The Option Investor Newsletter Sunday 07-23-2000 Copyright 2000, All rights reserved. 1 of 5 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/072300_1.html Entire newsletter best viewed in COURIER 10 font for alignment ****************************************************************** MARKET STATS FOR LAST WEEK AND PRIOR WEEKS ****************************************************************** WE 7-21 WE 7-14 WE 7-7 WE 6-30 DOW 10733.56 - 79.19 10812.75 +176.77 10635.98 +188.09 + 43.14 Nasdaq 4093.86 -152.32 4246.18 +222.98 4023.20 + 57.09 +120.77 S&P-100 804.55 - 10.97 815.52 + 12.52 803.00 + 12.75 + 9.18 S&P-500 1480.19 - 29.79 1509.98 + 31.08 1478.90 + 24.30 + 13.12 RUT 522.70 - 19.93 542.63 + 14.41 528.22 + 10.99 + 6.82 TRAN 2808.42 -110.62 2919.04 +134.40 2784.64 +139.27 + 14.66 VIX 21.47 - 1.14 22.61 + .79 21.82 - .44 - 3.63 Put/Call .59 .38 .48 .48 ****************************************************************** Up One Day And Right Back Down The Next By Eric Utley Buyer beware, this is not a friendly market! Investors scrambled to salvage their recent gains in the Tech sector Friday. The fading of Greenspan's voice coupled with a host of new earnings warnings prompted a profit taking sell-off Friday. The news of profit short-falls was enough to grab the attention of the bears and bring that formidable group out of hiding. Needless to say, we didn't get the follow-through day we needed after last Thursday's impressive rally. While the major indices didn't suffer serious technical harm after Friday's sell-off, it did suggest that investors are not quite ready to plow back into the market just yet. Over half of the S&P 500 and DOW companies have now reported their second-quarter numbers. According to First Call, around another 130 companies will report their results next week which we'll expand upon below. Of the companies that have reported their quarterly results thus far, amazingly, only 8% have disappointed. Historically, that number has stood closer to 25%. However, it seems that the small percentage of companies that have warned of lower-than-expected profits have had a much larger impact on the market than the majority that have surpassed estimates. Earnings warnings took their toll on the Tech sector Friday, led by the cautionary comments from A, LXK, and ERICY, not to mention the carryover of LU's disappointment on Thursday. HWP weighed heavily on the Industrials Friday in part from the warning issued by its spin-off A, and also from the cautionary tone from fellow printer maker LXK. Merrill Lynch issued a report Friday morning stating that HWP might suffer from LXK's warning. And suffer it did, HWP shed -$6. Among the other DOW losers were MSFT -$2.50, INTC -$4.50, HON -$1.50, JPM -$2.25, and EK -1.88. The DOW appears to be narrowing its three-month trading range. The index has been churning between the 10,500 and 11,000 levels since mid-April. The big decline Friday doesn't look too promising and could send the Industrials to retest its near-term support level at 10,700. A failure of support at that level might send the blue chip investors packing for a late-summer vacation and the DOW back down to 10,500. If the DOW's performance on Friday made you queasy, the NASDAQ might just put you over the edge. The Tech-laden index gave back all of its gains from Thursday's stellar rally. The COMPX finished the week in negative territory for the first time in four weeks. The warnings from A and ERICY rattled Tech investors, which prompted them to exit the NASDAQ. ERICY warned that its handset division would lose money this year, which erased 12% off the stock. The Semiconductor sector continues to show signs of weakness. The Philly Semi Index shed 12.8% last week, which contributed mightily to the NASDAQ's losses. It would appear that the once beloved Chip stocks have lost their leadership role. If it weren't for SUNW, the NASDAQ would have finished the day a lot lower Friday. In an atypical fashion, SUNW rallied over 6% after reporting better-than-expected profits and guiding analysts to higher growth estimates for the remainder of the year. The only standout winner on the NASDAQ Friday was the Biotech sector, which was ignited by the debut of several genomic related IPOs and anticipation of positive profits. The winners in the group included AMGN +$3.94, MEDI +$3.63, and IMNX +$2.81. While the NASDAQ's decline was a precipitous one, the volume was less than convincing. Which is about the only positive thing I can say about Friday's losses. Its two-month trend of higher prices is still intact, but like the DOW, the NASDAQ is looking a little top-heavy right now. It's those types of big rounding tops, that is clearly evident on the current chart, that bodes poorly for the index. Support at 4000 is both a psychologically and technically important level for the NASDAQ to trade above. A failure at 4000 might break the COMPX's string of higher lows, and could, dare I say, bring on the dreaded dip we have been fearing. After the big gap up in early June, there is little in the way of support preventing the NASDAQ from slipping back to the 3500 level. Along with Friday's nasty decline in the major indices, there are a few other cautionary flags being waved by the market. First, you may have noticed that a few IPOs have made their way to the headlines on CNBC. If you haven't noticed, the IPO market is showing signs of life. While it may be good for specific sectors of the market, it also means more supply of stock is making its way into investors' hands. And, like we mentioned above, investors' demand for stock is somewhat questionable right now. Moreover, the VIX is still hovering near relatively low levels. And, would you believe, the fear gauge actually dropped during Friday's sell-off. The complacency with which market participants met Friday's decline does not bode well for the market early next week. The CBOE equity Put/Call ratio did spike up Friday, but it's still reading fairly low numbers. One positive item I must bring to your attention is the recent action in the Long-bond. After Greenspan's hints of easing up on his rate rising binge, the Thirty-year bond rallied Thursday and again Friday, which of course sent yields lower. The 20-dma moving average of the yield of the 30-year turned downward last week, which may indicate a stabilizing of interest rates. And, of course, stabilizing or lower interest rates generally have positive implications for stock prices. After the final round of major earnings announcements are released next week, the market will give its full attention to the Federal Reserve meeting looming in the distance. Pay close attention to the action in the bond market. Many analysts have suggested that the Fed will only act according to what the market tells them to do. Although Greenspan has been criticized recently for trying to suppress stock prices, the bond market might be saying, "Hey Al, it's time to ease up." Those sweet nothings being whispered by the bond market into Greenspan's ear might signal the Fed chief to lighten up on rates. If so, the market might be poised for a big fall rally. We still have plenty of earnings reports next week that could sway the market one way or another. Of the companies expected to report next week, JDSU will most likely be one of the bigger releases. The fiber optic giant is scheduled to report after the close of the market Wednesday, which is coincidently, the same day the stock is being added to the S&P 500. Some of the other big names reporting next week include TXN, MRK, NT, XOM, T, NOK, EBAY, AMZN, WCOM, and AMGN. Along with the fresh crop of earnings announcements next week, two key economic reports are will be released. The Labor Department will report the second quarter employment cost index on Thursday. Most economists expect the ECI to rise between 1% to 1.2%. And on Friday, an advanced reading of second quarter gross domestic product will be released by the Commerce Department, which is expected to record an increase of about 3.6%. Also, Greenspan will grace the airwaves again when the chairman testifies to the House Banking Committee on Tuesday. Existing home sales and durable good orders for May will also be reported next week. Molly Evans wrote a fantastic article about the market's seasonal tendencies in her Traders Corner column last Thursday. If you haven't already, I highly suggest reading Molly's column, she puts out some great stuff! In her article, you will discover that the odds of a major market rally transpiring over the next several months are slim. However, if you must trade, may I offer the following. You've read the axioms several times here at OIN, such as 'don't fight the tape' and 'the trend is your friend'. They are general trading guidelines, but I've found the simpler rules are generally the most profitable. I'm also often reminded that the market is never wrong, only my opinions about it. With that said, whichever way the market decides to turn for the remainder of the summer let the tape be your guide. Ride the trend, cut your losses, and let profits run. May all your trades be profitable! Eric Utley Research Analyst **************** SEMINAR SCHEDULE **************** Seattle 3 day seminar begins next Friday July 21st. Don't miss it! 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 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************************* 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 ************************************************************** ************** EDITOR'S PLAYS ************** Here we are ending the third week of July with the market looking poised for a drop. The Tuesday/Wednesday sell-off this past week was pretty convincing, unlike the Thursday rally. On expiration Friday, the action wasn't any better as the Nasdaq sunk into the close, finishing under 4100 intraday support. In checking out last year's late-July meltdown, I noticed some similarities. Check out the charts below which show the VIX last year versus the VIX this year. 1999 VIX chart for July 2000 VIX chart for July You can see the similarities in both patterns. This goes along with the QQQ put play we were looking for this week. Remember, we were looking for an entry for either Thu/Fri/Mon. While watching the sell-at-all-costs action on Tuesday and Wednesday, I was waiting for a rebound to open a position. Sure enough we got it on Thursday and I went long QQQ puts on Friday. Last week's QQQ chart This week's QQQ chart As we scanned for new plays for the Calls and Puts this week, we have been pressed to find anything that looks good on the call side. When you look at 200 charts and find about five that look good enough to go long on, you learn to start taking the hint. If the market weakness persists, I will let these puts run. ********* New Plays ********* PVN - Providian Financial Here is an old friend we haven't seen in awhile. We used to play this stock all the time before they ran into legal trouble for over-charging fees to their customers. Now they are moving again as many Financial stocks are at or near new highs (MER, JPM, AXP, C and GS). The thing that caught our eye was the move above $100 on increasing volume. The play here is easy. We want to see $100 hold and the volume continue to increase as the stock moves up. ****** The QQQ puts are the only position I have right now. I am waiting for a dip to go long on some of my favorites again. I didn't list them because I don't expect to reach a short-term bottom in the coming week. I've said it before and I will say it again, I am looking for great entry points in the coming months to open positions for the fall rally. Until then, I will be picky about when and where I put my money. Jim was out-of-town this weekend, but will be back on Tuesday. Good luck! Ryan Nelson Editor **********************ADVERTISEMENT************************** Free voicemail, email, fax, and paging - all in one place! Accessible over the phone & Internet. Free Local & 800 Phone Number for Life! Send & receive faxes & email via the web or phone. ThinkLink charges no monthly fees. Plus, for a limited time, sign up now and receive an airline voucher worth up to $100 dollars off any major airline. FREE NOW! FREE FOREVER! http://www.OptionInvestor.com/tracking.asp?co=STThinkLink7172000 ************************************************************* **************** MARKET SENTIMENT **************** Firing On All Seven Cylinders By Austin Passamonte Well, Friday’s action pretty much summed up follow through on good volume from Thursday’s close. Smack-dab in the heart of earnings season, Pamplona on Wall Street but the bulls just can’t pull a sustained stampede together. Yes there were some solid days leading in but now what? Here we are in the middle of things, time to solidify our direction and go. All tech leaders, financials and stalwarts need to step in tune with each other. Taking turns each day is just treadmill behavior. Reminds me of my very first car, a 1970 Pontiac LeMans. Had a 350 4-bbl carb and 4:88’s in a posi-rear. Man that car would fly! Top end speed easily buried the 140 mph speedometer, or so I was told. Until the time arrived when one cylinder began to lose compression and like dominos, the other seven followed suit. If this summer rally is ever going to launch it needs to do so right now with all cylinders firing at once. Simple as that. No more waiting for the next report, Greenspan’s cryptic speech or any other lame excuse. A hard rally right off the starting line, right now. It’s a long ways until the next Fed meeting otherwise, folks. Let me ask you a serious question. Be honest now. If you had to guess where this market will head based on all the evidence, what would your verdict be? If 100% of your retirement fund was riding on the correct answer, what’s your reply? One roll of the dice, win or lose, all or none. What would your call be? That’s exactly the way we need to analyze facts and data leading away from here. Our future does depend on where the markets head to some degree or another. There can be no place for blind bias, hope or prayer. The market will do as it pleases and we can either ride the avalanche or get buried under it regardless of direction. Objectivity is money! I could clip & paste several prior “Sentiment” paragraphs to share with you again. As usual, there remain two major factors of concern. Yes the VIX. It slides lower & lower each day. Take a peek at historical charts when the VIX hits these levels and see how the DOW and OEX respond when it finally releases. Make up your own mind, don’t trust my lying eyes. Commercial traders on the S&P 500. They stubbornly added to a ten-year net short position right before the Dow & Comp heavyweights lined up to report. Are all these financial institutions daft, stupid or what? There’s a very good chance some of that money comes from your own bank loans or even 401K plans. Can we honestly believe they are acting like drunken conventioneers in Vegas? Those massive short positions likely consist of front and back-month futures contracts, some hedged with options. The giants scaled their way short as prices rose just like you and I cost-averaged JDSU down while it fell to $95. Did we have strong feelings the announced buyout of SDLI wouldn’t keep prices depressed very long? How’d that move turn out for us so far? The commercials are entrenched deeper short than any point this decade. More so than October of ’98, ’99 or the spring of 2000. That’s a pretty heavy bet on their part. Care to raise them & ante? I’ll fold and wait for a show of hands, thank you very much. The cards may begin turning face up on the table starting next week. Read ‘em and weep or gloat, depends on which side you buy in. Objectivity is money! 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. Thur 7/20 close: 22.06 Sat 7/22 close: 21.47 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 (7/18) (7/20) (7/22) ************************************************************* CBOE Total P/C Ratio .51 .46 .59 Equity P/C Ratio .45 .40 .55 Peak Volume (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 (7/18) (7/20) (7/22) ************************************************************** All index options 1.46 1.05 1.29 OEX Put/Call Ratio 1.39 .93 1.06 OEX Maximum Open Interest Strikes/Contracts: Puts 800/6,839 800/7,371 A790/5,794 Calls 825/16,857 825/14,660 A800/3,187 Put/Call Ratio .41 .50 1.82 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: (7/18) (7/20) (7/22) Overhead Resistance: (840 - 820) 25.27 168.76 17.20 (815 - 800) .93 .95 1.47 OEX Close: 807 813 804 Underlying Support: (800 - 785) 1.75 2.08 1.51 (780 - 760) 5.18 5.86 2.43 What the S/R measure indicates: Net open-interest ratios are firm above 820 OEX level while underlying support is light. New volume this week will adjust these figures soon. The OEX appears to remain below 820 for discretionary spread or directional play consideration if the index tests this benchmark of resistance. 30-yr Bond: 5.91% 5.81% 5.79% Light, Sweet Crude, Barrel: $30.64 $30.50 $28.56 200 Day Moving Average (as of 7/17) The 200 DMA is widely considered the major benchmark for critical support in a market. DOW; 10,750 10,739* 10,843 10,733 NASDAQ; 3,831 4,177 4,184 4,094 NDX; 3,551 3,960 3,995 3,908 SPX 1417 1493 1495 1480 OEX 762 807 813 804 CBOT Commitment Of Traders Report: Friday 7/14 Biweekly COT report discloses positions held by small specs and commercial traders of index futures contracts on the Chicago Board Of Trade. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs are not. Extreme divergence between each signals a possible market turn in favor of the commercial trader’s direction. Small Specs Commercials DOW futures Net contracts; +326 long +59 long Total Open Interest % 2.3% net-short .4% net-long NASDAQ 100 Net contracts; - 689 short - 5,578 short Total Open Interest % 2.6% net-long 38% net-short S&P 500 Net contracts; +36,908 long -44,272 short Total Open Interest % 9.8% net-long 11.8% net-short BULLISH SIGNALS Interest rates 5.79% on the 30-year Treasury Bond may be signaling the rate fears are over. Fed-Fund futures are pricing a 50% chance of one or more rate hikes, .25 basis at this time. 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 last week. Many issues beating the street with a majority still to report. IPO’s Numerous IPO’s have been met with positive enthusiasm. ****** BEARISH SIGNALS VIX Today’s close near 21.47 is getting worse. We may have seen the market top, near term. Energy Prices Prices are still too high. Ultimately this affects profit margins and inflation. August Crude closed $28.56 today. Seasonal energy patterns typically bottom by late summer, but heating & fuel oil expected to be very high this fall. COT Report Latest updated figures show small spec traders heavily long S&P 500 contracts while commercial traderss continue to build five-year extreme short position. Widening divergence in NASDAQ 100 futures market with commercials becoming heavily net-short. Divergence suggests possible market turn in favor of commercials soon. Seasonal Tendency The last two years have seen expiration Friday result in market decline through fall. Broad market strength this week will be vital to prevent history from repeating. Broad Market Weakness All major indexes and most of the individual sector leaders are suffering extreme weakness on a sustained basis. ************** MARKET POSTURE ************** As of Market Close - Sunday, July 23, 2000 Key Benchmarks Broad Market Last Support/Resistance Alert ************************************************************ DOW Industrials 10,733 10,550 10,950 SPX S&P 500 1,480 1,435 1,520 OEX S&P 100 804 775 822 RUT Russell 2000 522 500 550 NDX NASD 100 3,908 3,580 4,100 MSH High Tech 1,034 985 1,100 XCI Hardware 1,540 1,440 1,600 CWX Software 1,211 1,160 1,360 SOX Semiconductor 1,082 1,060 1,281 NWX Networking 1,313 1,250 1,400 INX Internet 568 470 605 BIX Banking 558 540 580 XBD Brokerage 571 500 590 IUX Insurance 633 610 660 RLX Retail 914 860 960 DRG Drug 390 385 430 HCX Healthcare 808 800 880 XAL Airline 169 156 178 OIX Oil & Gas 279 264 308 ** Comments - Oils (OIX) broke support and didn’t mount much of a fight. Being in the right sectors and assessing risk remains critical. If institutions are indeed selling the Oils, they will be putting the money somewhere else. Upward Support Revisions (MSH from 965) Downward Resistance Revisions (INX from 637)(OIX from 315) Downward Support Revisions (OIX from 285) ***********************ADVERTISEMENT************************ Get a NextCard Visa, in 30 seconds! 