will occur. You have to learn from them and do better in the next round. Even the pros make mistakes all the time. I've read where up to 80% of their trades may be losers - that's only one trade in five being a winner! What keeps them in the game is that the other four are cut off but the one left is a running winner. I wonder if that's true. 80%? Anyway, that's the way to stay in the game. When you've cut the garbage out, it allows your mind to focus upon, add to and protect your winners. There should be no time for nursing a crippled stock. Move on. Another thing you'd better never let me catch you doing is maxing out your margin! Seriously, margin calls can wipe you out. You've undoubtedly heard some of the horror stories of margin tragedies this spring. Of course, if your sole game is options, you're not on margin but some of us here do own stock and like to leverage it a bit. When the market turns and Mr. Broker comes calling, he looks rather big, bad and mean and makes you sell at the worst possible moment. I've had a margin call. Hey, I've made every mistake...it is not a pleasant visiting. I'd be very reluctant to go on margin to help finance my path for this sweet little rally. I hope you'll feel the same way. I hope all of you are putting some padding back into your portfolios. We've all been wishing and hoping for some fireworks yet this may be all we get. Anything above and beyond is a gift, keep that in mind, trade defensively and protect what it gave you. The VIX is still in low territory and tomorrow is Friday. Hmmm, that smells a little bit like a profit-taking setup to me. July is historically the best of the summer months and the following three are sacred BEARial grounds. I'll have to tell you all about that in my next article. I've been a busy girl studying that very thing. I'll be back to tell you about it soon. Contact Support ************* READERS WRITE ************* Sector Trader Update Hello, I'm a pretty new invester, at least with options. I signed up for two option newsletters at the same time to try and hurry along the learning process, planning to keep only one. It was a really hard choice deciding which to keep, when you came along with the Sector Trader that made the choice easy for us to keep the OIN. I've learned a lot (that's not saying I know a lot) from reading OIN and we look forward to it each night. Thank you, Mike T. Also, I appreciate your writing in a manner easy for the novice to understand. ------ Hi Mike, Thanks so much for your e-mail. I appreciate you taking the time to write us with your thoughts. We strive daily to bring you, the reader, the best, most fresh, most timely information we can lay our hands on. But without the ability to use it, it's practically useless. That's why it is our aim first and foremost to provide you with the concepts and education on trading, as well as the timely information to go with it. The ability to use that information is critical. It would be easy to simply write instructions on what to do tomorrow, but that's as good as a ticket to the poor house. Besides that, it's so much more rewarding to trade when you recognize that you are the one who pulls the trigger, takes the risk and makes the profits, thanks to your own efforts to learn the skills of trading. You've heard it before...give a man a fish, feed him for a day. Teach him how to fish, feed him for a lifetime. Thanks again for writing and for choosing OIN! Buzz Lynn **********************ADVERTISEMENT****************************** FREE! FREE! FREE! FREE! Investor's Business Daily - Free Two Week Trial! No obligation! No invoices! And nothing to cancel! Limited time offer! Click Here! http://ibd.infostreet.com/cgi-bin/freeoffer.cgi?source=ARZOJES ***************************************************************** ************* SECTOR TRADER ************* New QQQ and Broadband (BDH) Plays! By Buzz Lynn sectortrader@OptionInvestor.com Index Last Mon Tue Wed Thu Fri Week QQQ NASDAQ-100 98.69 -1.56 0.53 2.50 1.44 0.00 2.91 HHH Internet 111.88 -4.25 -1.13 9.38 2.63 0.00 6.63 BBH Biotech. 182.56 -0.88 0.31 -2.19 -11.88 0.00 -14.63 PPH Pharm. 100.25 2.50 1.00 -2.44 -4.25 0.00 -3.19 TTH Telecom 77.13 -0.94 -1.25 0.75 1.75 0.00 0.31 IAH I-net Arch. 95.94 -0.38 -0.69 2.31 2.06 0.00 3.31 IIH I-net Infr. 66.63 0.06 -2.38 4.94 4.69 0.00 7.31 BHH B2B 50.44 0.38 -0.88 7.19 3.56 0.00 10.25 BDH Broadband 96.81 -1.75 -0.31 3.56 3.94 0.00 5.44 SMH Semicon. 98.38 -0.13 -1.50 2.32 2.44 0.00 3.13 RKH Reg. Banks 96.75 -0.56 -0.25 0.50 -1.88 0.00 -2.19 UTH Utilities 93.00 1.81 1.19 -0.50 -0.13 0.00 2.38 ************** Updates ************** QQQ - NASDAQ 100 $98.69 +1.44 (+2.91 this week) The NASDAQ rally was confirmed today as yesterday's gains (stemming from YHOO earnings) were confirmed thanks to stellar earnings from AMCC. Let's see, Internet and semiconductors lead a tech rally. Where does that leave pharmaceuticals? More on that in the PPH section. As for QQQ, it looked strong yesterday and today as NASDAQ traded over 4100 and held up into today's close. While the whole NASDAQ market got its breakout, QQQ nonetheless encountered resistance at $100 in much the same way it did on June 21-22, while $97.50 to $98 provided nice intraday support. It looks like QQQ is establishing a new ascending channel. On the negative side, with the PPI and retail sales out tomorrow, tomorrow being Friday, and a nice run-up in prices this week, that $100 resistance may send the QQQ to the showers while washing profits down the drain. Be on your guard for profit taking weakness. How to play it? Read on. Short Strangle: It no longer looks like our calls will expire out of the money. This may be a good time to roll out of our current strangle position(s) into a new one. That means we would buy back our sold positions of 90P/95C and/or 92P/97C. If you are not averse to the risk of a possible reversal, you can consider buying back just the calls with the expectation that the puts will expires worthless. Of course, that leaves you really vulnerable if you sell more puts at a higher strike price and the market heads south again. Even though QQQ has moved up considerably making it more expensive to buy back the call portions of our strangle, it should cost us less to repurchase our sold puts too. Be sure to specify a "net debit" maximum on your closing position purchase, or "limit order" amount if you intend to "leg out". Otherwise, you'll pay top dollar for a market order that will substantially eat into your theta-derived (time decay) profit, maybe even for a loss. Using the theory that "old resistance equals new support", we should find mild support at $97.50, and strong support at $95. Because most of the time value has been shaken out of July strikes, you may want to sell August strikes now to capture more premium. Which strikes to sell? With resistance at $100 and support at $95 (on the low end), we'd consider the sale of the $100 or higher AUG calls and the $95 or lower AUG puts. That seams reasonable given the rollover of the stochastic, MACD, and RSI on the 30-min chart. SELL CALL AUG-100 QVO-HV OI=4233 at $ 5.13 SELL PUT AUG- 95 QVQ-TQ OI=1473 at $ 3.63 Net Credit = $ 8.75 or better Stop Loss = $11.50 Covered Call: Again, with $100 providing current resistance and support coming at $97.50 and $95, you may want to try "legging in" to the position wherein you can buy the underlying shares at support and sell the call at resistance. Ideally, that would mean purchasing the QQQ at $97.50 or $95, then selling the $100 or higher strike price once QQQ has bounced back up near $100 resistance again. The risk is that QQQ continues to fall after you buy it, which by definition lessens the amount you'll take in from selling the call. That can turn unprofitable very quickly. If that's a concern, you may be better served by doing a "buy/write" order that simultaneously buys the shares and sells the calls. Be sure to specify a net debit amount not to exceed. Ideally, your net debit would be less than support of $95. QQQ = $98.69 SELL CALL AUG-100 QVO-HV OI= 4233 at $ 5.63, ND = 93.06 or less SELL CALL AUG-102 QVO-HX OI= 320 at $ 4.38, ND = 94.31 or less SELL CALL AUG-105 QVO-HA OI= 556 at $ 3.13, ND = 95.56 or less Calendar Spread: Nearly identical to writing covered calls, we substitute a long- term call (or LEAPS if you like) for the underlying stock position. The difference in strategy here is that you DON'T want to get called out and have to prematurely give up all the time value you purchased in the underlying long call. So if the price moves up on the stock and you face getting called out, you can cover by buying back the sold strike, and/or reselling a higher one if it suits your style. With resistance at $96 being handily broken yesterday, our idea is to roll out of our sold JUL strike by repurchasing it and selling an AUG higher strike value of say $100 or better. Resistance has now moved up to $100. Remember to keep rolling up if the QQQ advances well into the money. Like covered calls, legging in can earn you more profit, but you run the risk of the play going against you if you are wrong in your judgement of a good entry. If that risk is not for you, specify a maximum net debit in your buy/write order. BUY CALL DEC- 94 QVQ-LP OI= 1580 at $16.13 SELL CALL AUG-100 QVO-HV OI= 4233 at $ 5.63, ND = 10.50 or less SELL CALL AUG-102 QVO-HX OI= 320 at $ 4.38, ND = 11.75 or less SELL CALL AUG-105 QVO-HA OI= 556 at $ 3.13, ND = 13.00 or less Long Calls After yesterday's and today's rally, it looks like a new upward trend is emerging thanks to some stellar earnings reports from YHOO and AMCC. Yet given the propensity for the market to take profits on a Friday following a strong weekly gain, we'd wait for a pullback to support, now nicely established at $97.50 intraday or $95 (derived from the theory that old resistance equals new support) before establishing a position. At Support: BUY CALL AUG- 95 QVQ-HQ OI= 916 at $8.25 SL=6.00 BUY CALL AUG- 98 QVQ-HT OI= 650 at $6.75 SL=4.75 BUY CALL AUG-100 QVO-HV OI= 4233 at $5.63 SL=3.50 Average Daily Volume = 24.77 mln ----- PPH - Pharmaceuticals $100.25 -4.25 (-3.19 this week) This play may be over - short leash time!! Remember this sector provides a safe haven when all others around it are crumbling in weakness. Conversely, now that tech issues are showing strong signs of life, investors are ditching PPH in favor of momentum issues again. Not even a stop loss would have saved us from the gap down. So why keep PPH here tonight? If investors decide to get "safe" again, PHH should get a nice bounce. Not only that, but PPH found nice support today at its 30-dma of $99.44 and isn't far from its 50- dma of $98.82. Also, if "old resistance equals new support" holds true, then $97.50 to $99.50 is the magic range of support. You can enter on a bounce from that range, but we're more inclined to believe that sentiment for the techs has turned positive and will remain through earnings season. We keep PPH here tonight as strictly a defensive play in case of a tech blow up tomorrow. But don't count on it. We'll likely be giving PPH the boot this weekend unless it can get back over $103 with some conviction. BUY CALL AUG- 95 PPH-HS OI= 0 at $7.25 SL=5.25 BUY CALL AUG-100 PPH-HT OI= 15 at $3.88 SL=2.25 BUY CALL AUG-105 PPH-HA OI= 62 at $1.75 SL=0.75 Average Daily Volume = 118 K ----- BBH - Biotech $182.56 -11.88 (-14.63 this week) This sector has had a great run, but all good things must come to an end. Recall we'd cautioned Tuesday night that it would be a good idea to tighten up your stops since nothing goes up in a straight line. (BBH was way over its 10-dma of $185 then and looked ready to roll over.) Good thing you did (we hope!) since not a single component of BBH showed any green at all today - everything bled red ink. DNA, MEDI, IDPH, QLTI, AFFX and HGSI all lost more than $10 today. Now having fallen to former resistance of $183 with its 10-dma (now $188.29) clearly violated, we need to see BBH hold and recover from here back over $188 or it will get the boot this weekend. Lately BBH has been able to spring back rather quickly. But this looks tough. It's pretty simple for BBH from here - perform tomorrow or get dropped. Any further descent is the cue to pass this one up and move on. BUY CALL JUL-175 BBH-GO OI= 130 at $11.63 SL= 8.75 BUY CALL JUL-180 BBH-GP OI= 482 at $ 8.50 SL= 6.50 BUY CALL AUG-185 BBH-HQ OI= 133 at $ 5.75 SL= 3.75 Average Daily Volume = 605 K ----- HHH - Internet $111.88 +2.63 (+6.63 this week) Uh oh! We may have had radar lock, but we were dead wrong in our assessment of yesterday's probable outcome of HHH following YHOO earnings. Even so, nobody should have entered this play, as the yesterday's gap up was way too huge and far exceeded the $101 rollover we were looking for. Since the Internet stocks have left the launch pad, what now? We still stand by the idea that YHOO earnings weren't as great as the Street analysts want us to believe and still expect weakness to follow YHOO earnings as it almost always does. Witness that YHOO actually lost ground today and ran smack into resistance at its 50-dma of $127.30 while the NASDAQ market built on yesterday's impressive gain. Similarly the HHH rolled over at $113.25, a level very close to former support on June 13th, and also its gap-down price at $114.50 on June 22. Apparently, some investors would rather jump ship at that level just to get whole on their purchases made prior to June's downdraft. Technically, MACD, stochastic and RSI are all rolling over from their overbought highs. Our prognosis hasn't changed, but our entry has. We would look to go short or buy puts on a bounce down from the $112 to $114 range, or on a breakdown under $110. If that can happen, the next level of support would then be about $104 to $105. BUY PUT AUG-115 HHH-TC OI= 75 at $10.13 SL=7.25 BUY PUT AUG-110 HHH-TB OI= 931 at $ 7.38 SL=5.25 BUY PUT AUG-105 HHH-TA OI= 274 at $ 5.25 SL=3.25 Average Daily Volume = 928 K ************** New Plays ************** BDH - Broadband $96.81 +3.94 (+5.44 this week) With the whacking JDSU and GLW took on news that JDSU would acquire SDLI, we thought it might be some time before JDSU recovered. Not so once the Street figured out this meant the entire sector was growing like a weed. Here's s direct quote from JDSU's CFO Tony Muller in an SEC filing: "Further, the preliminary results for the quarter for each of these three companies [JDSU, SDLI, ETEK] is for SALES AND INCOME TO BE HIGHER THAN INVESTMENT COMMUNITY ESTIMATES [emphasis ours], and you will learn of these results later in the month when we announce results." How much better than that can it get? Couple that with AMCC's stellar earnings last night, MOT's increasing handset margins and PMCS's stellar earnings announced after the close today, and we have a broadband sector with a great outlook. Technically, BDH had been rangebound with a ceiling of $92.50 since mid-June. Yesterday's close gave us the hint of a breakout. Today, thanks to the above, it happened in a big way. Support is now at $95 (old resistance), with today's intraday support at roughly $96. We would look to target shoot an entry at either of these levels or wait for a clear break over $97. Careful though. With old resistance at $92 and the nearest dma (the 5-dma) at $92 as well. Any round of profit taking tomorrow could suck BDH back down to that level, which could then leave us rangebound again. For that reason, we would look for another play if $95 can't hold. BUY CALL AUG- 90 BDH-HR OI= 14 at $ 9.50 SL=6.50 BUY CALL AUG- 95 BDH-HS OI= 40 at $ 6.50 SL=4.50 BUY CALL AUG-100 BDH-HT OI= 0 at $ 3.38 SL=1.50 SELL PUT AUG- 95 BDH-TS OI= 3 at $ 5.75 SL=3.75 Average Daily Volume = 153 K ************** No Play ************** IAH IIH BHH SMH TTH RKH UTH ************* DAILY RESULTS ************* Index Last Mon Tue Wed Thu Week Dow 10788.71 10.60 80.61 56.57 5.30 153.08 Nasdaq 4174.86 -42.91 -23.87 143.17 75.27 151.66 $OEX 808.03 -3.41 1.46 4.86 2.12 5.03 $SPX 1495.84 -3.28 5.26 12.04 2.92 16.94 $RUT 542.76 2.61 -1.09 10.51 2.51 14.54 $TRAN 2888.60 24.38 8.08 64.92 6.58 103.96 $VIX 22.75 1.06 -0.49 0.69 -0.33 0.93 Calls SDLI 343.50 25.38 -2.69 10.00 15.50 48.19 Perfect GSPN 144.63 -4.31 4.13 6.25 19.00 25.06 Momentum BRCD 205.50 7.56 2.44 -1.69 11.63 19.94 Leading CREE 152.50 4.06 3.75 6.56 5.19 19.56 Shot up MUSE 187.00 -4.06 3.50 11.13 7.38 17.94 Great chart MRVC 74.88 7.25 -4.00 1.69 8.00 12.94 New KANA 72.25 -0.81 