The Option Investor Newsletter Sunday 07-30-2000 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/073000_1.html Entire newsletter best viewed in COURIER 10 font for alignment ****************************************************************** MARKET STATS FOR LAST WEEK AND PRIOR WEEKS ****************************************************************** WE 7-28 WE 7-21 WE 7-14 WE 7-7 DOW 10511.17 -222.39 10733.56 - 79.19 10812.75 +176.77 +188.09 Nasdaq 3663.00 -430.86 4093.86 -152.32 4246.18 +222.98 + 57.09 S&P-100 776.18 - 28.37 804.55 - 10.97 815.52 + 12.52 + 12.75 S&P-500 1419.89 - 60.30 1480.19 - 29.79 1509.98 + 31.08 + 24.30 RUT 490.22 - 32.48 522.70 - 19.93 542.63 + 14.41 + 10.99 TRAN 2769.53 - 38.89 2808.42 -110.62 2919.04 +134.40 +139.27 VIX 24.30 + 2.83 21.47 - 1.14 22.61 + .79 - .44 Put/Call .59 .38 ****************************************************************** What an ugly week! Friday was a fitting end to a really ugly week. The economic news on Friday morning was bad, very bad. The GDP jumped to +5.2% from a June adjusted growth rate of +4.8%, a +8% jump. Soft landing? Slow down? What slow down? The economy is alive and well and thumbing its nose at Greenspan and company. Existing home sales are up, durable goods orders up, retail sales up, unemployment dropping with wages and benefits rising at the fastest rate in a decade. Just guess what the number one topic on trading desks will be next week? You will hear it on every media outlet and from every talking head. You are absolutely right, another interest rate hike at the August 22nd FOMC meeting. The markets saw the writing on the wall with the GDP report and traders not on vacation ran to the sidelines. Money market funds swelled by over $8 bln last week and that was before the GDP report. Before you read the rest of this remember "it is always darkest before the dawn." All the market news was bad. Support points were evaporating as though they were written in disappearing ink. The Dow dropped to support at 10500 at the open and was never able to mount any serious rebound for the entire day. Closing only slightly off the days lows at 10511. The critical support at the 200 DMA of 10760 failed on Monday and the technical outlook is grim. Tech traders on the Nasdaq ran for cover early and bargain hunters were obviously on vacation. After the opening drop of -150 points, -430 points for the week on top of several hundred from the prior week, you would have expected the bargain hunters to be out in force. There was not a buyer to be found with the low for the day occurring only ten minutes before the close. The 200 DMA for the Nasdaq is only a distant memory at 3862 over -200 points away. The Nasdaq has now fallen -15% as expected since the 4287 intraday high last week. Technical traders looking at the broader market and the S&P-500 saw that index close below the critical 1421 level which is the 200 DMA as well. The selling was not limited to tech stocks with the SPX breaking a long term up trend in place since last February. The Wilshire Total Market Index (TMW.X) of 5000 stocks broke through strong support at 13500 with a strong -298 point drop. This index is the broadest measure of market strength and direction and the drop confirms that the sell off is not just Nasdaq tech stocks or old economy Dow stocks. The only sectors that appear to be holding their ground are the defensive areas of insurance, food, beverage and drugs, traditionally pockets of strength when the market outlook is negative. Other pressures on the market that have nothing to do with the economic reports include the money flow and the IPO calendar. Over $8 billion moved into money market funds last week as investors sought the safety of the sidelines during the summer doldrums. In addition to the withdrawal of cash by investors, there was a strong group of new offerings which took over $3.5 billion in cash out of the existing market. With the success of the recent IPO surge, there are no less than 33 scheduled to make their debut next week. The total cash expected to pour into these new offerings is over $5 billion. Add to this the huge secondary offering by Goldman Sachs of $4 billion and you can see a huge drain on the market for next week. Take $10 billion more or less out of the market and a lot ho hum, mediocre stocks are going to see investors leave and never come back. Investors who have been hanging on to losers as they continued to drift lower will eventually decide to close those positions, take the loss and try to find something more exciting like a sexy new IPO. Ugly, ugly, ugly. Maybe that is the bright side of the analysis. If things are always darkest before the dawn and traders wait for the leaders to capitulate before moving back into the market, then look out for the stampede. CSCO held firm all week when the rest of the market was heading south. On Friday, CSCO dropped -5.19 to a low of $62.81. Dell concluded a -17% slide from $54 to $43 with a -1.81 drop. Intel which had resisted the drop finally capitulated with a -7.88 loss on Friday and closed at the low of the day. WCOM slid from $50 to $36 last week and optical powerhouse JDSU traded as low as $115.50, a number not seen since the announcement about the S&P 500 inclusion. JDSU closed the day with a -12.38 loss which equated to a whopping -$54 loss for SDLI when taking into account the upcoming buyout. If leader capitulation is required for re-entry into the market, then look out for the stampede! As if we did not have enough to worry about, the Asian markets are silently dropping and the economic recovery in Asia may not be as hot as we thought. Some of the drop is related to the Nasdaq and the tech weakness. Since much of the Asian economy is built on the assembly of tech products for world consumption, any slow down in cell phones and personal computers could hit them hard. If the Nasdaq weakness is a leading indicator for Asia, then they have a tough week ahead. The Nasdaq lost -431 points for the week, the second largest drop ever, and did it on strong volume. Friday's volume was 1.77 bln shares and almost 1 bln on the NYSE. Ironically, put contract volume is up only slightly but call volume is up as well. In spite of the big sell off, investors still appear to be complacent and not afraid of any further drops. If we need further reason to worry, we need only look to the economic calendar for next week. Every report will be examined microscopically for evidence of growth and inflation beginning with the Chicago PMI on Monday, Personal Income/Spending and Construction Spending on Tuesday. New Home Sales on Wednesday, Factory Orders on Thursday and, drum roll please, Nonfarm Payrolls for July on Friday. With the market on Fed watch, the nonfarm payrolls will be a big stumbling block. We do not have the census workers to blame things on any more. We will have to live and die by the number, good or bad. Rising interest rates, economic reports, earnings warnings, money flow, IPO flood or just summer doldrums. What ever reason you want to apply to the drop last week at least that week is over. Now, where do we go from here? I would not touch that with a ten foot pole, as they say. Emotionally, I would expect to see a relief rally on Monday. Nothing goes up or down in a straight line and a -15% drop on the Nasdaq should be a huge buying opportunity. However, if you bought at -15% back in March or April you would have lost a lot of money. With those drops in recent memory, traders are being a lot more careful about buying the dips. So, where emotionally you would expect a relief rally there may not be one. Analysts are now pointing to levels I mentioned last week of 3500 and some even lower. Just remember those same analysts were looking at 4500 just last week. The problem as I see it is simply the season and investor psychology. Many investors got burned severely last spring. Many have yet to re-enter the market. Every summer we get a lot of subscriber cancellations with notations, "going on vacation, back in September." When September comes, these readers come back ready to whip the markets and ride the fourth quarter wave. This summer has been worse after the beating investors took in March/April. Actually, I have spoken with other site owners who claim their site traffic has dropped -25% to -35%. Carry this on through to brokers that have seen order volume from retail traders drop as much as 50% and you can see why the dip was not met with bargain hunters. Look back at the Nasdaq rally in June. Compared to the 1999 Nasdaq excitement, this was a yawner. Slow, steady, no excitement. The pre-earnings jump for a week in July actually created some interest but when the first signs of trouble appeared investors sold into the rally and moved to the sidelines again. Investors who are not on vacation are simply much more cautious and are protecting their capital. Technically the Nasdaq is oversold. Emotionally, traders want to buy but are scared. The farther the market drops the more likely a bounce will occur and the more confident traders will become. They will feel the possibility of a further loss is minimal. If the market bounces at the open on Monday, I would not be a buyer. That would be an emotional bounce. If the market opens down and we get a decent downward spike, I would be a buyer on any rebound, BUT ONLY AS A TRADING BUY, not as a buy and hold. If we get a drop to 3500-3550, I think that would be a buy signal. The close at 3663 on Friday is exactly a -50% retracement of the gains since May. Technically, this is a make or break point. The next technical signal would be a 61.8% Fibonacci retracement to 3518. This fits in well with targets of 3500-3550 and would be a convergence of technical and sentiment indicators. Just remember any early week rally is likely to meet serious selling and another pull back before the Friday nonfarm payrolls. As I mentioned above, get used to hearing about the Fed meeting on Aug-22nd. It will be the topic of conversation in every analyst interview. I heard on a weekend talk show that several analysts are already expecting a hike at the following meeting as well, despite the election. The fall back was another +.50% hike in August to avoid raising again before the election. Either scenario will not be well received by the markets this week. Get out of the heat and into a seminar! Orange County Aug-10/12, Orlando Aug-17/19, Dallas Aug-24-26, are all three day technical analysis, stock and option seminars which will improve your investing profits. Be ready for the fall rally with more confidence and a better understanding of the markets. Why invest without all the knowledge available? http://www.OptionInvestor.com/seminar/seminar.asp Trade smart, sell too soon. Jim Brown Editor ********************************Advertisement******************** American Express® Cardmembers are buying online Find out more! http://click.linksynergy.com/fs-bin/stat?id=MH64V9Lgzgc& offerid=13447.10000026&type=1&subid=0 ***************************************************************** **************** SEMINAR SCHEDULE **************** Orange County California is the next three day Technical Analysis, Stock and Option Seminar Three days of indepth education. Don't miss it! The next seminar is a three day event in Orange County California on August 10-12th. We guarantee you will not be disappointed. The class size is small so you will get plenty of individual attention from Chris Verhaegh, Steve Rhoades and 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. Aug 10-12 Orange County 3 day NEW !!!!!!!!!!!!!! Aug 17-19 Orlando 3 day Aug 24-26 Dallas 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 ************** EDITOR'S PLAYS ************** Just like clockwork, the QQQs tanked after the earnings season and brought life back to the VIX. It's just too bad not all trades are this successful. I jumped out of puts mid-week and missed the final downward surge, but I'm not complaining. I am already looking forward to third Friday in July next year! But with such a pronounced downside move in the Nasdaq, second largest one week decline to be exact, it wouldn't surprise me to see a modest rebound. Don't get me wrong, this isn't the time to load up on bullish positions, but a quick downward move in the first hour of trading on Monday could provide some entry points for a couple day rebound. It's hard to say how long that might last, but I will probably be thinking puts again later in the week. Here is the VIX chart we looked at last week for comparison to this week's chart. Last week's VIX chart This week's VIX chart And there you have it! Complacency is officially over. The question on everyone's mind now is, how long until we hit 30? I don't expect it soon, but historical patterns tell us we it is on its way. This is the time of year that poor volume and poor momentum eat away at the stock market. ------ Some blame the QQQs for being too slow to trade, and while that can be true at times, it wasn't the case this week. Under the right circumstances, it becomes my favorite trade. I only had one round trip play this week, which was a swing play of a couple days and it treated me well, but when the QQQs are moving you can daytrade them too. Matt Russ (Asst. Editor) had eight round trip plays of which six were good winners and the two losers were only of an 1/8 and 1/4 respectively. You can see from the charts how this "balloon letting out air" decided to pop and plummet to the ground. Last week's QQQ chart This week's QQQ chart I am not planning on playing the bounce, but if the dip Monday morning is strong enough, I will jump in. I am more inclined to play some individual stocks that look good. And I will be waiting patiently for the rollover after the bounce to re-open some put plays. Wow, I sound fairly bearish for a naturally bullish guy, but it's all about learning to take what the market gives. Remember, market neutral at all times! ------ You may recall our analysis of PVN last week... "The play here is easy. We want to see $100 hold and the volume continue to increase as the stock moves up." Last week's PVN chart Well, we got the pullback to $98 on Monday, followed by a higher low on Tuesday at $99, then the pop back over $100 was the green light. The volume was good, not great, but you can really start to see a trend emerging here. And in the face of a market sell-off is even more convincing. Follow the trendline for entries, but a breakout above last week's high is also buyable for aggressive investors. This week's PVN chart ********* New Plays ********* There are too many stocks to list that are in an over-sold condition. For a more comprehensive list of bullish plays, check out the calls section. But for this week's new play, I wanted to show you a direct relative of PVN known as Capitol One Financial. It has a similar pattern and looks like it is about to hit breakout mode. You can see the ascending wedge pattern in the chart. In fact, it looks like the move above resistance began Friday afternoon. A confirmation Monday morning would do the trick for me. I am always encouraged when I can find the sector participating, instead of one lone runner. ------ I have no front month options right now, but I anticipate more volatility this week. With that said, you should be able to find lots of short-term trades, but use caution. If you can't watch them closely, I would stay out all together. Many analysts are now expecting a retest of the May lows for the Nasdaq, down near 3100. I would agree with that statement too. Therefore, don't get caught in bullish positions by holding out for more than a few days. Money is more likely to be made to the downside in the coming weeks. Good luck! Ryan Nelson Editor ************************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 ************************************************************** **************** MARKET SENTIMENT **************** COT & VIX One, Bulls Less Than Zero By Austin Passamonte Look on the bright side - the VIX has left it's danger zone! Sorry, poor attempt at humor considering how much pain was inflicted on unsuspecting bulls this Friday. That being said, we readers at OIN have no excuse to be part of this crowd. All the warning signs signaling an eminent decline have been expounded for weeks. Blindly ignoring them couldn't change the inevitable which began over the past few sessions. In the end, truth is always clear. It came as no surprise that S&P 500 commercial traders added to their historical 10-year net short position. Latest data was recorded Tuesday, July 25th and released at 3:00pm Friday the 27th. Fearless forecast of the month: The SP00S commercials began covering their shorts at significant profits later this week while bullish small specs liquidated for huge losses. No surprise here, the giants win almost 90% of these contests. Who did you place your money on to win? Going forward, we feel the bottom may lie considerably lower in the distance. It might not take long to find it although a relief rally is due. Current market sentiment favors a bounce in the OEX to retest the 790 area this week, possibly from Monday. We expect further selling to ensue at the open but daring bulls will soon be tempted to buy "cheap". Rally attempts may be tradable events but expect them to fail as new waves of selling pressure emerge. Be very cautious playing the long side, near term. We consider the next few rallies to be excellent put-buying opportunities. Commercial traders in the NASDAQ 100 have switched from net short to net long, although barely. Small specs in the NDX have done the reverse. This could be a setup for strength in the intermediate future we will monitor closely. We would like to see the S&P 500 commercials build a net-long position while small specs grow short but that may or may not develop. If it does while the VIX returns near the 30 level we will feel confident a solid bottom is in progress. Overall public & media sentiment has switched 180 degrees in less than two weeks. Expect that to intensify. We at OIN will carefully watch contrarian indicators to signal the next bullish entries. They are ahead of us, but it's impossible to say where or how far. Continue to favor the downside. In my opinion we are much more likely to first test April lows than July highs going forward. This trend is a bearish-wave until the markets can prove otherwise. Don't like buying puts? We personally watched OEX 790 puts trade from 8.5 to 21, QQQ 93 puts from 2.5 to 8 and PDLI 120 puts from 2 to 6 5/8. What amount would have been too many for you to own? Countless examples abound this week past and likely await your decision in the days ahead as well. Choose your trades wisely and prosper! 