1. Fill in the brief application 2. Receive approval decision within 30 seconds 3. Get rates as low as 2.9% Intro or 9.9% Fixed APR http://www.nextcard.com/index6.html?ref=aff0049911 ************************************************************ ************* SECTOR TRADER ************* Volatility Changes Ahead By Buzz Lynn sectortrader@OptionInvestor.com Have you been looking for a directional trade to buy low and sell high? With the exception of maybe a well-timed, but short-term Biotech (BBH) or Broadband (BDH) call, it's been tough to earn a buck as volatility has fallen to recent lows - that is unless you've been selling time rather than buying it. By selling puts and calls instead of buying, time value in options decreases on the other guy, not on us, with just the passage of time. That premium evaporates right into our pocket even as we sleep. Sounds like a great plan. Why would we want to do anything else? The answer is "volatility change". How important is it? Volatility (generally measured as the VIX, or volatility index, but every option has its own implied volatility) determines the time value component of the option's price. When volatility is high, options are expensive. When volatility is low, options are cheap. With the VIX now at 21.47, its lowest closing level since March 3rd, options have become relatively cheap on a historic basis. Remember the VIX has a typical range of roughly 20-30. Here's the rub. The VIX also generally signals a breakout or breakdown when it reaches either extreme, but it does not always accurately predict market direction. The market could move either up or down. With earnings more than half over (a few more biggies left to report this week, including TXN, NT, AMZN, JDSU, and WCOM), and many companies getting clobbered if they don't blow away the numbers, we don't see much of a reason for prices to rise, except perhaps on a few well-picked stocks with great outlooks. "Summer Rally" may have already come cleverly disguised as earnings season. Also, as Austin Passamonte has pointed out in the Market Sentiment many times, the COT indicates a big divergence between retail long positions and commercial short positions. Right now, commercials are heavily short and usually right in their anticipation of market movement. While we'll stop short of calling for a market reversal to the downside, it could happen. But no matter what direction, volatility is sure to reverse and rise with any big market move. That said, it reasonable to conclude that buying cheap and selling dear is a smarter plan right now than selling cheap and buying dear, especially if the market decides it wants to head back under 4000. Consider closing those short strangle positions before increasing volatility makes the value of the sold position more expensive. The point is that with volatility low, now is the time to consider buying cheap premiums with the idea that any increase in volatility will increase the time value, and thus the total value of the option. To that end, our HOLDR selection has stayed the same, but we're changing the nature of some of the plays to take advantage of what we think will be an increase in volatility coupled with a breakdown of the current trading range (at least on the NASDAQ). So that time decay doesn't affect our positions that much, we are going to look at longer time horizons on a few of them in order to give ourselves enough time to be right and not suffer catastrophic losses if we are wrong. Our intent is to say hedged. Can you say "Long Straddle"? Sure, we knew you could! Read on! Want more understanding of volatility? Be sure to read past columns by Lynda Schuepp, Mary Redmond, Austin Passamonte, and Chris Verhaegh. Index Last Mon Tue Wed Thu Fri Week QQQ NASDAQ-100 97.56 1.06 -2.69 -2.88 2.25 -2.75 -5.00 HHH Internet 117.50 0.44 -1.88 -2.06 5.88 -4.38 -2.00 BBH Biotech 188.00 4.06 1.13 -6.88 1.19 4.50 4.00 PPH Pharm. 96.75 2.75 -1.25 -0.69 -2.19 0.94 -0.44 TTH Telecom 74.13 -1.94 0.06 -0.63 -1.06 0.44 -3.13 IAH I-net Arch. 100.19 1.38 -2.38 -1.19 5.25 -0.63 2.44 IIH I-net Infr. 63.69 0.06 -1.19 -3.38 4.75 -2.75 -2.50 BHH B2B 49.00 -0.19 1.00 -4.00 2.75 -2.94 -3.38 BDH Broadband 97.69 3.06 -3.63 -2.25 0.31 -0.13 -2.62 SMH Semicon. 89.63 1.63 -4.56 -3.50 -1.69 -3.81 -11.94 RKH Reg. Banks 98.63 -1.69 -1.38 1.25 2.25 -1.44 -1.00 UTH Utilities 93.75 0.06 0.06 1.63 -0.75 -0.25 0.75 ************** Updates ************** QQQ - NASDAQ 100 $97.56 (-5.00 last week) Let's get right to it. Resistance lately has made itself known around $100, with extremes reaching to $102. Support has been pretty good at $96 with the next level hovering in the $92-$93 range. While it doesn't appear to be a larger trend, $97 held up well over the last two days. With earnings season already more than half over and winding down this week, an upside breakout of the QQQ appears unlikely any time soon. By definition then, it remains rangebound with the possibility of further declines. While CSCO and DELL won't report for a while longer, MSFT and INTC did nothing to bolster confidence in the tech sector when they reported last week. Those two, along with CSCO make up a big chunk of the NASDAQ-100, and will often lead the broader moves. Couple that with a low VIX, and a preponderance of commercial shorts and we can see the storm clouds of breakdown forming on the horizon. Nonetheless, there are bright spots with JDSU (which promised to exceed analyst estimates) reporting earnings on Wednesday. At least the optical arena should remain strong until then. However, that cannot compensate for a weak broader market. With the possibility of volatility increases, we'll stick to buying cheap this weekend and avoid selling premiums that could cost more to buy back on a volatility spike. Short Strangle: While we love the concept of time decay working in our favor, options have become cheap enough with the possibility of becoming more expensive in the near-term that we no longer suggest taking any new short strangle or straddle positions. It doesn’t mean you shouldn't do it as long as you thoroughly understand the risks and can move quickly if the trade goes against you. We simply favor buying cheap and hedging over selling cheap and hedging. You may want to consider closing any open straddle or strangle positions so the premiums don't re-inflate on you, making it more expensive to cover. If you are in a play already, no worries! Simply be prepared to cover if one of your sold strikes goes in the money by an uncomfortable amount. Only you can determine that level based on your own risk profile and strike price. Long Straddle: A straddle is the simultaneous purchase of a put and a call at the same strike price. Our desire is to see a big breakaway from the strike price - big enough to cover the cost of both the put and call, and give us profit in the process. Profits naturally come from an intrinsic value move, but the gravy here is that we get even more value if increased volatility increases the amount of time premium we own. Cheap time is what we want to take advantage of when we buy. That market condition exists now as indicated by the low VIX. That's the second of three conditions to satisfy before entering. The first is that we must expect a big move in either direction with the expectation that volatility will increase. The third is that we must give ourselves enough time to be right, say 30 days, without having our purchased premiums decay significantly on us. Thus we need to sell at least 60 days before expiration. By definition, that means we buy strikes at least 90 days, or three months out - preferably 120 if it's affordable. Remember though these look expensive on the surface, a volatility spike will increase their value even if the underlying issue doesn't budge. Can you see that if options are expensive and the price of the underlying doesn't move, it's much more difficult to profit? That's why premiums need to be historically cheap. For starters, you may want to buy ATM strikes. If you are more aggressive and expect a bigger move, you could enter a long strangle on this position too. That would keep the premiums cheaper, but it means we'd need a bigger move to be profitable. Straddle: BUY CALL DEC- 96 QVQ-LR OI= 981 at $13.63 BUY PUT DEC- 96 QVQ-XR OI=4875 at $10.00 Net Debit = $23.63 or less BUY CALL DEC- 98 QVQ-LT OI=1829 at $12.50 BUY PUT DEC- 98 QVQ-XT OI= 80 at $11.00 Net Debit = $22.50 or less Strangle: BUY CALL DEC-100 QVO-LV OI=4667 at $11.50 BUY PUT DEC- 94 QVQ-XP OI=1525 at $ 9.13 Net Debit = $20.63 or less Covered Call: Yes, QQQ is still rangebound. With earnings winding down at the end of the week and the possibility of slump afterwards, if you are not already in a position, there may be a better buying opportunity this coming week. Should QQQ take a dip, two things would happen. First, you could buy the QQQ cheaper. Second, while you would lose some intrinsic gain potential, selling ATM strikes might get you a better yield thanks to increased time value premium in the sold strike. Consider dips to $96 or even $92-$93 as a buy/write opportunity. If you are a bit more aggressive, you could buy the QQQ on a dip and sell calls on the rebound. Resistance is mild at $99 and stronger at $100. The good news is that you can still make money whether the volatility is high or low since you still collect a premium. The danger is that QQQ continues to fall below your net debit cost. So be prepared to exit when you reach you pre-determined level of pain. That might mean a 3% loss of position value from the time of purchase. Use that as a rough guideline. Everyone is different. The point is you don't want your $93 net debit position to get to $80. Sell too soon if the trade goes against you. QQQ = $97.56 SELL CALL AUG- 97 QVQ-HS OI= 552 at $ 5.75, ND = 91.81 or less SELL CALL AUG- 98 QVQ-HT OI= 1462 at $ 5.13, ND = 92.43 or less SELL CALL AUG-100 QVO-HV OI= 6652 at $ 4.13, ND = 93.43 or less SELL CALL AUG-103 QVO-HX OI= 181 at $ 2.94, ND = 94.62 or less Calendar Spread: This one acts much like a covered call, except that you DON'T want to get called out of your long underlying call. The objective here is to sell a new strike every month using the collected premium to reduce the net cost of the underlying position to zero. Again, consider waiting to buy the dip. Once you do, you could buy the underlying long-term call. Support is at $96, then again at $92-$93. Then you could simultaneously sell a near-term call, or wait for a bounce up to sell a higher priced strike. Resistance is at $99, then $100. It's important to remember to cover by buying back the sold strike if the underlying stock (QQQ) significantly exceeds the strike value or if the time portion of the total premium gets really low in a hurry. Hopefully you won't wait that long as it could become painful in the latter situation. Sell too soon. BUY CALL DEC- 94 QVQ-LP OI= 1602 at $14.63 SELL CALL AUG- 97 QVQ-HS OI= 552 at $ 5.75, ND = 8.88 or less SELL CALL AUG- 98 QVQ-HT OI= 1462 at $ 5.13, ND = 9.50 or less SELL CALL AUG-100 QVO-HV OI= 6652 at $ 4.13, ND = 10.50 or less SELL CALL AUG-103 QVO-HX OI= 181 at $ 2.94, ND = 11.69 or less Long Calls You can trade these at support and resistance - $96 support followed by $92-$93; resistance is at $99 and $100. However, when the market is locked in a trading range. This is a tough way to earn a buck. Friday had a bit more NASDAQ selling volume than we'd like to see and the market lost its bullish bias on that down day. You need to be agile here and possess some good trading skills to earn a living with this strategy, but it can still be profitable. At Support: BUY CALL AUG- 93 QVQ-HO OI= 1055 at $8.13 SL=5.75 BUY CALL AUG- 98 QVQ-HT OI= 1462 at $5.13 SL=3.00 BUY CALL AUG-100 QVO-HV OI= 6652 at $4.13 SL=2.50 At Resistance: BUY PUT AUG-100 QVO-TV OI= 2965 at $6.25 SL=4.25 BUY PUT AUG- 98 QVQ-TT OI= 3866 at $5.38 SL=3.50 BUY PUT AUG- 93 QVQ-TO OI=10893 at $3.13 SL=1.50 Naked Puts Premiums are getting to cheap to sell with the risk of a reversal in volatility, not to mention the potential for a drop in stock prices after earnings season winds down. No naked puts to sell. Average Daily Volume = 24.77 mln ----- BBH - Biotech $188.00 (+4.00 last week) Hmmm. Looks like a $180- $190 trading range has started to develop for BBH. The good news is that BBH found support just over $183 and confirmed the move up by breaking back over $184 convincingly. That would have made a nice entry. Intraday, $187 held as support. Since BBH is once again nearing resistance, we'll want to be protective of our profits by keeping a stop in place, say for any move under $187. At that point we will have to evaluate the reason for staying long the BBH, and perhaps turn it into a straddle/strangle play. But for now we stay long calls. If BBH can break $191.50, the closest point of resistance, that would be a cue to consider going long for a ride into blue sky. BUY CALL AUG-180 BBH-HP OI= 46 at $16.50 SL=12.00 BUY CALL AUG-185 BBH-HQ OI= 65 at $13.75 SL= 9.00 BUY CALL AUG-190 BBH-HR OI= 99 at $11.13 SL= 8.25 Average Daily Volume = 605 K ----- HHH - Internet $117.50 (-2.00 last week) With YHOO, ATHM, and AOL already reporting earnings, this sector should have taken a beating, but it hasn't. Support at $117, then $115 is holding well. Careful though. PCLN reports Monday; EBAY and ELNK report Tuesday and AMZN reports Wednesday. Any of these that disappoint could send HHH on fast trip to the basement. Until then the anticipation should keep the sector on solid ground if the rest of the market cooperates. Dip buying could work well here on Monday as long as HHH remains above $115. Move on if it doesn't. Resistance is at $122, so HHH has room to run. BUY CALL AUG-115 HHH-HC OI= 48 at $ 9.13 SL=6.25 BUY CALL AUG-120 HHH-HD OI=222 at $ 6.75 SL=4.75 BUY CALL AUG-125 HHH-HE OI=123 at $ 4.75 SL=3.00 Average Daily Volume = 928 K ----- BDH - Broadband $97.63 (-2.62 last week) While BDH has been finding support at $96 for the last two days, those days may be numbered - but not until LU and JDSU report earnings Tuesday and Wednesday, respectively. JDSU has already promised to beat estimates, while SDLI's conference call was a big winner too. Sequential growth was over 30% without acquisitions figured in. Gross margins went form a high 52% to a lofty 57%. SDLI is one money making machine. Where there is one cockroach, there are many, so look for continued strength through Wednesday. Technically, BDH's pullback and bounce off its 10-dma of $96.40 is a good sign, especially in a weak market like we saw on Friday. However $100 is tough resistance. We think BDH is playable now or on any pullback under $97. But if you are more conservative, you may want to wait for a breakout over $98 before getting in. If you sell puts, get ready to cover by mid week on any post-earnings depression form NT and JDSU. BUY CALL AUG- 95 BDH-HS OI= 41 at $ 7.88 SL=5.50 BUY CALL AUG-100 BDH-HT OI= 38 at $ 5.25 SL=3.25 BUY CALL AUG-105 BDH-HA OI= 43 at $ 3.38 SL=1.75 SELL PUT AUG- 95 BDH-TS OI= 30 at $ 4.13 SL=6.00 Average Daily Volume = 153 K ----- IAH - Internet Architecture $100.19 (+2.44 last week) With DELL and CSCO yet to report earnings (early August), and with its soul mate, BDH on a good run, we stay long on IAH. Technically, while resistance has been formidable at $101 the last two days, the 5- dma of $98.50 continues to hold. It's still showing strength in the face of market weakness. That said, feel free to buy dips to that level (for those with itchy trigger fingers) or wait for another pullback to the historical support level of $97. Likewise, a breakout over $101 would leave smooth sailing all the way to the next resistance at $105. Looking good. Relatively cheap options too. BUY CALL AUG- 95 IAH-HS OI=40 at $7.13 SL=5.00 BUY CALL AUG-100 IAH-HT OI=31 at $4.13 SL=2.50 BUY CALL AUG-105 IAH-HA OI=44 at $2.06 SL=1.00 Average Daily Volume = 44 K ************** No Play ************** PPH IIH BHH SMH TTH RKH UTH ************* COMING EVENTS ************* For the week of July 24, 2000 Monday None Scheduled Tuesday Existing Home Sales Jun Forecast: 4.80M Previous: 5.09M Consumer Confidence Jul Forecast: 139.0 Previous: 138.8 Wednesday None Scheduled Thursday Initial Claims 07/22 Forecast: 285K Previous: 311K Employment Cost Index Q2 Forecast: 1.4% Previous: 1.4% Durable Orders Jun Forecast: -0.4% Previous: 6.0% Help Wanted Index Jun Forecast: NA Previous: 83 Friday GDP Q2 Forecast: 3.7% Previous: 5.5% GDP Chain Deflator Q2 Forecast: 2.5% Previous: 3.0% Michigan Sentiment Jul Forecast: 108.0 Previous: 108.0 Week of July 31st 07/31 Chicago PMI 08/01 Personal Income 08/01 PCE 08/01 Auto Sales 08/01 Truck Sales 08/01 Construction Spending 08/02 New Home Sales 08/02 Leading Indicators 08/03 Initial Claims 08/03 NAPM Services 08/03 Factory Orders 08/04 Nonfarm Payrolls 08/04 Hourly Earnings 08/04 Average Workweek ************************Advertisement************************* Tired of waiting on trades to execute? 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The Option Investor Newsletter Sunday 07-23-2000 Sunday 2 of 5 To view this email newsletter in HTML format with imbedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/072300_2.html ************** TRADERS CORNER ************** Profiting from puts after earnings By Mary Redmond Since many stocks go down after their earnings are reported it is often possible to profit by buying a put on a stock the day after earnings are reported. This strategy is best used in a down trending market. If the markets are trending lower you can look for stocks which have just reported earning which were below the analysts expectations, or in some cases earnings which only match the expectations. Broadcom reported earnings on Tuesday evening. The earnings were excellent, which was probably expected because the stock has a history of superb earnings in a rapidly growing industry. This is part of the reason Broadcom has grown to be a $50 billion dollar company from a $10 billion dollar company in only a couple of years. On Wednesday Broadcom traded at $145 in the morning. The Dow and Nasdaq were both trending lower. The VIX was 22. BRCM's technicals were giving sell signals. For example, the MACD histogram was starting to move to the negative from the positive. The stochastic oscillator lines were both crossing the high level to the low level. In addition, Broadcom had recently moved up nearly 100 points in two months. It seemed highly likely that the stock was due for a sell off the day after earnings in a down trending market. So I sold BRCM at $145 and the stock dropped over 8 points for the day. It is possible to make money buying calls or stocks in a down market, or puts in an up market, but the percentage gain will usually be less. It is usually easier to make money by following the trend of the market, the sector and the stock. Before you buy calls it is usually best to see both the Dow and Nasdaq up (ideally) or at least the Nasdaq if you are trading tech stocks. There are exceptions to this rule. For example, on Friday the Dow and Nasdaq were both lower and JDSU was trending higher. The live charts showed the trades going through fast and furious, with people breaking down the doors to get in to this stock. The day before news came out about the stock being added to the S&P 500, and over 70 million shares traded. Buying a call on Friday morning was one of the easiest trades I ever made. However, opportunities like this don't come along very often. It is also important to use as many technical indicators as possible. None of the technical indicators are accurate 100% of the time. A combination of technical indicators works best. For example, the stochastic oscillator can be a buy signal if the lines move from an oversold condition (approaching 0) to the middle line of the chart. But the stochastic alone is not as accurate as the stochastic together with the MACD histogram. Ideally, you should have an understanding of the company's business model along and trading pattern, and use this in conjunction with as many technical indicators you can. The simplest way to make money on the downside is probably to buy put options. Some traders sell stocks short when they think the stock will drop. If you sell a stock short when it is going down and the market is going down you may be able to buy it back cheaper. However, it is highly risky to hold a short position overnight in today's highly volatile market. This is because stocks gap up at the opening frequently if news is released prior to the market open. For example, if you had sold JDSU short on Wednesday, you might have had to buy it back at a much higher price the next day. AMG Data reported that last week's inflows to equity funds were higher than they had been over the last two weeks. A total of $3.2 billion in net cash went into equity funds for the week ending July 19th. This included a net inflow to technology and growth funds, with net outflows from biotech, health care and international funds. The investment company institute's web site reported that retail money market funds had a net inflow of $3.63 billion and institutional money market funds had a net outflow of $1.9 million. The flows were slightly lower than the flows reported in June, but the net level is still positive, and the four week moving average into equity funds is a positive of approximately $2.5 billion. Margin debt at NYSE firms in June rose $6.5 billion or 2.7% to $247.2 billion in June from the end of May. In addition, withheld income tax collections rose to $48.2 billion during the first eight business days of July, a 12.2% gain over last July. This is important because it can indicate whether or not businesses are slowing down, which can slow down cash flows to 401K plans and retirement contributions. If these numbers slow to a single digit net gain from last year it may indicate that flows to the market might slow. The ipo market was also robust this week. The new public stocks included DCGN, TBIO, AGNT, SPRT, VASC, AIRN,and ERJ, all of which traded at a strong premium from the opening price. Many more ipos have been priced to start trading in the next few weeks. If ipos start trading at high opening prices this is usually a short term bullish indicator. However, it is worth noting that many more ipos are being priced than are actually coming to market, which means institutional and retail selectivity remains high. It also indicates that the ipo market may not be drawing as much cash away from the market as it did in previous quarters. If you talk to most retail and professional traders as well as fund managers most of them would probably say that they expect the markets to rally this fall. Those same people would most likely say that they expect a correction at some point between now and next November. It seems like many traders are hanging in there and trying to eke out the last little bit of profit they can get before taking off for vacation, and yet no one wants to miss the rally they expect in the fall. Contact Support ****** Butterfly, Butterfly, Where Did You Go? By Lynda Schuepp On July 2, I wrote an article about a butterfly spread on GE as an appropriate strategy for a sideways market. I never dreamed it could have turned out so perfectly. Imagine making 146% in a sideways market on a stable blue-chip stock? Let’s review, shall we? In a