The Option Investor Newsletter Tuesday 08-01-2000 Copyright 2000, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with imbedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/080100_1.html Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 08-01-2000 High Low Volume Advance/Decline DJIA 10607.00 + 85.00 10626.90 10516.80 921 mln 1675/1179 NASDAQ 3685.52 - 81.47 3766.92 3682.45 1.33 bln 1677/2317 S&P 100 784.01 + 1.37 788.08 780.74 totals 3352/3496 S&P 500 1438.10 + 7.27 1443.54 1428.96 49.0%/51.0% RUS 2000 497.77 - 2.87 500.68 497.71 DJ TRANS 2875.44 + 17.35 2875.44 2843.72 VIX 22.87 - 0.57 23.90 22.63 Put/Call Ratio .56 ****************************************************************** Rocky markets confuse analysts? Just another fun day in the markets as investors moved out of tech stocks and into defensive issues. With stocks like CSCO, INTC, DELL, SUNW and ORCL all losing over -$2 it is surprising the Nasdaq was not farther down than it was. Clearly investors are moving into a defensive posture with big names like KO +1.69, EK +2.69, PG +2.25, DIS +1.44, MRK +2.44 posting decent gains at the expense of tech stocks. KO? EK? My trading software would not accept those symbols. It would probably lock up and refuse to execute until I had written permission from my doctor. The economic reports out today were mixed and leaned slightly toward the economic slowdown scenario. Personal Income gained +.4% and Personal Spending +.5%. Married readers will have no problem understanding those ratios. Spending always increases faster than income. The NAPM index came in at 51.8 and basically flat. The prices paid component however moved up again to 61.9 but analysts felt the rise was based on the high oil prices. Earnings are drawing to a close and there were only a few companies announcing. Most reported as expected and the excitement is quickly fading. Only a few big name companies are still left to report. One of those, CSCO, saw a huge attack on its stock today when someone (according to CNBC) purchased almost 56000 put contracts for a total of almost $6,000,000 in premium. Although this was reported by David Faber on CNBC the total volume for all CSCO put contracts today was only about 25,000 contracts. We may never know if it actually happened or not but the impact of the rumor and an announced purchase of IPmobile for $425 million in stock contributed to the -2.25 for the day. We all know this does not mean that everyone is expecting CSCO to drop. There could be a large crowd that is selling covered puts expecting CSCO to go up after earnings. Volume alone does not mean anything. The 56000 contracts could have been part of a spread transaction as well. Still, when the transaction was made public there was a ripple through the tech sector with speculation of a possible problem with the coming CSCO earnings. After some of the earnings warnings for this quarter and missed earnings by some techs recently, any rumor can be detrimental to the market. We are definitely not seeing a pre-earnings run on CSCO. Dell is another company that announces in mid August. With the recent news of possible soft computer sales Dell has fallen from almost $55 to a six month low of $41.56 today. There is no good news in the wings it appears or the stock would have shown more strength in the face of these rumors. Has the Michael Dell magic charm worn off or is it just a reality check by investors? More than likely it is final acceptance that a 50% annual growth rate cannot last forever. The Internet bloom is fading and people are learning they can live with their existing computer model for more than one year. I know many people who surfed daily in the past and now don't even turn on their computers for weeks. Hard for them to justify that new 1000mhz PC. The bright spot in the market today in my opinion was the biotech sector. Riding the PDLI earnings wave today the gains for many were impressive. ONYX Pharmaceuticals (ONXX) also helped the sector with news of successful tests on their anti-cancer drug. HGSI +8.88, INCY +8.63, PEB +7.01, CRA +5.38, IMCL +4.50, DNA +4.25. Those stocks represented half of the total stocks that finished in the green on my watch list of over 100 stocks. Yes, the NYSE advance/declines were positive with 88 new highs and only 40 new lows but the Nasdaq story was much different. The bottom of my watch list included the semiconductor stocks with the SOX resting on its 200 DMA and threatening to fall off the chart. RMBS -4.25, AMCC -13.19, GSPN, -9.12, BRCM -9.69, PMCS -3.81. The next group was split between Internet networking stocks, Ecommerce and software stocks. The major losers were CMTN -$7, EXTR -6.88, AKAM -7.50, SCMR -6, MUSE -7.50, VIGN -4.50, JNPR -4.01, BRCD -4. It was ugly, very ugly. I must have looked at over 100 charts and only saw 3 or 4 that were moving up. Most were losing ground at a high rate of speed. The major fear is the last year of rate hikes may be starting to impact earnings for tech companies. The old economy stocks are seen as buying opportunities after being hammered for big losses in the spring. The old economy stocks are also viewed as being less impacted by the rate hikes going forward. Personally I think it is just smoke and when the August correction is over the tables will turn again. Remember when the Nasdaq was up over +100 on Monday? The Dow barely broke even. It is simple rotation and once techs take off again investors will drop those +10% annual growth stocks for hot tech stocks with growth of 50% or better before you can