0.50 4.69 6.94 11.31 10% gain SEBL 182.00 -1.81 -3.63 12.06 4.44 11.06 All-time hi TIBX 125.94 -1.19 -1.56 4.81 8.63 10.69 B2B mover PRSF 69.88 2.50 1.31 3.81 2.50 10.13 Running NT 76.63 -0.25 0.75 3.25 1.50 5.25 52-wk high ISSX 101.06 -2.63 -7.88 7.50 2.06 -0.94 7/18 ern. AGIL 72.06 -0.63 -0.63 2.75 -2.94 -1.44 Dropped INCY 93.50 5.06 5.06 -2.38 -10.13 -2.38 At support CIEN 166.00 1.88 -6.38 -6.00 4.63 -5.88 Rumors HGSI 153.75 5.63 6.75 -7.94 -14.69 -10.25 New DNA 153.94 1.44 -1.56 -8.75 -10.19 -19.06 Dropped Puts RMBS 94.50 -3.75 -10.00 4.25 3.00 -6.50 Underwater LLY 95.75 3.00 -1.00 -3.25 -4.00 -5.25 New LCOS 44.88 -2.75 -4.88 2.63 0.63 -4.38 Entry? ICIX 24.25 -1.88 -3.19 1.19 -0.31 -4.19 Wild ride CMGI 45.69 -2.25 -2.50 6.94 2.25 4.44 Dropped YHOO 122.56 -6.50 -4.50 19.44 -2.38 6.06 Roll over PHCM 84.94 5.75 -2.00 10.44 8.38 22.56 Dropped PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** AGIL $72.06 -2.94 (-1.44) Agile's midday weakness today left us scratching our heads. The stock has been range-bound for a week now and even a NASDAQ breakout couldn't push the stock higher. Not what we want to see for our call plays. AGIL did rebound from Thursday's 30-minute, $6 drop, but it is finding resistance at $72. Surprisingly, there was no news out, just a technical move. Needless to say, there are too many good plays available to have our capital sitting in this one any longer. Besides, AGIL doesn't report earnings until mid-August so we won't likely miss out on an earnings run. We will let it get these little "hiccups" out of its system and check the stock again after it moves above resistance at $75. DNA $153.94 -10.19 (-19.06) Well that was quick - we didn't even get an entry point on our play. After the strong gains seen in the Biotech sector over the past month, profit taking hit fast and furious over the past 2 days. DNA had been finding resistance near $175, and the sector weakness drove shares of the company sharply lower on increasing volume. Once support at $169 gave way, the selling accelerated all the way down to $155. Although the stock may be finding support near this level, earnings are only 2 trading days away and we would have had to drop it this weekend anyways. There just isn't enough time to play this Biotech prior to its earnings release on Monday. Rather than hope for the sector health to improve tomorrow, we're dropping DNA tonight in favor of better plays. PUTS: ***** PHCM $84.94 +8.38 (+22.56) There you have it, one dead put play. In fact, this play was close to death on Monday as it just refused to breakdown. We wanted to give it as much opportunity as possible with the rest of the Internet sector so weak. But, apparently YHOO's earnings on Tuesday evening ended that downtrend and Internet issues have been going crazy for the past two sessions, with PHCM leading the way. You were able to profit in the first half of this play, but stops were crucial to make sure those profits were preserved. There were a few minor news articles to help the stock, but the real catalyst was the return of the sector. We will part ways with PHCM before any more potential earnings run kicks in. Earnings are set for July 20th. CMGI $45.69 (+4.44) The once-dormant Internet bulls came out in herds in the last two days. The Yahoo-effect lifted the entire Net sector Wednesday, carrying CMGI past resistance at $40 without much hesitation which raised a cautionary flag for our put play. The better-than-expected profits posted by Yahoo infused hope back into the ailing Internet incubator arena. The rediscovered bullishness carried CMGI back above its 10-dma Thursday as traders bought the stock with reckless abandon. Investor may soon remember, however, that CMGI is far off from earning consistent profits like its Internet portal peer. Until that happens though, we must leave our play. ********************************Advertisement******************* Looking to buy or sell a new or used vehicle? Autobytel.com has been ranked #1 in J.D. Power and Associates Dealer Satisfaction with Online Buying Services study three years in a row. Autobytel.com has revolutionized the way vehicles are bought and sold, with a no-haggle, no-hassle buying experience. http://www.OptionInvestor.com/tracking.asp?co=OIAutobytel7102000 ***************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 DISCLAIMER ********** This newsletter is a publication dedicated to the education of options traders. The newsletter is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The newsletter picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. The newsletter staff makes every effort to provide timely information to its subscribers but cannot guarantee specific delivery times due to factors beyond our control.
The Option Investor Newsletter Thursday 07-13-2000 Copyright 2000, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with imbedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/071300_2.html ****************************Advertisement************************* Trade Options Online with an Established Expert! Mr. Stock has put over 20 years of experience into a site specifically designed for the most important aspects of your options trading. Our recognized, easy-to-use interface allows you to trade spreads, straddles and covered calls with one-mouse-click. Visit Mr. Stock today! http://www.OptionInvestor.com/tracking.asp?co=OIMrStock682000 ****************************************************************** ******************** PLAY UPDATES - CALLS ******************** GSPN $144.63 +19.00 (+25.06) No news, just sheer momentum. The tech enthusiasm lifted many stocks today as the NASDAQ finally follow-through on its triple digit gain yesterday. GSPN broke out from resistance near $125 and soared past $140, which it hasn't seen since March 23rd. These are the type of 15% one-day gains that we search for everyday. Volume was consistent and heavy throughout this breakout move, indicating conviction. Intraday, GSPN build minor short-term support at $140. A pullback to this level, along with a bounce on strong volume, would allow a decent entry. Tomorrow's trading will be dependent on the Retail Sales and PPI numbers, so look to the NASDAQ's behavior for direction. If positive, GSPN would have no problem achieving $150. On a profit-taking pullback below $140, look to $133 for support and entry opportunities. PRSF $69.88 +2.50 (+10.13) Well, PRSF started the day exactly where it finished yesterday. Continuing its uptrend, the stock smoothly surpassed resistance at $70. After venturing into the $73 territory, GSPN slid into the close, right near support. In after-hours trading, PRSF is trading above $70, so we will look for the stock to hold this new level. If PRSF comes out of the gates strong tomorrow, entry on the uptrend would be prudent. Any weakness below $70 could bring the stock down to $65 support that was established on Wednesday. Bounces from here would provide excellent entries. Watch the economic numbers tomorrow and the NASDAQ reaction. Volume was good today in PRSF, which leads us to believe that this uptrend truly has some legs. No news to report as pure momentum seems to be driving this issue. SDLI $343.50 +15.50 (+48.19) Perfect, absolutely perfect. Our rebound theory worked as planned and JDSU recovered from the overdone selling after the takeover announcement. Fiber optic stocks continue to be hot as consolidation seems to be the theme. On Thursday, SDLI trended up from $330 to the high for the day at $355 at 2pm EDT. At that point, the sellers stepped in to take some profits off the table. The stock did manage a slight bounce from $340 in the final 20 minutes of trading. As we mentioned in the Tuesday write-up when we initiated coverage, SDLI will trade in step with JDSU since it is an all-stock deal. So watch JDSU's trading behavior to determine SDLI's fate. JDSU closed today at $105.50, just above its 50-dma at $104. This is a positive sign. There is support at $100 on a pullback. On the upside for JDSU, the 100-dma at $110 may provide resistance, yet considering the gap from $120, euphoric investors may move the stock higher. Watch though for skeptical sellers in the wings. KANA $72.25 +6.94 (+11.31) B-2-B's are back on