sideways market, the trading range is typically support and resistance. An appropriate and simple sideways spread is a long butterfly, which consists of a bull and bear spread, using all calls or all puts. Details can be found in my past article from July 2nd: “Where did they put Ole Jesse James”. To review, the structure of a butterfly spread consists of a body made up of 2 short options and one long option for each wing, using all calls or all puts, all expiring in the same month. In the article I selected GE calls to construct this spread. Based on the criteria given in the article, I selected the July 50, 55, and 60 calls. We bought one unit of the July 50 calls, sold two units of the 55’s, and bought one unit of the 60. The bottom half of the butterfly is nothing other than bull call spread. You are buying the July 50 call and selling the July 55 call. The top half is a bear call spread-selling the July 55 call and buying the July 60 call. The downside break-even was 51-5/8 (50 plus the cost of 1-5/8), and the upside breakeven is 58-3/8 (60 less the cost of 1-5/8). The maximum profit is obtained if the stock closed at 55, the middle strike. GE closed at 54-1/8; it doesn’t get much better than that! Here is the Chart I used to determine the spread on 7/2: GE had been in a trading range since the third week in March with support at 48 and resistance at about 55. GE closed at 53 on July 2nd. At that time, I had decided to take the higher range of strikes 50-55-60 instead of 45-50-55 because I was more bullish after that large up candle on June 30th. Remember, maximum profit is obtained if the stock closes at the middle strike. Since GE was already at 53, I thought it was more likely for GE to close at 55 versus 50. Based on the option prices at that time, the July 50 calls would have cost about 2-1/2 each; the July 55 calls could have been sold for about 1/2 each; and the July 60 calls would have cost about 1/8. Total cost for the spread was about 1-5/8. The maximum reward was 3-3/8, (5 less 1-5/8). An updated chart of GE till expiration on Friday is shown: Notice GE stayed in that same channel and never broke below 48 or above 55. The next couple of days after putting on the spread, GE danced around the lower break-even and got as low as 49-1/2, but never hit the stop, which was set at resistance of 48. At expiration on Friday, the 50 calls closed at 4-1/8 x 4-3/8. We could have sold them for at least 4-1/8. In fact they traded as high as 4-5/8 during the day. The 55 calls closed at 1/16 and traded as high as 3/16 during the day. You could have let the 55 calls expire worthless, but for such small change it is always better to buy back the short option. The 60 call closed at an ask of 1/16, which you never would have been able to get and probably wouldn’t have been worth the commission for most people to do so. The 60 calls would obviously have expired worthless. Let's summarize: The July 50 calls could have been bought at 2-1/2 and sold at 4-1/8, profit 1-5/8 per contract. The July 55 calls could have been sold at 1/2 each and bought back at 1/16, profit 7/8 per contract. The 60 calls could have been bought at 1/8, loss of 1/8. Total profit was 2-3/8 per contract. That is a 146% return in only 19 days on a very conservative strategy in a sideways market. Annualize that return and you will find that it translates to over 2000%! Since GE is a bell-weather stock, a lot of analysts use it as a barometer of the overall market. With Greenspan not definitive (is he ever), it is highly likely that GE will continue to trade sideways with a slight bias to the upside. The butterfly spread still might be an appropriate strategy to use for August using the 50-55-60 calls again, but be careful because stocks and markets don’t stay range-bound forever. It the stock closed below support or above resistance, get out and don’t look back. If I were to put on this same spread for August it would cost about 2-5/16, that’s the total risk. Maximum reward is 2-11/16 (5 less 2-5/16) or about 115%. My minimum criterion is a 150-200% return on this strategy. Even though the price of GE is close to what is was when the spread was put on in July, the cost of the spread is a little too high. The reason for this is two-fold. First, there is more time until the August expiration so the “in-the-money” call (August 50) will be proportionately more expensive because of time value and secondly, GE is 1-1/8 higher than it was when the July spread was put on, so the “in-the-money” call (August 55) will also have more intrinsic value. I will be watching GE to see if there is an entry a little later on this week. It is possible that if GE goes up to 55 or 56, the short calls (August 55’s) will offset the cost of the August 50. Good luck and always keep learning. P.S. I have updated the orginal spreadsheet on GE with the expiration information as well as the August prices as mentioned in the article. I would be happy to e-mail anyone interested in it. Also a reader send me a dynamite update of my old spread- sheet, but I must have zapped it, so if you are that reader, please re-send to me, I would love to update my spreadsheet before sending my new one out to readers. Contact Support ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************* OPTIONS CLUB UPDATE ******************* Update from St. Louis Hi folks: We had our regular fortnightly meeting on July 10. Our next meeting will be July 24 where we will review additional information on the Bollinger Bands. Meeting is 7:00 pm at our regular location. Our meetng attendance continues to increase. Reminder of our Thursday lunches at Ozzie's. I have our room reserved through August. At our meeting we reviewed the first part of the Bollinger Band video. The segment we viewed traced the history of various means of banding stock prices including Keltner, Bomar and finally Bollinger Bands. The Bollinger Bands are created such that they are not a fixed distance from the moving average, but instead are calculated based upon price volatility; specifically the bands are calculated based on 1.5, 2.0 or 2.5 standard deviations of the closing price relative to the moving average over the duration of the period. The recommendation is that short term traders might consider using 10 period intervals and bands that are 1.5 standard deviations on either side of the moving average, intemediate term traders might select 20 period intervals and 2 standard deviations with long term traders picking 50 intervals with 2.5 standard deviations. The period can represent days, weeks, 15 minute intervals or whatever the trader may be interested in. Backtesting with a 10, 20 and 50 period interval is recommended to see what works best with a given security to identify price trends and breakouts. We also discussed several upcoming seminars. Information is available from various members. We are considering the start of a resource library including books and tapes contributed by members of the group as well as those we may buy as a group. The location and accounting is to be determined. A collection was taken up at the end of the meeting to offset the cost of the Bollinger tapes. At future meetings we will pass an envelope asking that attendees (other than first timers) contribute $5. Denny Fischer volunteered to be the treasurer and donated the collected funds from the last meeting as seed money for a club checking account from which we can pay for subsequent educational materials or other expenses. An envelope will be routed beginning next meeting. Payment will be on the honor system. We are still waiting for a response from OIN for a guest speaker. The indices have shown they have no intention of revisiting 9k or 3k. I believe we will see it flat to down over the next couple of months as the past gains are digested, the earnings outlook improves and the political landscape becomes clearer. Good time to sell covered puts and calls. I expected MO to turn up after the Fla jury rewarded smokers for their habit (some of the jurors were smokers-isn't that a conflict of interest?). I still believe we will see it move strongly when the appeal information is firmed and they begin showing improvements with their other divisions (of course everybody knows I'm long the LEAPS). Lots of good stocks with good propects. Anyone with plays or comments they want to share, pleas pass on. Attached is the information Vernon discussed at the last meeting from TC 2000. Good trading. I'm off to the island of Margaritaville tonight to see JB. Maris Contact Support ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* HGSI - Human Genome Sciences $162.50 (+9.25 last week) See details in sector list Put Play of the Day: ******************** CMOS - Credence Systems $46.69 (-9.63 last week) See details in sector list **********************ADVERTISEMENT************************** Free voicemail, email, fax, and paging - all in one place! Accessible over the phone & Internet. Free Local & 800 Phone Number for Life! Send & receive faxes & email via the web or phone. ThinkLink charges no monthly fees. Plus, for a limited time, sign up now and receive an airline voucher worth up to $100 dollars off any major airline. FREE NOW! FREE FOREVER! http://www.OptionInvestor.com/tracking.asp?co=STThinkLink7172000 ************************************************************* ************* DAILY RESULTS ************* Index Last Week Dow 10733.56 -79.19 Nasdaq 4094.45 -151.73 $OEX 804.55 -10.97 $SPX 1480.19 -29.78 $RUT 522.70 -19.93 $TRAN 2808.42 -110.62 $VIX 21.39 -1.22 Calls CRA 112.38 20.06 New, strong sector and Aug.3rd earnings HGSI 162.50 9.25 Biotechs buck trend with 2 day rally PVN 102.38 7.88 New, blow out numbers and analyst talk VRTX 120.19 5.19 MUST exit this play by Tuesday's close COF 55.81 4.81 New, "Charge It!" is music to COF's ears MRVC 75.50 2.88 Keeps on running before Thursday earnings NT 81.25 2.06 MUST exit this play by Tuesday's close DISH 44.94 0.75 "Dishing" up another earnings play SCMR 138.75 0.56 Stealing optical market share from LU ARBA 124.81 0.25 Consolidation and breakout pattern intact BRCD 199.88 -6.06 Dropped, long and profitable run CREE 138.44 -10.75 Dropped, falling on increasing volume GSPN 133.94 -12.06 Patient traders got numerous entry points CFLO 70.00 -13.00 Dropped, plunged through major support TIBX 112.00 -15.00 Dropped, appears to have lost momentum KANA 54.00 -16.44 Dropped, can't ignite further euphoria CMTN 84.38 -30.88 Analysts still like the DSL company Puts CMRC 53.38 -16.56 New, freefall after earnings is the play RFMD 75.38 -13.19 New, will Jon Joseph get the last laugh? ELON 39.00 -10.81 New, didn't even run up into earnings! CMOS 46.69 -9.63 Could it be, just maybe, the semis peaked? CHV 78.50 -5.22 Dropped, performed like a trooper GTW 62.88 -3.50 It's been a tough summer for box makers IP 34.75 -0.84 Nice try by bulls, bears still in charge AETH 183.00 1.63 Dropped, earnings Tuesday BEFORE the bell ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS KANA $54.00 (-16.44) Any last minutes hopes for an upswing have evaporated. KANA's slump on Friday put it well below the near- term DMAs. If you had any existing positions, your stops should have certainly bailed you out. Even though there's three sessions left to trade, an entry off this level is not wise. KANA would have to ignite an astonishing display of euphoria, and at that, you'd have to exit so quickly and precisely that it's just not worth the risk. So move on to greener pastures. There are other opportunities out there from which to profit. The company is reporting earnings this Wednesday, after the market, so close open positions prior to the close. BRCD $199.88 (-6.06) We have had a long and very profitable run on our BRCD play, but it is time to move on. Since picking the stock in early June below $140, we have watched in amazement as buyers have flocked to the stock, driving the price as high as $211.25 early last week. Although there is still more than 3 weeks until the company announces earnings in mid-August, the stock is looking a bit top-heavy at these lofty levels. The price action over the past several days has become more and more directionless (or less directional, whichever you prefer), making us think that we may be near a top. Although there may still be more profit in the play, the deteriorating sentiment in the broader markets is making us nervous. Rather than hold on in hopes of another spurt as earnings approach, we are content to take our profits and go searching for a new play that isn’t quite so long in the tooth. TIBX $112.00 (-15.00) The darling known as TIBX has appeared to have lost its momentum. After successfully rallying for nearly four straight weeks, TIBX succumbed to profit taking and the B-2-B bears last week. There was no specific news to spur the selling last week, rather, traders decided to lock in their gains after TIBX's fantastic run. The stock closed well below its 10-dma for the first time in over a month. Friday's slide below $115 should have triggered some of our stops and protected gains. And, although TIBX's recent decline has come on weak volume indicative of profit taking, we don't want to hang around to see our gains erased. TIBX has treated us well, but it's time to take profits. CFLO $70.00 (-13.00) The late-day buying we witnessed Thursday afternoon failed to return Friday morning. CFLO plunged in the first hour of trading en route to taking out support at $75, and falling below its 10-dma. The stock actually dipped below its next major support level at $70 in early trading. We saw several of CFLO's major support levels fail last week in part from nasty profit taking and a generally weak Tech sector. What was a beautiful up-trend last week has turned into an ugly downtrend. With Friday's slide, CFLO traced yet another lower low in what appears to a developing descending channel. Needless to say, the CFLO bears are growling and we are dropping the play. CREE $138.25 (-10.94) CREE received some positive press Friday evening on CNBC from Robert Loest of the IPS Millennium Funds. Too bad he didn't speak up earlier in the day! The Semiconductor sector suffered another blow from the bears Friday which caught up with our CREE play. CREE held its own last Thursday despite the heavy selling in the chips. But, Friday's bloodletting was too much. The stock fell out of its trading range after slipping below major support at $145. The losses mounted towards the end of trading as CREE fell further going into the weekend. What's especially disconcerting was CREE fell on increased volume. With earnings just around the corner, we're selling too soon before the losses mount. PUTS AETH $183.00 (-1.63) When we started this put play, the stock was drifting down on low volume, breaking through key resistance points with ease. Now we find the stock drifting upwards on low volume through those same resistance levels. On a weak Friday for most issues, AETH moved up on higher volume, helped by a buy rating initiated by Thomas Weisel. Despite encountering resistance at $185, AETH managed to close above the key resistance level of $180. In doing so, AETH also closed above the 5- and 10-dmas as well as the 100-dma. Since AETH is set to report earnings on Tuesday before the bell, we are closing this play. Despite its recent upward movement, a negative NASDAQ next week could bring it down for a relatively good exit, but based on the upside performance, we must drop our coverage. CHV $78.50 (-5.25) Nice play! CHV performed like a trooper and provided us with ample opportunity to make some gains. The play offered entry points starting at $82 on a decline, then followed up on Friday with a slide under light support at $80. Friday's close at $78.50 was smack on the low of the day. This coupled with the strong volume on the decline is certainly bearish; and perhaps CHV will make a break for firmer support at $70 next week. However, it's time to start planning an exit if you have any open positions. Chevron is reporting its earnings BEFORE the open on Tuesday, so you need to be out by Monday's close. Please don't take a chance and hold over the announcement. This event and the attractive share price could trigger a reversal. *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************** NEW CALL PLAYS ************** CRA - Celera Genomics $112.00 (+19.25 last week) Celera's mission is to become the definitive source of genomic, proteomic and related biological and medical information. Celera uses this information for an integrated information and discovery system available to researchers in pharmaceutical, biotechnology, and academic institutions on a subscription basis. The discovery and information system includes software tools that provide the ability to view, browse and analyze this information in an integrated way to facilitate discovery. Celera also offers a variety of services to customers to assist in the analysis and interpretation of the data. Ever since the biotech sell-off this past March, many of the genomics issues have recovered nicely. Stocks such as HGSI, MYGN, and PDLI have moved strongly off those March lows and the biotech index has almost doubled since then. No longer do they have to beware the Ides of March. With the genomics sector hot again, one would think that Celera would be a prime beneficiary of the move. After all, Celera's middle name is "Human Genome", after accomplishing the landmark achievement of completing the map of the human genome much sooner than expected, the stock moved lower as traders celebrated with a sell-on-the-news party. Building a base and finding strong support at $90 (currently its 200-dma) for the greater part of this month, the stock now looks poised to move on up, bouncing off its 50-dma, currently at $92. Breaking through resistance at $110, CRA also broke out above its 100-dma, currently at $105. The $105 point has been a thorn in the side of CRA. Testing it unsuccessfully numerous times this past month, it is heartening to see it finally break through on strong volume. Support levels abound for the stock, with the 5-dma currently at $103.75 and 10-dma at the psychological level of $100. An ensuing rally for the stock will find the 5- and 10-dma to provide support and bounces off these levels can be bought by aggressive traders. Looking ahead, the next level of resistance for the stock is $120. A break through $120 will leave a clear path to $130. With so many support levels below the stock and little resistance, any positive news from the company could move the stock up, and fast, if Thursday serves as an example. Not content to stay within its own little niche, this week saw analysts announcing on behalf of Celera its interest in joining the business of drug-making. The analysts made their predictions on Friday based on comments by Celera's President and Chief Scientific Officer Craig Venter when he commented that he and his company were considering whether or not to branch out into making drugs for cancer and other diseases. Kind words from Eric Schmidt, a pharmaceuticals analyst for SG Cowen Securities and Winton Gibbons, an analyst for William Blair & Co., are also helping the stock. As the market welcomed Celera's possible widening of their business model and continues to discount the future based on it, investors and traders alike could benefit from the prospects of positive future cash flows. BUY CALL AUG-110*CZA-HB OI=253 at $14.88 SL=11.00 BUY CALL AUG-115 CZA-HC OI=247 at $12.75 SL= 9.75 BUY CALL AUG-120 CZA-HD OI=143 at $10.50 SL= 7.50 BUY CALL SEP-115 CZA-IC OI= 92 at $19.75 SL=14.50 BUY CALL SEP-120 CZA-ID OI=243 at $16.00 SL=11.50 SELL PUT AUG-100 CZA-TT OI=379 at $ 6.50 SL= 9.50 (See risks of selling puts in play legend) Picked on July 23rd at $112.00 P/E = N/A Change since picked +0.00 52-week high=$276.00 Analysts Ratings 5-3-0-0-0 52-week low =$ 10.25 Last earnings 04/26 est=-0.51 actual=-0.44 Next earnings 08-03 est=-0.35 versus=-0.32 Average Daily Volume = 1.88 mln COF - Capital One Financial $55.81 (+4.81 last week) As one of the top 10 credit card issuers in the U.S., Capital One’s secret weapon is its vast databases. The company uses this data to match a potential Visa or MasterCard customer to any one of its thousands of cards, varying in annual percentage rates, credit limits, finance charges and fees. Ranging from platinum and gold cards for preferred customers to secured and unsecured cards for customers with poor credit histories, the company has a credit card for just about anyone. The company also sells wireless phone services, mortgage services, and consumer lending products. The words "Charge it!" are music to Capital One’s ears, as the bulk of the company’s business is credit card related. As proof that the American consumer is still spending (at least on plastic) prolifically, COF announced solid earnings on July 12th, posting year-over-year revenue growth of more than 26%. This is part of a recurring theme in the Financial sector as company after company has come in with strong earnings. While the tech-heavy NASDAQ continues to struggle in its trading range, many of the Financial stocks are performing well, including COF. After a slight post-earnings dip, the stock has charged (pun intended) to new highs on strong volume. Thursday’s move brought the stock above resistance at $55, and it was encouraging to see it hold above this level in light of the weakness in the broader markets on Friday. The 5-dma (currently at $53.44) has been providing support ever since the stock broke out in early July. With the recent strength, COF looks like it is due for a pullback as the price has been riding the upper Bollinger band for the past 4 days and the Stochastics are buried deep in the overbought zone. The 5-dma sits just above chart support at $52-53, so dips to this level look attractive for new entries. Just make sure that strong buying volume continues to support the price before jumping into the play. After meeting