say rally. All the market activity today was noise with the moves coming on very light volume. The Nasdaq only posted 1.3 billion shares and the NYSE 920 million shares. The lack of follow through on the tech rally on Monday was expected. Actually if you followed my suggestion on Sunday you profited from the early morning spike down to 3615 and the ensuing +150 point rebound to the 3765 close. Remember I said don't buy on the gap open but wait for a decent downward spike before taking a position on the expected relief rally. The trading rally we got was just like we scripted it. The next challenge is the new home sales report on Wednesday and then the nonfarm payrolls on Friday. There is a good possibility we could get another entry point before the Friday payroll report. Recently the market has rallied on the report regardless of the numbers. To trade this event you have to take a position on Thursday afternoon. We view this as a high risk play and should only be attempted with extreme risk capital. A strongly negative number in this interest rate wary environment could be very reactive. Whatever your outlook on the markets going forward we urge you to be very careful until a new trend is established. The cash drain on the markets is still alive and well with 46 of the 52 scheduled IPO or secondary offerings for this week still not in the market. As these are priced, and only three days are left, investors will be faced with too many targets and not enough cash. This is sure to cause continued volatility in the current market. Without a trend investors tend to jump in and out of stocks if it appears they guessed wrong and they do not want to buy and hold. Until this trading trend changes we will continue to see the market move lower. Many analysts are now calling for numbers as low as 3200 with the next support point being 3515. (right between my 3500-3550 from last Sunday) My informal sentiment poll consists of the dozens of traders in the office. When they are all in cash and are churning charts trying to find something to play when the market turns I think we are close to a bottom. If I multiply this "money burning a whole in their pocket" syndrome by the millions of investors I believe are in the same position then I can forecast a rally. We are not there yet but the cash is building on the sidelines in the office. It is a clear sign of a future rally. Now, hold that thought and your money! Over 150 readers attended the free one day seminar in Orlando today and were treated to a full day of information overload by Preferred Trade, DTN/IQ and OptionInvestor. We are having another free seminar day on August 8th in Dallas. Come be our guest for a free breakfast and lunch along with a presentation of the Preferred Trade execution system, the newest features of real time quote systems by DTN/IQ with a Nasdaq level two demonstration. Chris Verhaegh will fill your afternoon with trading strategies that will improve your profitability with both stocks and options. For more information: http://www.OptionInvestor.com/seminar/dtn Good luck and sell too soon. Jim Brown Editor **************** 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 ********************************Advertisement******************** Trade Options Online with an Established Expert! Mr. Stock has put over 20 years of experience into a site specifically designed for the most important aspects of your options trading. Our recognized, easy-to-use interface allows you to trade spreads, straddles and covered calls with one-mouse-click. Visit Mr. Stock today! http://www.sungrp.com/tracking.asp?campaignid=163 ***************************************************************** **************** MARKET SENTIMENT **************** Home, Home In The Range By Austin Passamonte Here we are again, stuck within the old familiar zone. It would be nice to break up or down from the pattern in place for many weeks now and that may happen soon. The relief rally everyone expected has appeared, of sorts. A lot of names we saw reaching towards recent or all-time highs are again looking like discounted bargains to itchy bulls. Seems like every pundit I hear or read believes the next downturn lies days away or less. We wouldn't be surprised with techs showing such weakness with rotation to defensive stocks verifying these fears. On a bright note, the daily Dow chart formed a decent "Morning Star" three-day pattern that usually a rally in prices. Again, we'll know shortly. We still hold the opinion that Friday's lows or deeper will be tested before a firm bottom in place. The VIX refusing to claim middle ground amplifies this belief. Friday's report should be the next of several potential market movers. Beyond that, we wouldn't be surprised to see a pre-FOMC rally as witnessed prior to the last three meetings, and still expect a sustained rally later in the year that will have us all enjoying profitable long plays. Until then trade with caution and keep an eye on those puts - they can turn lead to gold in a hurry! 