the heels of ARBA's better-than-expected earnings. The sector which has been beaten day of late looks like it is making a recovery. After closing Wednesday near $65, KANA powered ahead and spent most of the day teetering at the $68 level. Yet, late in the session, strong volume came in and drove the stock to close at the high of the day. This close is fractionally below the 100-dma which lies at $72.58. Today's 10% advance was rather significant and a little profit-taking is not out of the question for tomorrow. Keep this in mind, along with stop orders, to protect profits. Technically, KANA could pullback to the $68 area, and then $65 from there. Any high volume bounces from either of these support levels would offer very nice entries. Resistance may be encountered at the 100-dma, mentioned above, and then at the 200-dma at $77. Earnings are July 26th, so this momentum run may very well add on some hefty gains. BRCD $205.50 +11.63 (+19.94) Leading the tech sector higher, BRCD has barely paused at all on its impressive run. After a couple failed attempts earlier this week, the buyers finally had their way and shattered the $200 resistance level. Moving as high as $206.69 in another strongly positive day in the tech sector, BRCD only pulled back slightly at the close today, closing at $205.50. Volume is the only factor that concerns us, as it has dropped over the past couple days to only about two-thirds of the ADV. The 5-dma ($194.75) has been supporting the stock's run over the past month and this level provided a great entry point as buyers threw money at the stock this morning. July earnings season is off to a great start, and although it doesn't report until mid-August, BRCD is benefiting from the improving sentiment. Intraday dips to the $200 level or stronger support near $194 will provide the best entry point. More conservative investors may want to wait for volume to pick up again, driving the price up through resistance, now at $206. ISSX $101.06 +2.06 (-0.94) If you were willing to take the risk, ISSX gave us a great entry point at the close on Tuesday. On a burst of selling volume in the last 5 minutes, the share price plummeted as low as $88.78, just above the 30-dma (then at $87.31). The slight bounce in the final minutes of trading was confirmed with a decent move as the stock recovered back above the $100 level over the past 2 days. Volume has been on the light side though, and this causes us some concern in light of the strong volume seen on the NASDAQ. Earnings for the company are just around the corner, next Tuesday before the open, so we are running out of time on our play. At this point, we would be hesitant to enter new positions unless ISSX can demonstrate its intention to move higher by breaking through resistance at $104 on increasing volume. One way or the other, we'll be dropping ISSX this weekend ahead of earnings. INCY $93.50 -10.13 (-3.41) Is that an entry point? The Biotechs were due for a correction, and the pullback seen over the past 2 days hit INCY along with the rest of the sector. On average volume, shares of the company have now pulled back right to support at $93. With the 10-dma at $94.13, look for INCY to bounce near current levels and head higher as earnings approach. The company's release date is set for next Tuesday after the close, so time is running out for a run to develop. New entries can be considered if the stock bounces from current levels, but make sure that the sector is positive and volume is on the rise. Stronger support exists near $88-89. A bounce here could provide a better entry point, but if it doesn't hold as support, you are better off standing aside from the play. With so many strong stocks out there, you are better off waiting for one that is seeing strong buying volume in a strong sector - don't try to force the play just because you like the Biotechs. MUSE $187.00 +7.38 (+17.94) Even if you know nothing about MUSE, you have to love the chart over the past 3 weeks. Moving up steadily since confirming support at $124 in mid-June, the stock has been moving up for 3 days and correcting for 1 day before repeating the process. The last 3 days have been up, and with the strong gains seen in MUSE as well as the NASDAQ this week, a pullback would not be unexpected. The upward move today came on light volume (about two-thirds of the ADV), adding evidence that profit taking could be just around the corner. The 5-dma (currently at $173.81) has been providing support throughout the stock's recent move, and a pullback to this level, would make for a good entry as buying volume returns to support the price. The stock consolidated between $172-174 yesterday before moving strongly higher into the close, making this level look attractive for new entries. The fuse is getting short on our play though. Earnings will be released next Wednesday after the close, giving us less than a week to get in, make our profits, and get out. NT $76.63 +1.63 (+5.00) Let the earnings run begin. NT has been gradually moving higher for the past month and started running into resistance at $72 a little over a week ago. Then, supported by the strong move on the NASDAQ, NT shot higher yesterday, setting a new 52-week high of $76. Excited by the prospects of a strong summer rally and in anticipation of the company's earnings announcement (due out July 25th after the close), the bulls drove the price even higher today, tagging another new high of $78.25 before the inevitable profit taking set in. The tech sector had another good day on strong volume, and the late day pullback in shares of NT looks like another entry point forming. Mild intraday support is forming just below $76, with better support at $74. The 5-dma (currently at $73) has been supporting the stock's move, and a bounce between $73-74 would make for a great entry point, as long as it is confirmed by continuing strong volume. CREE $152.50 +5.19 (+22.00) The play of the day came through for us Thursday. CREE shot past resistance at $150 at the opening bell. The stock subsequently settled into a range between $151.50 and $155 for the remainder of the day. The slew of positive profit reports from the Tech related issues have littered Wall Street over the past two days with many market participants looking for more upside earnings surprises. If there is one group of stocks that is sure to please Wall Street this quarter, it's the Semi sector. The chip companies will begin rolling out earnings in the coming days which could fuel the group's momentum. CREE is among the leaders in the Semi sector and could benefit from positive profit reports from others. CREE's range bound trading Thursday could lead to an explosive breakout Friday if the chips fall in place (pun intended). Look for an entry if CREE rallies above resistance at $155 on healthy volume. The path is pretty clear above that level until $160. Support is now located at the bottom of its range, and just below at $150. CIEN $166.00 +4.63 (-5.88) CIEN plunged on unusually heavy volume Wednesday due to rumors of accounting irregularities. The rumors were linked to a private research firm known as CFRA who apparently issued a report detailing problems with CIEN's books. Wall Street came out with its rebuttal to the CFRA report Thursday and defended CIEN. JP Morgan and PaineWebber both said that the report had no new information and said that Wednesday's sell-off was unwarranted. DLJ reiterated CIEN as one of its top picks and set a price target of $190. It's good to have friends on Wall Street! CIEN recouped some its losses Thursday but fell short of returning to its post-rumor level of $170. However, the "misunderstanding" might have provided us with a good entry. Look for CIEN to regain its footing Friday on a positive PPI report. Look for an entry if the stock moves back above the $170 level, or wait for a more conservative entry above resistance at $175. A bounce off support at $165 might provide an additional entry. TIBX $125.94 +8.63 (+10.69) The B-2-B sector was the place to be in the last two days. Morgan Stanley DW said Wednesday that it had initiated coverage on TIBX with an Outperform rating and set a $130 price target. The support from MSDW added fuel to TIBX's momentum and