earnings estimates on July 12th, COF got a boost from Alyssa Sibley at Morningstar.com. Citing the company’s consistent profitability, 24% long-term expected growth rate and the fact that the stock trades at just 18 times its projected 2001 earnings, Sibley urged investors to check out COF. Over just the past week, the company has launched credit card products with iWon.com and Major League Soccer, and announced its 22nd consecutive quarterly dividend, payable on August 21st. BUY CALL AUG-50 COF-HJ OI= 185 at $7.13 SL=5.00 BUY CALL AUG-55*COF-HK OI=1745 at $3.75 SL=2.25 BUY CALL AUG-60 COF-HL OI=1539 at $1.69 SL=0.75 BUY CALL SEP-55 COF-IK OI= 809 at $5.38 SL=3.25 BUY CALL DEC-55 COF-LK OI= 212 at $8.25 SL=5.75 Picked on July 23rd at $55.81 P/E = 28 Change since picked +0.00 52-week high=$56.38 Analysts Ratings 13-10-1-0-0 52-week low =$32.06 Last earnings 07/00 est= 0.54 actual= 0.54 Next earnings 10-11 est= 0.58 versus= 0.45 Average Daily Volume = 908 K PVN - Providian Financial Bancorp $102.38 (+7.88 last week) Providian Financial Corporation provides consumer lending products such as home loans, credit cards, and other fee-based products. The Company mainly issues secured credit cards to customers with not-so-perfect credit histories and charges a high fee and high interest rates. With the use of direct-mail, phone solicitations and online advertising, Providian has been able to attract more than 12 mln customers. The company has operations in the US and the UK. When there's a strong earnings report, a lot of positive coverage, and interested buyers, a stock is inclined to breakout. PVN did just that on Thursday after announcing blow-out numbers before the market opened. The company reported record 2Q net income (before one-time charge) at 187.6 mln, or $1.29 p/s, beating the Street's estimates by $0.04! Providian increased its net income by 48% over 126.5 mln, or $0.87 p/s, in the same quarter 1999. Buyers were lined up to get a piece of PVN right from the open. The two-day buying spree pushed PVN through the resistance level of $95 and set the tone for the possibility of a stock split. PVN was already considered a split candidate above $90, but the break out above $100 and the new 52-week high ($102.88) may seal the fate. As far as the immediate future, PVN is clearly a momentum play driven by good news, so look for additional analyst coverage, strong volume, and a positive market sentiment to propel PVN higher next week. Shorter-term support is at $98-$102, but much firmer at the 10-dma level ($95.38). Enter on intraday weakness, but be careful of dips below the 5-dma line (currently at $97.56). On Friday, three influential firms gave PVN star coverage. There was AG Edwards with an upgrade to a Buy from an Accumulate. And First Union Securities reiterated its Strong Buy recommendation and $125 price target. While Lehman Brothers maintained its Neutral rating, it raised PVN's price target to $125 from $95. BUY CALL AUG- 95 PVN-HS OI= 97 at $9.88 SL=7.00 BUY CALL AUG-100*PVN-HT OI= 309 at $6.50 SL=4.50 BUY CALL AUG-105 PVN-HA OI=2587 at $3.88 SL=2.50 BUY CALL SEP-105 PVN-IA OI= 85 at $6.75 SL=4.75 BUY CALL SEP-110 PVN-IB OI= 303 at $4.88 SL=3.00 Picked on July 23rd at $102.38 P/E = 27 Change since picked +0.00 52-week high=$118.50 Analysts Ratings 16-7-2-0-0 52-week low =$ 58.13 Last earnings 06/00 est= 1.25 actual= 1.29 Next earnings 10-19 est= 1.34 versus= 1.04 Average Daily Volume = 1.04 mln ***********************ADVERTISEMENT************************ Get a NextCard Visa, in 30 seconds! 1. Fill in the brief application 2. Receive approval decision within 30 seconds 3. Get rates as low as 2.9% Intro or 9.9% Fixed APR http://www.nextcard.com/index6.html?ref=aff0049911 ************************************************************ ***************************** SEE DISCLAIMER IN SECTION ONE *****************************
The Option Investor Newsletter Sunday 07-23-2000 Sunday 3 of 5 To view this email newsletter in HTML format with imbedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/072300_3.html ************************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 ************************************************************** ****************** CURRENT CALL PLAYS ****************** CMTN - Copper Mountain Networks $84.38 (-30.88 last week) Copper Mountain Networks, develops and markets a comprehensive family of DSL solutions that enable high-speed internetworking over existing copper facilities. The company's mission is to enable carriers and other service providers to offer a full range of high-performance, cost-effective data and voice services over DSL that are easy to deploy, use, and manage. Copper Mountain's CopperRocket CPE family addresses the bandwidth, reliability, ease-of-use, and cost concerns of remote offices and users. For a skydiver, a rapid descent may be the ultimate rush. For a stock reporting better-than-expected earnings, it is more like jumping without the parachute opening. Although Copper Mountain is a relatively young stock compared to it's competitors, the company retains the largest market share in the industry. The company reported record second quarter earnings on July 17th after the close, with revenue of $80.2 mln and pro forma diluted net income of $0.24 per share. The stock ran up to a year high of 125.72 in the pre-earnings period, but encountered profit takers who sold CMTN on Tuesday despite continued support from analysts. Tim Savageaux at W.R. Hambrecht and Co. maintains a Strong Buy rating on the stock, and raised his earnings and revenue forecasts for the company for both 2000 and 2001. Similarly, Dain Rauscher Wessels analyst Sanjiv Wadhwani raised his estimates, boosting his 2000 and 2001 estimates while maintaining a Strong Buy-Aggressive rating on the stock. One of the fears driving the descent of the stock was the supposition by others in the communications equipment industry that CMTN can only serve a specific niche of the market compared to its competitors. Analysts beg to differ, stating that CMTN continues to post impressive results and is focused on maintaining its market leadership position in the DSL marketplace. They think the company is well positioned to offer multi-services over DSL with its IP-aware access concentrators. We are anticipating CMTN finding a bottom after being oversold. Overhead resistance is close with the 100-dma at $86.63. A strong volume move above that technical could be a break of the downtrend. This is a more aggressive play. Patience may payoff so be cautious when entering. Wait for a positive NASDAQ and be aware that the stock bottomed in late June near $78. A bounce from this level could prove to be a very profitable entry. Conservative traders may want to wait for a move through $90 before initiating a position. The latest plug for the company has been the announcement that Copper Mountain will supply DSL concentrators to NewPath Communications, a newly-formed Data Local Exchange Carrier (DLEC) based in Chicago, Ill. NewPath will use Copper Mountain's CopperEdge 200 DSL concentrators throughout its network across 14 states in selected markets in the Midwest. NewPath will then offer both retail and wholesale DSL services to small and medium sized businesses as well as to telecommuters and home office workers. BUY CALL AUG- 85*KUA-HQ OI= 149 at $9.00 SL= 6.75 BUY CALL AUG- 90 KUA-HR OI= 692 at $6.88 SL= 5.25 BUY CALL AUG- 95 KUA-HS OI= 411 at $5.25 SL= 3.50 BUY CALL AUG-100 KUA-HT OI= 503 at $4.00 SL= 2.50 BUY CALL SEP- 95 KUA-IS OI= 188 at $8.25 SL= 6.25 SELL PUT AUG- 80 KUA-TP OI= 262 at $8.13 SL=10.50 (See risks of selling puts in play legend) Picked on July 20th at $89.63 P/E = 138 Change since picked -5.25 52-week high=$125.72 Analysts Ratings 3-6-1-0-0 52-week low =$ 35.15 Last earnings 07/17 est= 0.22 actual= 0.24 Next earnings 10-19 est= 0.24 versus= 0.09 Average Daily Volume = 1.57 mln ARBA - Ariba Inc. $124.81 (+0.25 this week) As a leading provider of B2B solutions and services to leading companies around the world, including more than 20 of the FORTUNE 100, Ariba helps companies cut through the complexity of opportunities presented by the new economy. Ariba provides the most comprehensive and open commerce platform to build B2B marketplaces, manage corporate purchasing, and electronically enable suppliers and commerce service providers on the Internet. Made up of a complete set of integrated commerce solutions and open network-based commerce services, the Ariba B2B Commerce Platform™ offers a single system for managing buying, selling, and marketplace eCommerce processes. The trend continues. The past two months of Ariba's rally, which has seen the stock almost triple, has been following a pattern: consolidate for about two weeks, break out strongly, and consolidate for another two weeks before breaking out strongly again. After the post-earnings rally ARBA experienced when it posted record profits and marked itself as the Yahoo of the B2B sector, the stock spent the week in consolidation mode. Moving down and testing support at $110 early in the week, buyers rushed in on huge volume, taking advantage of the temporary discount and were rewarded handsomely. The rest of the week was spent successfully bouncing off support at $120 numerous times. The stock spent this week consolidating. One item of note this week is the heavier than average volume in ARBA's consolidation period. Perhaps this is due to the increased coverage and interest in B2B issues posting stellar earnings (such as ITWO and PPRO), as well as the renewed validation and excitement of the future of the B2B business model. Yet, it appears that ARBA's upward momentum remains intact, with low volume down moves and high volume up moves. Assuming the current trend of consolidation and breakout holds, expect another week of sideways movement for the stock. The key for ARBA will be holding support at $120. Bounces off this level can be bought, but a break through $120 may find the stock moving to $110. The 10-dma, currently at $117.80 is moving up fast and may also provide support for the stock. Aggressive traders hoping for a replay of last week can buy bounces off the 5-dma, currently at $126.90. There is formidable resistance at $135, as that level was tested in last Thursday's session. A break through $135 on strong volume will have ARBA trying for resistance at $140. A news item of interest this Friday came as insiders at Ariba, including CEO Keith Krach, announced that they filed with the SEC to sell a combined 1.05 mln common shares. According to Ariba's public relations department, "They are taking advantage of an open trading window to diversify their portfolios, and the sales are not an indication of any problem with the company." While the stock did sell off on Friday, volume was light and support at $120 held. Look for this support level as a key barometer of the stock's health. BUY CALL AUG-120*RBU-HD OI=2246 at $14.38 SL=10.75 BUY CALL AUG-125 RBU-HE OI= 842 at $11.88 SL= 9.00 BUY CALL AUG-130 RBU-HF OI=1008 at $ 9.63 SL= 6.50 BUY CALL NOV-125 RBU-KE OI= 249 at $25.25 SL=20.25 BUY CALL NOV-130 RBU-KF OI= 487 at $23.25 SL=18.25 SELL PUT AUG-115 RBU-TC OI= 660 at $ 6.13 SL= 8.50 (See risks of selling puts in play legend) Picked on July 20th at $133.88 PE = N/A Change since picked -9.06 52-week high=$183.31 Analysts Rating 15-11-1-0-0 52-week low =$ 16.56 Last earnings 07/12 est=-0.09 actual=-0.05 Next earnings 10-19 est=-0.05 versus=-0.03 Average Daily Volume = 6.17 mln GSPN - GlobeSpan, Inc. $133.94 (-12.06 last week) GlobeSpan, Inc. is a leading provider of integrated circuit, software, and system designs for digital subscriber line (DSL) applications which enable high-speed data transmission over existing copper wire telephone lines at rates over 100 times faster than today's 56 Kilobit modems. Globespan's business is accelerating communications through high-speed solutions based on DSL technologies. The company's innovations make possible real-time video conferencing, telecommuting, high-speed Internet surfing, and video-on-demand. Patience is rewarded. Those who were patient with GSPN this week found a variety of great entry points. The key support level of $127.50 has been holding strong all week providing for excellent entry points off the bounce. Aggressive traders buying bounces off the 10-dma were also rewarded with quick profits on this volatile issue. This has been a week of consolidation for the stock as it drifted sideways on low volume. As mentioned, it held its support at $127.50 and has been a technical trader's dream. While the stock has traded in a very wide range, it has found support where we expected it while down days were accompanied by low volume. Conversely, the up days were accompanied by stronger volume. This confirms the continuation of GSPN's breakout and consolidation pattern that has lasted throughout its two month rally. Looking at its previous two moves from breakout to consolidation, GSPN's last two up moves were preceded by about 6 days of consolidation. If this trend continues, then look for GSPN to break out of its slumber next week. There is formidable resistance at $150, but once broken, look for the stock to challenge its all-time high at $167. But for now, $140 must be conquered first. The last few trading sessions has seen the 10-dma (currently at $133.75) continue to serve as support while the 5-dma (currently at $137.50) has been acting as resistance. This is consistent with GSPN's 8 week long uptrend. If the trend continues to hold, then a clean break through the 5-dma resistance on strong volume will signal the next up move. Conservative investors, however, will want to wait for GSPN to break through $140 with conviction before entering. Aside from the appointment of Brian Laperriere as Vice President of Human Resources, there has been no news for the stock and as such, the stock has moved in sympathy with the NASDAQ, along with its own technical support and resistance levels. Traders looking to play this issue will want to make sure that the general market direction is on their side before entering. BUY CALL AUG-130*GHY-HF OI= 56 at $19.13 SL=13.75 BUY CALL AUG-135 GHY-HG OI= 40 at $16.88 SL=12.25 BUY CALL AUG-140 GRX-HH OI=213 at $14.50 SL=10.75 BUY CALL NOV-135 GHY-KG OI= 5 at $32.50 SL=27.00 BUY CALL NOV-140 GRX-KH OI=302 at $30.38 SL=25.00 SELL PUT AUG-125 GHY-TE OI= 9 at $10.50 SL=14.00 (See risks of selling puts in play legend) Picked on July 2nd at $122.06 P/E = N/A Change since picked +11.88 52-week high=$167.00 Analysts Ratings 2-4-0-0-0 52-week low =$ 14.31 Last earnings 03/00 est= 0.01 actual= 0.03 surprise=200% Next earnings 08-01 est= 0.04 versus=-0.14 Average Daily Volume = 1.12 mln VRTX - Vertex Pharmaceuticals Inc $120.19 (+5.19 last week) Vertex Pharmaceuticals discovers, develops and markets small molecule drugs that address unmet medical needs. Vertex has nine drug candidates in clinical development to treat viral diseases, inflammation, cancer, autoimmune diseases and neurological disorders. Vertex has created its pipeline using a proprietary, information-intensive approach to drug design that integrates multiple technologies - biology, chemistry, biophysics, and computer-based modeling - aimed at increasing the speed and success rate of drug discovery. Vertex Pharmaceuticals has collaborative agreements with major drug companies like Novartis, Eli Lilly, Kissei Pharmaceuticals, and Schering AG. Yes indeed, next week's earnings release suggests that VRTX could run up on Monday and Tuesday. The increasing trading volume is also a bullish sign, however, VRTX hasn't yet penetrated the recent 52-week high at $132.75. Now if it does comes off the current level on Monday and breakout, there's still a 12+ point spread in which to profit before VRTX faces the ultimate resistance. So there's potential. Choose entries carefully and heed the tight time frame if you're going to make a play. Keep it short and sweet. Vertex Pharmaceuticals is set to report this Tuesday, July 25th, after the closing bell. It would be prudent to close all call positions before the market closes on Tuesday, despite the positive outlook for a profitable 2Q. The company announced on July 11th that they expect to come in between $0.40 and $0.50 p/s, which will beat the $0.23 projection by First Call. Still it's essential to exit PRIOR to the announcement. Never take the chance of getting your capital swept away in a post- earnings sell-off. As mentioned above we have the earnings' release on the immediate horizon. But next month should also take VRTX by storm. On July 14th, the BoD announced a 2:1 stock split! While the company doesn't have an ex-date nailed down, the 2:1 stock dividend is payable on August 23rd. BUY CALL AUG-115 VQR-HC OI= 30 at $15.88 SL=11.50 BUY CALL AUG-120*VQR-HD OI=105 at $13.13 SL= 9.75 BUY CALL AUG-125 VQZ-HE OI= 42 at $11.00 SL= 8.25 BUY CALL OCT-130 VQZ-JE OI= 4 at $19.88 SL=14.50 Picked on July 18th at $122.63 P/E = N/A Change since picked -2.44 52-week high=$132.75 Analysts Ratings 4-5-1-0-0 52-week low =$ 22.13 Last earnings 03/00 est=-0.58 actual=-0.62 Next earnings 07-25 est= 0.23 versus=-0.43 Average Daily Volume = 628 K DISH - Echostar Communications Corp $44.94 (+0.75 last week) Dishing up to 500 channels of satellite TV heaven on the DISH Network is what EchoStar is all about. EchoStar is the #2 satellite broadcast provider in the US - DIRECTV hold the #1 ranking. They provide direct broadcast satellite (DBS) access to about 10 mln subscribers. In addition, their partnership with Microsoft allows customers to surf the Internet from the couch potato position through WebTV. CEO Charles Ergen owns 51% of the company and retains over 85% of the voting power. We're "dishing up" another earnings' play. DISH caught our attention after demonstrating consistent moves following the July 4th holiday this month. The share price has steadily advanced nearly 30% and its chart is impressive too. When we added this new call play on Thursday evening, we mentioned a technical obstacle - the 200-dma. On Friday, DISH did in fact move through this DMA during intraday trading; however, a fractional break isn't definitive confirmation. It's important that we see DISH shatter this technical line. In the recent past, the 200-dma (currently at $45.39) proved to be a formidable opponent and has kept DISH range bound. Therefore, you can understand why it's essential to be conservative and wait for a breakout on high volume moves. Another bright spot on Friday was the higher-low at $44.25 and the stock's ability to maintain trading activity primarily above the $45 mark. If DISH does not establish a short term support level at $45, a drop to support at $43 would be a good entry, provided there is a bounce. Also, we've got some leeway with this earnings' play. The release date isn't until August 1st, BEFORE the bell, which gives us all week to trade DISH. A big boost for the company's ego was the recent launch of the EchoStar VI on July 14th. This unit is the most powerful direct broadcast satellite ever manufactured. Charlie Ergen, CEO and chairman of EchoStar, reported its success and commented that "our sixth satellite will serve our fast-growing number of DISH Network satellite television customers" and "will increase our broadcast signal power and backup capacity as well as allow for expanded coverage to Alaska and Hawaii". BUY CALL AUG-40*UAB-HH OI=1379 at $7.50 SL=5.25 BUY CALL AUG-45 UAB-HI OI=1089 at $4.50 SL=2.75 BUY CALL AUG-50 UAB-HJ OI= 648 at $2.63 SL=1.25 BUY CALL SEP-45 UAB-II OI=1490 at $6.88 SL=5.00 BUY CALL SEP-50 UAB-IJ OI= 606 at $4.50 SL=2.75 Picked on July 20th at $44.63 P/E = N/A Change since picked +0.31 52-week high=$81.25 Analysts Ratings 9-5-0-0-0 52-week low =$14.00 Last earnings 03/00 est=-0.36 actual=-0.40 Next earnings 08-01 est=-0.34 versus=-0.20 Average Daily Volume = 4.17 mln MRVC - MRV Communications $75.50 (+2.88 last 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. Every time we think our play on MRVC has run out of steam, it surprises us and comes back with a vengeance. After running as high as $77.69 on Monday, the stock fell victim to selling pressures that dragged it all the way back to support at $68. That was all the ground the bulls were willing to give up and if you jumped in on the bounce, you profited nicely from the recovery back above $75. The stock then spent the remainder of the week oscillating between support at $74-75 (site of the 5-dma) and resistance at $80 (the top Bollinger band). It looks like support is firm at the 5-dma, and with continuing strength in the Optical sector, we are looking for our play to give us one more run before the company announces earnings. The announcement is scheduled for Thursday after the close, giving us a few days remaining in our play. As always, we recommend closing any open positions prior to the announcement, in order to avoid the normal post-earnings selloff. Volume continues to be a good indicator of the direction our play is headed, surging on the strong up days, and falling back considerably on the inevitable corrections. Consider new entries as MRVC bounces at the $74-75 support level as long as the bounce is confirmed by increased buying volume. There is also support at the 10-dma (currently $72.56), but we would be concerned with any drop below that level, especially so close to earnings. Just so you won’t miss it in the body of the play tonight, we’ve reiterated the earnings information here. MRVC will announce earnings on Thursday, July 27th after the close. That gives us half a week to enjoy the play before we need to be thinking about our exit strategy. The Optical sector has been on fire lately on the news about JDSU/SDLI, and with the strong SDLI earnings out this past Thursday, it is entirely possible that MRVC will have a nice run right up to the finish. Just don’t play the "hold over earnings" game. Investors are fickle and like we’ve said many times in the