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. Thurs 7/27 close: 22.21 Sat 7/29 close: 24.30 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 (7/25) (7/27) (7/29) ************************************************************* CBOE Total P/C Ratio .53 .59 .56 Equity P/C Ratio .46 .54 .46 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 (7/25) (7/27) (7/29) ************************************************************** All index options 2.75 1.15 1.51 OEX Put/Call Ratio 1.69 .97 1.38 OEX Maximum Open Interest Strikes/Contracts: Puts 790/6,646 790/7,043 790/7,848 Calls 805/4,059 810/4,191 800/4,806 Put/Call Ratio 1.64 1.68 1.63 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. Numeral listed for resistance is the ratio of calls to puts. Support is ratio of puts to calls. Values above "5" considered firm. Divergence of numbers may indicate future market direction. OEX Tues Thurs Sat Benchmark: (7/25) (7/27) (7/29) Overhead Resistance: (900 - 825)* N/A 223.80* (820 - 805) NEW BENCHMARK 1.78 (800 - 780) DATA .46 OEX Close: 802 793 776 Underlying Support: (780 - 765) 18.49 (760 - 740) 9.83 What the S/R measure indicates: Net open-interest ratios are firm directly below 780 and very light above. A large move in either direction now favors the upside. Net open interest above 820 is astronomical, suggesting further return of that level prior to expiration is unlikely. We expect to see a relief rally this week to test the 790 range on the OEX. 30-yr Bond: 5.80% 5.77% 5.78% Light, Sweet Crude, Barrel: $27.93 $28.10 $28.18 200 Day Moving Average (as of 7/25) The 200 DMA is widely considered the major benchmark for critical support in a market. DOW; 10,760 10,699* 10,586* 10,511* NASDAQ; 3,862 4,029 3,842* 3,663* NDX; 3,585 3,865 3,681 3,477* SPX 1421 1474 1449 1419* OEX 765 802 793 766 CBOT Commitment Of Traders Report: Friday 7/28 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; +445 (long) - 345 (short) Total Open Interest % 6.2% net-long 2% net-short NASDAQ 100 Net contracts; - 16,052 (short) + 445 (long) Total Open Interest % 22% net-short 3.5% net-long S&P 500 Net contracts; + 40,665 (long) -53,521 (short) Total Open Interest % 24% net-long 9.5% net-short BULLISH SIGNALS Interest rates 5.78% on the 30-year Treasury Bond may be signaling the rate fears are mixed. Fed-Fund futures are pricing a 50% chance of one or more rate hikes, .25 basis at this time. COT Report - NASDAQ 100 Sentiment reversal with small speculators growing net-short while commercials begin accumulation may suggest expected strength in the sector over the next weeks or months. ****** BEARISH SIGNALS Major Indexes Faltering Most major indexes are trading below 200 DMAs with numerous big-cap market leaders weakening or suffering. End Of Earnings Season Lack of positive news will direct market focus on August FOMC fears. Third-Quarter Earnings Warnings A number of companies pre-warning slowed earnings later in the year are being met with extreme selling pressure. IPO Glut Large numbers of nearby IPOs if executed could greatly dilute thinning market capital and pressure existing issues. Energy Prices Prices are still too high. Ultimately this affects profit margins and inflation. August Crude closed $28.18 today. Seasonal energy patterns typically bottom by late summer, but heating & fuel oil expected to be very high this fall. Prices in the low $20s would be welcome relief. COT Report - S&P 500 Latest updated figures show small spec traders were heavily long S&P 500 contracts while commercial traders continued to build ten-year extreme short position. Widened divergence strongly implored market turn in favor of commercials. The bottom is likely still ahead. Seasonal Tendency The last two years have seen weeks following expiration Friday result in market decline through fall. Broad market failure is confirming history may repeat. ************** MARKET POSTURE ************** As of Market Close - Friday, July 28, 2000 Key Benchmarks Broad Market Last Support/Resistance Alert **************************************************************** DOW Industrials 10,511 10,400 10,950 SPX S&P 500 1,419 1,395 1,520 ** COMPX NASD Composite 3,663 3,400 4,300 ** OEX S&P 100 776 764 822 ** RUT Russell 2000 490 470 550 ** NDX NASD 100 3,447 3,400 4,100 ** MSH High Tech 959 890 1,075 ** BTK Biotech 605 560 730 ** XCI Hardware 1,440 1,360 1,600 ** GSO.X Software 395 370 455 SOX Semiconductor 957 880 1,200 NWX Networking 1,218 1,150 1,400 ** INX Internet 485 470 605 BIX Banking 536 525 575 ** XBD Brokerage 559 500 590 IUX Insurance 687 630 705 RLX Retail 882 860 910 DRG Drug 398 385 430 HCX Healthcare 817 800 855 XAL Airline 162 156 178 OIX Oil & Gas 284 264 308 Several support levels were taken out on Friday and shorts will be looking to cover some positions near-term. We are starting to see some of the favorite tech stocks start breaking down and this is expected in a good washout. Lowering support (SPX,COMPX,OEX,RUT, NDX,MSH,BTK,XCI,NWX,BIX). Lowering resistance (MSH,RLX). **********************ADVERTISEMENT****************************** FREE! FREE! FREE! FREE! Investor's Business Daily - Free Two Week Trial! No obligation! No invoices! And nothing to cancel! Limited time offer! Click Here! http://ibd.infostreet.com/cgi-bin/freeoffer.cgi?source=ARZ0JES ***************************************************************** ************* SECTOR TRADER ************* Time to Catch a Piece of the Trend By Buzz Lynn Contact Support When we said Thursday that we were another day closer to a volatility change, we had no idea it would come Friday. Whoa Momma! Finishing the day at 24.32, the VIX closed at its highest level since June 27th. What that means is that some pessimism is beginning to form, which became readily apparent in the NASDAQ's big decline under its 200-dma of 3867 and its historical support level of 3750. We could chalk it up to just another soft Friday in the markets, however, nearly 1.8 bln shares traded tells us this decline may have some legs. Conversely, since lightning rarely strikes the same place twice, we are unlikely to see another 150-200 point drop on Monday. In fact, it wouldn't be unusual to see a dead cat bounce early this week. We still need to be on the lookout around 3725-3750 to see if that level will provide resistance. Should the market make an attempt at recovery and roll over at that point, it would confirm the negative trend. In other words, consider it a great entry for put buying. With that line of thinking, we have no sectors to trade long this week. Now, let's turn to a few HOLDRS we didn't pick this weekend that may still become good plays. You may remember from Thursday we had PPH on our radar for calls if the market tanked (it did), or TTH should the market rally (it didn't). PPH cleared the congestion and looked good on Friday with two exceptions. First, it still didn't clear its 50-dma. Second, the move came on decreased volume. There was simply no conviction from investors to tell us that the drug stocks are taking off again. Thus, no play. TTH was a different animal. Continued weakness in T and WCOM made the TTH chart look ugly, sending this issue to a new low. It looks like a great short candidate. But if you look at the largest components, SBC, T, and WCOM, they all have good support at their current levels. If these three find support, then TTH won't move much lower, despite the appearance of a nice down trend. It too may have found a bottom. Again, no play. Some sectors got hit so hard on Friday, we reversed our stance from long to short. Check out the IAH play to see why. Other new plays include shorting or put buying on HHH, IIH, and BDH. Careful though. Lots of stochastic readings are flashing "oversold". Once the selling is over, the dog days of Summer are likely to give us another rangebound market where our play structure will change again. For now, we have to play the hand we're dealt. Check 'em out below! On the radar: PPH-long, TTH-spread. Still have questions? Send them in! Though we can't respond to questions seeking advice on a specific play, we'll always address those universal issues that are important to you, our readers. ************* Results ************* Index Last Mon Tue Wed Thu Fri Week QQQ NASDAQ-100 86.81 -2.50 1.25 -0.25 -3.44 -5.00 -9.94 HHH Internet 101.19 -5.63 1.44 -2.56 -4.63 -4.94 -16.31 BBH Biotech. 168.31 -6.00 -8.50 1.63 0.56 -7.75 -20.06 PPH Pharm. 98.88 3.69 -3.38 -0.81 2.06 0.56 2.13 TTH Telecom. 67.25 -1.56 0.31 -1.38 -2.81 -1.44 -6.88 IAH I-net Arch. 90.06 -4.38 2.38 -0.19 -2.88 -3.47 -8.53 IIH I-net Infr. 50.25 -2.38 -0.44 -1.81 -4.94 -3.88 -13.44 BHH B2B 40.75 -2.50 0.44 -1.25 -2.63 -2.31 -8.25 BDH Broadband 85.75 -2.75 1.81 0.25 -5.63 -5.63 -11.94 SMH Semicon. 81.63 -0.38 3.56 -4.06 -6.06 -1.06 -8.00 RKH Reg. Banks 95.25 0.25 -0.19 -2.44 0.13 -1.13 -3.38 UTH Utilities 93.50 0.00 -0.06 -1.00 1.00 -0.19 -0.25 ************** Updates ************** QQQ - NASDAQ 100 $86.81 (-9.94 last week) "A fall under $90 could set up a near-term trend for further downside action." Wow! We had no idea that downside would come that quickly when we penned those words on Thursday. Like the NASDAQ, QQQ fell well below its 200-dma of $90. While the news pundits kept talking about "the lack of buyers" rather than a preponderance of sellers, the nearly 1.8 bln shares traded on the NASDAQ should have caused them to change their thinking. That's pretty big volume for a Summer Friday. QQQ also saw a large volume increase telling us that sentiment is changing to the negative. If there is any good news, it's that QQQ has finally fallen far enough to fill the gap it created on June 2nd, which could lend some support if only temporarily. The next area of support is $84, while new resistance is back up at $90 from where it fell. How does that work? In technical analysis, old support frequently becomes new resistance in a down trending market, while old resistance can become new support on the way up. In the latter situation, that's what the term "breakout" is all about. Suffice it to say, QQQ is in a downtrend now. But with the stochastic registering oversold, we could get a dead cat bounce, possibly followed by further decline over the next few weeks. Either way, count on a rangebound market after the dust settles or enjoy getting dirty in the process. Long Straddle: Finally, a big volatility move on the VIX, which also rubbed off on the QQQ. We are now beginning to see some small inflation in the time value of our premiums. As volatility increases, that trend should continue. We mentioned this Thursday, but it bares repeating, "We may begin to see the volatility increase if NASDAQ makes a break to the downside. Though our call would be losing intrinsic value, our put would be gaining, and volatility would be increasing the remaining time value of both. In essence, this becomes a race against the clock where we seek to have a big market move to increase volatility before all the time value component of our position evaporates. That's why we buy enough time to be right and still have enough to sell back if we are wrong. You know Jim's saying - buy time if you want, just don't use it." While this play was looking good when the VIX was at 21-22, as VIX approaches 28-30, you don't want to be buying this position only to have volatility decrease and thus decrease the premiums too. The fact is that QQQ has its own volatility considerably higher than the OEX, so we are paying more for time value than with an OEX contract to enter a position. That means it evaporates faster when volatility falls. But the same concept applies - volatility increases the value of the time premium in the short run. In the long run though, we still need a big move to get the intrinsic value working more in our favor too. If you are already in this play, you may want to stick with it - it's working. If you aren't, as the premiums become more expensive to buy, this play becomes less profitable, or worse, becomes a loser when volatility retreats. Understand the concept before getting in. Straddle: BUY CALL DEC- 86 QVQ-LH OI=1343 at $12.00 BUY PUT DEC- 86 YQQ-XH OI=1397 at $ 9.25 Net Debit = $21.25 or less BUY CALL DEC- 90 QVQ-LL OI=1563 at $10.00 BUY PUT DEC- 90 QVQ-XL OI=2229 at $11.25 Net Debit = $21.25 or less Strangle: BUY CALL DEC- 90 QVO-LL OI=1563 at $10.00 BUY PUT DEC- 86 YQQ-XH OI=1397 at $ 9.25 Net Debit = $19.25 or less Calendar Spread: Despite an immediate downward trend, we anticipate it to eventually flatten out and become rangebound. That's a perfect time to initiate a spread. For those of you brave soles, you can consider shorting a current month call now (maybe on a dead cat bounce?) with the intent to buy a longer-term call at a later date for a cheaper price. That's called "legging in". You just need to be right about the market direction at the time you execute your trades. Otherwise, if QQQ has already found a bottom, you could leg in by purchasing the long term call now and selling the near term call when it hits resistance at say $90 - again, maybe on a dead cat bounce. QQQ is at mild support (around $86-$87) from filling the gap-up island created on June 2nd, which could make a good entry. Either way, the objective is to have time decay from selling short term options pay the cost of the long term option. Confirm the bottom before getting into the long-term position. Remember to set reasonable stops perhaps at a value of 10-20% below your net debit in case the market sinks again like a stone. BUY CALL DEC- 86 YQQ-LH OI= 1343 at $12.00 SELL CALL AUG- 86 YQQ-HH OI= 58 at $ 5.13, ND = 6.88 or less SELL CALL AUG- 90 QVQ-HR OI= 995 at $ 3.13, ND = 8.88 or less Long Puts Despite finding mild support in the $86-$87 range from which QQQ gapped up on June 2nd, the overall trend points down, thus we switch to the put side this weekend. As we noted Thursday, the gutsy and experienced can simultaneously sell calls and buy puts. But that's a strategy best saved for the trigger-happy expert market timers. For the rest of us, heavy volume on Friday's decline makes the downward trend look sustainable, save a dead cat bounce or two. Consider any decline under $86, or a rollover from resistance at $90, heck even $89, as a put buying opportunity in expectation of continued weakness. Otherwise $85, and $81 would be the next areas of support. Remember to watch the big guys INTC, MSFT, WCOM, ORCL, JDSU, DELL, and CSCO for clues to direction. CSCO reports earnings on August 8th and may display some strength after Friday's $5 fall to $63. At Resistance: BUY PUT AUG-90 QVQ-TL OI= 6647 at $6.00 SL=4.00 BUY PUT AUG-86 YQQ-TH OI= 8500 at $4.00 SL=2.50 BUY PUT AUG-80 YQQ-TB OI= 7142 at $1.81 SL=0.75 Average Daily Volume = 22.01 mln ----- IAH - Internet Architecture $90.06 (-8.53 last week) Ready, set, SWITCH! IAH was so ugly on Friday, it merits playing in the down direction. Recall that we noted to walk away if IAH fell under its 30-dma. Not only did IAH gap down under its 30-dma, it fell far enough to close under its 50-dma (barely) on a 42% increase in volume over its ADV. If that weren't enough, technical indicators like MACD, RSI, and stochastic all fell over as if pierced through the heart. Nonetheless, while sellers had the upper hand most of the day, IAH managed to find support at a historically strong level of $88.75. So this put play comes with a contingency. If the market recovers, better to stand aside. However, if it continues to fall, look for IAH to fall under $88.50 before taking a position. At that point $85 would be the next level of support. The fact is that IAH could just as easily bounce up or trade sideways at this level. So make sure to nail the entry. BUY PUT AUG-95 IAZ-TS OI= 0 at $5.50 SL=3.50 BUY PUT AUG-90 IAZ-TR OI= 0 at $2.81 SL=1.50 BUY PUT AUG-85 IAZ-TQ OI= 0 at $1.19 SL=0.50 Average Daily Volume = 45 K ************** New Plays ************** IIH - Internet Infrastructure $50.25 (-13.44 last week) Like IAH, IIH comes with a contingency before you get into the play. Here's the deal. IIH fell below all support, including the 50- dma (currently at $57.13), Wednesday and Thursday. Technically, MACD and RSI, have rolled over. The immediate trading future doesn't look great for its components EXDS, BVSN, INKT, INSP, and VRSN. The stochastic is already flat on its back in the basement at 4.81, which means buyers might now be interested. Doubt it. The double-edged sword on the stochastic is that it can stay oversold for a long time if there aren't any buyers. From those aspects, IIH looks "put-able". The catch is that the selloff wasn't accompanied by much volume making investors intentions unclear with IIH - no conviction. The other thing to watch is the price level at $50. That's the point from which IIH gapped up on June 2nd and to which it has retraced back in the last 2 days. In short the gap is now filled and $50 could remain as support. The entry on this play could be made on any move under $49, or any move back down from a dead cat bounce to $53. Wait for the entry. BUY PUT AUG-55 IIH-TK OI= 46 at $6.38 SL=4.25 BUY PUT AUG-50 IIH-TJ OI= 10 at $3.13 SL=1.75 BUY PUT SEP-55 IIH-UK OI=180 at $8.88 SL=6.25 Average Daily Volume = 210 K ----- BDH - Broadband $85.75 (-11.94) Yet another contingency play! BDH has been taking in the shorts (short sellers?) for the last two days, which just happen to coincide with JDSU's earnings date and addition to the S&P 500 on Wednesday. Even the mighty JDSU isn't immune to a post earnings selloff. Neither is NT for that matter. Of course NT also announced its intent to buy ATON. The Street was unimpressed and handed NT a loss of nearly $5 on twice the ADV. Why focus on NT and JDSU? NT makes up about half the value of BDH, along with LU. JDSU had a big jump over the last two weeks and is thus subject to a big fall. The fact is we may be late to the party on this one. BDH stopped dead on historic support of $85 with volume below the ADV. No conviction here from investors to take it any lower. At least not yet. With earnings season now ending, the bloom is coming off these former roses, GLW, SCMR, AMCC, and SDLI, who all suffered double-digit losses on Friday. Only RFMD was in the green. Anyway, the point is that BDH is at support. We need to see which direction it goes from here, but the bigger trend says "down", give or take a dead cat bounce. That said, look to enter on a drop under $84.50 or on a bounce down from previous support at $88. Confirm that the market is weak before jumping in, as BDH will likely lead any recovery in the tech markets. BUY PUT AUG-90 BDH-TR OI=41 at $6.75 SL=4.50 BUY PUT AUG-85 BDH-TQ OI=20 at $3.88 SL=2.25 BUY PUT SEP-90 BDH-UR OI= 3 at $8.75 SL=6.25 Average Daily Volume = 210 K ************** No Play ************** BBH HHH PPH BHH TTH SMH RKH UTH ************* COMING EVENTS ************* For the week of July 31, 2000 Monday Chicago PMI Jul Forecast: 55.8% Previous: 56.8% Tuesday Personal Income Jun Forecast: 0.5% Previous: 0.4% PCE Jun Forecast: 0.4% Previous: 0.2% Auto Sales Jul Forecast: 6.8M Previous: 6.8M Truck Sales Jul Forecast: 7.5M Previous: 7.2M NAPM Index Jul Forecast: 52.5% Previous: 51.8% Construction Spending Jun Forecast: 0.3% Previous: 0.1% Wednesday New Home Sales Jun Forecast: 868K Previous: 875K Leading Indicators Jun Forecast: -0.1% Previous: -0.1% Thursday Initial Claims 07/29 Forecast: 280K Previous: 272K NAPM Index Jul Forecast: 61.5% Previous: 64.0% Factory Orders Jun Forecast: 5.0% Previous: 4.6% Friday Nonfarm Payrolls Jul Forecast: 70K Previous: 11K Unemployment Rate Jul Forecast: 4.0% Previous: 4.0% Hourly Earnings Jul Forecast: 0.3% Previous: 0.4% Average Workweek Jul Forecast: 34.5H Previous: 34.5H Week of August 7th 08/07 Consumer Credit 08/08 Productivity 08/09 Wholesale Inventories 08/09 Fed Beige Book 08/10 Initial Claims 08/10 Export Prices ex-ag. 08/10 Import Prices ex-oil 08/11 Retail Sales 08/11 Retail Sales ex-auto 08/11 PPI 08/11 Core PPI 08/11 Michigan Sentiment ************************Advertisement************************* Tired of waiting on trades to execute? 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The Option Investor Newsletter Sunday 07-30-2000 Sunday 2 of 5 To view this email newsletter in HTML format with imbedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/073000_2.html ************** TRADERS CORNER ************** More on Volatility By Mary Redmond If you look at options prices on the stocks you follow you may sometimes be surprised to see that some stocks which have recently made price declines have high priced call options. For example, Broadcom has recently declined from $245 to $220, yet the Jan 01 220 ATM call options were still priced at $46 when the stock was trading at $220, which is a premium of over 20% to the stock price. You can compare this to Nortel, which has Jan at the money call options priced at $11, a 15% premium when the stock was priced at $73. The reason for this type of option price disparity is volatility. An option's volatility will increase if the stock makes a big move in either direction. If a stock has a pattern of slow, steady gradual increases then the volatility will tend to be lower. For the last several months, NT has usually made one or two point moves on the up days and one or two point moves on the down days. Broadcom, on the other hand, frequently moves up or down as much as twenty points in a day. This is the main reason Broadcom's volatility is higher and it's options are more expensive than Nortel's. The ideal time to buy an option is when the stock has been flat for a long period of time and you have reason to believe that it will make a large unanticipated move. Under these conditions, the implied volatility of the options will usually be less than the historical volatility of the stock. When a stock is due to report earnings the volatility usually rises. Now we are in a period when many companies have reported earnings, and the volatility of the options is still high from their earnings runs. It is generally considered a poor time to buy call options. Using the two stocks mentioned above as examples, you can compare the historical and implied volatility numbers. On Thursday, Broadcom's historical volatility in June was 69.03. The implied volatility of the Jan $225 calls was 72.5. This means that the Jan calls are high priced using the implied and historical volatility. Nortel's historical volatility was 41.3 in June. As of Thursday, the implied volatility of the at the money August calls was 53.3. This seems logical, as the stock has recently reported earnings and made a strong earnings run. If the stock has moved at all this will show up in the volatility number. For example, the implied volatility of Lucent is relatively high partly because of the wide price swings which occurred earlier this year. On the first week of January Lucent was $77. By Jan 6 it had dropped to $52. By March Lucent moved up to $73, and has since that point lost nearly 35% of its value. This type of historical movement increases option volatility and price. This is the main reason the Lucent Jan at the money calls were $7 when the stock was $47, a 15% premium over the stock price. That is the same percentage premium given to the Nortel Jan at the money calls although the two companies have just reported wide differences in their recent earnings reports, and