helped to propel the stock past resistance at $115. The B-2-B group was given another boost Thursday after Ariba provided a positive outlook the night before. While TIBX's earnings announcement is several months off, the return of momentum to the B-2-Bs might be the catalyst to take our play higher. After the brief bout of profit taking earlier this week, TIBX has bolted right back into its ascending channel. The stock still faces congestion above current levels, near its March highs. TIBX's momentum might continue to plow the stock past resistance. Consider entry at current levels if TIBX continues its advance into the weekend. For a more conservative entry, wait for the stock to clear the $130 level. TIBX has strong support just below at $125 and again at $120 which may be levels to look for entry on any intraday profit taking. SEBL $182.00 +4.44 (+11.06) SEBL shot out of the gates Wednesday morning, the stock eclipsed resistance at $175 with ease mid-way through trading to finish the day at an all-time high. SEBL continued higher Thursday and rewarded the bulls with yet another new 52-week high on the heels of a positive release from Ariba. The Goldman Sachs Computer Software Index ($GSO) has been set a blaze this week, and it would appear momentum is building in the sector. SEBL's two consecutive days of rallies have bolted the stock into breakout mode. The company will release its results after the bell on Tuesday which we confirmed. The anticipation for better-than-expected profits may continue to carry SEBL into uncharted territory. The only resistance SEBL faces is at its intraday high of $182.38. With that said, consider entry at current levels if SEBL rallies Friday morning. A tame inflation report may fuel the Software sector's momentum and carry our play into the weekend. An intraday pullback to support at $175 may provide an additional entry if the stock bounces from that level. ******************* PLAY UPDATES - PUTS ******************* LCOS $44.88 +0.63 (-4.38) LCOS got some relief on Wednesday as the NASDAQ rallied behind YHOO's earnings report. It appears that intraday support has developed at $44. We are sticking with this put play for another day to see if LCOS is giving us an entry point. With no news out on LCOS, we do not believe that a reversal is imminent. Yet, we would like to point out the newfound momentum and enthusiasm in the NASDAQ. Watch to see if the NASDAQ and LCOS move in tandem or diverge tomorrow. Any continued upmoves in LCOS and we would NOT recommend initiating new positions until LCOS rolls over at its 10-dma of $48.63. A slide through $44 on decent volume and LCOS may be heading for a retest of $40. This break through $44 would provide a good entry point. This YHOO euphoria may be wearing off for the Internet sector, as YHOO rolled over a bit late on Thursday. RMBS $94.50 +3.00 (-6.50) Yes, Rambus gained $3.00 today, but it is still underwater on the week and far from showing us anything that constitutes frenzy buying. In fact, the action we've seen reflects more of a relief rally than anything and RMBS has underperformed many other high-tech stocks. Maybe more encouraging for our put play is the levels of resistance sitting just above the stock. It has been unable to hold above $95 in the past two sessions, plus it will run into the 10-dma at $98.50, and more formidable resistance at $100. The downside, however, does look more appealing. On market weakness, RMBS could trade back down to the $86 support from Tuesday. You may recall this recent bout of profit-taking occurred due to some comments made from Intel (the major proponent of Rambus) about Rambus memory showing less advantage than some lower priced chips. This obviously is not what investors want to here. All in all, you may want to cut your plays short as RMBS is set to report earnings this Tuesday, after the bell. We don't recommend you hold over earnings. YHOO $122.56 -2.38 (+6.06) Entry point? Yahoo traded right up to resistance today before rolling over. You will note on the chart that YHOO has struggled breaking out over the mid-$120s level since late June. This is the entry point we were waiting for. The volume dried up somewhat on Thursday too, possibly signaling the end of the buying frenzy. You may recall that earnings and revenues were strong in the second quarter, but some analysts are still concerned about a slowing advertising environment and slowing growth in the their page views. For cautious investors, you may want to wait for a break back below $120, something YHOO didn't do today. On the flip side, a move over $130 would signal the end of searching for entry points to buy puts. In other words, if momentum wants to take the stock higher, we will revisit this play another day. ICIX $24.25 -0.31 (-4.19) Profit warnings can be a good thing, if you're a put holder. Our ICIX play took a wild ride over the past two days. Late Tuesday night, ICIX warned that its revenues would fall 10 to 15% short of Wall Street's forecasts. The company also said it expected to record a larger loss in cash flow than previously expected. The earnings warning was met with a host of analyst downgrades Wednesday morning which subsequently caused ICIX to gap down by over $3. But then, with an intraday sleight of hand, ICIX swiftly rebounded after the company said it had hired an investment bank to explore options for selling its Web hosting unit DIGX. The announcement may have provided a profitable entry point for our play as the news of ICIX's profit warning returned Thursday and weighed heavily on the stock. Watch for the sellers to return Friday morning and consider entering the play if ICIX falls below support at $24. A more conservative entry might be found if ICIX falls beneath $23.50. **********************ADVERTISEMENT****************************** FREE! FREE! FREE! FREE! Investor's Business Daily - Free Two Week Trial! No obligation! No invoices! And nothing to cancel! Limited time offer! Click Here! http://ibd.infostreet.com/cgi-bin/freeoffer.cgi?source=ARZOJES ***************************************************************** ************** NEW CALL PLAYS ************** MRVC - MRV Communications $74.88 +8.00 (+12.94 this week) MRV Communications is in the business of creating and managing growth companies in optical technology and Internet infrastructure. The company has created several start-up companies and independent business units in these areas. MRVC's core operations include the design, manufacture, and sale of products in these areas, primarily Network Element Management, and physical layer, switching and routing management systems in fiber optic metropolitan networks. The company also produces fiber optic components for the transmission of voice, video and data across enterprise, telecommunications and cable TV networks. Unless you've been asleep for the past month, you already know that the Optical sector has been glowing brightly. Led higher by the likes of SDLI, GLW, and CIEN, stocks in this space are continuing to shine. MRVC split 2-for-1 at the end of May, and without so much as a hint of a post-split depression, immediately began marching higher. Supported by the 5-dma, the stock didn't really slow its ascent until running into resistance at $67 three weeks ago. Taking some time to consolidate its gains, MRVC has now built up good support near $60. With gains continuing in the sector and earnings season now in full swing, MRVC decided to put on its running shoes and start heading higher again today. Heading higher right from the opening bell, the stock saw strong buying all day today, with more than 1.5 times the average number of shares traded hands. Today's high of $75.31 is the highest level for the stock since mid-March, and represents near term resistance. Speaking of earnings, MRVC is set to report its numbers on July 27th after the close, and today's action looks like it could be the beginning of an impressive run. The Networking sector is showing some nice strength as it moves back into the plus column for the year, and this improving sentiment should add to MRVC's upward bias as the earnings cycle continues. Support for the stock can be found at $69 and then $65, and with the proximity of the 