past, holding over earnings is a high risk, ill-advised gamble. BUY CALL AUG-70*RVY-HN OI=3530 at $12.88 SL= 9.50 BUY CALL AUG-75 RVY-HO OI= 488 at $10.38 SL= 7.25 BUY CALL AUG-80 RVY-HP OI=1031 at $ 8.50 SL= 6.00 BUY CALL OCT-80 RVY-JP OI= 376 at $14.88 SL=11.00 BUY CALL OCT-85 RVY-JQ OI= 108 at $13.38 SL=10.00 SELL PUT AUG-65 RVY-TM OI= 238 at $ 4.75 SL= 6.75 (See risks of selling puts in play legend) Picked on July 13th at $74.88 P/E = N/A Change since picked +0.63 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 = 2.12 mln NT - Nortel Networks $81.00 (+3.25 last week) Nortel Networks is a leading global supplier of data and telephony network solutions and services. Covering all the bases, its business consists of the design, development, manufacture, marketing, sale, financing, installation, servicing and support of networks for both carrier and enterprise customers. With a presence in over 150 countries, NT serves local, long-distance, personal communications services and cellular mobile communications companies as well as cable television companies, Internet service providers and utilities. There’s nothing like a successful play to fatten your wallet and NT has given us one nice, consistent ride. After we picked it in mid-June, the stock co-operated nicely by dropping sharply to give us an attractive entry point near $64, before heading higher. Although the move sputtered a few times, buyers continued to step up to the plate, allowing NT to trace a pattern of higher highs and higher lows over the past month. What makes this such a great play is that the stock moves in a nice predictable pattern, moving higher and then pulling back to give those stragglers another chance to jump on board. Last week, we got another opportunity as the broad market weakness pulled NT back to bounce at the $76 support level before heading higher. With earnings rapidly approaching, investors all but ignored what was happening in the broad markets on Friday, and they propelled NT to another all-time high of $81.31, and the stock closed just fractionally below this level. Volume has been an excellent indicator as pullbacks come on markedly reduced volume while strong gains have been accompanied by average to above average volume. Earnings really are close at hand - NT reports its quarterly numbers on Tuesday after the close, so new entries should not be considered by the risk-averse. If you feel compelled to play new positions in the next two days, look for bounces near the 5-dma to trigger your entry. Use any strength in the next two days as an opportunity to milk a little more profit out of the play, but make sure you close any open positions prior to the close on Tuesday. If you caught any financial news this week, you are likely aware that NT’s competitor, Lucent beat downwardly-revised earnings estimates on Thursday, but the conference call was less than stellar. LU got punished to the tune of a 20% loss, while NT continued to rise. This highlights the relative strength NT enjoys in its market niche, and confirms that investors think the company’s future is bright. One last reminder - NT has earnings Tuesday after the close, so make sure you are out of any open positions before then. BUY CALL AUG-75 NTV-HO OI=6676 at $ 8.88 SL=6.25 BUY CALL AUG-80*NTV-HP OI=3596 at $ 6.00 SL=4.00 BUY CALL AUG-85 NTV-HQ OI=1971 at $ 3.75 SL=2.25 BUY CALL SEP-75 NTV-IO OI=3285 at $10.38 SL=7.50 BUY CALL SEP-80 NTV-IP OI=1104 at $ 7.50 SL=5.25 BUY CALL SEP-85 NTV-IQ OI= 970 at $ 5.13 SL=3.00 SELL PUT AUG-75 NTV-TO OI= 227 at $2.38 SL=4.00 (See risks of selling puts in play legend) Picked on June 15th at $67.00 P/E = N/A Change since picked +14.00 52-week high=$81.31 Analysts Ratings 19-10-3-1-0 52-week low =$19.91 Last earnings 04/00 est= 0.19 actual= 0.23 Next earnings 07-25 est= 0.14 versus= 0.14 Average Daily Volume = 9.87 mln SCMR - Sycamore Networks $138.75 (+0.56 last week) Sycamore markets optical networking products that enable network service providers to upgrade their existing fiber-optic networks to offer more bandwidth. Its SN 6000 transport node helps companies provide high-speed services. The company also designs add/drop nodes, optical switches, and network management software. The company targets telecom service providers, Internet service providers, and cable operators. It was a wild week for the Fiber Optic sector. GLW began the week with a bang by blowing away its estimates last Monday, which sent the stock into orbit. But, then came the warning from LU Thursday. For the third time in under a year, LU warned analysts that the company would fall short of estimates. The company said it had failed to recognize the shift from traditional telecom equipment to the new optical networking gear. LU said rival telecom equipment makers have been selling the optical components in force and taking market share. One of those competitors that has been stealing LU market share just happens to be our SCMR. In an ironic way, the LU warning is great for our play. The news that LU has been losing market to rival optical firms bodes well for SCMR going into the company's earnings report scheduled later in August. Investors will be expecting good numbers from SCMR, which might continue to carry our play higher. Despite all the volatility in the Tech sector last week, SCMR ended with a slight gain. The stock traded slightly lower Friday on under 2 mln shares exchanged. That's compared to an ADV of more than 4 mln. The light selling Friday might have provided us with a good entry point going into next week. Investors' insatiable demand for Fiber Optic plays helped stabilize SCMR Friday in what was a tumultuous day for anything Tech. The stock stopped right at its major support at $135 which is near its 10-dma, and bounced higher into the close Friday. An aggressive trader might look for an entry point if SCMR can rally above the $140 level on healthy trade. While a more conservative trader might wait for SCMR's momentum to build and look for an entry if the stock clears congestion and moves above the $145 level. If the Tech sector weakness drags our play lower, consider entry if SCMR bounces off its 10-day near $135. All eyes will be focused on JDSU Wednesday. The optical equipment behemoth is scheduled to report its second-quarter results after the close of the market on July 26th. The company is expected to surpass estimates, which would confirm the continued boom in the optical networking arena. A positive report combined with up-beat guidance might set the tone for the sector next week and take our SCMR play higher. BUY CALL AUG-135 QSM-HG OI= 224 at $15.75 SL=11.25 BUY CALL AUG-140*QSM-HH OI=1143 at $13.25 SL= 9.75 BUY CALL AUG-145 QSM-HI OI= 168 at $11.13 SL= 8.25 BUY CALL SEP-140 QSM-IH OI= 500 at $18.75 SL=13.50 BUY CALL SEP-145 QSM-II OI= 101 at $17.75 SL=12.75 Picked on July 16th at $138.19 P/E = 144 Change since picked +0.56 52-week high=$199.50 Analysts Ratings 7-4-2-0-0 52-week low =$ 47.25 Last earnings 04/00 est= 0.02 actual= 0.05 Next earnings 08-18 est= 0.06 versus= N/A Average Daily Volume = 4.39 mln HGSI - Human Genome Sciences $162.50 (+9.25 last week) HGSI licenses a proprietary database of gene sequences to such pharmaceutical heavyweights as SmithKline Beecham and Merck. The company has eschewed the race to decode the entire human genome in favor of focusing on patenting gene sequences involved in disease. HGSI is one of the few genome companies involved in developing gene-based therapeutics, its four compounds in clinical trials are intended to limit the toxic effects of chemotherapy, promote repair of damaged cells, stimulate antibody production, and spur re-growth of blood vessels. Despite the tumultuous market last Friday, the Biotech sector rallied for the second consecutive day. The Amex Biotech Index ($BTK) gained over 2% fueled by positive profit reports within the group. HGSI benefited from the broad rally within the sector and also from the news that the company might earn royalties from a licensing agreement it shares with MedImmune (MEDI). Last Thursday, SmithKline Beecham signed an agreement under which MEDI would provide vaccine technology. HGSI stands to earn a portion of the estimated $30 mln in payments. The announcement prompted HGSI to gap higher Friday morning and extend its gains for the week. Yet another positive development for our play was the bullish debut of several biotech IPOs last week. Variagenics (VGNX) enjoyed a first-day pop last Friday by surging over 75% in its debut. The high demand for biotech-related IPOs bodes well for our HGSI play as investors' craving for genomic-related issues appears to be alive and well. Although HGSI finished last week with a gain, for the most part, the Biotech sector spent its time consolidating its recent gains. However, Friday's impressive showing in the wake of a weak Tech sector might lead to a continued rally in the group next week. HGSI's uptrend remains healthy with solid support at $160 and again at $155. The stock had trouble clearing congestion around $165 last Friday. Look for a bold move above that level for entry. A more conservative entry point might be provided upon a strong rally above the $170 level on healthy volume. Confirm the overall movement in the Biotech sector before entering the play. Like many biotechs, HGSI is influenced by the general sector direction. By charging higher last week, HGSI surged further into split territory. Like we have mentioned in the past, the company has plenty of shares to authorize a 2-for-1. The stabilized market conditions have prompted more and more companies to announce splits as you may have noticed from the OIN split section. We'll continue to monitor the wire for a declaration by HGSI. The company last split its stock in January when it was trading at $149. BUY CALL AUG-155 HHA-HM OI=199 at $20.50 SL=14.75 BUY CALL AUG-160*HBW-HL OI=469 at $18.00 SL=13.00 BUY CALL AUG-165 HBW-HM OI= 41 at $16.00 SL=11.50 BUY CALL OCT-160 HBW-JL OI=488 at $34.63 SL=25.00 BUY CALL OCT-165 HBW-JM OI= 33 at $26.25 SL=19.00 SELL PUT AUG-150 HHA-TL OI=120 at $ 9.63 SL=12.50 (See risks of selling puts in play legend) Picked on July 13th at $153.75 P/E = N/A Change since picked +8.75 52-week high=$232.75 Analysts Ratings 1-5-4-0-0 52-week low =$ 24.88 Last earnings 03/00 est= -0.33 actual= -0.35 Next earnings 08-08 est= -0.22 versus= -0.05 Average Daily Volume = 1.70 mln **********************ADVERTISEMENT************************** Free voicemail, email, fax, and paging - all in one place! Accessible over the phone & Internet. Free Local & 800 Phone Number for Life! Send & receive faxes & email via the web or phone. ThinkLink charges no monthly fees. Plus, for a limited time, sign up now and receive an airline voucher worth up to $100 dollars off any major airline. FREE NOW! FREE FOREVER! http://www.OptionInvestor.com/tracking.asp?co=STThinkLink7172000 ************************************************************* ***************************** SEE DISCLAIMER IN SECTION ONE *****************************
The Option Investor Newsletter Sunday 07-23-2000 Sunday 4 of 5 To view this email newsletter in HTML format with imbedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/072300_4.html ************* NEW PUT PLAYS ************* RFMD - RF Micro Devices, Inc. $75.38 (-13.13 last week) RF Micro Devices, Inc. is a leading supplier of radio frequency integrated circuits (RFICs) for the wireless, broadband and cable communications industries. RFMD designs and manufactures components for many communications applications, from cellular to CATV. The ever-expanding RFMD product line includes power amplifiers, linear amplifiers, LNA/mixers, quadrature modulators/demodulators, upconverters, front ends, attenuators, switches and transceivers. Will Jonathan Joseph get the last laugh? When the Salomon Smith Barney analyst recently made the unpopular call of downgrading the entire semiconductor sector, it was initially shrugged off as the index moved higher. However, since making a double top this past week, semiconductors for the most part have moved lower. One of the reasons to account for this is a post-earnings slump. While the earnings posted so far have been strong, apparently they were not strong enough to allay fears of an impending slowdown. RFMD reported its own earnings this past Tuesday and the numbers were decidedly good. Sequential quarterly revenues increased 15.8% to a record $98.2 mln, gross profit increased by 91.5% to $50.6 mln, and gross margin climbed 51.5%. With numbers like those, one would think the Street would be impressed. But despite these numbers, RFMD only beat the consensus estimate by a penny, matching the dreaded whisper number of 19 cents. In a market environment where the name of the game is to obliterate the whisper number or be obliterated, the stock has sold off after earnings on steadily increasing volume. Friday was not helped by handset maker Rescission’s announcement that their third-quarter earnings would disappoint. As over 90% of RFMD’s revenues are tied in to the wireless sector, a portion of Friday's 7.52% drop on heavy volume can be attributed to the warning. The technical picture doesn't look too good either. Breaking a key support level of $80 on Friday morning, the stock spent the rest of the day moving steadily lower, continuing a steep downtrend that has plagued the stock all week. Failed rallies above the $80 level are an ideal target to shoot for. The 5- and 10-dma are both sitting at the $85 level which will also provide strong resistance. Early this past week also saw RFMD break its 200-dma, currently at $92. Looking below, RFMD could find support at $73 after which the next level of support is at $67. With strong overhead resistance and weakening support, this could be a fun ride down. BUY PUT AUG-80*RFZ-TP OI=1344 at $11.50 SL=8.75 BUY PUT AUG-75 RFZ-TO OI= 584 at $ 8.88 SL=6.25 BUY PUT AUG-70 RFZ-TN OI= 422 at $ 6.38 SL=4.50 Average Daily Volume = 3.52 mln CMRC - Commerce One Inc $53.38 (+16.56 last week) Commerce One has become one of the signature names in the emerging B2B environment. They provide e-commerce solutions that enable buyers and suppliers of goods and services direct access to trading communities over the Internet. Founded in 1994 as DistriVision, the company was renamed Commerce One in 1997 and is based in Walnut Creek, CA. The last minute freefall prior to its earnings' release spilled over into after-hours trading on Tuesday evening. Yes, the B2B's were fighting the overall tech weakness, but a 6+ point drop in minutes is frightening. After the announcement, it was evident that CMRC lost the battle with Ariba (ARBA). However, CMRC's numbers were nothing to shush away. The company reported a 2Q upside surprise with a narrower-than-expected loss. Commerce One came in at -$0.10 versus the estimated -$0.14 and proved it was receiving real money for real services. USB Piper Jaffray even started new coverage with a Strong Buy recommendation. But nonetheless, CMRC suffered a typical post-earnings sell-off after running up days before the release. This is a good example of why it's not wise to hold a call position over an earnings' announcement! Anyway, CMRC shed almost 24% of its share price last week and has room left to fall. By Wednesday, the stock submerged itself below the near-term DMAs with its closest ally now at the 10-day line ($56.10). On Friday, intraday support established itself around $52.50. So conservatively, first look for a slide under this mark, followed by moves toward firmer support at $45. If you're itchy to jump into this post-earnings decline and want to enter more aggressively, downward bounces off the above-mentioned 10-dma, or $56 mark should suit your style. BUY PUT AUG-60 RJC-TL OI=1177 at $10.50 SL=7.50 BUY PUT-AUG-55*RJC-TK OI= 280 at $ 7.25 SL=5.00 BUY PUT-AUG-50 RJC-TJ OI= 207 at $ 4.50 SL=2.75 Average Daily Volume = 6.44 mln ELON - Echelon Corp $39.00 (-10.81 last week) Echelon designs systems and software that control automated networks for buildings, industrial equipment, and transportation industries. Its products include transceivers, routers, network interfaces can sense, monitor, and direct such equipment as automatic doors, lighting, security systems, industrial conveyors, and rail cars. Customers include well-known companies like Honeywell and Raytheon. CEO Kenneth Oshman maintains a 16% controlling stake in Echelon. ELON didn't even run-up before its earnings release! To the contrary, this stock was already in a general downtrend cycle and things only got worse after the announcement on Thursday. Echelon reported a 29% revenue increase for the quarter ending June, 2000 at $12.7 mln versus same period 1999 of $9.8 mln. On a per share basis this is actually -$0.01 for 2Q 2000 compared to -$0.02 in 2Q 1999. The actual numbers weren't too shabby, but the forecast was rather glum. Robertson Stephens' analyst Paul Johnson brought ELON to its knees on Friday. He commented that he now expects the company to only break even a share this year, downgrading his earlier forecast for earnings of $0.01! This poor coverage put even more pressure on the share price. On Thursday, ELON was already under the gun. It had suffered along with the rest of the techs in late trading and was bracing for its after-hours earnings release. The $45 near-term support level was cracked and it was poised for further devastation. As of now, we have a stock that is looking for a bottom. With the 200-dma ($41.17) now shattered, the next safety net is at a historical support level of $30. Take a look at four-month chart and you can see how ELON traded at this level during April and May. The trading volume following the recent events was very strong on the decline, so watch for continued action to foretell further drops. Market weakness would be the icing on the cake to keep this downward momentum intact. As for entries: on Friday, $40 served as overhead resistance. Therefore, if all goes according to plan and ELON continues to bump its head at this mark, then $40 is a viable point of entry. Although it's imperative to wait for ELON to show weakness below $38 before opening positions. BUY PUT AUG-45*EUL-TI OI=364 at $9.38 SL=6.50 BUY PUT AUG-40 EUL-TH OI=151 at $6.00 SL=4.00 BUY PUT AUG-35 EUL-TJ OI=275 at $3.38 SL=2.50 Average Daily Volume = 1.37 mln /charts/charts.asp.symbol=ELON ************************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 ************************************************************** ***************** CURRENT PUT PLAYS ***************** IP - International Paper $34.75 (-1.06 last week) International Paper is a global paper and forest products company that is complemented by an extensive distribution system. The company produces printing and writing papers, pulp, tissue, paperboard and packaging and wood products. Additionally, the company makes specialty chemicals, panels, and laminated products. Its primary manufacturing and distribution operations are in the United States, Europe and the Pacific Rim Declining all week long, IP has had a hard time finding any strength. Finally on Friday, the buyers got their day in the sun, but the clouds quickly appeared on the horizon. After a valiant attempt by the bulls to break IP out of its downtrend, the bears came back to confirm who is in charge. The buyers managed to briefly move the price up to $35.94, just below the 100-dma ($36.31) before the price began rolling over. In light of the broad market weakness on Friday, this performance really isn’t too bad, especially given the stock’s refusal to break below the $34 support level the day before. The chart is starting to look congested, with only $2.31 between the declining 100-dma (which has been creating resistance) and support at $34. Volume has declined to about 75% of the ADV, and any increase in volume will indicate the strength of the current move. Something will likely have to give soon, and with the deteriorating market sentiment, our crystal ball still says the breakout will be to the downside. After all, with earnings winding down, there is little on the horizon that could be seen as supportive to the stock’s price. Target new entries as the price rolls over near the 200-dma, or wait for the sellers to break the $34 support level on strengthening volume. BUY PUT AUG-40 IP-TH OI= 139 at $5.88 SL=3.00 BUY PUT AUG-35*IP-TG OI=3543 at $2.06 SL=1.00 Average Daily Volume = 3.36 mln CMOS - Credence Systems $46.69 (-9.63 last week) Credence makes test equipment and testing software that is used in the high-volume production of semiconductors. The company's products test digital logic, mixed-signal, and nonvolatile memory circuits used in such products as televisions, PCs, cameras, and telephones. CMOS sells its products primarily to chip manufacturers, assembly houses, and test services companies. Could it be, just maybe, that the semis have peaked? According to Semiconductor Equipment and Materials International (SEMI) orders for chip fabrication equipment fell for the third consecutive month in June. In a report released last Thursday evening, SEMI said that the major U.S. chip equipment manufacturers shipped $126 of product for every $100 of orders received. Also known as the book-to-bill ratio, it reported $128 in shipments for the month of May. Although the decline is a modest one, it's a decline in business nonetheless. Moreover, many analysts expected the Chip boom to cease during the summer in what has traditionally been a slow time of year for the semis. However, it's that slowdown that we are attempting to capitalize upon from the short-side on CMOS. The stock suffered greatly last week from the heavy selling in the semis. Wall Street's concerns over a slowdown in the Chip sector prompted a series of downgrades last week. Most notably, Robertson Stephens downgraded TER, one of the chip equipment bellweathers. The downgrade was the second high-profile warning on the Chip sector in as many weeks. CMOS has been