NT made a large move up while LU made a large move down. The volatility numbers don't know which direction the stocks move - just the movement. The volatility in today's stock market is unprecedented. If you compare the daily price changes and percentage moves in stocks and the indexes today from a few years ago you can see a dramatic difference. This volatility raises the price of options, and makes it difficult to profit from straddles. For example, on Wednesday afternoon this week the QQQ August at the money call options were $4 7/8 and the puts were $4 1/2. An Aug QQQ straddle would cost over $9.00. For this straddle to be profitable the Nasdaq 100 would have to move more than 10% by the third week of August. Since the market knew that two key economic reports were due out this week, the volatility of the options increased. On Friday morning after the GDP was reported the calls moved to $1.75 and the puts moved to $7.75, for a profit of only half a point on the straddle. June was one of the best months on record for the Nasdaq. It is worth noting that in June the moving average of cash out of money market funds and into equity funds was high. In addition, the ipo market had not yet recuperated from the April drop, so few ipos were priced and brought to market. Around the second week in June the moving average of cash into equity funds was approximately $5 billion, and the moving average of cash out of money market funds was approximately $7 billion. Last week the investment company institute reported that retail money market funds increased by $385.2 million and institutional money market funds increased by $1.44 billion. The total amount of cash in money market funds has increased by approximately $23 billion to $1.7 trillion during July. The weekly moving average of cash into money market funds is currently approximately $8 billion. This very likely represents retail and professional traders moving to the sidelines. AMG Data reported that $5 billion in new cash went into equity funds for the week ending July 27, slightly higher than the last couple of weeks. The weekly moving average of cash into equity funds is currently in the range of $3.5 billion. This is lower than the levels seen earlier this year, which has been a seasonal trend for the last several years. It is also important to note that the ipo calendar has increased while the fund flows have slowed. Over $6.8 billion in new stock was issued this week. Three of the larger issues included TCM, which raised over $1.9 billion, BLUE, which raised over $1.5 billion, and CORV, which raised over $1.1 billion. On Friday alone over $1.8 billion in new stock was issued, with 10 ipos trading. Since numerous ipos in the last couple of weeks have traded at a strong premium in the aftermarket underwriters are attempting to price as many new issues as possible. Most premier ipos tend to be reserved for institutional buyers. If the institutions are not taking in as much cash, they will be forced to sell current holdings to buy ipos which puts downward pressure on stock prices. This was obviously too much stock for the system to handle this week considering the slower fund flows and end of earnings season. It is important to keep a close eye on this trend, as a heavy ipo market can act like a sponge and soak up market liquidity. Contact Support ****** Using ROC and RSI to Tame the OEX By Lynda Schuepp When Trading the OEX, you need all the help you can get. This week was no exception. Most traders are familiar with, and use MACD and stochastics, but fewer traders use ROC and RSI. ROC and RSI are also momentum indicators, and are particularly useful in trending markets. ROC or "Rate of Change" compares the price this period with the price some number of periods ago. I am using 14 on the daily chart (seen below) for some longer-term plays, part of my summer vacation strategy. Therefore, the ROC rating today is some percentage above or below the bar from 14 days ago. Therefore, it is quite useful in determining if a trend is changing. The overbought and oversold bands are subjective. I go back in time and look at the past fluctuations and pick levels that generate signals about every 3-4 weeks because these are more significant signals. RSI, commonly known as the "Relative Strength Indicator" which is a momentum indication that is a front-weighted ratio for a security relative to itself and its past performance. It plots as an oscillator with a value from 0 to 100. I use 40 and 70 as overbought and oversold levels. The narrower the bands the more signals, the wider the band, the fewer the signals. See daily chart for OEX from August to November 1999: In the chart, you can see 3 trades, roughly 4-6 weeks apart. I am looking for bigger moves with bigger gains. The trades are entered when there is confirmation in price, RSI and ROC. The green numbers indicate a buy and the red numbers indicate a sell. Note that trend-lines can be drawn on RSI and ROC to further confirm the trade. Trade #1: The signals on July 20th indicate a sell (red #1) so you could buy a put, or short the call. I personally have not shorted any calls on the OEX, but it clearly makes more sense, since theta or time decay will work for you instead of against you. Since this is a long-term play, I would be buying the September 700 put which is slightly out of the money. Candlesticks revealed a dark cloud cover followed by a very large down candle (black). The candlesticks were saying down. RSI reached an extreme reading (over 70) and crossed back down below the overbought line, indicating a change in direction. ROC had crossed up above the overbought level and also turned back down. Three strong signals indicating a sell. The Red #1's shown on the chart indicates a "sell". The OEX was trading at 710 at the close on July 20th. No buy signals were generated until August 11th (see green #1). The price was showing a bullish engulfing candle at the bottom of a steep decline. This is a VERY strong buy signal. The candle also broke above the trend line. I probably wouldn't have needed further confirmation but RSI also confirmed the buy by dropping back under the oversold line. ROC was extremely stretched and turned back to the oversold line as well. The OEX closed at 676 for a 34 point move! Trade #2: The signals on August 27th indicate a sell (red #2) so I would buy an October 700 put. Candlesticks again reveal a dark cloud cover followed by a large down candle. Candlesticks were saying down. RSI rose up to an extreme high reading, and turned down. Although it did not reach the overbought line, it crossed back below the green trend-line shown on the chart. Trend-lines on RSI and ROC are very meaningful. ROC crossed up above the overbought level and also turned back down. Note that ROC also broke the green trend-line drawn, further confirming the signal to sell. Four strong signals to sell. The OEX was trading at 708 at the close on August 27th. A buy signal was generated on October 4th (see green #2). The price was showing a bullish hammer candle at the bottom of a steep decline followed by a tall white (up) candle. Additionally, the previous 4 or 5 days bounced off the 200 DMA! This too is a very strong buy signal. RSI also confirmed the buy by rising back above the oversold line and closed above the red trend-line. ROC was extremely stretched and turned back above the oversold line and closed above the red trend-line as well. You don't get much stronger signals than these. The OEX closed at 682 for a 26 point move. Trade #3: This time the entry signal on October 20th is for a buy (green #3) so I would buy the December 690 calls which would be slightly out of the money. Candlesticks revealed a long white (up) candle, which closed above the 200 DMA, a very strong signal for upward movement. The candlesticks were saying up this time. Both RSI and ROC reached extreme readings and crossed back up above the oversold lines. Again, three strong signals indicating to buy. The Green #3's shown on the chart indicates a "buy". The OEX was trading at 679 at the close on October 20th. No sell signals were generated until November 23rd (see red #3). The price was showing a bearish engulfing candle at the top of a steep rise. This is a VERY strong sell signal. RSI also confirmed the sell by dropping back under the overbought line and breaking thru the green trend-line. ROC was extremely stretched, trending down and turned back under the overbought line as well. The OEX closed at 746 for an incredible 67 point move! Now let's look at what the OEX charts look like currently, after these past couple of months and see where we are after Friday's massacre. See chart of OEX up until Friday: Trade #4: This time the entry was a buy signal on May11th (green #4) so I would buy the July 760 calls. (The OEX closed at 754.) Candlesticks revealed a long white (up) candle, which closed above the 200 DMA, indicating upward movement Both RSI and ROC reached extreme readings and crossed back up above the oversold lines. Again, three strong signals indicating a buy. The Green #4's shown on the chart indicates a "buy". No sell signals were generated and with expiration coming up on July 21st, it would be prudent to close out prior to the close and take the money and run. On July 17th a doji type candle was formed followed by a very bearish down candle on the 18th. The position would have been closed at the end of the day on the 18th with the OEX at 807 giving up a whopping 53 point gain. The calls would have had 47 point of intrinsic value and some nominal time value left! And now, let's look at Friday. It sure looks like we're headed down to the 200 DMA again. The RSI and the ROC are both almost in a buy position. Don't jump the gun. WAIT for confirmations in all three indicators before considering an entry but it's starting to look like a nice set up to me. Lynda@OptionInvestor.com ****** Walking In The Middle Of The Road By Molly Evans What do you say after a week like this? To be flippant and say, "Here we go again" is not in my heart. I know people got hurt over this decline. The warning sirens were sounded but until they've been burned, the newer ones don't hear it very well. We never know just exactly when or even how deep the cut is going to be but the signals are there and we must take cover when the alarms go off. I could be very positive and congratulate all of those who were prudent enough to buy puts. I have to admit that I gulped big one day when the equity put/call ratio took a jump. I'll assume it was all OIN readers buying those puts. For a moment there I thought we might get a rally as put/call ratios are a contrarian indicator. When the put/call ratio is low, it says that investors are too bullish and we're due to pull back. It did take a small jump one of those days and I thought "Oh no! My puts and my shorts! I've been counting on them!" I thought maybe we were suddenly going to reverse and go back up again. Nothing would surprise me anymore. There's nothing like a tornado to blow things around and that's what we got. The charts are now all mixed up and we do get to start again. Depending how your portfolio is holding up through this cycle will be a large determinant in how you want to proceed with your investing and trading. OIN is in the business to bring you momentum plays. OIN rocks but you've GOT to be astute to the overall market sentiment and cultivate the discipline to wait for the perfect entry into it. When the market is rolling, these plays are rewarded very nicely. Yet, if you're buying a ticket onto the momentum plane looking to rise into the clouds quickly, you must accept the risks inherent that. OIN will continue to find you the plays but it's up to you to determine your risk profile and patience to wait for that right entry or let it go if the risk outweighs the potential. When the market decides to take it back, it does so with a vengeance. Rotation and profit taking do occur and if you're on the wrong side of the trade, the pain is immediate. Anyone who has been trading for awhile knows all of this. All traders have taken their hits, have learned from them and adjusted or they quit when they were broke. Yes, the market does swoon and the Nasdaq is going to be very volatile as the arguments over valuations, the Fed and the economy are fought out. Some people tend to get a little shy about venturing back into the momentum stocks as they're astounded at how quick and violent the shakeouts are. I think that many of you must be just like me. You want to learn about options trading, how leverage can work for you and how to control risk. You want the great returns but are finding it a very difficult task indeed with the market whipsawing. At this point, you'd be content to sacrifice 200% gains for a bit of safety and stability. There is a reason that good money managers advocate portfolio allocation. You don't have to be 100% options in highflying stocks all the time. You don't even have to be in the market all the time. There is a time and a place for everything. Moderation and common sense is tantamount to success. There are a lot of solid plays out there right now. No, they're not all the techs that have gone through 10 and 15% pullbacks either. They're pokier plays and are in the energy, pharmaceutical, utilities and insurance indices. Do you ever look at charts in those sectors? Maybe it was an experiment and you may call me insane but I bought Dupont LEAPs the other day. Talk about an ugly chart! There are LOTS of these. They've broken all the rules by undergoing steady downtrends, collapsing through moving averages and have a mountain of overhead facing them. I certainly don't advocate you buying the biggest dogs you can find but sure enough, rotation does occur and pokey stocks can make you money too. Broaden your horizons. Be a smart trader. I'm up 20% on those LEAPs. Isn't entry point everything? When our favorites are out of favor, it could pay to do as the big boys do and that is to look for the safe havens that they're flocking towards. This down cycle may not be over yet either. We all now know that the summer provides a tricky environment for trading with the thinner volume and corporate slowdowns. Did you realize that almost 900 points were gained in the week following the May 24th intraday lows? We came up nearly 1300 points from that day to the peak of the July 17th high. Was that just a drawn out bear trap rally? That's what bear traps do. They rise huge amounts in a short time frame only to run out of buyers and then everyone rushes in to protect their profits. In this case nearly 70% of the run occurred in that first seven trading days and the other 400 or so points was an attempt to get the eager back to the table. It's not that the bull pundits didn't try. Listen to what Al Goldman, Chief Market Strategist at AG Edwards writes to his clients, "Rising corporate earnings are the main fuel for a bull market. Due to the slowdown in the economy, corporate earnings will not be up as much as some had projected but will still be up some 12% or better for the full year. It is the durability of earnings growth that is most critical, not the intensity. We continue to believe the Fed will not raise rates at its next meeting (August 22) and inflationary pressures will stay benign." Yes, the ducks are lined up to restart the secular bull market. But, what will spark the buyers who have been more than willing to sit on their hands? Fortunately, their hands are full of money and a good economy with rising earnings will prove irresistible. Investor jitters will turn to joy in July, and then we will have fun in the sun for the rest of the summer." You think he might have a vested interest in coaxing those money fisted hands to come to the table? I had to laugh at this. The only people having fun in the sun right now are the ones on vacation not knowing their portfolios have just taken a nosedive. Quite honestly, I'm not a pessimist in life. Yet, the wounds that I got from the tech wreck in the spring made me seek out a different perspective to learn. I've been hanging out in the bear's den and pretty much missed this latest run at higher ground. I've had to do some soul searching and realize that the truth does lie somewhere in the middle. Vacillating between extremes of sentiment is paralyzing and quite frankly, costly in terms of dollars lost on mistaken "reads" and money not gained from being a contrarian. Yes, my portfolio has gone up in the past couple of days but not like it should have had I been walking the rope of moderation and neutrality. For example, I sold my bullish positions on AMCC right before earnings. Then, it gapped up on the stronger than expected earnings and I thought that gap would quickly close as we'd get downward pressure on the Nasdaq in August. Days turn very long when you're on the wrong side of the trade! My puts became profitable just yesterday. I held through the losses but didn't add more. They had lost 75% of their value at one point. I held shaming myself for a misentry even though I thought the call was the right one (yeah, yeah, yeah, I hear you!). Maybe at the next big seminar Jim will give me an hour in the spotlight at the very end so I can present "My Stoopadist Masteaks in de Mahket." You'll all go away feeling so good about yourselves, guaranteed! Maybe better not, I'd probably be fired if he knew. Anyway, the highflying stocks need time to cool off now and then. If you're brave enough to play puts on them, more power to you. I want to be there too but as I have shown you and have learned, you don't just say, "Well that's ridiculous! I'm going to buy puts on that right now!" Confirmation of a move is important. When it's to the downside the rewards come quickly but not until it's ready! As Austin Passamonte told me the other day, "as traders we don't care which way the market moves, just so it does!" That's the mark of a flexible directional trader. He'll win on both the downside and the upside if he reads the market and positions himself to capitalize on those issues that are the most promising for making a dramatic move. But even this isn't the key to winning in the trading game. The real work to trading is controlling the impulses coming from between your ears. You must continually monitor yourself for employing emotional trading rather than developed plan trading. You can pick any stock (and you should know a basket of stocks like your own kids) but it's the mental and emotional aspects of yourself that determine the outcome to your position. Being an options trader is about leveraging yourself and hedging for superior gains and risk control. Picking the stock to play is the easiest part of the whole scenario. There are so many opportunities with options. Buying calls and waiting for them to appreciate is not the only game in town. Lynda and Chris are our market neutral players. They can make money no matter which way the stock moves. Being "market neutral" does not mean that you realize the market swings both ways. Market neutral trading is positioning oneself so there is a gain no matter what happens directionally through advanced trading tactics. That's a completely different level of trading. It doesn't give as glamorous returns as picking BRCD calls at $140 and riding it to $200 but it's a steady ringing of the cash register and you should be open to learn from them. In wrapping this up, I want to say that it's been a tough week for bullish believers and players. We would all do well to give serious thought and commitment to analyzing what it is we're doing in the market. Ask yourself the tough questions. Is it worth it to chase a stock that's had a huge run already? Where is the support? Where's the resistance? How much does the stock need to go up (or drop) further for your position to be profitable? How much is enough profit? ("Just a little more" is not an acceptable answer) Are you cutting your losses quickly? Have you considered researching other stocks or sectors? Are you the one selling option premium or buying option premium? Is it time to rethink that one? Is it time to rethink your whole plan? Now more than ever is the time to sober up and be mindful that perhaps not every dip should be bought. Be extra cautious and extra disciplined. It's a very competitive sport to trade. The risk in owning stock and options is on us as the public. Be ever mindful of that risk and cut yourself off to sit it out awhile if you're drowning. You're subscribing to this newsletter to learn how to trade options and seek counsel from those who have walked the path. No one knows all the answers but collectively we're trying to better enable you to stay in the game and get ahead of the pack. 100% options 100% of the time on highflying stocks could knock you out. Please be smart. We want you to be around to subscribe for a long, long time. molly@OptionInvestor.com ********************************Advertisement******************** American Express® Cardmembers are buying online Find out