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. Sat 7/29 close: 24.30 Tues 8/1 close: 22.87 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 (8/01) (8/03) (8/05) ************************************************************* CBOE Total P/C Ratio .56 Equity P/C Ratio .52 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 (8/01) (8/03) (8/05) ************************************************************** All index options 1.18 OEX Put/Call Ratio 1.13 OEX Maximum Open Interest Strikes/Contracts: Puts 790/6,451 Calls 800&810/5,253 Put/Call Ratio 1.23 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: (8/01) (8/03) (8/05) Overhead Resistance: (900 - 825)* 214.49* (820 - 805) 2.29 (800 - 780) .65 OEX Close: 784 Underlying Support: (780 - 765) 3.88 (760 - 740) 11.96 What the S/R measure indicates: Net open-interest ratios are firm directly below 760 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 the OEX remain between 760 and 820 unless extreme market movement breaks either barrier. Consider discretionary reversal trades near either benchmark if tested. 30-yr Bond: 5.73% Light, Sweet Crude, Barrel: $27.79 200 Day Moving Average (as of 7/25) The 200 DMA is widely considered the major benchmark for critical support in a market. DOW; 10,665 10,606 NASDAQ; 3,886 3,685 NDX; 3,613 3,521 SPX 1425 1438 OEX 767 784 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 5.73% 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. IPO's Numerous IPO's have been met with positive enthusiasm. 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 Several major indexes are trading below 200 DMAs with big-cap market leaders suffering. Third-Quarter Earnings Warnings A number of companies pre-warning slowed earnings later in the year are being met with extreme selling pressure. Energy Prices Prices are still too high. Ultimately this affects profit margins and inflation. August Crude closed $27.79 today. Seasonal energy patterns typically bottom by late summer, with recent technical & fundamental signs pointing to a market decline. 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 - Tuesday, August 1, 2000 Key Benchmarks Broad Market Last Support/Resistance Alert **************************************************************** DOW Industrials 10,606 10,400 10,950 SPX S&P 500 1,438 1,395 1,500 COMPX NASD Composite 3,685 3,400 4,150 OEX S&P 100 784 764 810 RUT Russell 2000 500 470 540 NDX NASD 100 3,609 3,400 4,000 MSH High Tech 966 890 1,075 BTK Biotech 623 560 700 XCI Hardware 1,445 1,360 1,580 GSO.X Software 398 370 455 SOX Semiconductor 955 880 1,140 NWX Networking 1,231 1,150 1,330 INX Internet 481 470 605 BIX Banking 547 525 575 XBD Brokerage 570 550 590 IUX Insurance 699 660 705 RLX Retail 855 835 910 ** DRG Drug 407 385 430 HCX Healthcare 840 800 855 XAL Airline 168 158 178 OIX Oil & Gas 282 264 304 Retail broke support and short covering provided a bounce on Monday for the broader market. XBD, IUX, DRG, HCX, XAL are those that haven't broken our support levels in the past three weeks. Raising support (XBD, IUX, XAL). Lowering Resistance (SPX, COMPX, OEX, RUT, NDX, BTK, XCI, SOX, NWX, INX, OIX) ************** TRADERS CORNER ************** Why Is The Summer Slower? By Mary Redmond As OIN readers and writers we had ample warnings about the expected summer slump we are now experiencing. For the last three years the Nasdaq has dropped significantly during the month of August. While the reasons may have seemed different each time, the statistical and psychological events which occur in the late summer generally follow a pattern. The gross tax revenues from businesses have been consistently slower during the summer quarter for the last several years. You can view tax statistics on the Treasury's web site at irs.gov, and the numbers can sometimes be give insight to the market. For example, the gross tax collections have nearly doubled from 1990. In 1990 total tax collected from individuals and corporations was $1,066,600 million. Last year the total tax revenue collected was $1,917,642 million. When you consider the increase in the amount of money earned by individuals and by businesses during the last decade, it is easier to understand why the stock markets have made such spectacular gains in the last decade. Last year the gross corporate income taxes increased by 7.8% in the fourth quarter of the year from slowing down in the summer quarter. The prior year they increased by 18%. Since alot of 401K money comes directly into the market as a percentage of payroll tax, the slower tax revenues can lead to slower fund inflows. At times the psychology of the market seems to be as important as technical and fundamental factors. For example, some market analysts have cited statistics showing the market hasn't gone down in any election year. Every election year so far has seen a market which rallied although the economic fundamentals were widely different in each decade. It seems likely that the reason for this phenomenon is largely psychological. Election years can stimulate feelings of patriotism, competitiveness and excitement about the future, all of which can stimulate the market. The market hates malaise, lack of news and a general sense of boredom sometimes even more than it hates outright bad news. In addition, when you understand the psychology behind certain technical chart patterns, they can become easier to recognize and more useful as tools. One of the most widely recognized chart patterns is a head and shoulders, which usually is a warning sign of what can be a precipitous drop. When you think about how you might act if a stock followed that pattern, you can understand why it can be a useful tool. For example, suppose you buy a stock at $10 and sell it at $12. If it went back to $10.5 you might buy back in and be happy to sell it if it went to $15. Then suppose you bought back in at $10 and watched it go up to $11 and then start to fall back below $10. How would you start to feel? Probably panicky, and anxious to get out. If you multiply that over millions of investors you