sliding lower on increased volume as investors vacate the Semi sector. The stock did stabilize somewhat last Friday after a late-day rally rescued CMOS. The threat of a slowdown in orders may continue to carry CMOS lower. Watch for the selling to resume early next week and look for an entry if CMOS falls below support at $44. Upon a continuation of Friday's late-day rally, an aggressive trader might look for an entry if CMOS runs into resistance at $48 and subsequently rolls over. Make sure to confirm direction in the Chip sector before entering the play! BUY PUT AUG-50 CQS-TJ OI= 30 at $7.75 SL=5.50 BUY PUT AUG-45*CQS-TI OI=247 at $5.13 SL=3.00 BUY PUT AUG-40 CQS-TH OI= 27 at $2.56 SL=1.25 Average Daily Volume = 1.11 mln GTW - Gateway $62.88 (-3.50 last week) Gateway is the #2 direct marketer of PCs in the U.S. behind the leader Dell. The company sells products directly to computer users ordering by phone or Web site, which helps to cut markup costs. Gateway makes desktop and portable PCs and network servers. The company also sells component add-ons such as CD-ROM drives and offers services such as Internet access, Web hosting, and e-commerce solutions. About half of its products are sold to consumers. It has been a tough summer for the box makers. Wall Street's suspicion of slowing sales of PCs was confirmed last week when several of the largest computer makers reported their quarterly results. On the surface, it was reported that most of the companies exceeded profit estimates. However, upon digging a little deeper into the numbers it was revealed that many box makers fell short on revenues and also warned of a continued slowdown in PC purchases. And, since GTW has focused its business on the home PC market, the stock has suffered from the warnings. AAPL reported slightly lower revenues last week and IBM confirmed the decline in PC sales by stating it has suffered from weakened consumer demand. CPQ is scheduled to report its numbers next week, which could have an impact on our play. Although we are entering into the busy time of year for the PC makers, with back to school shopping and the holiday season approaching, the current slowdown might not be completely factored into the stock prices. A glance over GTW's chart just might confirm our suspicions. The stock enjoyed a steep advance into its quarterly report two weeks ago and has subsequently slipped into a downtrend. There is still some empty space below, which may lead to further downside in the stock. GTW bounced off support at $62 early Friday morning. An entry point might be provided if the stock falls below that level. A more conservative entry might be found if GTW dips below $60. An aggressive trader might look for entry if GTW rolls over after running into resistance at $64 after any intra-day rally. BUY PUT AUG-65*GTW-TM OI= 432 at $5.25 SL=3.25 BUY PUT AUG-60 GTW-TL OI= 469 at $2.88 SL=1.50 BUY PUT AUG-55 GTW-TK OI=1154 at $1.31 SL=0.75 Average Daily Volume = 1.61 mln **********************ADVERTISEMENT************************** Free voicemail, email, fax, and paging - all in one place! Accessible over the phone & Internet. Free Local & 800 Phone Number for Life! Send & receive faxes & email via the web or phone. ThinkLink charges no monthly fees. Plus, for a limited time, sign up now and receive an airline voucher worth up to $100 dollars off any major airline. FREE NOW! FREE FOREVER! http://www.OptionInvestor.com/tracking.asp?co=STThinkLink7172000 ************************************************************* ***** LEAPS ***** As Earnings Wind Down, It’s Time for Some House Cleaning By Mark Phillips Contact Support July earnings has been a mixed bag for our LEAPS portfolio, with some plays charging to new highs, while others have failed to even acknowledge that it is earnings season. Even after their earnings announcements, heroes like EMC and SUNW have continued to impress, while others (particularly the Semiconductors) like XLNX and AMD have endured selloffs of truly painful proportions. This is confirmation of Jim’s advice of NEVER holding a position over earnings - even stellar numbers can be insufficient to please the market and 7 out of 10 companies will sell off after announcing their results. A quick look at the Drop list this weekend will show you where the pain was. TXN, XLNX and CY all got the axe as nearly the entire sector was in the red for the past four days. The details can be found below, but suffice to say that we are going to take this opportunity to do some house cleaning, so that we are ready to add new plays once the market starts to get healthy again. Those of you that have been with us for the past few months will recall our urging to use any earnings runs as an opportunity to lock in profits on your open positions so that you will have cash in hand to buy the bottom later in the year. Particularly vulnerable at this point are open JAN-2001 positions. These are all regular calls now (refer to the article titled The New 2003 LEAPS, dated May 31st) and if the market repeats its usual summer pattern of flat-to-down, time decay on these options will begin to be very painful. Accordingly, we are no longer recommending new positions in the 2001 options. They will behave more like short-term options (Can you say "accelerating time decay"?) from here on out, and they no longer fit with the longer term strategy of LEAPS investing. We will continue to update the performance of the 2001 LEAPS in the playlist through the end of August, but we DO NOT recommend any new positions with these options. It should be very instructional to watch the way the performance of the 2001 calls begins to diverge from the performance of the 2002 and 2003 LEAPS over the next 6 weeks. The beginnings of this time decay disparity can already be seen clearly on some of our laggard plays like AOL and NSM. Since we are no longer recommending new plays on the 2001 options, we have added the 2003 LEAPS into the playlist. The exception to this is that the 2003 LEAPS have not yet been issued for equities that trade on cycle 3. These include C, NT and JDSU and based on past experience, we expect these to be issued by a week from Monday at the latest. With respect to the Return column, since listing the 2003 LEAPS should not be construed as a new recommendation, we will not be calculating returns for these options since this was not our original entry point. Continue to watch the 2001 options and the 2002 LEAPS for updates to the Return column. As time decay begins to accelerate on the 2001 calls, it will provide a good real world example of how the premiums are affected. So what’s going on with the market? Earnings continue to come in very strong, but all but the most stellar numbers are being met with selling, making this a very difficult market in which to profit from a bullish outlook. Adding to our woes is our old nemesis (or friend, depending on the day), the VIX, which continues to slide ever lower. It hasn’t been above 24 for the past two weeks, and Friday’s close at 21.47 is the lowest close it has seen since March 3rd as the NASDAQ approached 5000 for the first time. Remember what happened to the index shortly thereafter? That’s right! It began the swift and painful slide that gave many new investors their first taste of a bear market. Recall that a VIX reading below 21 s a very reliable predictor of near-term market tops, and we are frighteningly close to that now. With the VIX in the danger zone, the fattest part of earnings season behind us, and investor nervousness alive and well, now is not the time to be blindly initiating new positions, even in LEAPS. Instead, take advantage of the remaining earnings reports to lock in profits or limit your losses and enjoy the summer. As Molly reminded us on Thursday, we are right in the middle of the toughest 6 months for profitable trading in the equity markets. Now is a good time to step back from the markets and enjoy life. Trust me! When you come back refreshed, they will still be here and you’ll be happy to have a pile of cash ready to be put to work. November through April is the best time to make money in the stock market (historically) and you’ll have plenty of time to put that money to work in new LEAPS positions as the markets find their footing once again in the months to come. Current Plays SYMBOL SINCE LEAPS SYMBOL PICKED CURRENT RETURN EMC 11/07/99 JAN-2001 $ 40 EMB-AH $ 7.69 $50.38 555.14% JAN-2002 $ 45 WUE-AI $ 9.50 $55.00 478.95% JAN-2003 $ 90 VUE-AR $35.50 $35.50 ------ CSCO 11/14/99 JAN-2001 $ 40 CYQ-AH $ 9.56 $30.88 223.01% JAN-2002 $ 45 WIV-AI $11.00 $32.88 198.91% JAN-2003 $ 70 VYC-AN $25.13 $25.13 ------ NT 11/28/99 JAN-2001 $37.5 NT -AU $11.13 $45.38 307.73% JAN-2002 $37.5 WNT-AU $15.13 $49.75 228.82% TXN 12/12/99 JAN-2001 $ 55 TNZ-AK $11.13 $15.25 37.02% JAN-2002 $ 60 WGZ-AL $14.25 $20.75 45.61% SUNW 12/19/99 JAN-2001 $ 80 SUX-AP $17.63 $31.63 79.41% JAN-2002 $ 90 WJX-AR $22.00 $37.50 70.45% JAN-2003 $105 VSU-AA $40.63 $40.63 ------ CY 01/16/00 JAN-2001 $ 40 CY -AH $ 9.13 $13.88 52.03% JAN-2002 $ 40 WSY-AH $12.63 $20.25 60.33% ERICY 01/30/00 JAN-2001 $16.3 RQC-AO $ 4.94 $ 5.50 11.34% JAN-2002 $16.3 WRY-AO $ 6.75 $ 7.88 16.74% JAN-2003 $ 20 VYD-AD $ 8.13 $ 8.13 ------ NSM 02/27/00 JAN-2001 $ 70 NSM-AN $18.50 $ 3.75 -79.73% JAN-2002 $ 70 WUN-AN $24.25 $10.63 -56.16% AOL 03/12/00 JAN-2001 $ 60 AOO-AL $14.00 $ 7.63 -45.50% JAN-2002 $ 65 WAN-AM $18.63 $13.13 -29.52% JAN-2003 $ 65 VAN-AM $18.25 $18.25 ------ AXP 03/12/00 JAN-2001 $43.3 AXP-AP $ 7.25 $18.50 155.17% JAN-2002 $46.6 WXP-AQ $ 9.33 $21.13 126.47% JAN-2003 $ 60 VAX-AL $18.38 $18.38 ------ WM 03/19/00 JAN-2001 $ 25 WM -AE $ 5.00 $ 7.75 55.00% JAN-2002 $ 30 WWI-AF $ 5.38 $ 7.50 39.41% JAN-2003 $ 35 VWI-AG $ 7.63 $ 7.63 ------ AMD 04/16/00 JAN-2001 $ 70 AMD-AN $17.50 $24.38 39.31% JAN-2002 $ 70 WVV-AN $26.00 $35.63 37.04% JAN-2003 $ 90 VVV-AR $36.75 $36.75 ------ JDSU 04/16/00 JAN-2001 $ 80 XXZ-AP $27.50 $62.13 125.93% JAN-2002 $ 80 YJU-AP $39.63 $75.50 90.51% VSTR 04/16/00 JAN-2001 $ 90 UVT-AR $23.88 $68.13 185.30% JAN-2002 $ 90 WWP-AR $35.00 $77.63 121.80% JAN-2003 $150 VLV-AJ $59.13 $59.13 ------ MOT 05/14/00 JAN-2001 $33.3 MOT-AY $ 6.58 $ 8.88 34.95% JAN-2002 $36.6 WMA-AZ $ 9.54 $11.38 19.29% JAN-2003 $ 40 VMA-AH $13.38 $13.38 ------ NOK 05/21/00 JAN-2001 $ 50 NZY-AJ $10.25 $11.25 9.76% JAN-2002 $ 50 IWX-AJ $17.25 $18.38 6.55% JAN-2003 $ 55 VOK-AK $22.13 $22.13 ------ HD 05/28/00 JAN-2001 $ 50 HD -AJ $ 6.25 $12.00 92.00% JAN-2002 $ 50 WHD-AJ $11.38 $17.88 57.12% JAN-2003 $ 60 VHD-AL $17.88 $17.88 ------ XLNX 05/28/00 JAN-2001 $ 70 ZIZ-AN $14.63 $18.00 23.03% JAN-2002 $ 70 WXJ-AN $23.38 $27.75 18.69% NXTL 06/11/00 JAN-2001 $ 60 FZC-AL $12.25 $19.25 57.14% JAN-2002 $ 60 YFG-AL $19.25 $27.00 40.26% C 06/18/00 JAN-2001 $ 65 C -AM $ 7.63 $11.75 54.00% JAN-2002 $ 65 WRV-AM $13.75 $19.00 38.18% AMGN 07/02/00 JAN-2001 $ 75 YAA-AO $10.75 $14.50 34.88% JAN-2002 $ 75 WQY-AO $20.75 $25.13 21.11% JAN-2003 $ 70 VAM-AN $28.75 $34.38 19.58% VRSN 07/02/00 JAN-2001 $180 JSV-AP $56.88 $56.00 - 1.55% JAN-2002 $190 YVS-AR $66.25 $67.88 2.46% JAN-2003 $180 OVS-AP $88.00 $88.00 ------ DELL 07/09/00 JAN-2002 $ 55 WDQ-AK $12.63 $13.38 5.94% JAN-2003 $ 60 VDL-AL $15.38 $16.00 4.03% GENZ 07/16/00 JAN-2002 $ 70 YGZ-AN $17.13 $21.13 23.35% JAN-2003 $ 70 OZG-AN $23.13 $26.63 15.13% Spotlight Play ERICY - Ericsson Telephone $19.81 As further proof of the difficult market environment that currently exists, ERICY announced earnings on Friday that beat the street estimate by a penny and was promptly handed a 12% haircut. Although the numbers looked good on the surface, the real catalyst for the drop was the company’s lowered guidance for handset sales due to component shortages. Although this is tough in the short-term, what it tells us is that demand for the company’s products is still strong. Margin concerns are also plaguing ERICY’s cell phone business, accounting for about a third of the company’s revenue stream. On the brighter side, their Network Operations unit, making up the balance of ERICY’s income stream, is making tremendous progress and looks like it will continue to take market share from Lucent. In just the last year the company doubled their operating margins in the Network Infrastructure arena, and this side of the business looks much rosier. If prices can firm near current levels, you may want to consider nibbling at new positions. However, with the typical summer slowdown fast approaching, the prudent choice might be to wait for a pullback to even stronger support near $18, which is just a hair below the 200-dma. BUY LEAP JAN-2002 $20.00 WRY-AD at $6.38 BUY LEAP JAN-2003 $25.00 VYD-AE at $6.88 New Plays LU - Lucent Technologies $51.25 The love-hate relationship between LU and its shareholders got another dose of reality last week when the company released their earnings Thursday morning. Although they managed to beat the reduced estimates by a penny, the company let the other shoe drop, admitting that its efforts to boost production of new fiber optic products were taking longer than originally planned. Exacerbating the company’s revenue problems, sales of traditional telephone switches has been falling faster than expected. It seems like the management has finally quit sugar-coating their outlook and the worst may be behind for the company. With Friday’s long-awaited announcement that the company will spin off its $4 billion chipmaking and fiber optic components unit, it looks like the company is successfully narrowing its focus to what it does best. This core skill is supplying hardware and software to the telecommunications service provider market, concentrating especially on broadband, mobile Internet and infrastructure solutions. It was encouraging to see that the selling pressure couldn’t penetrate the $50 support level, even on Friday. As long as this support level can hold, we would consider current levels as an attractive entry point for what could be a very nice recovery in the long-term. Granted, this is a play on a potential turnaround, but if the company can execute on its plans, we could be in for a nice ride. BUY LEAP JAN-2002 $55.00 WEU-AK at $12.88 BUY LEAP JAN-2003 $55.00 VEU-AK at $17.50 Drops CY $45.94 Although it has been a solid performer for several months, rapidly deteriorating sentiment in the Semiconductor sector has decreed the end of our play in CY. After announcing blowout earnings and incredible revenue growth early last week, the “sell the news” crowd has been out in force. In just the past four sessions, the stock has been given more than a 15% haircut, making a powerful argument for not holding over earnings. It should also be a reminder of why we always recommend using stop loss orders to lock in profits. With no news to resurrect the stock in the near term, it is time to move this play to the sidelines until the market and sector can regain some signs of life. EMC $89.56 Ok, before you fire off those nasty emails, THIS IS NOT A DROP of our play on EMC. But we are no longer recommending new positions in the JAN-2001 Calls. For those of you that have been with us awhile, you will recall that we have recommended taking advantage of any July earnings run to lock in profits on those (hopefully) few remaining 2001 LEAPS. The normal summer slowdown is fast approaching, and since the 2001 calls now only have 6 months of time value remaining, time decay will be a very significant factor through the expected summer decline. If you were bold enough to hold over EMC’s earnings last week, you were rewarded with a very positive report and an attendant rise in EMC. The run looks like it is running out of steam, as the stock is finding solid resistance at $90. This looks like the best opportunity we will get to close out those 2001 LEAPS at a profit and when a new entry presents itself (not this week!), roll up to the 2002 or 2003 LEAPS. TXN $62.25 Another victim of the deteriorating sentiment in the Semiconductor sector, TXN has been particularly disappointing lately. With earnings slated for Monday after the close, the stock hasn’t even had a hint of an earnings run. To make matters worse, Friday’s action dragged the price below the 200-dma - for the first time since October of 1998! The meaty part of earnings season is now behind us, and it looks like the summer weakness that we are so familiar with is close at hand. The decline this past week should have stopped out any open plays and we’ll take this opportunity to step aside from TXN until the bulls decide they want to come back out and play. XLNX $75.94 Do you notice a recurring theme here? The Semiconductors were a big red spot on the NASDAQ this week, as several components reported strong earnings and were rewarded with vicious selling after the fact. In addition to the typical “sell the news” mentality, XLNX suffered on Friday from A WR Hambrecht downgrade. Hambrecht analyst Jim Liang cut XLNX to a Buy from a Strong Buy, citing the stock’s relatively high valuation. David Wu at ABN Amro jumped into the fray, raising his price target on the stock to $120, but it was too little, too late. The sellers had already made up their minds and the stock shed over 12% on extremely heavy volume. Add that loss to the $9.56 loss from earlier in the week, and it is clear to us that it is time to put XLNX out to pasture. *********** SPLIT PLAYS *********** Another Big Week For Splits By Ryan Nelson We saw another healthy week for split announcements as the earnings announcements fueled the flames. We had 15 major companies declare splits this past week, pushing the monthly total to 25. We should see a few more next week before it starts to drop off, but what this does is set up for lots of split runs in the next six weeks. You may have noticed that we haven't had any current split run plays yet this month, but that will change. The one caution flag is the overall market, which may decide to retreat in the short-term. That is ok though and we will be watching for those entry points to play some of these split runs. Current Split Run Plays None Current Split Candidate Plays GSPN HGSI SCMR CRA ARBA VRTX PVN Candidates That Are Not Current Plays VRSN BRCM LLY COHR GLW SEBL BRCD TIBX SAPE CREE AKAM 10 Most Recent Announcements We Predicted AMD (most recent announcement) PDLI TXN CHINA CMVT NT VRTS SEPR YHOO TMPW Major Announcements So Far This Month BMET WAT NMSS PDLI UVN VRTX ALTR ACTU CORR INCY CDT BBBY RATL EXTR PROX MPWR ATML AMD MNMD MER AFFX TXCC TSTN C INHL For our complete stock split calendar, click here... http://members.OptionInvestor.com/splits/index.asp ***********************ADVERTISEMENT************************ Get a NextCard Visa, in 30 seconds! 1. Fill in the brief application 2. Receive approval decision within 30 seconds 3. Get rates as low as 2.9% Intro or 9.9% Fixed APR http://www.nextcard.com/index6.html?ref=aff0049911 ************************************************************ ***************************** SEE DISCLAIMER IN SECTION ONE *****************************