more! http://click.linksynergy.com/fs-bin/stat?id=MH64V9Lgzgc&of ferid=13447.10000026&type=1&subid=0 ***************************************************************** ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* COF - Capital One Financial $56.81 (+1.00 last week) See details in sector list Chart = Put Play of the Day: ******************** VRTS - Veritas Software Corp. $87.69 (-21.63 last week) See details in sector list Chart = ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************* DAILY RESULTS ************* Index Last Week Dow 10511.17 -222.74 Nasdaq 3663.00 -431.90 $OEX 776.18 -28.37 $SPX 1419.89 -60.30 $RUT 490.22 -32.48 $TRAN 2769.53 -38.89 $VIX 24.30 2.91 Calls FRX 110.25 2.78 Hit a nice entry point for intrday trade PVN 103.63 1.25 Good news momentum play still in the money COF 56.81 1.00 Bucking the overall market trend GENZ 65.13 -3.08 Pristine position as sector leader LEH 108.13 -8.69 On the short list as a possible takeover ATON 129.00 -14.75 A normal call play now an arbitrage play HWP 107.75 -16.25 New, finished Friday with an amazing gain SCMR 115.00 -23.75 Insatiable demand for anything-optical NTAP 85.00 -24.36 Use caution with a falling knife, and SLs AMCC 133.56 -26.19 Dropped, a slew of bad Semi news killed it HGSI 127.38 -35.13 Dropped, sleight of hand with earnings BRCD 163.94 -35.94 New, anybody for a reversal play? Puts AFFX 144.50 -49.06 New, revisiting a "bioflux"? VRTS 87.69 -21.63 Watch for entry on bounces to $95 and $100 ARBA 107.63 -17.19 New, fair is foul and foul is fair EMLX 49.38 -11.13 Caution flags raised with support at $44 CMRC 42.88 -10.50 Has gone from point A to point B in style FON 34.81 -8.63 Dropped, 5 days of new all-time lows TERN 53.88 -8.13 New, wicked combo of dissenting variables GTW 55.13 -7.75 Box-maker summer-slowdown validated ELON 32.63 -6.38 Couldn't even make an earnings run CMOS 42.00 -4.69 Lukewarm reception at RS Semi Conference IP 33.00 -1.75 Dropped, it's time to throw in the towel ************************** 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 HGSI $127.38 (-35.13) HGSI reported its second quarter results Friday morning with a sleight of hand. We had called the investor relations department earlier in the week and they told us HGSI's second quarter results were scheduled to be released in the second week of August. Unfortunately for us and our play, the wider-than-expected loss reported by HGSI was met by an unforgiving Biotech sector to begin with. The early, and unexpected, profit report issued by HGSI Friday morning should have prevented entry into the play, especially given the gap down by $4. Needless to say, we're dropping our play with a bad taste in our mouth. AMCC $133.56 (-26.19) Well, that didn't last long! Although AMCC is the proverbial helium-filled balloon, the elevator in which it was trapped was propelled downwards on a string of negative events. LSI warned about future revenues and INTC picked a fight with RMBS, and the whole Semiconductor sector felt the pain. Then on Thursday, NOK warned about 3rd quarter revenues, keeping the decline moving. AMCC managed to halt its slide at this point right at the $147 support level. Friday's carnage on the NASDAQ was too much for our hero as it stood there clutching a bag full of Kryptonite, and it plunged through support, giving up an additional $12.63. Fortunately, we never got a decent entry point, and we will take this opportunity bid our play farewell while wishing it a speedy recovery. PUTS FON $34.81 (-8.63) Last Friday marked the fifth consecutive day FON fell to a new 52-week low. The stock gapped slightly higher in the morning only to rollover later in the day and fall below its only remaining support level, Thursday's intra-day low of $35.25. The entire Telecom Services sector was bleeding red Friday. After WCOM warned of lower revenue growth Thursday, traders disconnected with the group. A glance across the sector reveals the likes of T, WCOM, PCS, and FON all trading near yearly lows. Although FON fell on heavy volume Friday and looked weak going into the close, we feel it would be a good time to take our quick profits. IP $33.00 (-1.75) It's time to throw in the towel on our IP play. The stock continues to trace lower lows and lower highs, but it is moving so slowly, that time decay is offsetting the gains from the decline in the stock price. Volume remains anemic, indicating there is still a dearth of sellers at these levels. Confirmation of the strength of the $32.50 support level came in the last 90 minutes on Friday, as buying volume increased into the close. In light of the prevailing market weakness and IP's unwillingness to break down any further, we think we've wrung out all we can from this play. *********** 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 ************** HWP - Hewlett-Packard $107.25 (-16.75 last week) HP is a top provider of computers, imaging and printing peripherals, software, and computer-related services. More than half of HP's sales come from outside the US. To further fuel its growth, HP is restructuring itself as an Internet specialist providing Web hardware, software, and support to corporate customers. To that end the company has spun off its test and measurement equipment and medical electronics businesses as Agilent Technologies (A). To finish Friday with a gain was next to amazing, especially for a Tech stock. Despite the tumbling action in the Tech sector HWP managed to buck the overwhelmingly negative trend. But, it hasn't been a pleasant time for HWP stockholders recently. Just two short weeks ago, HWP was trading at an all-time high on the heels of the resurgence in the Tech sector. Since that time, HWP suffered from the profit warning from fellow printer maker Lexmark and the news that PC sales had fallen lower-than-expected during the second-quarter. The two aforementioned events combined to shave nearly 20% off HWP's stock. However, many analysts have come to HWP's defense recently. Most notably, Salomon Smith Barney reiterated its Buy rating last week and set a $155 price target on the stock. Salomon also said that they were quite comfortable with HWP's third quarter estimates despite the warning from LXK. And Kurt King, a PC analyst with Banc of America, said the news of slowing sales of PCs had been fully factored into HWP's stock price. In light of the positive comments from Wall Street last week and HWP's impressive relative strength displayed Friday, we thought the stock might be setting up for an earnings run. HWP has a history of exceeding analysts' estimates which has typically carried the stock higher into the actual announcement. The company is scheduled to release its third-quarter results on August 18th, which has been confirmed. HWP established a solid bottom in the latter-half of last week near the $105 level. Look for an entry if Friday's strong finish carries over to Monday's trading and lifts HWP past resistance at $110. A more conservative entry point might be found if HWP can muster enough momentum to move back above its 100-dma, which is currently located at $112. According to Zack's, HWP's consensus estimate for its third quarter is 85 cents per share. That number has crept up from a low of 83 cents over the past few months. Rising estimates can be an indication of an upside surprise. Furthermore, HWP has not split its stock since 1996, when it was trading near $105. The company has more than enough authorized shares to declare a 2-for-1 split. BUY CALL AUG-105 HWP-HA OI= 243 at $ 7.63 SL=5.25 BUY CALL AUG-110*HWP-HB OI=5626 at $ 5.13 SL=3.00 BUY CALL AUG-115 HWP-HC OI=1511 at $ 3.50 SL=1.75 BUY CALL SEP-110 HWP-IB OI= 109 at $ 7.63 SL=5.25 BUY CALL NOV-115 HWP-KC OI= 190 at $10.88 SL=8.25 Picked on July 30th at $105.25 P/E = 33 Change since picked +0.00 52-week high=$156.00 Analysts Ratings 9-11-4-0-0 52-week low =$ 67.00 Last earnings 04/00 est= 0.82 actual= 0.87 Next earnings 08-16 est= 0.85 versus= 0.85 Average Daily Volume = 3.71 mln BRCD - Brocade Communications $163.94 (-35.94 last week) Brocade Communications is a provider of Fibre Channel switching solutions for Storage Area Networks (SANs), which apply the benefits of a networked approach to the connection of computer storage systems and servers. The company's family of SilkWorm switches enables companies to cost-effectively manage growth in their storage capacity requirements and improve the performance between their servers and storage systems. This provides the ability of increasing the size and scope of a company's SAN, while allowing them to operate data-intensive applications, such as data backup and restore, and disaster recovery on the SAN. Anybody for a reversal play? After riding BRCD for a $70+ gain, the stock was looking a little top-heavy and we dropped the successful play last weekend. Expecting a slow decline, we were a bit surprised to see the magnitude of the decline experienced over the past 2 days. BRCD is in a hot sector, with earnings approaching on August 16th, and the $40 drop looks like it was overdone. The stock is now sitting at the top of the congestion zone between $158-163, where it should find support. Technically, the stock still looks negative as the RSI, Stochastics, and MACD are heading south on the back of strong volume (double the ADV on Friday). The long red candle from Friday pushed through the lower Bollinger band and the stock ended the week just above the 50-dma ($159.25). BRCD looks like it could reverse and bounce higher, but it will have a hard time doing so if the market and sector continue their rapid descent into the basement. Needless to say, this is a HIGH RISK play and is not for the faint of heart. Consider new entries on a bounce from the congestion zone mentioned above, but don't try to catch the falling knife. Wait for the confirmation of strong buying volume to arrest the stock's slide before jumping into the fray. If the $155 support level can't hold back the selling, stand aside and look for a different play. Once again, this is an aggressive play that should be actively watched and traded, taking quick profits when they're there and utilizing stop losses. On Tuesday, Morgan Stanley Dean Witter initiated coverage of BRCD with a Strong Buy rating, which gave the stock a temporary boost. The market downdraft was more weight than the buyers could shoulder, and the impact of this upgrade was muted by the marauding bears. BUY CALL AUG-160 GUF-HL OI= 82 at $17.88 SL=13.00 BUY CALL AUG-165 GUF-HM OI= 81 at $15.38 SL=11.25 BUY CALL AUG-170*GUF-HN OI=2314 at $13.00 SL= 9.75 BUY CALL AUG-175 GUF-HO OI= 44 at $11.00 SL= 8.25 BUY CALL OCT-175 GUF-JO OI= 66 at $23.25 SL=17.50 SELL PUT AUG-155 UBZ-TK OI= 72 at $ 9.00 SL=12.00 (See risks of selling puts in play legend) Picked on July 30th at $163.94 P/E = 856 Change since picked +0.00 52-week high=$211.25 Analysts Ratings 9-5-2-0-0 52-week low =$ 21.75 Last earnings 05/00 est= 0.08 actual= 0.11 Next earnings 08-16 est= 0.13 versus= 0.01 Average Daily Volume = 2.97 mln **********************ADVERTISEMENT****************************** FREE! FREE! FREE! FREE! Investor's Business Daily - Free Two Week Trial! No obligation! No invoices! And nothing to cancel! Limited time offer! Click Here! http://ibd.infostreet.com/cgi-bin/freeoffer.cgi?source=ARZ0JES ***************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 07-30-2000 Sunday 3 of 5 To view this email newsletter in HTML format with imbedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/073000_3.html ********************************Advertisement******************** American Express® Cardmembers are buying online Find out more! http://click.linksynergy.com/fs-bin/stat?id=MH64V9Lgzgc&o fferid=13447.10000026&type=1&subid=0 ***************************************************************** ****************** CURRENT CALL PLAYS ****************** FRX - Forest Laboratories $110.25 (+2.75 last week) Forest Laboratories develops, manufactures and sells both branded and generic forms of ethical products which require a physician's prescription, as well as non-prescription pharmaceutical products sold over-the-counter, which are used for the treatment of a wide range of illnesses. Forest products are marketed principally in the United States and western and eastern Europe. Marketing is conducted by Forest and through independent distributors. As predicted in Thursday's newsletter, Forest Labs hit a nice entry point in early trading Friday, bouncing off a day low of $110.13, just below the 5-dma of $110.25. The stock then rallied to a day high of $113.63, but ended up stalling the rest of the day around $111.00, closing at $110.25 just off the low of the day. Closing down only $3.22 was actually conservative considering the overall market sell-off. Forest Labs has been on the fast track this year, reaching a 52-week high of $114.50 on July 27th, a whopping 131.3% rise. Add to that the fact that the stock is up 11.8% in the last 4 weeks, and it looks like we've got a winner. Can the company maintain this superhero performance in the upcoming weeks? Charging through its 10-dma of $107.18 and closing at $110.25, it appears that it could do just that. The stock still appears to be in good shape to rally if it can maintain this uptrend. Continue to look for an entry level on the play on a bounce near the $109 - $110 area. This is just slightly above the 10-dma, which should also offer support in the $108 area. The stock trades with an ADV of 695K, so watch for heavy volume to confirm any moves. The company reported first quarter revenues on July 19th of $0.31. That figure included a one time charge of $14 mln from the termination of a co-promotion agreement with Warner Lambert. Booming sales of their very popular antidepressant drug Celexa put the bottom line $0.04 ahead of estimate, with sales of the drug up $150 mln in the quarter, almost two times the amount in the first quarter of 1999. Standard and Poor's calls the Healthcare and Biotech sectors "best bets" in their midyear review of top performing sectors, naming FRX as one of their top picks. BUY CALL AUG-105*FRX-HA OI= 51 at $ 9.13 SL=6.25 BUY CALL AUG-110 FRX-HB OI= 47 at $ 6.38 SL=4.50 BUY CALL AUG-115 FRX-HC OI=115 at $ 4.00 SL=2.50 BUY CALL SEP-105 FRX-IA OI= 0 at $12.25 SL=9.25 Wait for OI BUY CALL SEP-110 FRX-IB OI= 10 at $ 9.50 SL=6.50 SELL PUT AUG-105 FRX-TA OI= 28 at $ 3.13 SL=1.50 (See risks of selling puts in play legend) Picked on July 27th at $113.50 P/E = 84.30 Change since picked -3.25 52-week high=$114.25 Analysts Ratings 7-7-5-0-0 52-week low =$ 41.75 Last earnings 07/19 est= 0.27 actual= 0.31 Next earnings 10-19 est= 0.50 versus= 0.32 Average Daily Volume = 695 K SCMR - Sycamore Networks $115.00 (-23.75 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. The Tech sector snuffed SCMR's momentum last week. The sharp sell-off last Friday carried SCMR down to oversold territory, evident in the current stochastics reading. SCMR has fallen into oversold territory three times in as many months. Historically, SCMR has managed to regain its footing after each sell-off, and stage rallies to new highs in its ascending channel. So, what will it take to get SCMR back on track? First off, investors' insatiable demand for anything-optical is alive and well. Corvis (CORV), an optical networking concern, debuted last Friday with a first-day pop of over 100%. The CORV IPO suggests that investors are still willing to pay up for the hot optical-related stocks. Secondly, the bulk of second-quarter earnings were reported over the past two weeks, with a few Tech heavyweights yet to announce quarterly results, including SCMR. The hoopla surrounding earnings season is fading, which, in a contrarian fashion, might finally allow for a SCMR specific earnings run to commence. The company is slated to report in four weeks. Finally, the ongoing consolidation in the optical group bodes well for SCMR. We'll be looking for SCMR to reverse its course next week and rebound from its recent sell-off. The Fiber Optic sector has the potential to lead a Tech rally if the broader market reverses. A sign of a possible reversal next week came when SCMR's support at its 50- dma held strong Friday. The stock bounced right off its 50-day at $111 to recoup some of its losses. If the Tech sector rebounds early Monday, an aggressive trader might look for entry off a quick bounce off the $115 level. If you're looking to minimize directional risk wait for SCMR's momentum to build and look for entry if the stock clears resistance at $120. SCMR will be presenting at an analyst-filled Opticon 2000 conference, which commences Monday morning in California. SCMR CEO, Dan Smith, will be one of the keynote presenters at the gathering. Smith will deliver a speech on leveraging the current opportunities in the optical business. Kind words from the CEO might spark the reversal we'll be looking for. BUY CALL AUG-110 QSM-HB OI= 79 at $13.13 SL= 9.75 BUY CALL AUG-115 QSM-HC OI= 62 at $10.63 SL= 7.50 BUY CALL AUG-120*QSM-HD OI=367 at $ 8.13 SL= 5.75 BUY CALL SEP-115 QSM-IC OI=640 at $15.88 SL=11.50 BUY CALL SEP-120 QSM-ID OI=281 at $13.63 SL=10.00 SELL PUT AUG-110 QSM-TB OI=120 at $ 7.00 SL= 9.00 (See risks of selling puts in play legend) Picked on July 16th at $138.19 P/E = 129 Change since picked -23.19 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 08-24 est= 0.06 versus= N/A Average Daily Volume = 4.42 mln ATON - Alteon Websystems $129.00 (-14.56 last week) In the race for faster communication, Alteon makes products to speed up the servers that feed data into networks and Web sites. The company offers Gigabit Ethernet server switches, and the controlling operating system to manage server "farms", or servers that handle large amounts of data. Alteon sells it gear to manufacturers, service providers, and content publishers. What began as an innocent call play has now turned into arbitrage opportunity. Just one day after ending merger discussions with GLW, NT said Friday morning that it would acquire ATON. Under the terms of the takeover, NT said it would exchange 1.83 shares for each ATON share, which valued the deal at $7.8 bln based on the previous day's closing prices. Unfortunately, the deal was announced in conjunction with an unforgiving Tech sector, which pressured shares of the acquirer NT. Many analysts said that both NT and ATON would have traded much higher were it not for the weakness in the broader Tech sector. What was interesting about the deal is that NT didn't pay a premium for ATON. The $7.8 bln price tag amounted to only $1 over ATON's closing price Thursday. Several analysts spoke on the deal Friday morning, saying the acquisition provided a tremendous boost to NT. By acquiring ATON, NT gains a stronghold in the rapidly growing Ethernet switches market, which are used for data storage and routing. What's more, NT's purchase takes the optical giant one step closer to being an end-to-end provider of Internet equipment and services. After having the weekend to mull over the deal, Wall Street might bestow its praise and approval upon NT for its acquisition. For our purposes, what's good for NT is good for us. Since the proposed merger is an all-stock deal ATON and NT will trade in unison with one another. Accordingly, we must pay close attention to how NT trades from here out. ATON fell as low as $124.75 Friday before stabilizing around the $129 level. The gap down by nearly $15 Friday morning leaves very little resistance, if any, above current levels. Look for an entry if ATON begins to fill its massive gap and moves above its intra-day high Friday of $131. And, remember to confirm direction in NT! During a conference call Friday morning, ATON and NT executives defended their merger agreement and said the sell-off was not related to the deal. Both companies blamed the overall weakness in the Tech sector as the culprit for the haircut given to their respective stock prices. If the message from NT and ATON officials is heard by the market, next week we might be rewarded. BUY CALL AUG-125*UAO-HE OI=60 at $10.88 SL=8.25 BUY CALL AUG-130 UAO-HF OI=16 at $ 8.38 SL=6.00 BUY CALL AUG-135 UAO-HG OI= 2 at $ 6.38 SL=4.25 BUY CALL SEP-130 UAO-IF OI=33 at $12.63 SL=9.50 BUY CALL SEP-135 UAO-IG OI= 1 at $10.50 SL=7.25 SELL PUT AUG-120 UAO-TD OI=41 at $ 4.25 SL=5.75 (See risks of selling puts in play legend) Picked on July 25th at $155.38 P/E = N/A Change since picked -26.38 52-week high=$160.56 Analysts Ratings 5-3-0-0-0 52-week low =$ 41.00 Last earnings 06/00 est= 0.03 actual= 0.16 Next earnings 10-20 est= 0.07 versus= -0.45 Average Daily Volume = 946 K PVN - Providian Financial Bancorp $103.63 (+1.25 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. Our good-news momentum play on PVN is still in the money. Granted there haven't been huge gains, nevertheless, it's in the black. The sector rotation out of techs and into defensive issues is without a doubt buoying PVN in this market. Near-term support for this split-candidate is currently established at $103 and $104; however, firmer