5-dma ($67.63) and the 10-dma ($66.31) any bounce north from this area looks attractive for new entries. There has been no recent company-specific news on MRVC, but the recent announcement that JDSU will be buying rival SDLI, is fueling speculation of more deals in the Optical sector. While MRVC may or may not be directly involved in this move towards greater consolidation, the general sentiment will likely continue to create an upwards bias for the stock. ***July contracts expire next week*** BUY CALL JUL-70*RVY-GN OI=1341 at $ 7.00 SL= 5.00 BUY CALL JUL-75 RVY-GO OI= 172 at $ 4.38 SL= 2.50 BUY CALL JUL-80 RVY-GP OI= 496 at $ 2.25 SL= 1.00 BUY CALL AUG-75 RVY-HO OI= 242 at $11.38 SL= 8.50 BUY CALL AUG-80 RVY-HP OI= 468 at $ 9.25 SL= 6.50 BUY CALL OCT-80 RVY-JP OI= 296 at $15.63 SL=11.25 SELL PUT AUG-65 RVY-TM OI= 72 at $ 5.63 SL= 7.75 (See risks of selling puts in play legend) Picked on July 13th at $74.88 P/E = N/A Change since picked +0.00 52-week high=$97.44 Analysts Ratings 1-1-0-0-0 52-week low =$ 6.50 Last earnings 04/00 est=-0.01 actual= 0.03 Next earnings 07-27 est= 0.03 versus= 0.01 Average Daily Volume = 2.11 mln HGSI - Human Genome Sciences $153.75 -14.69 (-10.25 this week) HGSI licenses a proprietary database of gene sequences to such pharmaceutical heavyweights as SmithKline Beecham and Merck. The company has eschewed the race to decode the entire human genome in favor of focusing on patenting gene sequences involved in disease. HGSI is one of the few genome companies involved in developing gene-based therapeutics, its four compounds in clinical trials are intended to limit the toxic effects of chemotherapy, promote repair of damaged cells, stimulate antibody production, and spur re-growth of blood vessels. Been looking for an entry into the genomic related issues? The Biotechnology sector fell for the second consecutive session Thursday as traders shifted capital into the Tech sector. Along with the negative money flow, part of the selling can be attributed to the arch nemesis traders known as profit takers. HGSI made a nice run over the last two weeks and Thursday's Tech rally prompted investors to lock in profits. Despite two straight days of selling, there are several factors that could rekindle HGSI's momentum and take it higher. First and foremost, investors' anticipation of earnings and new products has been the catalyst that carried HGSI higher and may continue to do so. Secondly, HGSI is a uniquely positioned company because of its gene-based therapeutics. The company said Wednesday that it had licensed two such genes to Transgene (TRGNY) to collaborate in developing treatments for severe cardiovascular conditions. After the announcement, U.S. Banc Piper Jaffray reiterated its Strong Buy rating on HGSI and said more agreements could follow. What's more, HGSI is trading around historical split levels. The company has plenty of shares to authorize a 2-for-1. Despite the two recent days of selling, HGSI's technical picture remains attractive. The stock clustered around its 10-dma Thursday which is currently at $155. HGSI has major support just below at $150 which may provide a good entry if the stock bounces off that level upon further profit taking. A rally back above $155 may provide a more conservative entry point. If you want to wait for momentum to return to HGSI, look for an entry as the stock hurdles resistance at $160, thereafter is a pretty clear chart to the $170 level. Think the genomic craze is another Wall Street fad? Don't tell that to Steve Newby. Newby is the portfolio manager of the world's first and only genomic specific mutual fund. According to Morningstar, Newby's genomic portfolio was the best performing mutual fund for the second quarter, earning an very profitable 39%. Among the fund's top five holdings is none other than HGSI. ***July contracts expire in two weeks*** BUY CALL JUL-150*HHA-GL OI=786 at $10.63 SL= 7.25 BUY CALL JUL-155 HHA-GM OI=393 at $ 8.13 SL= 5.75 BUY CALL JUL-160 HBW-GL OI=260 at $ 5.75 SL= 3.75 BUY CALL AUG-155 HHA-HM OI=114 at $19.38 SL=14.00 BUY CALL OCT-160 HBW-JL OI=475 at $31.63 SL=23.00 SELL PUT JUL-145 HHA-SK OI=200 at $ 3.50 SL= 5.50 (See risks of selling puts in play legend) Picked on July 13th at $153.75 P/E = N/A Change since picked +0.00 52-week high=$232.75 Analysts Ratings 1-5-3-0-0 52-week low =$ 23.00 Last earnings 03/00 est= -0.33 actual= -0.35 Next earnings 08-08 est= -0.20 versus= -0.05 Average Daily Volume = 1.68 mln ************* NEW PUT PLAYS ************* LLY - Eli Lilly and Company $95.75 -4.00 (-5.25 this week) Eli Lilly makes Prozac, the world's best-selling antidepressant. It also makes Gemzar to treat pancreatic cancer, Evista for osteoporosis, and Zyprexa which is used to tread schizophrenia. Other products include antibiotics, growth hormones, anti-ulcer agents, and cardiovascular therapy medications. The company is looking to produce a replacement for bestseller Prozac, which is set to begin losing its US patent protection in 2003. Feeling a little depressed? LLY shareholders might, after the stock's meteoric rise two weeks ago and now subsequent slide lower. In late June, LLY announced that its sepsis drug currently under development may actually work. The new drug, if successful, is to be called Zovant which would treat sepsis, a major threat in emergency rooms. The announcement caused LLY to gap nearly $13 higher. However, upon further examination of the news, a few brave analysts called LLY's rally overdone, and actually downgraded the stock. One such analyst was Adam Greene of Wasserstein Perella. Greene shifted his rating on LLY to a Hold citing valuation concerns. He added that, if approved, Zovant would add between $300 to $600 mln to LLY's market cap at the drug's peak, a far cry from the $16 bln created by the $13 gap higher. Along with the concerns over its valuation, LLY may continue to suffer from the flight of capital to the Tech sector. The ebb and flow of the market has been good to the Pharmaceutical sector recently while the Tech sector churned. However, the resurgence of tech related issues is attracting investors' money, consequently, away from the defensive drug stocks. The current divergence between tech and drug stocks, coupled with a weak chart, may lead to further downside for LLY. With Thursday's decline, LLY slipped back down into its void created by the huge gap two weeks ago. The stock has virtually no support below current levels which warrants consideration for entry Friday morning. Before entering the play, confirm divergence in the market and look for LLY to continue falling. The stock has resistance just above at $96 which may provide entry upon failure to move above that level. ***July contracts expire in two weeks*** BUY PUT JUL-100*LLY-ST OI=4131 at $5.50 SL=3.50 BUY PUT JUL- 95 LLY-SS OI=1623 at $2.00 SL=1.00 BUY PUT JUL- 90 LLY-SR OI=8517 at $0.50 SL=0.00 Average Daily Volume = 3.76 mln ********************** PLAY OF THE DAY - CALL ********************** SEBL - Siebel Systems $182.00 +4.44 (+11.06 this week) Siebel is a leading provider of sales automation and customer service software. Its main product, Siebel Sales Enterprise, offers client information and decision support across a corporation's worldwide computer network. Field personnel can access Siebel applications through wireless devices as well. Glaxo Wellcome, Prudential Insurance, and Lucent are among Siebel's clientele. Most Recent Write-Up SEBL shot out of the gates Wednesday morning, the stock eclipsed resistance at $175 with ease mid-way through trading to finish the day at an all-time high. SEBL continued higher Thursday and rewarded the bulls with yet another new 52-week high on the heels of a positive release from Ariba. The Goldman Sachs Computer Software Index ($GSO) has been set a blaze this week, and it would appear momentum is building in the sector. SEBL's two consecutive days of rallies have bolted the stock into breakout mode. The company will release its results after the bell on Tuesday which we confirmed. The anticipation for better-than-expected profits may continue to carry SEBL into uncharted territory. The only resistance SEBL faces is at its intraday high of $182.38. With that said, consider entry