The Option Investor Newsletter Sunday 07-23-2000 Sunday 5 of 5 To view this email newsletter in HTML format with imbedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/072300_5.html ************* COVERED CALLS ************* Stock Buying Basics: Trade Execution By Mark Wnetrzak Getting good "fills" is simple, just follow the most direct route to your trading partner. Today, we will examine one of the most popular execution tools available to retail traders; the ECN or Electronic Communication Network. Prior to the late 1990's, this avenue was largely unavailable to individual traders. InstiNet, which began in 1969, was the first venue for institutions in what is commonly called the "third market." However, in recent years, there has been a major expansion in the number of companies providing this type of direct market access. Electronic Communication Networks are computerized systems that anonymously match buyers and sellers of stocks. In simple terms, ECNs basically function as separate exchanges. These networks allow individuals to enter bids and offers directly on the NASDAQ exchange, side by side with orders from market-makers and major institutions. These systems have changed the market considerably and in what has become a major battle in the industry, the NASD (NASDAQ's parent group) says ECNs are pilfering a substantial amount of traffic, including orders from some major Wall Street brokerages. It is not unusual to have 25% of the NASDAQ's total daily volume traded through ECNs and the reason is, prices quoted on these systems are better than those on the main NASDAQ system. Proponents say these networks improve prices for all traders but of course the NASD is not about to give away its top spot in the electronic trading market. The group has recently proposed a new "SuperMontage" computer trading system in which all orders would be forced through the NASDAQ exchange. Those in opposition of the NASD's design complain that the routing procedure would create a less inefficient, anti-competitive system eliminating the many benefits that ECNs have provided to the trading public. The development of electronic trading networks made it possible for institutions to trade stocks without routing the transactions to the floors of the exchanges and it wasn't long before someone decided they could avoid the exchanges completely through the use of these networks. Obviously ECNs are powerful tools for retail traders and now it is possible to trade virtually at all hours with other people or institutions connected to the same network. Most systems are based on trade-matching and the majority of these networks function as "crossing" markets. That is, your order is filled if it corresponds with another opposing order. The "active" ECNs, such as Archipelago, use complex decision-making algorithms and the SelectNet system to find the quickest way to execute a trade, at the best possible price. Individual investors also have access to new types of orders that previously were reserved for major institutions with high-priced, sophisticated software. The most popular trading packages offer direct access to the various ECNS, while at the same time, allowing the user to decide which route or exchange to use in the trade. With the incredible advancements in trading technology, it's only natural that the public would demand equal access to information and techniques used by professionals. Next week, we will review one of the most popular networks for retail traders; Island ECN. Good Luck! SUMMARY OF PREVIOUS PICKS ***** NOTE: Using Margin doubles the listed Monthly Return! Stock Price Last Call Strike Price Profit Monthly Symbol Picked Price Month Sold Picked /Loss Return EGAN 13.94 12.69 JUL 12.50 2.19 *$ 0.75 13.9% CYTO 9.69 7.81 JUL 7.50 2.94 *$ 0.75 12.1% FSII 18.25 18.63 JUL 17.50 2.63 *$ 1.88 10.5% ARQL 13.88 22.13 JUL 12.50 2.44 *$ 1.06 10.1% CCUR 13.13 13.13 JUL 12.50 1.38 *$ 0.75 9.2% TGEN 12.25 12.38 JUL 10.00 3.00 *$ 0.75 8.8% SCUR 18.81 18.25 JUL 17.50 2.19 *$ 0.88 7.7% FHS 13.13 14.31 JUL 12.50 1.63 *$ 1.00 7.6% ZD 11.38 13.88 JUL 10.00 2.25 *$ 0.87 6.9% LYNX 32.63 38.13 JUL 25.00 9.75 *$ 2.12 6.7% TKTX 39.00 31.13 JUL 30.00 9.88 *$ 0.88 6.6% CYTO 7.97 7.81 JUL 5.00 3.38 *$ 0.41 6.5% RHAT 25.00 25.31 JUL 20.00 6.38 *$ 1.38 6.4% CEGE 25.56 27.63 JUL 20.00 6.88 *$ 1.32 6.1% BCGI 14.56 16.13 JUL 12.50 2.88 *$ 0.82 6.1% GENE 27.75 25.75 JUL 20.00 9.25 *$ 1.50 5.9% BCRX 27.00 28.50 JUL 22.50 5.63 *$ 1.13 5.7% CLTR 20.50 25.00 JUL 17.50 3.63 *$ 0.63 5.4% CAIR 25.50 24.13 JUL 20.00 6.63 *$ 1.13 5.2% TGEN 12.25 12.38 JUL 7.50 5.25 *$ 0.50 5.2% IBC 14.94 15.75 JUL 12.50 3.25 *$ 0.81 5.0% NERX 18.88 19.75 JUL 15.00 4.38 *$ 0.50 5.0% IFCI 23.13 23.81 JUL 20.00 4.00 *$ 0.87 4.9% LCCI 27.31 27.19 JUL 22.50 5.50 *$ 0.69 4.6% ALSC 26.88 22.50 JUL 22.50 5.88 $ 1.50 4.4% BWEB 22.88 19.75 JUL 17.50 5.88 *$ 0.50 4.3% PGO 19.00 18.75 JUL 17.50 2.25 *$ 0.75 3.9% TSEM 30.69 30.38 JUL 25.00 6.50 *$ 0.81 3.6% LYNX 47.56 38.13 JUL 40.00 9.63 $ 0.20 0.8% MED 9.44 6.81 JUL 7.50 2.69 $ 0.06 0.6% GLGC 38.75 28.44 JUL 30.00 10.00 $ -0.31 0.0% MAIL 9.44 8.63 AUG 7.50 2.50 *$ 0.56 7.0% DLK 16.75 24.00 AUG 12.50 5.25 *$ 1.00 6.3% BLSW 32.88 30.06 AUG 25.00 9.38 *$ 1.50 5.5% IVIL 8.94 7.31 AUG 7.50 2.13 $ 0.50 5.3% PSFT 18.38 21.88 AUG 15.00 4.38 *$ 1.00 5.2% WFR 18.38 17.94 AUG 15.00 4.38 *$ 1.00 5.2% PMTC 12.69 10.69 AUG 10.00 3.25 *$ 0.56 5.2% IMNR 11.00 9.94 AUG 7.50 3.88 *$ 0.38 4.6% EPTO 15.13 13.13 AUG 12.50 3.38 *$ 0.75 4.6% MCOM 33.00 37.81 AUG 25.00 9.25 *$ 1.25 4.6% EFCX 14.38 13.38 AUG 10.00 4.88 *$ 0.50 4.6% LOOK 23.00 23.75 AUG 17.50 6.25 *$ 0.75 3.9% *$ = Stock price is above the sold striking price. Comments: With Alliance Semiconductor (ALSC) closing exactly at the sold strike, getting "called-out" is unlikely. There are several options available if you own the stock on Monday: Selling the stock and pocketing the profit, rolling forward, rolling down, etc. Technically, the stock appears a bit weak and the sector is undergoing some selling pressure. Lynx Therapeutics (LYNX), E-Med Soft.Com (MED), and Gene Logic (GLGC) should each offer a break-even exit next week. In many cases, "not losing money" becomes the goal! As for August, Mail.Com (Mail) is undergoing some profit taking and may test the June high near our sold strike. Ivillage's (IVIL) technical picture is turning bearish and a test of the June low appears likely. Parametric Tech (PMTC) is moving lower after forming a bearish evening star and is testing the June support area. Remember, violating a support area is a technical exit signal! Epitope (EPTO) appears to be successfully testing its 50 dma and may eventually recover. NEW PICKS ********* Sequenced by Company ***** Stock Last Call Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return HLYW 8.94 AUG 7.50 HWQ HU 2.06 272 6.88 28 9.8% IGEN 20.69 AUG 17.50 GQ HW 3.88 70 16.81 28 4.5% ITXC 34.50 AUG 30.00 UXI HF 7.00 97 27.50 28 9.9% LE 40.13 AUG 35.00 LE HG 7.00 330 33.13 28 6.1% MCRE 13.06 AUG 10.00 MQZ HB 3.50 140 9.56 28 5.0% OO 13.94 AUG 12.50 OO HV 1.94 132 12.00 28 4.5% TMWD 59.50 AUG 45.00 DQW HI 18.63 1 40.87 28 11.0% Sequenced by Return ***** Stock Last Call Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return TMWD 59.50 AUG 45.00 DQW HI 18.63 1 40.87 28 11.0% ITXC 34.50 AUG 30.00 UXI HF 7.00 97 27.50 28 9.9% HLYW 8.94 AUG 7.50 HWQ HU 2.06 272 6.88 28 9.8% LE 40.13 AUG 35.00 LE HG 7.00 330 33.13 28 6.1% MCRE 13.06 AUG 10.00 MQZ HB 3.50 140 9.56 28 5.0% IGEN 20.69 AUG 17.50 GQ HW 3.88 70 16.81 28 4.5% OO 13.94 AUG 12.50 OO HV 1.94 132 12.00 28 4.5% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MR-Monthly Return. ***** HLYW - Hollywood Entertainment $8.94 *** On The Rebound! *** Hollywood Entertainment owns and operates hundreds of Hollywood Video retail superstores across the United States, and is the second largest retailer of rentable home videocassettes, DVDs and video games in the United States. Their transaction database contains information on about 27 million United States member accounts. The company's recent acquisition, Reel.com, has gone out of business, marking one of the first high-profile failures of the click-and-mortar model of Internet retailing. Officials at HLYW said that as a result of the declines in the value of publicly traded e-commerce companies, they did not believe it was in their best interest to continue funding Reel from Hollywood's strong video store cash flow. It appears that investors agree with the decision. AUG 7.50 HWQ HU LB=2.06 OI=272 CB=6.88 DE=28 MR=9.8% Chart = ***** IGEN - IGEN International $20.69 *** Breakout! *** IGEN International develops, manufactures, and markets diagnostic systems utilizing IGEN's patented ORIGEN technology, which is based on electrochemiluminescence, a universal diagnostic platform, which addresses many segments of the diagnostics industry. IGEN believes that ORIGEN-based diagnostic products offer significant advantages over existing systems by providing a combination of enhanced speed, sensitivity, flexibility, throughput and cost effectiveness. IGEN reported earnings in May with a strong increase in revenue primarily due to a rise in product sales led by the M8 analyzer, the first of the M-SERIES line of proprietary instruments and consumable products based on ORIGEN. Two new board members were appointed near the end of June and the news seems to have spurred investor interest. We favor the bullish move out of a stage I base on heavy volume with technical support near our cost basis. AUG 17.50 GQ HW LB=3.88 OI=70 CB=16.81 DE=28 MR=4.5% Chart = ***** ITXC - ITXC Corp. $34.50 *** Talking Via Your PC *** ITXC is a service provider for voice on the Internet. ITXC WWeXchange Service provides phone-to-phone wholesale call completion for carriers and resellers and has been chosen by ten of the top 12 U.S. facilities-based carriers, leading European competitive carriers and PTTs worldwide to complete their customers' calls. ITXC webtalkNOW! Service enables portals, ISPs and communications Websites to offer PC-to-phone calling to their customers under their own brands. This week ITCX announced that it is now completing regional Bell operating company originated international phone-to-phone calls over the Internet. With recent contract signings, ITXC has expanded its customer base to include 13 of the 14 largest U.S. based international carriers. ITXC has been in a basing formation for the last few months with strong support near our sold strike. The technicals suggest the trend will continue though there are some signals suggesting upside potential. We favor a conservative entry and you may consider waiting for Tuesday's earnings report before opening the position. AUG 30.00 UXI HF LB=7.00 OI=97 CB=27.50 DE=28 MR=9.9% Chart = ***** LE - Lands' End $40.13 *** What's up with Friday's Rally? *** Lands' End is a direct marketer of traditionally styled, casual clothing for men, women and children, accessories, domestics, shoes, and soft luggage. They offer their products through multiple distribution channels consisting of regular mailings of its monthly primary catalogs, prospecting catalogs, specialty catalogs as well as through the Internet, its international businesses, and its outlet retail stores. Let see, Lands' End has been quietly forming a stage I base with little or no news and then Friday, it spikes up $4.12 on almost 3 times normal volume? Even the message boards are quiet! An old sage used to say, "the tape tells all". Well, the tape is saying someone is interested in this stock and we simply wish to participate in the speculation with a reasonable cost basis. AUG 35.00 LE HG LB=7.00 OI=330 CB=33.13 DE=28 MR=6.1% Chart = ***** MCRE - MetaCreations $13.06 *** New Business Plan! *** MetaCreations is a provider of e-commerce visualization solutions for the World Wide Web. MetaCreations' strategy is centered on the Company's Metastream technology and software tools designed to make the interactive use of photo-realistic 3D on the Web practical and pervasive. Last quarter, MetaCreations divested its graphic software business to focus on launching the next version of the Metastream technology and licensing model. The launch of Metastream 3.0 appears to be a success with Nike and Sony, to name a few, adopting MTS 3 as their interactive marketing platform. Investors appear to be pleased with this new business model and are looking forward to the international conference on computer graphics and interactive techniques (SIGGRAPH) where Metastream, a subsidiary of MetaCreations, plans to present its latest advances in technology and to make two major announcements. A rather speculative issue (earnings are due early next week) that offers a conservative cost basis for a long-term entry point. AUG 10.00 MQZ HB LB=3.50 OI=140 CB=9.56 DE=28 MR=5.0% Chart = ***** OO - Oakley $13.94 *** The Glare of a Stage II Lift-off *** Oakley is a designer, manufacturer and distributor of consumer products that include high performance eyewear, footwear, watches, apparel and accessories. They have developed products that demonstrate superior performance and aesthetics through proprietary technology and styling. Its designs and innovations are protected by more than 520 legal patents worldwide. I almost had to put my Oakley Sunglasses on to read the "bright" earnings report on Wednesday: Net sales increase 39 percent to a record $100 million on strength of eyewear growth; net income for the second quarter increased 75% to a record $18.5 million. Of course FS Van Kasper immediately changed their new coverage from a "buy" to a "strong buy"...timely! We were attracted by the glare of the stage II breakout from a lateral consolidation phase on very heavy volume - almost resembles a Saturn V blastoff! But, since we don't wish to chase the stock, we'll seek a lower risk entry point with a favorable cost basis. AUG 12.50 OO HV LB=1.94 OI=132 CB=12.00 DE=28 MR=4.5% Chart = ***** TMWD - Tumbleweed $59.50 *** Internet Business Solutions *** Tumbleweed Communications provides advanced e-mail solutions for business communications. Its products enable businesses to create secure online communication channels with established e-mail networks and enterprise applications. With Tumbleweed's Integrated Messaging Exchange (IME), the Company combines an open scalable messaging software platform, a suite of applications for specific business processes, and a broad range of professional services to provide a secure channel for sending and receiving business critical information online. On Thursday, Tumbleweed reported its 2nd Quarter, meeting the Streets earnings estimates and reporting a total revenue increase of 53% and a transaction revenue increase of 108%. Tumbleweed did have a post-earnings sell-off on Friday though the downside appears limited with the May and June highs providing near term support. This issue tends to be volatile and thus we suggest you evaluate your risk-reward tolerance before entering the position. AUG 45.00 DQW HI LB=18.63 OI=1 CB=40.87 DE=28 MR=11.0% Chart = ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? 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Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************************* NAKED PUT PERCENTAGE LIST ************************* Naked Put Percentage List By Matt Russ Stock Stock Strike Option Option Margin Percent Support Symbol Price Price Symbol Price At 25% Return Level ADBE 134.63 130 AXX-TF 8.13 3366 24% 128 AETH 183.00 165 HEX-TM 13.63 4575 30% 165 AFFX 193.56 185 FUE-TQ 18.00 4839 37% 185 ARTG 121.00 110 ARY-TB 7.25 3025 24% 110 BRCM 229.94 220 RDU-TD 12.63 5749 22% 220 CDWC 60.31 55 DWQ-TK 3.13 1508 21% 55 CHKP 250.50 230 YKE-TV 14.50 6263 23% 225 CIEN 155.44 150 UEE-TJ 12.00 3886 31% 150 CMTN 84.38 80 KUA-TP 6.13 2110 29% 78 CRA 112.00 100 CZA-TT 7.00 2800 25% 100 DIGX 88.19 80 UOM-TP 5.38 2205 24% 80 DITC 83.25 80 DUI-TP 6.50 2081 31% 77 DNA 153.31 150 DNA-TJ 9.00 3833 23% 150 FDRY 90.00 80 OUJ-TP 4.50 2250 20% 75 GLW 283.25 270 GWD-TN 9.75 7081 14% 265 GSPN 133.94 120 GHY-TD 8.75 3349 26% 128 HGSI 162.50 150 HHA-TL 9.63 4063 24% 150 ISSX 85.69 80 ISU-TP 5.63 2142 26% 80 ITWO 144.13 130 QYJ-TF 7.00 3603 19% 128 JNPR 160.81 150 JUY-TJ 7.75 4020 19% 150 MLNM 112.88 105 QMR-TA 7.38 2822 26% 108 MUSE 156.88 150 UZQ-TJ 12.50 3922 32% 148 PDLI 165.00 160 RPV-TL 13.25 4125 32% 155 RBAK 139.38 120 BKK-TD 6.00 3485 17% 120 SCMR 138.75 120 QSM-TD 4.75 3469 14% 120 SDLI 442.31 400 OSL-TT 19.75 11058 18% 400 SEBL 159.56 150 SGW-TJ 9.50 3989 24% 150 SEPR 129.81 115 ERU-TC 5.88 3245 18% 120 TERN 62.06 60 TUN-TL 5.50 1552 35% 58 VRSN 180.44 170 QVZ-TN 9.75 4511 22% 170 VRTS 109.31 105 VUQ-TA 6.88 2733 25% 105 *********************** CONSERVATIVE NAKED PUTS *********************** Success Basics: Market Philosophy By Ray Cummins Learning to trade profitably in the market is a great achievement but in truth, it involves no secrets. If you study the methods of the most well known financial experts, you will find a number of common characteristics. The first attribute is a fundamental knowledge of market economics and the basic concept of supply and demand. The second important trait is the use of a specific plan or trading methodology. Another worthwhile quality is patience, and the discipline to execute the trading plan without regard to emotion and other outside influences. The final trait centers on the ability to view the investment world in counterintuitive or contrarian ways. This capacity involves the need to be creative and oppose the current of popular opinion. In many ways, that is the essence of any successful position management strategy. One of the first concepts that novice traders must learn is to separate the company from its stock. Companies change relatively little on a fundamental basis in the short term, but their share values move substantially. The primary point to remember is that today's market price is not the company's value. Price is simply a reflection of the current state of the public's attitudes about a specific company. It is common knowledge that perceptions and expectations are often completely out of line with absolute valuations. Understanding the differences between value and the current market price is one of the initial steps to becoming an independent thinker. Another difficult influence to overcome is the vast amount of information that we are faced with in today's technologically advanced society. Investors have access to a wide selection of inexpensive online data; economic news, company announcements, real-time quotes and professional quality charting services. With the current revolution in communications, it is possible for a trader to receive this information at almost any location on the planet, with little or no delay. Financial news services featuring every conceivable expert and their opinions on the latest developments are also available around the clock. While the value of such immediate (and hardly intellectual) analysis is suspect, they continue to flood the airwaves with perpetual appraisals of every event. To maintain an appearance of wisdom, market "gurus" try to justify each individual price movement with logical reasoning. Unfortunately, these experts can be motivated by self-promotion and ego enhancement and thus the analysis often exceeds common rationale. In addition, the media is constantly searching for stories or angles that will increase their exposure and improve advertising ratings. This leads to a sophisticated and widely disseminated form of gossip that is not particularly helpful from an informational point of view. In simple terms, the investing public has extremely easy access to news and analyses that tend to arouse emotions and overcome one's intellect. Regrettably, this appetite for real-time data and market information becomes a kind of addiction on which our emotional subconscious thrives. As with any dependency, it takes a greater amount of participation to maintain the same level of excitement. The overdose may be in the form of new services or software and often, more expensive equipment. Regardless of the path to "information overload," the end result is generally the same; a tendency to indulge in excess trading with a minimum of actual research and planning. The outcome is similar to a drug addict's withdrawal symptoms but in this case, poor decisions simply lead to financial ruin as the market brutally assaults every hastily conceived position that you have initiated. The best way to avoid the effects of outside influences is to deliberately structure your trade selection process so that the critical decisions are made only when the markets are closed. The key is to set aside time for examination and analysis when external events will have less influence on your judgment. You should also use proven strategies and sound money management techniques to avoid situations that can be affected by external elements. A popular theory suggests that the average investor may very well try to be rational but his rationality tends to be hampered by emotional works and social influences. That's not something that you want working against you when it is time to make an important trading decision. Good Luck! *** WARNING!!! *** Occasionally a company will experience catastrophic news causing a severe drop in the stock price. This may cause a devastatingly large loss which may wipe out all of your smaller gains. There is one very important rule; Don't sell naked puts on stocks that you don't want to own! It is also important that you consider using trading STOPS on naked option positions to help limit losses when the stock price drops. Many professional traders suggest closing the position when the stock price falls below the sold strike or using a buy-to-close STOP at a price that is no more than twice the original premium from the sold option. SUMMARY OF PREVIOUS PICKS ***** Stock Price Last Put Strike Price Profit Monthly Symbol Picked Price Month Sold Picked /Loss Return SIRI 44.31 43.00 JUL 35.00 1.88 *$ 1.88 25.4% DLK 16.75 24.00 JUL 12.50 0.38 *$ 0.38 22.1% ANCC 30.22 34.06 JUL 22.50 0.44 *$ 0.44 14.8% FSII 18.25 18.63 JUL 15.00 0.75 *$ 0.75 13.6% IMG 18.31 17.06 JUL 15.00 0.56 *$ 0.56 13.3% EFCX 10.56 13.38 JUL 7.50 0.44 *$ 0.44 12.5% CEGE 31.50 27.63 JUL 25.00 0.38 *$ 0.38 12.4% SCUR 15.88 18.25 JUL 12.50 0.38 *$ 0.38 11.6% MRVT 19.50 24.50 JUL 15.00 0.44 *$ 0.44 11.0% GENE 30.44 25.75 JUL 22.50 0.50 *$ 0.50 11.0% CAMP 29.00 39.38 JUL 22.50 0.81 *$ 0.81 10.6% TSEM 30.69 30.38 JUL 25.00 0.69 *$ 0.69 10.3% YRK 28.94 25.94 JUL 25.00 0.38 *$ 0.38 10.3% TGEN 14.88 12.38 JUL 12.50 0.38 $ 0.26 9.5% GENE 26.13 25.75 JUL 17.50 0.63 *$ 0.63 9.3% OAKT 20.94 22.88 JUL 17.50 0.44 *$ 0.44 8.9% LBRT 29.31 28.25 JUL 20.00 0.38 *$ 0.38 8.8% NSS 20.13 18.19 JUL 15.00 0.44 *$ 0.44 8.6% FSII 16.00 18.63 JUL 12.50 0.50 *$ 0.50 8.4% PILT 15.31 16.88 JUL 10.00 0.38 *$ 0.38 8.0% CBST 49.25 49.06 JUL 35.00 0.50 *$ 0.50 7.0% CAIR 25.50 24.13 JUL 17.50 0.44 *$ 0.44 6.9% MPPP 19.19 12.13 JUL 10.00 0.38 *$ 0.38 6.5% SYMM 20.00 23.19 JUL 15.00 0.38 *$ 0.38 6.3% VITR 48.13 54.94 JUL 30.00 0.56 *$ 0.56 6.0% SIPX 27.25 33.69 JUL 20.00 0.31 *$ 0.31 5.8% CLRS 38.88 41.81 JUL 30.00 0.69 *$ 0.69 5.8% CEGE 27.25 27.63 JUL 17.50 0.44 *$ 0.44 5.4% IMNX 44.69 57.75 JUL 30.00 0.56 *$ 0.56 5.1% TLCM 40.06 24.81 JUL 30.00 0.56 $ -4.63 0.0% GSTRF 10.56 8.03 AUG 7.50 0.56 *$ 0.56 18.2% NFLD 17.50 15.94 AUG 15.00 1.00 *$ 1.00 13.2% SQST 14.00 10.56 AUG 10.00 0.50 *$ 0.50 13.2% WSTL 25.19 28.50 AUG 20.00 0.81 *$ 0.81 12.0% PILT 17.81 16.88 AUG 12.50 0.50 *$ 0.50 10.7% RAZF 22.25 19.19 AUG 17.50 0.56 *$ 0.56 9.7% MRVT 22.63 24.50 AUG 17.50 0.50 *$ 0.50 7.2% BLSW 32.88 30.06 AUG 22.50 0.56 *$ 0.56 6.8% NXLK 39.69 39.94 AUG 30.00 0.75 *$ 0.75 6.3% INFS 37.00 37.75 AUG 30.00 0.50 *$ 0.50 5.2% *$ = Stock price is above the sold striking price. Comments: Targeted Genetics (TGEN) dropped slightly below our sold strike however, the chances are slim it will be assigned. The big drop in Telcom Semiconductor (TLCM) confirmed a "failed" rally this week and an early exit would have avoided Friday's horrid, post- earnings drop. August Positions: (GSTRF) Globalstar Telecom is testing the previous July low as it continues to form a stage I base. Northfield Labs (NFLD) is testing the May high and should be monitored closely. Sciquest.Com may be taking collateral damage from its competitor, Ventro (VNTR) which recently reported disappointing revenue. Razorfish (RAZF) is pulling back as we move towards Tuesday's earnings report but the technicals remain bullish. Positions Closed: Us Lec Corp. (CLEC) and Open Market (OMKT). Creative Tech (CREAF) proved Murphy's Law remains in effect by rallying back above our sold strike for a profitable outcome. NEW PICKS ********* Sequenced by Company ***** Stock Last Put Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return ATMS 11.44 AUG 7.50 OUA TU 0.31 0 7.19 28 13.0% HLYW 8.94 AUG 7.50 HWQ TU 0.50 36 7.00 28 20.6% ICGE 39.94 AUG 30.00 EUE TF 0.75 688 29.25 28 9.3% PSFT 21.88 AUG 17.50 PQO