support is in the proximity of the 5- and 10-dma at $100. If PVN is demonstrates a clear direction, then you could enter off the current level, but take your profits quickly. Overhead resistance is strengthening at $106 and $107. Look for overall confirmation of the momentum on strong moves through these levels. Again watch the volume, it's been somewhat lagging this week. Please consider using stop losses as a safety net! Long positions in this market are risky. Of the 24 analysts following PVN, 22 maintain a Strong Buy or Buy recommendation. And just last week First Union Securities and Lehman Brothers issued a $125 price target. The company's earnings report on July 20th was also favorable. They reported a record 2Q net income of 187.6 mln or $1.29 p/s beating the Street's estimates by $0.04. Its net income was increased by 48% over 126.5 mln or $0.87 p/s in relation to same quarter 1999. BUY CALL AUG-100*PVN-HT OI= 392 at $7.13 SL=5.00 BUY CALL AUG-105 PVN-HA OI=2730 at $4.50 SL=2.75 BUY CALL AUG-110 PVN-HB OI=2099 at $2.56 SL=1.25 BUY CALL SEP-105 PVN-IA OI= 167 at $7.50 SL=5.25 BUY CALL SEP-110 PVN-IB OI= 393 at $5.25 SL=3.25 Picked on July 23rd at $102.38 P/E = 28 Change since picked +1.25 52-week high=$118.50 Analysts Ratings 16-6-2-0-0 52-week low =$ 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 = 1.09 mln LEH - Lehman Brothers Holdings $108.13 (-8.69 last week) Lehman Brothers is a global investment firm that services high- net-worth institutional investors. They provide a vast array of trading and financing services and are the lead underwriter of global equity and fixed-income securities. The firm is also leading the charge into online bond offerings in the US. They're regionally headquartered in New York, London, and Tokyo. LEH is another defensive play. The investors are once again quickly rotating out of the techs and into Drugs, Oils, and yes, even some financials. Another component of this momentum play was the scuttlebutt earlier in the week concerning mergers and acquisitions within the banking and investment industry. As it is, Lehman Brothers and Bear Stearns are primary takeover targets. The coupled events propelled LEH through its resistance at $115 and upward to a new all-time high of $121.75 on Tuesday. However, the technical advances were sidetracked by weakening markets and of course, typical profit taking towards the end of the week. Nonetheless, $106 and $107 are holding up as support. Before you open new positions, a strong show of momentum and a cooperating market should be demonstrated. Be patient until the uptrend resumes. In mid-September, Lehman Brothers is expected to report its earnings. In the meantime, LEH is considered a split-candidate above $100, which is always a nice touch! Company-specific news was scarce last week, however, Riddell Sports announced that it hired Lehman Brothers to provide advice on strategic business options, which may include a merger or sale of the company. BUY CALL AUG-105 LEH-HA OI= 316 at $ 7.13 SL= 5.00 BUY CALL AUG-110*LEH-HB OI=1488 at $ 4.75 SL= 2.75 BUY CALL AUG-115 LEH-HC OI= 643 at $ 2.69 SL= 1.25 BUY CALL AUG-120 LEH-HD OI= 638 at $ 1.50 SL= 0.75 BUY CALL SEP-110 LEH-IB OI= 57 at $ 7.50 SL= 5.25 BUY CALL OCT-115 LEH-JC OI=1236 at $ 7.88 SL= 5.75 Picked on July 25th at $121.09 P/E = 10 Change since picked -12.96 52-week high=$121.75 Analysts Ratings 3-6-1-0-0 52-week low =$ 47.56 Last earnings 06/00 est= 2.43 actual= 2.78 Next earnings 09-25 est= 2.14 versus= 2.20 Average Daily Volume = 1.24 mln GENZ - Genzyme Corp $65.13 (-3.06 last week) Genzyme is a biotechnology company that specializes in developing drugs for rare genetic diseases. And they actually make money! Their business strategy is to buy companies that can contribute to its in-house development of niche biopharmaceutical products. They are also product diversified with development, manufacturing and marketing capabilities in therapeutic and diagnostic products, pharmaceuticals and diagnostic services. GENZ maintained its pristine position as the sector leader until it finally succumbed to some profit taking on Friday. This event wasn't too atypical considering the NASDAQ was in correction mode and GENZ just set a new all-time high at $72.50 during Thursday's session. Despite the mild sell-off, GENZ is holding up relatively well in comparison to some of the high-flying biotechs that have been feeling the selling heat. This "tech rotation" scenario may be short-lived, but our goal is to play the current trend. Another catalyst that helped the share price rise to new heights was the positive analyst coverage mid-week. Robertson Stephens and PaineWebber reiterated Buy ratings for GENZ and the latter firm also upgraded its price target on GENZ to $80 from $75. Initially though, the momentum run was stoked by the company's stellar earnings' report. On July 20th, Genzyme announced a 64% net income increase at $66.1 mln, or $0.72 p/s, compare with same quarter last year of $40.2 mln, or $0.46 p/s. The blowout numbers easily beat the much lower estimates of $0.53 p/s. From a technical standpoint, light support was forming at $68 and $70. Although Friday's pullback found the $65 mark as a stronger launching point for entries. You could enter on dips to this level, but the more conservative (and who isn't in this market environment!) would be better to wait for more definitive moves through upper resistance. The first line of opposition is at $70. Ultimately, GENZ needs to shatter the $72.50 record high. You'll want to pay attention to the volume levels as well. GENZ made its recent advances on more than double the normal trading activity, so look for high-volume moves to hint at another breakout. The war on patents is alive and well. Genzyme recently filed a lawsuit against Transkaryotic Therapies for allegedly infringing on its patent for Replagal, a drug that treats Fabry disease. The suit claims Transkaryotic is already trying to market the drug in the U.S. and Europe. Both companies are in a heated race to be the first to win FDA approval to treat this rare and fatal metabolic disorder, which affects on in 40,000 men. BUY CALL AUG-60*GZQ-HL OI=2212 at $6.75 SL=4.75 BUY CALL AUG-65 GZQ-HM OI=1566 at $3.75 SL=2.00 BUY CALL AUG-70 GZQ-HN OI= 242 at $1.81 SL=1.00 BUY CALL SEP-70 GZQ-IN OI= 10 at $3.63 SL=2.00 BUY CALL OCT-70 GZQ-JN OI= 509 at $8.75 SL=6.25 Picked on July 27th at $71.31 P/E = 28 Change since picked -6.18 52-week high=$72.50 Analysts Ratings 4-8-2-0-0 52-week low =$30.75 Last earnings 06/00 est= 0.53 actual= 0.72 Next earnings 10-19 est= 0.55 versus= 0.49 Average Daily Volume = 1.19 mln COF - Capital One Financial $56.81 (+1.00 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. Bucking the trend in the broader markets as well as the Financial sector, COF bounced nicely on Thursday and actually held onto those gains during Friday's wild ride. The current run, which began in early July, looks like it still has legs. After pulling back early in the week to consolidate its recent gains, the stock got moving again Thursday morning on the back of increasing volume. This bulls remained in control on Friday as well. Even though the stock sold off a bit early in the day, the bulls re-sharpened their horns and came back near the $55.50 level and drove the stock up to close at the high of the day. This equated to the stocks highest close in over a year, and it is looking like buyers want to take a shot at driving the stock higher still, with the all-time high of $60.25 being the target to shoot for. Resistance is looming ahead at $58, and then the all-time high, so it will take a concerted effort to scale these obstacles. The profit taking early last week confirmed support at $53, right on the 10-dma at the time. Since then the 10-dma has moved up to $54.19, and we are looking for COF to continue to be supported by this moving average. Market uncertainty could produce yet another nice entry point; consider a pullback and bounce at the 10-dma to be just such an opportunity. For those of you wanting confirmation first, wait for buying volume to propel COF through the $58 resistance level before playing. As always, pay attention to where the markets are headed. Even though COF bucked this trend on Thursday and Friday, it is hard for any stock to do this for a sustained period of time. On Wednesday, Capital One launched OneRamp Free Internet Access for consumers nationwide. Offered in conjunction with Spinway, Inc., a leading provider of co-branded, free dial-up Internet access and online advertising technology solutions, the service will be immediately available to COF's U.S. customers. COF expects this alliance to enable the company to introduce their products to more consumers, and in a departure from the free-ISP pattern, will not require customers to periodically click on banner ads in order to stay connected to the Internet. BUY CALL AUG-50 COF-HJ OI= 185 at $7.25 SL=5.00 BUY CALL AUG-55*COF-HK OI=1460 at $4.00 SL=2.50 BUY CALL AUG-60 COF-HL OI=2825 at $1.50 SL=0.75 BUY CALL SEP-55 COF-IK OI= 732 at $5.50 SL=3.50 BUY CALL DEC-60 COF-LL OI= 256 at $6.25 SL=4.25 Picked on July 23rd at $55.81 P/E = 29 Change since picked +1.00 52-week high=$57.13 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 = 945 K NTAP - Network Appliance $85.00 (-24.38 last week) As indicated by its name, NTAP pioneered the concept of the network appliance, an extension of the industry trend toward specialized devices that perform a specific function in the network. NTAP designs, manufactures, markets and supports high performance network-attached data storage and access devices. These products, including the company's NetApp file servers provide fast, simple, reliable and cost-effective file service for data-intensive network environments. The company is also embracing online business through its NetCache Web caching appliances, which are designed to ease Internet bandwidth demands by storing information physically closer to users. Jumping on the selloff bandwagon that pulled into town last week, NTAP had a rough ride. With earnings season effectively over, there is very little to hold up the tech sector as investors and fund managers alike head off for their summer vacations. Throw in a few revenue warnings and bearish analyst comments and you have all the ingredients for an ugly day in the markets. NTAP had just run up nearly 40% in the prior 2 weeks and was primed for some profit taking anyways, but the magnitude of the selloff looks like it was overdone. With the decline on Friday, NTAP is within spitting distance of its 50-dma (currently at $82.47) and just above the June consolidation between $76-83. Unless things are about to get really ugly, this looks like a prime candidate to bounce in the days ahead. On the other side of the argument, it does concern us that NTAP closed right on the low of the day on heavy volume on Friday, so play this one with caution. Trying to catch an oversold bounce is a higher risk play than jumping into an established trend, so wait for an indication from the market before jumping in. Trying to catch this knife before it hits the ground could leave your hand fingerless, and that will make it much tougher to type in that next order on your computer. A bounce from support (preferably the 50-dma) will make for your best entry, but make sure that volume is confirming the reversal. Although NTAP has earnings scheduled for the middle of August, this play may turn out to be short-lived. Accordingly, if you get a good entry and have a profit, don't hold on for the home run. This will be a good candidate for taking profits quickly, so you don't get caught in the next decline. This play is a prime example of how stop losses can save a trade. In an interview with IT Radio Network on Wednesday, NTAP president, Tom Mendoza, put the storage market and his company's position within it into perspective. Citing a storage market growth rate of 30%, he pointed out that Network Attached Storage (NAS) is growing at a 70% annual rate. NTAP currently has a 61% share of this $900 million market. BUY CALL AUG- 85 NUL-HQ OI=234 at $10.13 SL= 7.00 BUY CALL AUG- 90*ULM-HR OI=506 at $ 7.63 SL= 5.25 BUY CALL AUG- 95 ULM-HS OI=542 at $ 6.00 SL= 4.00 BUY CALL SEP- 90 ULM-IR OI=487 at $ 9.75 SL= 6.75 BUY CALL DEC-100 ULM-LT OI=830 at $13.75 SL=10.50 SELL PUT AUG- 80 NUL-TP OI=472 at $ 4.88 SL= 7.00 (See risks of selling puts in play legend) Picked on July 25th at $106.19 P/E = 447 Change since picked -21.19 52-week high=$124.00 Analysts Ratings 16-4-0-0-0 52-week low =$ 12.44 Last earnings 05/00 est= 0.06 actual= 0.07 Next earnings 08-17 est= 0.07 versus= 0.04 Average Daily Volume = 5.09 mln ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. 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The Option Investor Newsletter Sunday 07-30-2000 Sunday 4 of 5 To view this email newsletter in HTML format with imbedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/073000_4.html ************* NEW PUT PLAYS ************* AFFX - Affymetrix, Inc. $144.50 (-49.00 last week) Affymetrix is a leader in developing and commercializing systems to acquire, analyze and manage complex genetic information in order to improve the quality of life. The Company's GeneChip(R) system consists of disposable DNA probe arrays containing gene sequences on a chip, reagents for use with probe arrays, a scanner, and other instruments to process the probe arrays and software to analyze and manage genetic information. The Company's spotted array system enables individual researchers to create and analyze custom microarrays on an easy-to-use, cost-efficient platform. Revisiting a "bioflux"? That was the terminology used to describe the plunge in the biotech and genomic sectors in April, but with choppy markets and earnings disappointments this week, it might be better termed as a reflux. After hitting an astronomical high of $327 in February, AFFX has been trending downward, save a few jumps along the way during the recent summer NASDAQ rallies. Lower-than-expected earnings posted on Monday evening by this sector leader triggered a massive sell-off in biotech stocks on Tuesday, with the high-flying genomics sector taking the hardest hit. AFFX lead the slide, trading down $28.00 at $166.50 in late trading, swiftly cutting through all near term support. The stock closed on Friday at $144.50, well below even the 5- and 10-dmas of $162.01 and $176.80. Opening the day at $152.00, $1.13 above Thursday's close, AFFX was unable to find support all day Friday, as all technical DMA's lie above the current stock price. Although the stock did attempt a midday recovery on a strong volume move, a break above the day high resistance of $152.33 never materialized. Trading in such low territory in conjunction with increasing interest rate fears after Friday's GDP release is surely a bad sign, especially with the close well below the aforementioned DMA's. Entry points to this play should be focused around bounces off $150 on any upward spikes, which provided Friday's intraday resistance. Conservative traders might wait until it moves through support at $140 with high volume selling. AFFX is a driver in the biotech sector, so make sure the sector is on your side with accelerating downside volume before opening a position. BUY PUT AUG-140 FIQ-TH OI= 1 at $ 8.63 SL= 6.00 BUY PUT AUG-145*FIQ-TI OI= 5 at $11.13 SL= 8.25 BUY PUT AUG-150 FIQ-TZ OI=10 at $14.00 SL=10.50 Average Daily Volume = 1.05 mln ARBA - Ariba Inc. $107.63 (-17.19 last 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 PlatformT offers a single system for managing buying, selling, and marketplace eCommerce processes. Fair is foul and foul is fair. After having just closed this call play on Thursday, we now welcome ARBA back to the fold, as our latest put play. The same reasons for closing this call play are the same reasons we are now opening this put play. This past week has seen ARBA consistently fail to close above its 5-dma, now at $117. What once looked like consolidation has now revealed itself to more resemble a rollover. After breaking through strong support at $120, the stock continued down, breaking the critical support level of $110. The beginnings of the downward regression channel we mentioned in the drop is now becoming more developed and volume to the downside, while still light, is steadily increasing. The on-again off-again love affair with B2B stocks appears to have waned. The honeymoon of stellar earnings, validation of the B2B business model, and momentum in the B2B sector seems now but a memory. Concerns over valuation for ARBA also appears to be in question. With investors pondering whether ARBA is worth 3 times the value of CMRC, Friday's action was a mirror image of much of the action this past week, failure to rally above the downward regression channel followed by a sell-off. Support for the stock can be found just below at $105 and at the psychological level of $100. Those looking for an entry point can find a number of resistance levels overhead. With strong resistance at $110, the 5-dma at $117, and the 10-dma at $121.78, there is also resistance at the $115 mark. Failure to break through these levels on strong volume may serve as target entries. As there has been little news from the company, watch for ARBA to move in sympathy the NASDAQ. Make sure that market sentiment is in your favor before entering. BUY PUT AUG-110 IUR-TB OI= 608 at $10.00 SL=7.00 BUY PUT AUG-105*IUR-TA OI= 245 at $ 7.38 SL=5.25 BUY PUT AUG-100 IUR-TT OI=2604 at $ 5.13 SL=3.00 Average Daily Volume = 6.08 mln TERN - Terayon Communications Systems $53.88 (-8.13 last week) Terayon Communication Systems is a leading provider of broadband access systems for delivering advanced voice, data and video services over cable and DSL lines. The company's TeraComm system is designed to enable cable operators to maximize the capacity and reliability of broadband access services over any cable plant, minimize time-consuming and costly network infrastructure upgrades, and provide a range of service levels to residential and commercial end users. The Santa Clara, CA based company sells its products to cable operators throughout North America, Latin America and Europe. International sales account for almost 85% of Terayon's revenues. So what's to blame for TERN's recent decline? Is it a typical post-earnings sell-off, a sector rotation out of techs, poor market conditions? Most likely it's a wicked combination and quite honestly, the more dissenting variables the better! On July 18th, the company reported solid earnings at $0.07 p/s versus the consensus estimates of $0.03. Revenues for the 2Q of 2000 grew 382% to $92 mln from $19.1 mln in the 2Q of 1999. And despite CEO Zaki Rakib's statement that his company is entering "the third quarter with strong customer demand and a solid base for the accelerating broadband revolution ahead," TERN dove after the announcement. The pattern was typical. A quick run-up ahead of the report - "buying the rumor" - followed by a decline - "selling the news." The difference here is that TERN is not recovering. The stock's conclusive moves below the 50-dma ($63.92) in Wednesday's session followed by a slip under the 200-dma ($59.48) lends itself to the possibility of a further technical decline. TERN's lack of response to Lehman Brothers Buy reiteration and $165 price target as well as Deutsche Banc's new Strong Buy coverage is also a good indication that buyers aren't yet lined up to get their hands on this tech stock. Currently, there is some light support at $50, but $40 marks a firmer bottom. Take a look at a three to six month chart for visual confirmation. All in all the scene looks good for a put play, but we've got to watch our backs! Confirm the stock's direction and a cooperative market before starting new plays. Entries on spikes near the 200-dma or more likely, off Friday's intraday resistance near the $55 mark are practical. But enter only when its profitable to do so. Patience and prudence will be the key until the markets find a conclusive trend. BUY PUT AUG-60 TUN-TL OI=242 at $8.75 SL=6.00 BUY PUT AUG-55*TUN-TK OI=178 at $6.13 SL=4.00 BUY PUT AUG-50 TUN-TJ OI=503 at $3.63 SL=2.00 Average Daily Volume = 2.32 mln ********************************Advertisement******************** American Express® Cardmembers are buying online Find out more! http://click.linksynergy.com/fs-bin/stat?id=MH64V9Lgzgc&of ferid=13447.10000026&type=1&subid=0 ***************************************************************** ***************** CURRENT PUT PLAYS ***************** CMOS - Credence Systems $42.00 (-4.69 last week) Credence makes test equipment and testing software that is used in the high-volume production of semiconductors. The company's products test digital logic, mixed-signal, and nonvolatile memory circuits used in such products as televisions, PCs, cameras, and telephones. CMOS sells its products primarily to chip manufacturers, assembly houses, and test services companies. The