at current levels if SEBL rallies Friday morning. A tame inflation report may fuel the Software sector's momentum and carry our play into the weekend. An intra-day pullback to support at $175 may provide an additional entry if the stock bounces from that level. Comments Strong volume drove SEBL to close just off its high for the day. The uptrend is sound and a renewed enthusiasm in the B2B sector could help the stock. Be cautious of profit-taking tomorrow after two days of incredible gains for the NASDAQ. It's also Friday, when traders lock in a little profit. Watch how the NASDAQ digests the economic data tomorrow and look for any entries off bounces between $170 and $175. Protect your profits with stops. BUY CALL JUL-175*EZG-GO OI=2355 at $11.25 SL= 8.50 BUY CALL JUL-180 EZG-GP OI= 558 at $ 8.63 SL= 6.50 BUY CALL JUL-185 EZG-GQ OI= 579 at $ 5.63 SL= 3.75 BUY CALL AUG-180 EZG-HP OI= 636 at $17.13 SL=13.25 BUY CALL NOV-190 EZG-KR OI= 149 at $28.63 SL=22.25 SELL PUT JUL-175 EZG-SO OI= 59 at $ 3.75 SL= 5.00 (See risks of selling puts in play legend) Picked on July 6th at $164.38 P/E = 271 Change since picked +17.63 52-week high=$177.06 Analysts Ratings 15-3-0-0-0 52-week low =$ 24.19 Last earnings 03/00 est= 0.14 actual= 0.17 Next earnings 07-21 est= 0.18 versus= 0.12 Average Daily Volume = 4.51 mln ********************************Advertisement******************* Looking to buy or sell a new or used vehicle? Autobytel.com has been ranked #1 in J.D. Power and Associates Dealer Satisfaction with Online Buying Services study three years in a row. Autobytel.com has revolutionized the way vehicles are bought and sold, with a no-haggle, no-hassle buying experience. http://www.OptionInvestor.com/tracking.asp?co=OIAutobytel7102000 ***************************************************************** ************************ COMBOS/SPREADS/STRADDLES ************************ The Summer Rally Begins! Technology stocks moved higher again today as traders celebrated a slew of positive earnings reports. ****************************************************************** - MARKET RECAP - ****************************************************************** Tuesday, July 12 Technology stocks rallied today, with the Nasdaq closing at its highest level in more than three months. Industrial issues also advanced on strength in financial stocks. The Dow closed up 56 points at 10,783 and the Nasdaq was up 143 points at 4099. The S&P 500 Index was up 12 points at 1492. Trading volume on the Nasdaq reached 1.77 billion shares, with winners beating losers 2,493 to 1,533. Trading activity on the NYSE was moderate at 999 million shares, with advances outpacing declines 1,756 to 1,153. In the bond market, the U.S. 30-year Treasury rose 1/32, pushing its yield down to 5.88%. Tuesday's new plays (positions/opening prices/strategy): American Eagle AEOS AUG12C/AUG15C $2.00 debit bull-call CIT Group CITI AUG22C/JUL22C $0.56 debit calendar Mail.com MAIL NOV5C/AUG7C $2.18 debit diagonal All of our new spread positions offered relatively favorable prices during the session. MAIL and AEOS provided entries in the morning session and the CITI target was available in the afternoon. Portfolio plays: Stocks ended higher for the fourth consecutive day amid optimism over recent earnings reports. Strong performances in technology issues led the Nasdaq to its highest close since mid-April. The rally began last week after a tame employment report and today the Internet group surged after Yahoo! reported a second-quarter profit that beat the estimates by 20%. Analysts raised their ratings and forecasts for the stock, noting that page views also exceeded estimates. Solid gains by IBM, Disney, and 3M led the blue chips higher and bank and brokerage stocks received a boost from news that UBS AG would acquire PaineWebber (PWJ) for $10.8 billion in cash and stock. Our bullish position in PWJ moved to maximum profit on the news. In the broad market, communication equipment and airline issues rallied while oil service, textiles and metals & mining stocks consolidated. The recent bullish activity has given investors reason to believe that the FOMC may not raise interest rates at its August meeting. A less aggressive Fed will allow stock prices to climb higher and that's the primary reason for the current upward movement. Our portfolio enjoyed a number of big gains in the technology sector after Yahoo! delivered a better-than-expected earnings report. Almost every large-cap technology position in the portfolio is is profitable and our recent YHOO call-credit spread offered a favorable entry for those who believe YHOO may have difficulty reaching $140 in the next week. Another big gainer was 3com (COMS). The stock jumped $8 and now the issue is well above our sold strike in the bullish calendar spread. The play offered a $0.43 profit as the issue moved through the strike and even at the current price, the position offers a small positive return. Merger news dominated the market and our recent position in TV Guide experienced some exciting activity. The stock moved up $9 after Gemstar International (GMST), a maker of television guides, announced the completion of its purchase of TV Guide following notification that U.S. antitrust regulators would not oppose the deal. Last year, Gemstar announced plans to acquire the company in a stock-for-stock transaction. The exchange ratio (TV Guide share holders will receive .6573 shares of GMST for every TVGIA share) values TVGIA's stock at approximately $45 and that's the price of our sold option in the current credit strangle. Officially, the stock closed at $45.62, roughly at break-even for the play. During the session, we purchased the the stock at $44.25 to cover the sold position. The cost basis for the play is $43.50, based on today's stock purchase and the previous position credit of $0.75. Another bullish issue that will likely require the same treatment is Juniper Networks (JNPR). The short position in our neutral, credit strangle is at $170. When the share value crosses that strike price, we will purchase the underlying issue to cover the sold option. In this manner we can remain profitable (although at a much lower ROI) in the overall position. Thursday, July 13 Technology stocks rallied again today as investors celebrated a slew of positive earnings reports. The Nasdaq ended up 75 points at 4174. Slumping biotech and retail issues weighed heavily on the Dow with the industrial average closing relatively unchanged after a number of bullish sessions. The S&P 500 Index also made little movement, closing at 1495. Trading activity on the Nasdaq was heavy with 1.87 billion shares changing hands. Advances beat declines 2,129 to 1,915. Volume on the NYSE reached 1.0 billion shares, with advances beating declines 1,472 to 1,418. In the bond market, the 30-year Treasury rose 29/32, pushing its yield down to 5.815%. Portfolio plays: Technology stocks were bullish again today and the Nasdaq posted big gains for the second consecutive session. Industrial issues also enjoyed favorable gains even as profit-taking in major drug and financial issues limited the upside movement. Semiconductor and Internet stocks drove the tech sector higher while the broad market saw positive activity gains in paper and chemical stocks. Retail and biotech shares were the only major slumping sectors. The recent consolidation has produced a solid base from which to rally and investors are reacting positively to a lengthy list of better-than-expected earnings releases this week. The question now is how will the Fed react to the new bullish activity. In economic news, the Labor Department reported that the strong U.S. jobs market retreated slightly in the last few weeks, taking some pressure off the Federal Reserve to raise interest rates. More important data is due Friday, including the Producer Price Index and June retail sales. The monthly PPI will provide a reading on inflation at the wholesale level while retail sales figures will indicate whether consumer demand is flagging in the face of higher interest rates. The central bank's rate-setting body, the Federal Open Market Committee, next meets on August 22 to consider whether to raise interest rates to further limit