TW 0.44 280 17.06 28 9.9% RHAT 25.31 AUG 17.50 RCV TW 0.38 0 17.12 28 7.6% WSTL 28.50 AUG 20.00 QLW TD 0.56 210 19.44 28 9.7% ZIXI 55.00 AUG 40.00 HQU TH 1.63 246 38.37 28 14.0% Sequenced by Return ****** Stock Last Put Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return HLYW 8.94 AUG 7.50 HWQ TU 0.50 36 7.00 28 20.6% ZIXI 55.00 AUG 40.00 HQU TH 1.63 246 38.37 28 14.0% ATMS 11.44 AUG 7.50 OUA TU 0.31 0 7.19 28 13.0% PSFT 21.88 AUG 17.50 PQO TW 0.44 280 17.06 28 9.9% WSTL 28.50 AUG 20.00 QLW TD 0.56 210 19.44 28 9.7% ICGE 39.94 AUG 30.00 EUE TF 0.75 688 29.25 28 9.3% RHAT 25.31 AUG 17.50 RCV TW 0.38 0 17.12 28 7.6% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MR-Monthly Return. ***** ATMS - Tidel Technologies $11.44 *** Own This One! *** Tidel Technologies sells and supports products designed for automated teller machines electronic cash security systems. They provide ATMs that meet variety of demands in the marketplace. Chameleon, their most advanced ATM product, is an interactive multimedia kiosk that combines the security of traditional Electronic Funds Transfer banking networks with the limitless options of the Internet. For example, an ATM user could make a cash withdrawal, and then buy airline tickets and book a hotel reservation, all while receiving high-impact advertising messages in broadcast-quality video and audio. The company recently announced a new quarterly record for ATM shipments and the CEO remarked that they are very pleased with the pace of the current business. He expects the momentum to carry forward into the next quarter and based on the bullish history, the issue should remain well above our cost basis. Financial results for this quarter will be released on or about July 26, 2000. AUG 7.50 OUA TU LB=0.31 OI=0 CB=7.19 DE=28 MR=13.0% Chart = ***** HLYW - Hollywood Entertainment $8.94 *** On The Rebound! *** Hollywood Entertainment owns and operates hundreds of Hollywood Video retail superstores across the United States, and is the second largest retailer of rentable home videocassettes, DVDs and video games in the United States. Their transaction database contains information on about 27 million United States member accounts. The company's recent acquisition, Reel.com, has gone out of business, marking one of the first high-profile failures of the click-and-mortar model of Internet retailing. Officials at HLYW said that as a result of the declines in the value of publicly traded e-commerce companies, they did not believe it was in their best interest to continue funding Reel from Hollywood's strong video store cash flow. It appears that investors agree with the decision. AUG 7.50 HWQ TU LB=0.50 OI=36 CB=7.00 DE=28 MR=20.6% Chart = ***** ICGE - Internet Capital Group $39.94 *** Stage I Base *** Internet Capital Group is an Internet company engaged in business-to-business (B2B) e-commerce through a network of partner companies. They own interests in 49 B2B e-commerce companies. ICG owns two types of B2B companies. The first focuses on creating Internet-based markets for the exchange of goods, services and information. The second allows service providers to sell software and services to businesses engaged in e-commerce, providing assistance in designing business practices to take advantage of the Internet and in building and managing the infrastructure needed to support B2B e-commerce. E-commerce is still a HOT industry and the sector represents the next major wave in business automation with an expected multiyear cycle that will influence larger populations and produce more far-reaching implications than any wave of computing that has preceded it. We simply favor the neutral-to-bullish technical pattern in this issue and the positive outlook for the sector. AUG 30.00 EUE TF LB=0.75 OI=688 CB=29.25 DE=28 MR=9.3% Chart = ***** PSFT - PeopleSoft $21.88 *** Own This One! *** PeopleSoft designs, develops, markets and supports a family of enterprise client/server and Internet based application software products for use throughout large and medium sized organizations including corporations worldwide, and education institutions, and federal, state, provincial and local government agencies in North America. The company designs its products for the client/server and Internet models of computing. PSFT also delivers commercially available application software products in for Business Management, Supply Chain, Industry Solutions, and Product Architecture. The Company beat the consensus forecast by $0.01 in the second quarter and revenue from human resource and financial software, a sector targeted for future growth, improved 38%. Supply chain management revenue rose 44% and demand for their software was strong across every product line and geography. On Friday, the bullish issue was upgraded by a number of brokers. AUG 17.50 PQO TW LB=0.44 OI=280 CB=17.06 DE=28 MR=9.9% Chart = ***** RHAT - Red Hat $25.31 *** They Beat The Street! *** Red Hat is a developer and worldwide provider of open source software products and services. The company's product offerings include Red Hat Linux and related tools, open source software applications, documentation, manuals and general merchandise. Professional services offerings include technical support and maintenance, custom development, consulting, training along with education, developer support and hardware certification. Red Hat has also built a comprehensive Internet site dedicated to the open source software community. In June, the leading Linux software operating system provider reported better-than-expected earnings, suggesting the company was on track to meet profitability goals by next year. Red Hat nearly doubled its quarterly sales from twelve months ago, and the CEO commented that RHAT's quarterly performance represents continued execution in a plan to leverage acquisitions to enter new markets and develop additional revenue sources. We favor the low risk entry point. AUG 17.50 RCV TW LB=0.38 OI=0 CB=17.12 DE=28 MR=7.6% Chart = ***** WSTL - Westell Technology $28.50 *** Trend Reversal! *** Westell Technologies provides telecommunications products and services. Westell Inc., their products business, supplies DSL Equipment, Telephone Access Systems and equipment to monitor and maintain telecommunications networks. Conference Plus Inc., their service business, is an Application Service Provider, hosting and providing audio, video, IP conferencing and support services. Last week, Westell reported second-quarter earnings of $3.7 million, or $0.06 a share. A First Call survey expected the company to report a profit of $0.02 a share. Revenue rose 347% in the latest three months to $107.9 million, well above the $24 million in the same period a year earlier. Telecom issues are becoming popular again and with the recent positive ratings, it appears investors are now bullish on this company. AUG 20.00 QLW TD LB=0.56 OI=210 CB=19.44 DE=28 MR=9.7% Chart = ***** ZIXI - ZixIt Corporation $55.00 *** New Trading Range! *** ZixIt Corporation develops and markets products and services that enhance privacy, security and convenience over the Internet. ZixMail is a secure document delivery, private email and message tracking service that enables Internet users to easily send and receive encrypted and digitally signed email communications without changing their existing email systems. ZixCharge, which is currently under development, is a shopping portal and Internet payment authorization system that enables consumers to use their existing charge cards to purchase goods and services over the Internet without being required to provide personal and charge card information to Internet merchants. In June, ZIXI received a bullish upgrade based on the company's evolving product strength, its impressive roster of recent investors, and a financial model indicating significant revenue potential. ZixIt has been stair- stepping higher since May and appears ready for the next move up. AUG 40.00 HQU TH LB=1.63 OI=246 CB=38.37 DE=28 MR=14.0% Chart = **********************ADVERTISEMENT************************** Free voicemail, email, fax, and paging - all in one place! Accessible over the phone & Internet. Free Local & 800 Phone Number for Life! Send & receive faxes & email via the web or phone. ThinkLink charges no monthly fees. Plus, for a limited time, sign up now and receive an airline voucher worth up to $100 dollars off any major airline. FREE NOW! FREE FOREVER! http://www.OptionInvestor.com/tracking.asp?co=STThinkLink7172000 ************************************************************* ************************ SPREADS/STRADDLES/COMBOS ************************ A broad market sell-off ends the rally! The stock market closed sharply lower Friday after a string of profit warnings gave investors new cause for concern. Friday, July 21 The stock market closed sharply lower Friday after a string of profit warnings gave investors new cause for concern. The Dow finished down 110 points at 10,733 while the Nasdaq ended 90 points lower at 4094. The S&P 500 Index was down 15 points at 1480. Trading volume on the NYSE hit 967 million shares, with declines beating advances 1,774 to 1,095. Trading activity on the Nasdaq was average at 1.54 billion shares, with declines leading advances 2,607 to 1,325. In the bond market, the U.S. 30-year Treasury rose 9/32, pushing its yield down to 5.79%. Sunday's new plays (positions/opening prices/strategy): Cisco Systems CSCO AUG55P/60P $0.62 credit bull-put Intl. Rectifier IRF AUG45P/50P $0.88 credit bull-put Phillip Morris MO AUG27C/30C $0.43 credit bear-call Cisco Systems traded in a relatively small range throughout the session but there were a few opportunities to achieve a favorable cost basis. International Rectifier slid $2 at the open however, the best available credit for the position was only $0.88. The Phillip Morris entry price was based on a 20-contract position initiated near 10:20 A.M. Portfolio Plays: Technology stocks led the market lower today amid a slew of mediocre earnings reports and revenue forecasts. Frustration over the lack of follow-through in the recent rally led many investors to take profits even as the Summer rally was just gaining momentum. The stock market enjoyed bullish activity earlier in the week after FOMC chair Alan Greenspan told the Senate Banking Committee he expects economic growth to slow next year. But in classic style, he also commented that the current tightness in the labor market could spur inflation. Today analysts reviewed the speech, giving it a more sober appraisal and now they are again speculating about what the Fed is going to do with interest rates at their August meeting. In the blue-chip group, Hewlett-Packard was the biggest loser, falling almost $7 on speculation of weakness in their printer business. IBM and Intel also slumped after leading the market higher earlier in the week. Investors displayed unhappiness with bellwether technology issues and the Semiconductor sector endured the worst losses in that category. In the broad market, healthcare, biotech and investment management issues rallied, while electronic and personal care stocks consolidated. Friday was basically a "non-event" for the Spreads portfolio as the majority of July positions are substantially "in-the-money" or they have been previously closed to protect profits or limit losses. However, we did experience some exciting activity in the Macromedia (MACR) spread. Shares of the developer of web software fell almost $30 after analysts expressed concerns about the company's revenues, despite better-than-expected earnings. Late Thursday, the company reported first-quarter earnings that surpassed expectations and said it would see improved results for the year as a whole. Revenue increased 85% to $94 million for the quarter, up from $51 million a year earlier. Based on the report, a US Bancorp Piper Jaffray analyst downgraded MACR to a "buy", saying its revenues were slightly below to in line with expectations. Nada also said Macromedia was heading into a seasonally weak period. The negative review dropped the issue to a low of $64 in the morning session and MACR was among the top net and percentage losers on Nasdaq. One analyst said that the market reaction was a case of expectations getting out of hand and we agree with that assessment. Fortunately, the play ended positive for the month. Overall, the final day of the expiration period was relatively kind to the Combos section. A number of big-cap technology issues suffered losses during the session but fortunately, the majority of plays finished well beyond the maximum profit range. Over 80% of our current positions closed profitably and the few losses were minimal. The remaining (August) plays were little affected by the move and a small group of consolidating issues offered new opportunities for roll-outs and adjustments. Some of our bullish small-cap stocks actually opposed the downward market momentum, rallying to recent highs. Overall, it was an excellent end to another profitable month for this category of the newsletter. The summary of July's results along with the complete list of current portfolio plays will be posted in next Tuesday's edition of the OIN. Questions & comments on spreads/combos to Contact Support ****************************************************************** - READER'S REQUEST - With the current uncertainty in the market, we decided to utilize some of the recent issues that our subscribers have suggested as candidates for this week's positions. ****************************************************************** SUNW - Sun Microsystems $104.00 *** Big Earnings! *** Sun Microsystems is a worldwide provider of products, services and support solutions for building and maintaining network computing environments. The company sells scalable computer systems, high-speed microprocessors and high performance software for operating network computing equipment and storage products. They also provide support, education and professional services. The company's products are used for many demanding commercial and technical applications in various industries including telecommunications, manufacturing, financial services, education, retail, government, energy and healthcare. Earnings and revenues continue to dominate the market and Friday, Sun Microsystems reported exceptional numbers as the computing giant vaulted over analyst's estimates for its most recent quarter. With record revenues of $5 billion, representing a growth of 42% over the same quarter last year, Sun exceeded all expectations. Strong server growth led the company and in every important market, including telecommunications, financial services, retail and manufacturing, they had an incredible quarter. Analysts say the best is yet to come as SUNW upped its projections for annual revenue growth, with a target near 30% for the next fiscal year. PLAY (conservative - bullish/synthetic position): BUY CALL OCT-125 SUX-JE OI=574 A=$3.88 SELL PUT OCT-85 SUX-VQ OI=1288 B=$3.12 INITIAL NET DEBIT TARGET=$0.12-$0.25 PROFIT TARGET=20% Note: Using options, the position is equivalent to being long on the stock. The collateral requirement for the naked put is approximately $2,500 per contract. Chart = ****************************************************************** BBBY - Bed Bath And Beyond $39.69 *** Split Rally? *** Bed Bath & Beyond sells domestics merchandise and other home furnishings through stores across the U.S. These stores are on average approximately 42,000 square feet in size and carry the company's full line of both domestics merchandise and home furnishings. Their domestic merchandise includes bed linens and related services, bath items, and kitchen textiles. BBBY's home furnishings include kitchen and tabletop items, basic housewares, and general home furnishings. In each store, groups of related product lines are presented together in separate areas of the store, creating the appearance of several individual specialty stores for different product lines. The company believes that its format of merchandise presentation makes it easy for its customers to locate products, reinforces customer perception of wide selection and a high level of customer service. Bed, Bath, & Beyond is fundamentally sound and growing. Last quarter, BBBY exceeded analyst's estimates and its own internal plans for expansion. The company now operates 254 stores in 39 states, having opened 10 superstores during the latest quarter, two more than analysts expected. Bed, Bath, & Beyond has also done an excellent job of inventory management and has been financing its rapid growth using cash from operations instead of debt. This position is based primarily on the technical condition of the issue and the potential for a pre-split rally. Bed, Bath, & Beyond is planning a two-for-one stock split to be effected in the form of a 100% stock dividend, which will be distributed on August 11, to shareholders of record on July 28. PLAY (conservative - bullish/credit spread): BUY PUT AUG-32.50 BHQ-TZ OI=3795 A=$0.62 SELL PUT AUG-35.00 BHQ-TG OI=81 B=$0.93 INITIAL NET CREDIT TARGET=$0.38-$0.43 ROI(max)=18% B/E=$34.62 Chart = ****************************************************************** - Speculation Plays - These positions are based on recent increased activity in the stock and/or underlying options. Both plays offer favorable risk/reward potential but they should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. ****************************************************************** VSTR - Voicestream Wireless $149.75 *** Merger Target! *** VoiceStream Wireless provides personal communications services (PCS) under the VoiceStream brand name in 11 urban markets, including large cities such as Denver, Seattle, Salt Lake City and Honolulu. They hold 107 broadband PCS licenses covering approximately 62.6 million persons. VoiceStream Wireless' services include rate plans, prepaid services, wireless e-Mail, wireless data, and text messaging. German telecommunications giant Deutsche Telekom AG has made a bid for VoiceStream that values the company at over $50 billion. Sources say the offer is over $200 per share of VSTR stock and the two companies are reportedly holding serious talks about a potential deal. Deutsche Telekom plans to enter the U.S. market and is expected to draw from an investment pool of $92 billion to finance its most recent foray. The Wall Street Journal said Deutsche Telekom's offer could trigger a bidding war for VSTR with NTT DoCoMo, the wireless affiliate of Japan's Nippon Telegraph and Telephone. VoiceStream will weigh the $50 billion cash and stock takeover offer this weekend and a formal agreement could be reached as early as next week. The hitch is that politicians opposed to the deal have introduced legislation to prevent any takeover of a U.S. telecoms operator by a company more than 25% owned by a foreign government. In this case, the German government holds 58% of Deutsch Telekom. In our opinion, regardless of who buys the company, or even if the U.S. government succeeds in blocking the foreign ownership, the competition should hold the share value at or above its current price, providing a relatively conservative "speculation" position. We will use the premium from the sold put to finance the purchase of the debit spread. The collateral requirement for the naked put is approximately $3,200 per contract. PLAY (conservative - bullish/debit spread combination): BUY CALL AUG-160 BWU-HL OI=1350 A=$7.25 SELL CALL AUG-165 BWU-HM OI=3591 B=$4.75 SELL PUT AUG-120 UVT-TD OI=161 B=$2.43 INITIAL NET DEBIT TARGET=$0.00 ROI=15% (based on collateral) Chart = ****************************************************************** - TECHNICALS ONLY - These plays are based on the current price or trading range of the underlying issue and the recent technical history or trend. The probability of profit from these positions is also higher than other plays in the same strategy based on disparities in option pricing. Current 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. ****************************************************************** PLL - Pall Corporation $19.75 *** Rangebound? *** Pall Corporation is a supplier of fine filters, principally made by the company using its proprietary filter media, and other fluid clarification and separations equipment for the removal of solid, liquid and gaseous contaminants from a wide variety of liquids and gases. The company's business is best analyzed by the principal markets, or industry segments, in which it sells its products: Bio-Pharmaceuticals, Medical, Aeropower and Fluid processing. During the past five years, Pall has continued its development and sale of fluid clarification and separations products in a wide variety of markets. The company also makes metal and plastic housings and a wide variety of appurtenant devices. With favorable disparities in the front-month premiums, this position offers a favorable speculation play for those who are neutral on the issue. Implied volatility is at a historic high and call volume swelled last week with no reports or news that might account for the increased options activity. Pall is not due to release earnings until late August and unless there is a merger in the works, this position has a high probability of closing profitably. PLAY (aggressive - neutral/credit strangle): SELL CALL AUG-22.50 PLL-HX OI=249 B=$0.93 SELL PUT AUG-17.50 PLL-TW OI=139 B=$0.68 INITIAL NET CREDIT TARGET=$1.62-$1.75 ROI(max)=30% UPSIDE B/E=$24.25 DOWNSIDE B/E=$15.75 Chart = ***********************ADVERTISEMENT************************ Get a NextCard Visa, in 30 seconds! 1. Fill in the brief application 2. Receive approval decision within 30 seconds 3. Get rates as low as 2.9% Intro or 9.9% Fixed APR http://www.nextcard.com/index6.html?ref=aff0049911 ************************************************************ ***************************** SEE DISCLAIMER IN SECTION ONE *****************************
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