Philly Semiconductor Index ($SOX) moved fractionally higher Friday, in what appeared to be a relief rally. But, CMOS didn't participate. And, there appears to be little relief from the stock's current slide. The Robertson Stephens Semiconductor Conference wrapped up Friday with an appearance by none other than CMOS. Officials from CMOS presenting to analysts at the meeting said the company was positioned well for the second half of the year and continues to capture market share from rival capital equipment firms. However, traders were less than impressed with CMOS's presentation noting the stock's divergence from the broader Chip sector Friday. Despite the stream of positive guidance flowing from the much heralded RS Chip conference, the SOX shed a disheartening 12% over the course of last week's trading. The seasonal summer-slowdown in the Semi sector had been expected, but the warnings from high-profile chip makers such as LSI, and chip-users such as NOK, were not. Slower sales for the aforementioned companies translates into fewer orders for the chip equipment that companies like CMOS manufacture. The carryover from the warnings from LSI and NOK, combined with the lukewarm reception at the RS conference, pushed CMOS below support at $43 Friday. Trading activity remained near the ADV, suggesting the sellers are still stronger than the buyers. The stock bounced higher after establishing support at the $41 level early Friday. If the Chip sector shows signs of weakness early Monday morning, consider entry if CMOS falls below support at $41. Thereafter, the stock has major support at $41, and minor help at $38. After those various levels CMOS doesn't have major support until $35. BUY PUT AUG-45*CQS-TI OI=268 at $6.38 SL=4.50 BUY PUT AUG-40 CQS-TH OI= 79 at $3.25 SL=1.50 BUY PUT AUG-35 CQS-TG OI=145 at $1.31 SL=0.50 Average Daily Volume = 1.17 mln GTW - Gateway $55.13 (-7.75 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. The highly anticipated summer-slowdown for the box makers was validated last week. However, it was reported that PC sales slowed more than anticipated. According to Dataquest, an industry research firm, sales of PCs rose 11.7% in the second quarter of the year, which was the smallest quarterly gain in over two years. Dataquest also reported that GTW lagged others with a 3.7% market share. Many analysts believe sales of PCs will rise in the fall with the return of back-to-school shopping and the lucrative holiday season, which might start to stabilize the precipitous drop of the box makers' stocks. While sales of PCs might start to pick-up, the computer manufacturers will face another problem in the form of higher component prices. Micron, a leading memory manufacturer, said last week that the prices for its widely used DRAM memory chips will continue to rise in the second-half of the year. While the news of lower sales have been discounted into GTW's stock price, the prospects of rising memory prices might lead to further downside. Additionally, the weakening Tech sector bodes well for our play on the short side. Speaking of downside, GTW sank right at the opening Friday, subsequently falling through support at $56. After the morning slide, the stock stabilized near the $55 level. A breakdown below that level might provide a good entry for new positions. The support we had mentioned last Thursday broke down without hesitation Thursday. Additionally, GTW's 4% slide came with the return of volume, which might suggest even lower prices are ahead. After the $55 level GTW has some help around $52.50, but no major support until $50. Confirm direction in the PC sector Monday morning, and watch for the sellers to return with volume before entering the play. BUY PUT AUG-60*GTW-TL OI= 799 at $6.25 SL=4.25 BUY PUT AUG-55 GTW-TK OI=1361 at $3.25 SL=1.75 BUY PUT AUG-50 GTW-TJ OI= 430 at $1.25 SL=0.50 Average Daily Volume = 1.62 mln VRTS - Veritas Software Corp. $87.69 (-21.63 last week) Veritas Software is the de-facto standard for application storage management, with over 60 of the world's leading servers and operating systems integrating its software. As the leading provider of enterprise-class application storage management software, Veritas Software ensures the continuous availability of business-critical information by delivering integrated, cross-platform storage management software solutions. Founded in 1982, the Mountain View, Calif.-based Company has grown to more than 3,700 employees residing in 24 countries worldwide. When we started this play on Thursday, we cited a number of overhead resistance levels to watch for in entering this put play. Friday saw the sell-off continue, but not without trying to rally in spite of market weakness. Early in the day, the stock attempted to break through the psychological $100 level. Stopping just short at $99.88, the stock sold off on massive volume as sellers piled in during amateur hour. Finding support just above $87, the stock bounced and attempted to rally. But by mid day, VRTS encountered resistance near the $95 level and sold off to close near its lows for the day on almost twice the ADV. In doing so, VRTS closed just below $90 support. With VRTS now deep below its 200-dma at $102, the next levels of support can be found in $5 increments at $85 and $80. Overhead resistance remains strong with resistance at $90, $95, the psychological $100 and its 5- and 200-dma near $102. Look for failure to rally above these levels as entry points. As VRTS continues to move in step with the NASDAQ, make sure market conditions are on your side before entering and make sure that volume confirms the move. News this week for the company was good but was largely ignored as the stock was dragged down by a sagging NASDAQ. On Monday, VRTS announced a worldwide partner program, Veritas Vplus, that enables partners to differentiate themselves based on type, level and specialty, and offers added benefits for continued growth. On Thursday VRTS was selected by SUNW as a recommended vendor of data availability solutions and announced its participation in its online marketplace, the Sun iForce Startup Community. BUY PUT AUG-90*VUQ-TV OI=2554 at $8.75 SL=6.25 BUY PUT AUG-85 VUQ-TU OI=2167 at $6.13 SL=4.00 BUY PUT AUG-80 VUQ-TZ OI= 201 at $4.00 SL=2.50 Average Daily Volume = 5.70 mln CMRC - Commerce One Inc $42.88 (-10.50 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. CMRC has gone from point A to B in style! We started coverage on this put play last weekend as its post-earnings sell-off went into overdrive. On Monday, we were quickly rewarded with optimal entries into the decline. Downward moves from $54, then off the $53 and $52 range confirmed the trend was intact. As the week progressed, we saw near-term support dwindle and CMRC break through opposition at the $45 level! The technical bonus came with Friday's move towards historical support at $40, which is our Point B! The 5.6% cut in share price on respectable volume didn't exactly bring CMRC to $40, but it was close at $41.38. If you still have open positions, play it safe despite the negative market environment. Keep the stops tight. Entries into this play are rather risky at this time considering the precarious price level. Wait for further devastation to transpire before jumping back in for more. The next goal to set your sights on in the event CMRC doesn't experience a "buyer's revival" is for it to tumble to $35, then $30. These levels haven't been seen since April and May. A renewed interest in the stock is mentioned because for one, the share price is attractive and two, there was some positive news surrounding Commerce One this week. On Tuesday, DLJ Securities reiterated its Buy rating in response to the company's new partnership with General Electric (GE) to create a formidable B2B exchange to compete with the IBM and Ariba (ARBA) alliance. Commerce One and seven Hong Kong companies also formed an alliance to start six B2B Web sites with the objective of handling as much as 1% of Hong Kong's GDP within three to four years. With that in mind, watch the downtrend line and be careful of a directionless market. BUY PUT AUG-50 RJC-TJ OI=659 at $9.25 SL=6.25 BUY PUT AUG-45*RJC-TI OI=910 at $5.75 SL=3.75 BUY PUT AUG-40 RJC-TH OI=567 at $3.00 SL=1.50 Average Daily Volume = 6.75 mln ELON - Echelon Corp $32.63 (-6.38 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 couldn't even make a run into its earnings this month, which for our purposes is a good thing! The existing downtrend acted as a strong stimulus for ELON to continue its downward spiral following the announcement on July 20th. Plus, there's the current consensus that investors are less concerned about the actual earnings numbers - Echelon's were pretty darn good. Instead, many investors are focusing on the forward-looking statements about revenue for the remainder of the year, which haven't been all that great. Remember Jim's Market Wrap from Thursday regarding SEASONS? Well there you go...ELON is a prime example. What we had at the beginning of the week was a stock trying to find a bottom. Now, we've got a stock teetering on the brink of total destruction. The $30 level does mark strong support, but hitting $25 isn't out of the picture yet. Volume has been waning this week, but the consistent losses are a bearish sign that there are still plenty of investors looking to move on to greener pastures. Entries into this play can be had off downward bounces at the 5-dma (now at $35.44), but take heed. Friday's strong intraday bottom at $32 warns that we should be on guard. If you have open positions, keep the stops tight to protect existing gains and capital. BUY PUT AUG-40 EUL-TH OI=200 at $9.25 SL=6.25 BUY PUT AUG-35*EUL-TG OI=386 at $5.63 SL=3.50 BUY PUT AUG-30 EUL-TF OI=170 at $2.75 SL=1.25 Average Daily Volume = 1.43 mln /charts/charts.asp.symbol=ELON EMLX - Emulex Corporation $49.38 (-11.13 last week) A leading networking company, EMLX designs, builds and distributes three types of connectivity products: network access servers, printer servers, and high-speed fibre channel products. It's fibre channel products, which are based on internally developed ASIC technology, are deployable across a variety of network configurations and operating systems to support increasing volumes of stored data. EMLX sells its products directly throughout the world to OEMs and end users, as well as through system integrators and industrial distributors. Not a screaming decline, but EMLX's action on Friday looked like an entry point. The early morning rise brought the stock right up to resistance at $52, before it began rolling over again. At any rate, the action was hard to call on Friday, with volume just over half of the ADV and the intraday volume pattern being mixed. Given the pain being felt on the NASDAQ, we would have expected EMLX to head further south, and this lack of weakness raises a caution flag. Even at its high on Friday, EMLX was still nearly $2 below its 5-dma, but the stock did manage to stay above the $47 support level at the close. Both the open and close were below the lower Bollinger band, and this combined with the oversold condition on the Stochastics oscillator could be supportive. If it sounds like we talking out of both sides of our mouth, it's because EMLX is giving us mixed signals. It could be finding support near current levels or preparing for a further decline. So how do we play it? Ideally, we wait for buying volume to push the price up near the $53 resistance level, also the site of the 5-dma (currently at $53.88), and enter new positions as the price rolls over. If weakness resumes on Monday, the $47 level still looks good for new positions as the price continues south, but keep your stops in place, as buyers stepped in at $44 on Friday. Earnings are scheduled for Thursday, August 3rd. BUY PUT AUG-50*UML-TJ OI=83 at $5.50 SL=3.50 BUY PUT AUG-45 UML-TI OI=55 at $3.88 SL=2.25 Average Daily Volume = 2.12 mln ************************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 ************************************************************** ***** LEAPS ***** History Repeats and the Techs Take a Beating By Mark Phillips Contact Support I hope you heeded my advice and have been using the July earnings cycle as an opportunity to lock in profits and close out any remaining 2001 positions. This earnings cycle is effectively over, with the remaining stragglers reporting over the next 3 weeks. There have been some stellar reports from the likes of JDSU, NT, and EMC, but all of these stocks are now trading significantly off their recent highs. Stocks that have failed to impress the street have really been abused, and a perfect example is this week's Spotlight Play, NOK. Speaking of our playlist, take a look at the return column this weekend and compare it to the playlist from a week ago. Notice the significant declines in many of our plays, with plays such as JDSU, VSTR, and XLNX seeing their returns slashed in half. Another interesting point is that on plays that are showing a loss, the loss is consistently worse on the 2001 options now. This is the beginning of the accelerating time decay effect on these near-term options that we've been warning about over the past several weeks. As Jim mentioned in the Market Wrap on Thursday, the declines we are seeing are less about specific stocks and the economy and more closely related to the season. Jim, Ryan, Austin and Molly have done an excellent job of highlighting the historical pattern, so I won't belabor the point here. If you really want to understand this cycle, refer back to the Market Wrap, Market Sentiment and Traders Corner over the past 2 weeks. Speaking of historical patterns, how do you like the VIX? The historical comparison of this volatility indicator between last year and this year is uncanny - thanks for putting it so clearly Ryan (Editor's Plays - July 23rd, 2000). Go back and review the charts in that article and send me nasty emails if you don't see the amazing predictive nature of the VIX. After continuing to decline to new lows, the excitement in the markets this week finally sent the VIX up towards the middle of its range, ending the week at 24.32 - just like what happened during this past week, a year ago. Granted, this is still a little on the low side, but keep in mind we haven't seen the VIX close this high in over a month. This gives us license to at least begin to nibble on attractive plays, but in a cautious manner. Don't forget we are in that most perilous time of the year for bullish plays. One housekeeping note about the playlist this weekend. Notice that the 2001 option has been deleted for the VRSN play. The option is no longer listed at the CBOE, and this likely means there is no open interest in the issue. It seems kind of silly to continue to list a non-existent option in our playlist (it really makes it tough to update the returns), so the 2001 option has been deleted. Note that both the 2002 and 2003 LEAPS are both listed, so you should have plenty of options (pun intended) for this play. So the markets are in their normal seasonal downtrend with earnings essentially over and economic fears looming again. So why are we continuing to list new plays, you ask? Entry points! Not everything will suffer at the same time, so now we go searching for those bargains that appear when great stocks have been excessively beaten down. Given the current market sentiment, we need to be more discriminating about our plays, but if you locked in profits over the past few weeks, you should be sitting pretty with lots of cash that you'd like to put to work. I can't emphasize this enough - Don't chase plays in this market! Decide what your entry criteria is while the markets are closed. Then if you get the conditions you want then enter the play. If it doesn't materialize, keep in mind that it may come back to you next week or next month, or more likely at the end of October. At any rate, keep your cash safe until you are satisfied that your entry strategy is well thought out and the market delivers exactly what you are waiting for. Remember it is always easier to find another play after missing one than it is to find more money after throwing it into a losing play. Trade Smart! Or even better, enjoy your vacation! Current Plays SYMBOL SINCE LEAPS SYMBOL PICKED CURRENT RETURN EMC 11/07/99 JAN-2001 $ 40 EMB-AH $ 7.69 $42.13 447.85% JAN-2002 $ 45 WUE-AI $ 9.50 $48.88 414.53% JAN-2003 $ 90 VUE-AR $35.50 $33.38 ------ CSCO 11/14/99 JAN-2001 $ 40 CYQ-AH $ 9.56 $26.00 171.97% JAN-2002 $ 45 WIV-AI $11.00 $28.38 158.00% JAN-2003 $ 70 VYC-AN $25.13 $21.50 ------ NT 11/28/99 JAN-2001 $37.5 NT -AU $11.13 $37.25 234.68% JAN-2002 $37.5 WNT-AU $15.13 $42.25 179.25% SUNW 12/19/99 JAN-2001 $ 80 SUX-AP $17.63 $30.50 73.00% JAN-2002 $ 90 WJX-AR $22.00 $36.25 64.77% JAN-2003 $105 VSU-AA $40.63 $39.75 ------ ERICY 01/30/00 JAN-2001 $16.3 RQC-AO $ 4.94 $ 4.13 -16.40% JAN-2002 $16.3 WRY-AO $ 6.75 $ 6.63 - 1.78% 07/23/00 JAN-2003 $ 25 VYD-AE $ 6.88 $ 5.63 -18.17% NSM 02/27/00 JAN-2001 $ 70 NSM-AN $18.50 $ 1.88 -89.84% JAN-2002 $ 70 WUN-AN $24.25 $ 7.00 -71.13% JAN-2003 $ 40 VSN-AH $16.50 $16.50 ------ AOL 03/12/00 JAN-2001 $ 60 AOO-AL $14.00 $ 5.00 -64.29% JAN-2002 $ 65 WAN-AM $18.63 $10.13 -45.63% JAN-2003 $ 65 VAN-AM $18.25 $15.25 ------ AXP 03/12/00 JAN-2001 $43.3 AXP-AP $ 7.25 $15.25 110.34% JAN-2002 $46.6 WXP-AQ $ 9.33 $18.25 95.61% JAN-2003 $ 60 VAX-AL $18.38 $16.25 ------ WM 03/19/00 JAN-2001 $ 25 WM -AE $ 5.00 $ 8.50 70.00% JAN-2002 $ 30 WWI-AF $ 5.38 $ 7.88 46.47% JAN-2003 $ 35 VWI-AG $ 7.63 $ 7.88 ------ AMD 04/16/00 JAN-2001 $ 70 AMD-AN $17.50 $16.13 - 7.83% JAN-2002 $ 70 WVV-AN $26.00 $27.38 5.31% JAN-2003 $ 90 VVV-AR $36.75 $28.50 ------ JDSU 04/16/00 JAN-2001 $ 80 XXZ-AP $27.50 $45.13 64.11% JAN-2002 $ 80 YJU-AP $39.63 $58.25 46.98% VSTR 04/16/00 JAN-2001 $ 90 UVT-AR $23.88 $44.88 87.94% JAN-2002 $ 90 WWP-AR $35.00 $55.38 58.23% JAN-2003 $150 VLV-AJ $59.13 $36.25 ------ MOT 05/14/00 JAN-2001 $33.3 MOT-AY $ 6.58 $ 5.38 -18.24% JAN-2002 $36.6 WMA-AZ $ 9.54 $ 9.13 - 4.30% JAN-2003 $ 40 VMA-AH $13.38 $10.88 ------ NOK 05/21/00 JAN-2001 $ 50 NZY-AJ $10.25 $ 5.75 -43.90% JAN-2002 $ 50 IWX-AJ $17.25 $12.75 -26.09% 07/30/00 JAN-2003 $ 50 VOK-AJ $17.75 $17.75 0.00% HD 05/28/00 JAN-2001 $ 50 HD -AJ $ 6.25 $ 8.50 36.00% JAN-2002 $ 50 WHD-AJ $11.38 $14.50 27.42% JAN-2003 $ 60 VHD-AL $17.88 $14.75 ------ NXTL 06/11/00 JAN-2001 $ 60 FZC-AL $12.25 $ 9.75 -20.41% JAN-2002 $ 60 YFG-AL $19.25 $16.50 -14.29% JAN-2003 $ 60 VFU-AL $21.88 $21.88 ------ C 06/18/00 JAN-2001 $ 65 C -AM $ 7.63 $ 9.63 26.21% JAN-2002 $ 65 WRV-AM $13.75 $17.00 23.64% AMGN 07/02/00 JAN-2001 $ 75 YAA-AO $10.75 $ 7.88 -26.70% JAN-2002 $ 75 WQY-AO $20.75 $17.50 -15.66% JAN-2003 $ 70 VAM-AN $28.75 $26.13 - 9.11% VRSN 07/02/00 JAN-2002 $190 YVS-AR $66.25 $55.13 -16.78% JAN-2003 $180 OVS-AP $88.00 $73.38 ------ DELL 07/09/00 JAN-2002 $ 55 WDQ-AK $12.63 $ 8.00 -36.66% JAN-2003 $ 60 VDL-AL $15.38 $10.63 -30.88% GENZ 07/16/00 JAN-2002 $ 70 YGZ-AN $17.13 $18.75 9.46% JAN-2003 $ 70 OZG-AN $23.13 $24.38 5.40% LU 07/23/00 JAN-2002 $ 55 WEU-AK $12.88 $ 9.13 -29.11% JAN-2003 $ 55 VEU-AK $17.50 $13.00 -25.71% Spotlight Play NOK - Nokia $43.75 It's not often you get a bargain like this. NOK, arguably the premier wireless handset manufacturer, reported earnings Thursday morning and promptly received a 25% haircut. The stock had not had a phenomenal runup into earnings and they didn't miss estimates, so you are probably wondering what the problem is. The company warned (cardinal sin) that 3rd quarter profits would be lower than expected due to seasonal declines and problematic timing of new product releases. Notice that they did not mention problems like supply-chain shortages or declining demand for their products. Instead, they cited two short-term problems that are unlikely to affect the company long term and it looks like the decline is giving us a great entry point. After falling as low as $40.16 on Thursday, the price recovered somewhat on Friday, and this came in the midst of carnage on the NASDAQ. The stock looks like it may be finding resistance near $45, so look for a pullback to initiate new positions. Any bounce higher from the zone between $40-42 looks buyable, but if $40 fails to hold, stand aside and let the dust settle. BUY LEAP JAN-2002 $45.00 IWX-AI at $13.63 BUY LEAP JAN-2003 $50.00 VOK-AJ at $17.75 New Plays HWP - Hewlett-Packard $107.75 Guilty by association, HWP fell hard this past week after the printer company, Lexmark (LXK) missed its earnings target and forecast 10-15% revenue growth for the year as opposed to the long-term target of 20%. The current market environment is not forgiving of this type of admission, and with concerns of slowing PC sales added into the mix, HWP spent the week falling in sympathy due to their exposure in both of these markets. By Friday, the decline appeared to be losing steam, and HWP actually gained $1.25 on a day when the NASDAQ saw huge losses across virtually every sector. HWP has strong support at $100, which is just