inflation. Natural Microsystems (NMSS) was the big mover in the Spreads portfolio today. The issue jumped $25 after the communications software company reported a better-than-expected profit and also announced plans for a two-for-one stock split. NMSS reported second-quarter net income of $5 million, compared with a net loss of $3.6 million in last year's period. Our bullish credit spread at $85 is at maximum profit. Juniper Networks (JNPR) was also at the top of the leader board. The stock rallied $17 to close just short of $170 amid speculation on the company's earnings, due out after the bell today. Strong rumors suggest that the announcement is going to be near $0.09 a share, slightly higher than consensus estimates. Emulex (EMLX) was the most surprising issue in our section. The recently downgraded stock vaulted $5 to close just above $67 and our bullish, diagonal spread moved into profitable territory. With the recent technology run-up and resistance near $70, it may be prudent to lock in the current gains. Small-cap stocks also participated in the rally. Cabletron (CS) moved up $2.50 to a recent high near $28 on strength in telecommunications and networking companies. Our long-term diagonal position is at maximum profit above $22.50 and we will use the current rally to roll up and forward to the August $25 options. Only two candidates remain on our current "watch-list." Secure Computing (SCUR) appears to have made a successful test of the 30 dma and the issue has renewed its previous up-trend. However, the company's earnings are due out later this month and that will determine the final outcome of our position. Obviously, we will look for any profitable early-exit opportunities. International Business Machines (IBM) is holding steady above $100 and remains inside of our sold strike in the neutral, credit spread strangle. Their earnings are also due in the next week and that report will likely affect the profitability of the position. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - Today I received a new request for bullish, credit spreads. With the recent upside activity, it may not be the most opportune time to initiate plays in this strategy however, I have provided two candidates that offer relatively low risk positions. These plays are based on the current price or trading range of the underlying issue and the recent technical history or trend. News and market sentiment will have an effect on these issues. Review each play individually and make your own decision about the future outcome of the position. ****************************************************************** AFCI - Advanced Fibre Comm. $54.81 *** Earnings Rally! *** Advanced Fibre Communications designs and manufactures end-to-end distributed multi-service access solutions for the portion of the telecommunications network between the carrier's central office and its subscribers, often referred to as the "local loop." The company's Universal Modular Carrier 1000 is a global product family consisting of a variety of multi-service access platforms with integrated optics and other intelligent customer premises equipment. The platform utilizes a hybrid asynchronous transfer mode/time division multiplexing architecture, which provides a variety of loop interfaces for narrow-band analog and digital services including telephone service, integrated services digital network), point-to-point dedicated digital circuit (T-1), high bit rate digital subscriber, and asymmetric digital subscriber line services. Revenues and split announcements are driving the market and this position is an earnings-related play. Companies in this group have outstanding future growth potential and AFCI's June quarter is rumored to be progressing better than previously expected. Product visibility continues to improve and the company's service relationships with all its major customers remain strong. The company is slated to release quarterly results July 17 and the average estimate of analysts polled is $0.10 per share. If you favor the potential for positive results after the announcement, this position offers a great way to speculate on the outcome of the report. PLAY (aggressive - bullish/credit spread): BUY PUT AUG-42.50 OI=13 A=$1.56 SELL PUT AUG-45.00 OI=355 B=$2.12 INITIAL NET CREDIT TARGET=$0.62-$0.68 ROI(max)=32% B/E=$44.38 Chart = ****************************************************************** NTAP - Network Appliance $85.31 *** Hot Networking Sector! *** Network Appliance and its subsidiaries are engaged in the design, manufacturing, marketing and support of high performance network data storage and access devices, which provide fast, reliable and cost effective services for data-intensive network environments. The company is a supplier of network attached data storage and access devices called "filers." Network Appliance's first filer product was specifically designed to improve the storage and accessibility of data stored on a network. Their products include entry-level filers targeted for workgroups and smaller application environments along with systems for larger departments; and a new enterprise class filer. The company also has an Internet caching appliance, NetCache, which achieves Internet bandwidth savings and improves performance by moving data closer to end-users. NTAP is one of the leading companies in the Networking group and fundamentally, they are near the top of the heap. Last quarter, the data access services provider reported earnings that were well ahead of market expectations. The company said net income rose 128% in the first quarter to $24 million, up from $10 million a year earlier. Sales more than doubled to $200 million and based on the positive report, a number of brokerages upgraded the issue. Merrill Lynch, Needham, Solomon Smith Barney, SunTrust and A.G. Edwards, all moved their future earnings estimates higher with bullish price targets. From our viewpoint, the sector outlook is excellent and the issue appears to have made a successful technical recovery, moving above a recent resistance area near $80-$85. The next earnings report is due the day before August options expire and it appears there is little chance the stock will test our sold strike during the next month in this bullish, low risk position. PLAY (conservative - bullish/credit spread): BUY PUT AUG-70 NUL-TN OI=187 A=$1.62 SELL PUT AUG-75 NUL-TO OI=118 B=$2.25 INITIAL NET CREDIT TARGET=$0.75 ROI(max)=17% B/E=$74.25 Chart = ****************************************************************** FNV - Finova Group $15.31 *** Options Activity! *** The Finova Group is a financial services holding company. Through its principal subsidiary, Finova Capital, the company provides a broad range of financing and capital market products. Finova extends revolving credit facilities, term loans and equipment and real estate financing primarily to middle-market businesses with financing needs generally between $100,000 and $35 million. FNV operates in 20 specific industry or market niches under three market groups. These are Commercial Finance; Specialty Finance; and Capital Markets. Implied volatility in options on Finova rose again today amid speculation over upcoming earnings and potential consolidation in the industry. One source noted active buying in August calls, where open interest rose substantially. Some say the activity is based on next week's earnings announcement. FNV is expected to report on July 20 that it earned $0.69 a share, according to a consensus estimate. Of course the Paine Webber buyout, among other recent mergers, has generated new speculation about the future of many smaller financial companies. This play is based on recent increased activity in the stock and underlying options. Although the position offers a favorable risk/reward potential, it must be evaluated for suitability and reviewed with regard to your strategic approach and trading style. PLAY (conservative - bullish/diagonal spread): BUY CALL JAN-7.50 FNV-AU OI=27 A=$8.38 SELL CALL AUG-12.50 FNV-HV OI=385 B=$4.00 INITIAL NET DEBIT TARGET=$4.25 INITIAL TARGET ROI=17% Chart = ************************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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