above the rising 200-dma ($96.75), and this looks like an ideal point to look for attractive entries. The company will announce its earnings on August 16th, an event which should help to support the share price in the near term. Even though HWP looks great for the long-term under the capable leadership of Carly Fiorina, we will be better served by listening to the market, than trying to argue with it. Along those lines, look for new entries as the stock bounces betwen $100-102 and heads higher. A violation of the 200-dma would be a bad sign though, and would be our signal to stand aside and wait for the overall market to improve. BUY LEAP JAN-2002 $110.00 WPW-AB at $28.25 BUY LEAP JAN-2003 $120.00 VHP-AD at $32.63 PCS - Sprint PCS Group $54.25 Looking for another wireless play? Now that we've had our fun with VSTR, we've been looking for another stock to play in this sector and PCS looks like our next playmate. The Telecom stocks have been having a rough time lately, and PCS has felt the pain as well, dipping back to kiss the 200-dma (currently $52.63) the past 2 days. Since going public at the end of 1998, PCS has only approached its 200-dma once, and that was when the NASDAQ was in free fall this past April. Even in that market environment, PCS refused to penetrate that level and quickly recovered. In addition to the 200-dma, PCS has strong historical support between $50-53, and the bounce on Friday came on strong volume, helping to make a strong case for a near term bottom. We would like to see the stock firm up support near current levels before heading higher, but any recovery off of current levels looks buyable. More conservative players may want to wait for the Telecom sector to regain some health before playing, giving PCS time to solidify its support. If the decline continues from current levels and penetrates the $50 level, keep your cash safe and wait. The best play in the world can't overcome negative market sentiment and we don't want to chase this play lower if the markets head further south, dragging our play with them. BUY LEAP JAN-2002 $60.00 WVH-AL at $11.88 BUY LEAP JAN-2003 $65.00 VVH-AM at $14.38 **Wait for OI** Drops None *********** SPLIT PLAYS *********** And The Final Tally Is... By Ryan Nelson With July ending, it is time to take a look at the monthly total to see if splits were as abundant as forecasted. I said I was looking for 30 splits due to the vast amount of annual shareholder meetings this spring where additional shares were authorized. Not to mention, that the stock market rebound had many companies positioned to split. Well, the final tally was 33 major, optionable companies that announced. Not bad by any measure for a one month total. Now the question is, how many CEOs still want to enact those splits with with the market shredding their stock prices? Too late guys! The splits will still happen. Fortunately for us, this recent decline will allow for some entry points to the split runs next month. We will talk about this more soon as the payable dates near. Until then, don't buy too soon as the market is still looking weak. Current Split Run Plays None Current Split Candidate Plays SCMR PVN LEH HWP FRX BRCD Candidates That Are Not Current Plays VRSN BRCM LLY GLW SEBL TIBX GSPN BLDP SAPE COHR 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 = 33 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 IMPH DYN RFMD BUD RARE FLEX PWER NSIT For our complete stock split calendar, click here... http://members.OptionInvestor.com/splits/index.asp **********************ADVERTISEMENT****************************** FREE! FREE! FREE! FREE! Investor's Business Daily - Free Two Week Trial! No obligation! No invoices! And nothing to cancel! Limited time offer! 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The Option Investor Newsletter Sunday 07-30-2000 Sunday 5 of 5 To view this email newsletter in HTML format with imbedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/073000_5.html ************* COVERED CALLS ************* The Future of Online Trading Continues to Evolve... By Mark Wnetrzak E*trade, Fidelity, DLJ Direct and Datek are the companies most investors associate with the words "online trading." These popular discount brokerages provide self-reliant investors the means to buy and sell securities and other instruments over the Internet for low transaction fees. Savvy traders have saved millions of dollars using these e-brokerages instead of paying the higher commissions that the traditional brokers charge. But, the real power of the Internet to affect the way individuals invest lies in the creation of automated, centralized trading exchanges. Such exchanges can save investors even more money by eliminating the professional intermediaries (for example, Knight Trading Group) and the transaction premiums they charge for providing liquidity. Of course, this in turn would attract more frugal investors and further decrease trading costs. Institutional investors have had access to online trading with Instinet since 1969 but until recently, individual traders have been left out. With the evolution of the Internet brokerages and now the Electronic Communication Networks (ECN), that is no longer the case. Today there are nine networks that handle stock trades outside the traditional exchange system and they account for more than one-fourth of all trades in Nasdaq stocks. Instinet, which is owned by Reuters Holdings, is the largest ECN, handling over one-half of all electronic "third-market" transactions. Other major players include Island ECN, owned by Datek, which is now handling orders worth hundreds of billions of dollars; Tradebook, owned by Bloomberg; and Archipeligo, in which Goldman Sachs and E*trade recently purchased a major stake. The most advanced, "active" ECNs are gaining support from traders because they use sophisticated algorithms to "read" the inside market and choose the most advantageous way to route a trade, attempting to achieve the best price. These systems will take market and limit orders, with several of them offering advanced order-entry capabilities previously unavailable to individuals. These networks are also able to route large numbers of orders and execute them in a short time interval with no additional guidance or human intervention. For example, Archipelago will check a limit order for a match, and if there is no match, it will post the order to the Level II screen. If the order is priced more favorably than the current inside market, the system will check to see who is on the inside bid and dynamically decide the quickest way to route the order. These are auto-executions at electronic speeds that allow enormous orders to get filled (through SelectNet) by executing against multiple market-makers and ECNs at the same time. The most well-known active ECNs are Archipelago - easily the largest in terms of volume, NexTrade and Attain. One of the current drawbacks is that while SelectNet routing to ECNs will auto-execute in most exchanges, that isn't necessarily true with a market-maker. If a SelectNet preference is routed to a market-maker, by regulation, he has up to 30 seconds to respond. Obviously, in a fast moving market, this could be quite costly as the market-maker can simply wait for the period to elapse and then decline the offer. Fortunately, the active ECN quickly restarts the algorithmic search for another market-maker. Understanding the different execution routes is of utmost importance as it is necessary for an investor to be able to utilize the new systems profitably. Currently, with the appropriate software packages, many different kinds of orders are available to retail traders. These include STOP orders on Nasdaq stocks and RESERVE orders that allow you to post one size order on the level II screen and actually transact a different size order. In the future, the addition of logical or conditional (if - then) orders will further decrease the need for traditional brokers. As the equity and option markets continue to evolve, it is paramount that every investor understand the trading system's dynamics that can affect his or her portfolio success. 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 HLYW 8.94 7.94 AUG 7.50 2.06 *$ 0.62 9.8% MAIL 9.44 8.00 AUG 7.50 2.50 *$ 0.56 7.0% DLK 16.75 19.25 AUG 12.50 5.25 *$ 1.00 6.3% PSFT 18.38 20.88 AUG 15.00 4.38 *$ 1.00 5.2% WFR 18.38 15.50 AUG 15.00 4.38 *$ 1.00 5.2% PMTC 12.69 10.09 AUG 10.00 3.25 *$ 0.56 5.2% MCRE 13.06 10.75 AUG 10.00 3.50 *$ 0.44 5.0% TMWD 59.50 42.63 AUG 45.00 18.63 $ 1.76 4.7% IMNR 11.00 8.41 AUG 7.50 3.88 *$ 0.38 4.6% EPTO 15.13 12.50 AUG 12.50 3.38 $ 0.75 4.6% MCOM 33.00 37.00 AUG 25.00 9.25 *$ 1.25 4.6% OO 13.94 14.50 AUG 12.50 1.94 *$ 0.50 4.5% IGEN 20.69 18.25 AUG 17.50 3.88 *$ 0.69 4.5% LOOK 23.00 17.88 AUG 17.50 6.25 *$ 0.75 3.9% IVIL 8.94 6.25 AUG 7.50 2.13 $ -0.56 0.0% EFCX 14.38 8.75 AUG 10.00 4.88 $ -0.75 0.0% BLSW 32.88 20.88 AUG 25.00 9.38 $ -2.62 0.0% ITXC 34.50 19.63 AUG 30.00 7.00 $ -7.87 0.0% LE - Not Playable *$ = Stock price is above the sold striking price. Comments: It was nice of Lands' End (LE) to warn about slower than expected sales "before" Monday's open. Even though the tape continues to act peculiar and is again showing strength, Monday's gap-down at the open, on high volume, marks this candidate as one to avoid. Many of the portfolio issues are correcting and testing recent support areas. Evaluate your individual long-term outlook and identify logical exit points. With the recent weakening market, stemming losses quickly may be the most prudent money management technique. Next week, we will list Ivillage.com (IVIL), Electric Fuel (EFCX), Bluestone Software (BLSW), and Itxc Corp. (ITXC) as closed. Looksmart (LOOK) and Tumbleweed Comm. (TMWD) may also be candidates for an early exit. 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 ACOM 21.75 AUG 15.00 AUY HC 7.50 26 14.25 21 7.6% ASKJ 17.44 AUG 15.00 AKU HC 3.25 118 14.19 21 8.3% CGO 42.13 AUG 35.00 CGO HG 8.38 83 33.75 21 5.4% CLTR 22.00 AUG 17.50 QCE HW 5.00 10 17.00 21 4.3% FRNT 18.44 AUG 17.50 FUO HW 1.50 164 16.94 21 4.8% GPX 5.81 AUG 5.00 GPX HA 1.25 485 4.56 21 14.0% NLCS 58.13 AUG 50.00 QEZ HJ 11.00 466 47.13 21 8.8% Sequenced by Return ***** Stock Last Call Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return GPX 5.81 AUG 5.00 GPX HA 1.25 485 4.56 21 14.0% NLCS 58.13 AUG 50.00 QEZ HJ 11.00 466 47.13 21 8.8% ASKJ 17.44 AUG 15.00 AKU HC 3.25 118 14.19 21 8.3% ACOM 21.75 AUG 15.00 AUY HC 7.50 26 14.25 21 7.6% CGO 42.13 AUG 35.00 CGO HG 8.38 83 33.75 21 5.4% FRNT 18.44 AUG 17.50 FUO HW 1.50 164 16.94 21 4.8% CLTR 22.00 AUG 17.50 QCE HW 5.00 10 17.00 21 4.3% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MR-Monthly Return. ***** ACOM - Agency.COM $21.75 *** Welcome to the Russell 2000 *** Agency.COM is an international Internet professional services firm. They provide clients with an integrated set of strategy, creative and technology services that take them from concept to launch and operation of their Internet businesses. They provide planning, designing, programming and implementation for a range of online activities, from marketing strategies to the creation of online commerce platforms. Agency.Com reported higher than expected cash earnings on Thursday due primarily to their clients increased spending on its Internet consulting services. Revenue increased 30% from last quarter and 95% from last year. Add several new contracts, partnerships, upgrades, and membership in the Russell 2000 index, and you have a reasonable risk- reward scenario. We favor the support near the lower end of the stage I base though the technicals suggest an upside resolution may be forthcoming. AUG 15.00 AUY HC LB=7.50 OI=26 CB=14.25 DE=21 MR=7.6% Chart = ***** ASKJ - Ask Jeeves $17.44 *** What Cash Burn Rate? *** Ask Jeeves provides online personal service infrastructure for companies seeking to target, acquire, and retain customers online. The online personal service infrastructure allows companies to connect users to information through automated search, decision advisory support and interaction with live customer care representatives. Ask Jeeves' answer to the Internet cash-burn rate worries was an excellent earnings report, beating the Street by 5 cents. Revenues for the 2Q were $25.9 million, an 817% increase over last year and their cash position totaled $141.6 million, which the company believes will preclude the need for future financing. First Union Securities liked what they heard and quickly upgraded Ask Jeeves to a Strong Buy. Ask Jeeves has been forming a Stage I base for several months and recent signs of accumulation have increase the probabilities for a favorable outcome. The positive earnings and increasingly bullish technicals makes this a reasonable speculation position. AUG 15.00 AKU HC LB=3.25 OI=118 CB=14.19 DE=21 MR=8.3% Chart = ***** CGO - Atlas Air $42.13 *** Record 2nd Quarter Results! *** Atlas Air is an air cargo outsourcer, with an all Stage 3 FAA noise regulation compliant fleet of Boeing 747 freighter aircraft. They provide reliable air cargo transportation services throughout the world to major international air carriers generally under three- to five-year fixed-rate contracts which typically require that the Company supply aircraft, crew, maintenance and insurance contracts. Their customers include Alitalia, British Airways, China Airlines Ltd., Korean Airlines and Malaysian Airlines. Atlas Air not only reported stellar earnings, they were added to the S&P MidCap 400 Index. The company reported net income rose by 43% to a record $19.0 million or $0.53 per fully diluted share for the quarter ended June 30, 2000, versus $13.3 million or $0.38 per fully diluted share for the year-earlier period, on 4% greater shares. Atlas Air reached a new intra-day high on Friday on heavy volume and is just $0.06 from being in blue sky territory. We favor a more conservative entry point near the May and Junes highs. AUG 35.00 CGO HG LB=8.38 OI=83 CB=33.75 DE=21 MR=5.4% Chart = ***** CLTR - Coulter Pharmaceutical $22.00 *** Stage I Speculation *** Coulter Pharmaceutical is engaged in the development of novel drugs and therapies for the treatment of cancer and autoimmune diseases. The company currently is developing a family of therapeutics based upon two drug development programs: therapeutic antibodies and targeted oncologics. The company's most advanced product candidate is Bexxar(TM), a monoclonal antibody conjugated to a radioisotope. The company's therapeutic antibodies program also includes an interferon receptor antagonist. Initial efforts in the targeted oncologics program are based on tumor activated prodrug and tumor- specific targeting technologies. Coulter intends to seek expedited Biologics License Application ("BLA") review and marketing approval for Bexxar while simultaneously pursuing clinical trials to expand the potential use of Bexxar to other indications. CLTR and SmithKline Beecham announced this week the start of Phase II multicenter investigational trial of Bexxar in combination with CHOP chemotherapy as a first-line treatment of patients with intermediate-grade non-Hodgkin's lymphoma. The U.S. Patent office also issued another patent relating to CD20 antibody therapy for the treatment of lymphoma. Coulter continues to form a stage I base with support above the sold strike. A conservative but speculative entry point - do your research. AUG 17.50 QCE HW LB=5.00 OI=10 CB=17.00 DE=21 MR=4.3% Chart = ***** FRNT - Frontier Airlines $18.44 *** Blue Sky Territory? *** Frontier Airlines is a scheduled airline that currently operates routes linking its Denver hub to 22 cities, spanning the nation from coast to coast. Frontier has a fleet of 24 leased jets, including seven Boeing 737-200s and 17 larger Boeing 737-300s. Frontier's June traffic results showed promising gains in both Revenue passenger miles (up 31.9%) and Available seat miles (up 20.5%), and was the first month Frontier carried in excess of 250,000 customers. Investors have shown their support by lifting Frontier to the very brink of Blue Sky Territory as they speculate on next Months earnings report. Frontier is maneuvering to take advantage of next summer's heavy travel period by taking early delivery of two Airbus aircraft. We simply favor the stage II bullish chart that is defying the current Market conditions. Regardless, a failure to "fly" higher in the next few days may warrant a test of support - which is just below our cost basis. AUG 17.50 FUO HW LB=1.50 OI=164 CB=16.94 DE=21 MR=4.8% Chart = ***** GPX - GP Strategies $5.81 *** Cheap Speculation *** GP Strategies is a performance improvement company that assists productivity driven organizations to maximize workforce performance by integrating people, processes and technology. Their wholly owned subsidiary, General Physics Corp., is a total solution provider for strategic training, engineering, consulting and technical support services to Fortune 500 companies, government entities, utilities and other commercial customers. No recent news but GP Strategies is rallying on heavy volume and possibly forming a double bottom? Does the name Millenium Cell (MCEL) mean anything? In December 1998, GPX contributed a battery technology group (four employees and the rights to its license) to Millenium in exchange for an equity ownership, a note payable and certain royalty payments. Guess when Millenium is expected to price? Next week! Cheap speculation with a reasonable cost basis with an underlying IPO angle! AUG 5.00 GPX HA LB=1.25 OI=485 CB=4.56 DE=21 MR=14.0% Chart = ***** NLCS - National Computer $58.13 *** New Trading Range *** National Computer Systems (NCS) is a global information services company providing software, services, systems and Internet-based technologies for data collection, management and interpretation. NCS was recently awarded a renewal of the Public Inquiry Contract by the Student Financial Assistance (SFA) office of the U.S. Dept. of Education. The contract value is expected to exceed $100 million over 5-1/2 years. NCS is positioned to take advantage of the Internet and recently designed and implemented the Free Application for Federal Student Aid web site that facilitates the application process for Title IV student financial aid. The SFA estimates that more than 30 percent of the 10 million financial aid applications it will receive in 2001 will be filed electronically. The technicals remain bullish though the stock is a bit over-bought, and a news blurb about errant test results in Minnesota may pressure the stock early next week. AUG 50.00 QEZ HJ LB=11.00 OI=466 CB=47.13 DE=21 MR=8.8% Chart = ********************************Advertisement******************** American Express® Cardmembers are buying online Find out more! http://click.linksynergy.com/fs-bin/stat?id=MH64V9Lgzgc&o fferid=13447.10000026&type=1&subid=0 ***************************************************************** ************************* NAKED PUT PERCENTAGE LIST ************************* Naked Put Percentage List By Ryan Nelson Stock Stock Strike Option Option Margin Percent Support Symbol Price Price Symbol Price At 25% Return Level AKAM 77.94 75 RUG-TO 5.50 1949 28% 75 AVNX 112.19 100 UYN-TT 6.38 2805 23% 103 BRCD 163.94 160 GUF-TL 11.00 4099 27% 160 CHKP 107.38 105 YKE-TA 7.00 2685 26% 100 CMTN 75.50 80 KUA-TP 9.00 1888 48% 75 DNA 149.00 145 DNA-TI 4.50 3725 12% 145 EXTR 129.94 125 EUT-TE 9.63 3249 30% 130 GLW 232.75 230 GRJ-TF 11.75 5819 20% 220 GSPN 110.69 110 GHY-TB 10.38 2767 38% 100 HWP 107.25 110 HWP-TB 7.25 2681 27% 104 INTC 129.13 130 INQ-TF 6.00 3228 19% 129 ITWO 121.38 120 QYJ-TD 8.63 3035 28% 120 JNPR 134.50 130 JUY-TF 8.25 3363 25% 127 MUSE 120.63 120 UZQ-TD 10.88 3016 36% 103 NTAP 85.00 85 NUL-TQ 7.25 2125 34% 80 PHCM 75.75 75 UGE-TO 6.13 1894 32% 70 PVN 103.63 100 PVN-TT 3.00 2591 12% 100 PWER 128.25 125 OGU-TE 9.50 3206 30% 120 QLGC 74.13 75 QLC-TO 7.13 1853 38% 70 RBAK 121.50 120 BKK-TD 9.75 3038 32% 118 RMBS 70.91 65 BYQ-TL 4.00 1773 23% 65 SDLI 321.06 320 QJV-TD 21.50 8027 27% 300 SEBL 136.44 135 SGW-TG 10.88 3411 32% 138 SEPR 108.69 110 ERU-TB 8.38 2717 31% 102 TIBX 94.69 95 PIW-TS 7.38 2367 31% 90 TLGD 111.94 110 TQK-TB 12.38 2799 44% 110 VRSN 160.75 160 XVR-Tl 11.88 4019 30% 158 VRTX 98.88 100 VQR-TT 6.50 2472 26% 97 *********************** CONSERVATIVE NAKED PUTS *********************** Trading Plans: Rules for success... By Ray Cummins One of the most difficult skills new traders must develop is the ability to follow a trading plan. At first glance, it seems like a relatively uncomplicated proposal. The initial stage is easy, outline a trading system; a specific approach that requires you to make decisions based on a particular mechanism or strategy for managing positions. The next phase, executing the plan, is where the trouble begins. In fact, many experts believe that this step can be one of the biggest obstacles to overcome when learning how to trade profitably. Almost everyone agrees that precision and consistency are absolutely necessary in any successful system but few people realize how difficult it is to follow a pre-determined plan when the elements of fear, hope and greed enter the equation. We all begin with the best intentions, knowing that a mechanical and disciplined method is the easiest way to achieve profits on regular basis. Somewhere along the way, we become sidetracked. News and outside events conspire to derail our scheme at almost every opportunity. Of course we know that allowing the market to make the trading decision is much more precise than relying on our complex human intuition. Unfortunately, the pressure of the moment is often too great and we find ourselves changing designs prematurely, usually eliminating any opportunity for a profitable outcome. The problem is a common one. New investors generally begin with a great work ethic and most have a relatively worthy idea of how they expect to manage a particular issue. Then they get diverted by an unexpected event such as an analyst upgrade or a news story about the outlook for the company or its products. At that point, a change occurs. But it's generally not in the company or its fundamental condition. In reality, the change takes place in the mind of the trader; an adjustment in perception as opposed to a physical alteration. Anyone who has participated in the stock market will recognize this unwanted transformation as a universal weakness that occasionally overwhelms all traders. The primary reason for this occurrence is lack of discipline. The need for instant gratification prevents the majority of investors from exercising the patience necessary to be successful. We all know that surviving the "learning curve" to eventually profit in the market is not easy, but too many people quit after a few losing plays, long before they have time to develop the various skills required for profitable trading. Obviously, while it is important to execute the plan precisely, it is also essential to remain flexible and be ready to change one's direction or strategy when the need arises. This concept may appear contradictory but it makes perfect sense when the change in tactics or attitude is based on a revised outlook, either technical or fundamental, for the underlying issue. In any type of financial market, the conditions are constantly changing and to be successful, a trader must adapt accordingly. New trends and unexpected economic events must be interpreted with an open mind and adjustments should be initiated only after considering all the facts at hand. Once the rules are understood and a personal strategy is defined and tested, the mechanics of the game become relatively simple. The key is to remember that the primary goal of every system is to limit losses and maximize profits. Next week we will discuss one the most popular ways to improve consistency with entry and exit decisions: the trading stop. 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 HLYW 8.94 7.94 AUG 7.50 0.50 *$ 0.50 20.6% GSTRF 10.56 8.25 AUG 7.50 0.56 *$ 0.56 18.2% ZIXI 55.00 40.13 AUG 40.00 1.63 *$ 1.63 14.0% NFLD 17.50 15.38 AUG 15.00 1.00 *$ 1.00 13.2% ATMS 11.44 8.75 AUG 7.50 0.31 *$ 0.31 13.0% WSTL 25.19 23.50 AUG 20.00 0.81 *$ 0.81 12.0% PSFT 21.88 20.88 AUG 17.50 0.44 *$ 0.44 9.9% WSTL 28.50 23.50 AUG 20.00 0.56 *$ 0.56 9.7% RAZF 22.25 17.78 AUG 17.50 0.56 *$ 0.56 9.7% ICGE 39.94 32.06 AUG 30.00 0.75 *$ 0.75 9.3% RHAT 25.31 18.19 AUG 17.50 0.38 *$ 0.38 7.6% MRVT 22.63 21.25 AUG 17.50 0.50 *$ 0.50 7.2% NXLK 39.69 33.00 AUG 30.00 0.75 *$ 0.75 6.3% INFS 37.00 34.75 AUG 30.00 0.50 *$ 0.50 5.2% SQST 14.00 9.63 AUG 10.00 0.50 $ 0.13 3.4% PILT 17.81 12.00 AUG 12.50 0.50 $ 0.00 0.0% BLSW 32.88 20.88 AUG 22.50 0.56 $ -1.06 0.0% *$ = Stock price is above the sold striking price. Comments: The overall "Market" continues to act worrisome and all current positions should be monitored closely in this horrid environment. With many of the portfolio issues entering a correction phase, choosing to own them will depend on your risk-reward tolerance and long-term outlook. Consider closing the following issues if they continue to weaken and/or violate technical support areas: Zixit (ZIXI), Northfield Labs (NFLD), Tidel Tech (ATMS), Pilot Network (PILT), Sciquest.Com (SQST), and Bluestone Software (BLSW). 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 ADPT 24.00 AUG 20.00 APQ TD 0.31 596 19.69 21 7.6% DRMD 5.75 AUG 5.00 DUQ TA 0.31 35 4.69 21 24.1% GELX 28.56 AUG 25.00 GQX TE 0.38 45 24.62 21 6.7% JEF 26.56 AUG 25.00 JEF TE 0.50 0 24.50 21 7.6% NLCS 58.13 AUG 40.00 QEZ TH 0.88 40 39.12 21 10.2% R 21.25 AUG 20.00 R TD 0.88 316 19.12 21 15.7% THC 31.19 AUG 30.00 THC TF 0.81 65 29.19 21 9.7% Sequenced by Return ****** Stock Last Put Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return DRMD 5.75 AUG 5.00 DUQ TA 0.31 35 4.69 21 24.1% R 21.25 AUG 20.00 R TD 0.88 316 19.12 21 15.7% NLCS 58.13 AUG 40.00 QEZ TH 0.88 40 39.12 21 10.2% THC 31.19 AUG 30.00 THC TF 0.81 65 29.19 21 9.7% ADPT 24.00 AUG 20.00 APQ TD 0.31 596 19.69 21 7.6% JEF 26.56 AUG 25.00 JEF TE 0.50 0 24.50 21 7.6% GELX 28.56 AUG 25.00 GQX TE 0.38 45 24.62 21 6.7% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MR-Monthly Return. ***** ADPT - Adaptec $24.00 *** On The Rebound! *** Adaptec supplies bandwidth management solutions designed to enhance total system performance by increasing the data transfer rates between personal computers, servers, peripherals, and networks. They produce bus adapter boards and chips toward this end, and also market optical media software for CD-R and CD-RW. Adaptec has been edging higher since the California maker of CD recording software offered an improved business outlook in a recent presentation at a conference in San Francisco. The demand for their products is strong and company officials anticipate favorable revenue growth through the second half of the year. Bullish comments from an analyst with Robertson Stephens have also helped spur interest in the issue and we favor the improving technicals and low risk entry point. AUG 20.00 APQ TD LB=0.31 OI=596 CB=19.69 DE=21 MR=7.6% Chart = ***** DRMD - Duramed $5.75 *** Cheap Speculation! *** Duramed Pharmaceuticals develops, manufactures, and markets a line of prescription drug products in tablet, capsule and liquid forms throughout the United States. Their products are sold to a wide variety of organizations, including drug store chains, hospitals, nursing homes, and governmental agencies. Duramed recently reported favorable results for the past quarter with record sales, up 25% from the first quarter of 2000, and gross profits that increased 63% from the previous quarter. The company cited a strong, balanced performance with contributions from the family of Cenestin (R) products, the flagship drug of Duramed's long-term commitment to hormone problems. The company is also continuing to monitor a number of business activities that may improve its working capital position and expects to place heavy emphasis on partnering high-profile projects. The issue appears to rebounding technically and the recent support near $5 makes this a reasonable speculation position. AUG 5.00 DUQ TA LB=0.31 OI=35 CB=4.69 DE=21 MR=24.1% Chart = ***** GELX - GelTex $28.56 *** Excellent Earnings! *** GelTex Pharmaceuticals is focused on the development of non- absorbed, polymer-based pharmaceuticals that selectively bind to and eliminate target substances from the intestinal tract. Their leading products include Renagel Capsules and Cholestagel. Shares of GelTex rallied earlier in the month after the company reported better-than-expected earnings and announced it had won government clearance to start patient testing of a potential treatment for colitis. The drug developer reported quarterly net income of $16 million, or $0.79 a share, well above the analysts' consensus of $0.41 a share. Total retail prescriptions for the quarter increased 18%, while new prescriptions rose 19% and sales of the company's Renagel product hit $10.2 million, a 27% gain over the first-quarter total. With a bullish fundamental outlook and favorable technicals, this appears to be a good candidate for any speculative portfolio. AUG 25.00 GQX TE LB=0.38 OI=45 CB=24.62 DE=21 MR=6.7% Chart = ***** JEF - Jefferies Group $26.56 *** On The Move! *** Jefferies Group together with its affiliated companies, is an institutional brokerage firm and investment bank focusing on research and capital raising services for small to medium sized companies. They trade in equity, high yield and convertible securities, options and international securities for institutional clients. The majority of U.S. brokerages have reported strong profit gains in the second quarter despite a recent downturn in the market. The results, driven by increases in profits from managing money and investment banking fees, marked the second-best quarterly results ever for industry. In addition, the recent consolidation in the group, led by the buyout of PaineWebber (PWJ), has spurred new interest in many of the potential merger targets. If you favor the bullish technical activity in this issue and like to participate in speculative plays, we suggest a "target-shooting" order to open this position. A reasonable cost basis would be near $24. AUG 25.00 JEF TE LB=0.50 OI=0 CB=24.50 DE=21 MR=7.6% Chart = ***** NLCS - National Computer $58.13 *** New Trading Range *** National Computer Systems (NCS) is a global information services company providing software, services, systems and Internet-based technologies for data collection, management and interpretation. NCS was recently awarded a renewal of the Public Inquiry Contract by the Student Financial Assistance (SFA) office of the U.S. Dept. of Education. The contract value is expected to exceed $100 million over 5-1/2 years. NCS is positioned to take advantage of the Internet and recently designed and implemented the Free Application for Federal Student Aid web site that facilitates the application process for Title IV student financial aid. The SFA estimates that more than 30 percent of the 10 million financial aid applications it will receive in 2001 will be filed electronically. The technicals remain bullish though the stock is a bit over-bought, and a news blurb about errant test results in Minnesota may pressure the stock early next week. AUG 40.00 QEZ TH LB=0.88 OI=40 CB=39.12 DE=21 MR=10.2% Chart = ***** R - Ryder System $21.25 *** Options Activity! *** Ryder primarily is engaged in the logistics and transportation business with focus on integrated logistics, including dedicated contract carriage, the management of carriers, and inventory deployment; and transportation services, including full service leasing, maintenance and short-term rental of trucks, tractors and trailers. Ryder shares have rebounded since the transport and logistics company reported second-quarter net income of $29 million, a 44% increase, driven by gains in the logistics units. Options prices and volume have also moved higher on "takeover" rumors and implied volatility for front-month options is at a recent high. Ryder is an old favorite in the rumor mill and one analyst commented that it was no secret that the company would be a highly valuable asset to a number of other corporations. AUG 20.00 R TD LB=0.88 OI=316 CB=19.12 DE=21 MR=15.7% Chart = ***** THC - Tenet Healthcare $31.19 *** Break-Out! *** Tenet Healthcare is a healthcare services company that owns or operates general hospitals and related healthcare facilities serving urban and rural communities in 18 states. THC has 130 general hospitals, and often has associated healthcare facilities, such as medical office buildings and psychiatric facilities, located in their general vicinity, thus providing many communities with a full range of healthcare services in one convenient location. Tenet Healthcare recently reported higher fiscal fourth-quarter earnings as robust revenue and pricing trends offset a smaller revenue base created by the sale of non-strategic facilities. The company was quickly upgraded to a "buy" rating, based on the out-performance of expectations in past quarters and momentum in confidence for fiscal 2001. THC is consistently making headway toward becoming a higher-margin, better cash-flow generating investment than in the past and the move above resistance at $28 suggests this issue is poised for further upside activity. AUG 30.00 THC TF LB=0.81 OI=65 CB=29.19 DE=21 MR=9.7% Chart = ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Option Trading Basics... By Ray Cummins There are many types of investors and no single strategy can work for all of them. With the recent volatility and indecision in the market, we have another great opportunity to take a break from trading and discuss some of the strategies that work best in uncertain times. There are many types of investors and no single strategy can work for all of them. By definition, trading is a risky venture but you know there are people who profit regularly in this business. What do these profitable traders have in common? As a group, they all conform to the same fundamental plan. They develop sound and sensible methods for participating in the market, using strategies that work best for each particular situation. They also acquire the proper tools for accurate analysis of their candidates and potential plays, and they construct positions with regard to the appropriate risk/reward attitude of their financial situation. There are a number of ways to be successful in the options market. The primary uses of options are speculating and portfolio hedging. Both of these practices involve the management of risk, with each strategy approaching the potential for loss in a different manner. Fund managers and institutional traders reduce risk by offsetting a portion of their holdings with option positions. Many of them purchase Puts to insure their equity portfolios while others use option writing strategies, selling both Puts and Calls to improve returns from their long-term investments. Speculative strategies include buying and selling options and in most cases, traders use these techniques to generate additional leverage in directional positions. Ownership of an option can produce large profits when the underlying instrument moves as expected and on those occasions when the forecast is incorrect, the loss is limited to the initial cost of the position. Another popular approach, spread (or combination) trading, seeks to produce option positions with less risk than the speculative strategies. The majority of spread techniques involve buying and selling simultaneous but opposing positions in different option series. Common spread strategies include Calendar Spreads, Price (or vertical) spreads, and various combinations of the two. The Calendar spread (also known as a horizontal spread) involves the purchase of an option with one expiration date and the sale of another option at the same price but a different expiration date. The philosophy for using calendar spreads is that time will erode the value of the short term option at a faster rate than it will the long term option. Traders who attempt to forecast the future direction of specific issues generally use price spreads. These positions consist of a long (purchased) option and a short (sold) option, where both options are of the same type (calls or puts) and expire at the same time. Vertical spreads are commonly used by investors who want to use options to take advantage of an expected market move. The benefit of this technique is that it is aptly suited to situations where the underlying issue's trend is relatively well established and option pricing concerns are of secondary importance. One of the most widely utilized "neutral" strategies is the Straddle. Debit straddles involve the purchase of both call and put options and the position benefits from a large movement in the underlying issue. Based on the size and timeliness of the move, the technique can generate large profits. In most spread and combination strategies, the returns are far smaller than those generated by speculative positions in exchange for reduced risk. The are two well-known benefits of derivatives. They can be used to generate exponential profits on correctly forecast movements and alter the risk of a portfolio. A trader who purchases calls can profit from an increase in the price of the underlying asset, while the maximum loss from buying the option is limited to the cost of the option. The potential gains in this type of position are limited only by the price change in the underlying instrument. Since the asset's price is the most important factor affecting an option's value, the success of directional strategies is based on the appropriate assessment of future market movement. Technical and fundamental analysis are typical procedures used to identify the direction and magnitude of movement in the underlying issue. Additional considerations with regard to option buying are time and leverage. Obviously, the major drawback for options is that they are a wasting asset; the intrinsic value of the option falls as the expiration date approaches. Timing is a critical concern with derivatives because the initial premium for time value can be larger than any profit resulting from favorable movements in the underlying instrument. In addition, the future potential or "implied volatility" of an option can be difficult to assess and that particular concept can be overwhelming for novice investors. The most common result is that a trader will correctly forecast the movement of the underlying issue but, having paid an excessive premium for the option, will eventually experience a loss in the position. Leverage is also a very important component of option trading as it allows an investor to achieve substantial profits with a relatively small cash investment. The most common failure among new traders is the inability to assess the suitability of a specific position in terms of its risk and profitability characteristics, and the basic lack of theoretical option-pricing knowledge. In addition, many novice option traders base their selection of plays on the potential for return rather than the appropriate position or strategy for each combination of market direction and volatility. Retail option buyers are a great example! They consistently purchase options that are slightly out-of-the-money with a relatively short time remaining before expiration. They generally avoid option pricing models due to their confidence concerning the future movement of the underlying issue and their distorted assumptions about profit potential. Most investors partake in the options market without paying much attention to Fair Value and Implied Volatility. As a result, they select overpriced options, often failing to profit even when they are correct about the change in the price of the underlying instrument. Options possess characteristics that differ from other financial instruments. These unique attributes provide option traders with advantages unavailable to the majority of market participants. Although the initial learning curve can be difficult to overcome, the evidence concerning spread trading suggests that a structured plan with strategies for limiting losses and maximizing gains can produce favorable portfolio growth in the long-term. The majority of experienced traders utilize spreads to reduce the cost and the risk of option ownership. They construct combination plays with partially offsetting option positions to reduce the potential for capital loss. Spreads can be also be designed to generate return diagrams of almost any character. For the investor who is not familiar with spread and combination strategies, this type of trading also offers a great opportunity to learn the basics in a low risk environment. The fundamental concepts are relatively easy to understand and once established, most positions can usually be managed with little difficulty. The occasional adjustments also provide the necessary background for more advanced techniques. Those who enjoy aggressive, directional trading can construct combination positions to fit their style as well. Although the potential for upside profit is reduced, the limited downside exposure provides a favorable risk/reward ratio for the majority of investors. The options market offers a number of tools and techniques that can help the astute trader construct a powerful portfolio; one which possesses a high degree of safety with consistent returns. Through the use of combinations, the trader has a vehicle to pursue a wide variety of strategies. The complete option player can profit with both bullish and bearish plays, in situations that dictate either aggressive or conservative positions. With an understanding of the risk/reward relationships between long and short options at different prices in varying time periods, he can benefit from the most advanced techniques available in the market. Good Luck! **********************ADVERTISEMENT****************************** FREE! FREE! 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