can see what usually happens when this pattern occurs. An opposite of a head and shoulders top can be a double bottom. Many analysts have indicated that if we were to see a double bottom in the Nasdaq this summer it could precipitate a major fall rally. Think about how you would feel if the Nasdaq went near the previous low levels and then started to rise. Many investors might feel as if the rock solid bottom was around 3400 and that almost nothing could crash it below this level. We had a deluge of ipos hit the market today. Five new issues traded, SPWX, CVGP, VIRL, WMUX, and TRPH, raising over $200 million in total. However, the issues which have been priced to hit the market tomorrow and later this week are even bigger. AOLA plans to raise over $2.5 billion, and GS plans to raise nearly $4 billion. This is alot of stock to hit a weak market. The ipo market tends to be self correcting. For example, today only one of the issues traded at a premium of over 100%. The other four traded at or near the ipo price. If more ipos trade at a price near the offering, it is likely that the demand will decrease. It is often possible to profit from buying a put option on a stock which plans a major secondary. Secondary issues of stock will dilute the number of shares outstanding, which decreases the price in many cases. Of course, the overall trends of the market can impact your profit. In addition, underwriters are generally required to support the shares of the stocks they underwrite for a period of time. However, if you look at some of the stocks which have had large secondaries in the last few years, buying a put on these stocks shortly after the secondaries would have been profitable in many cases. Contact Support ****** So, What's the Market Trend? By Scott Martindale Waddaya do now, you ask? Watching this market is like watching Shaquille O'Neal dribble a basketball. Truly amazing. As options traders, we know we can make money whether the market goes up or down, and we also know that "the trend is your friend." So, what's the trend? Jim, Ryan, Buzz, Eric, and the gang take a crack at it each day, but who else can give us a clue? Allow me to share views (anonymously) from some of my favorite newsletter writers (a.k.a., gurus). Perhaps we can fit a least squares regression line to them. One analyst says this quarter has been the hardest stock market in most peoples' living memory. All the typical tools to project short-term price movements, including charting, earnings, momentum, & news, are proving totally inadequate. Every piece of economic data seems to be a surprise to the Street, such as GDP, earnings, and so on. He calls this a traders market, i.e., you should use stops to protect yourself. According to another, the Fed has finished raising interest rates and monetary policy is not tightening, helping our and overseas economies to grow. This should help push the value of the Euro and the yen back to par with the dollar. He says the market has bottomed and the "smart money" is flowing back into tech stocks. He expects a classic rising market during the first four days of the month, and believes August is a good month for the Nasdaq stocks. The big rally this fall will eventually leading to a Dow of 15,000 and a Nasdaq of 10,000 within a few years (with extreme volatility throughout). However, while many "e-stocks" will fall and never recover, the best "e-enabling" stocks will prosper. And yet another predicted a sharp pullback and sees further 40-50% downside here and "dead money" for 90-120 days. The last stocks to move down will be the optical networking and broadband understructure chips, which will have to give up 30-50% of their recent gains to complete the "capitulation selling." Last year, this occurred on August 15. By year-end, he says, the best "e- enabling" stocks will be up big time. Similarly, another analyst feels that business is good, but investor psychology is bad. He has been predicting a summer selloff of a modest extent, but not a bear market. He sees a small upturn this week because of the cash inflows from mutual funds, but then a likely sag in the weeks leading up to Labor Day, followed by the big fall rally. Finally, one believes that the lack of investor fear indicates that the market will wait for a spike in pessimism before sustaining a rally. Overhead technical resistance (such as heavy call open interest) remains, as does not-so-fearful market sentiment in the put/call ratio, Index of Bullish Market Opinion, and short interest activity. This must change prior to a sustained rally. My favorite charting service has reflected the technical confusion this year. Their views on the market keep changing as technicals move from good to bad. Overall, they believe this is still a market of individual stocks with good and bad chart patterns, not a bear market. They see a good chance the Dow's March low will be tested, possibly declining to the 1998 high (9244). However, the Nasdaq has shaken out and is probably in for a test of the May low only, with a worst-case return to last year's tops (2800), before starting the next cyclical bull. On the other hand, there are bearish analysts that worry P/E's are too high, interest rates are getting ready to surge, bank stocks will plunge 50%, and e-stocks will fail miserably. He expects a wave of bank failures due to high-risk real estate loans, excessive investment in derivatives, and too many internet venture capital deals. He recommends buying U.S. Treasuries, gold & silver, gold stocks, and medium-term puts on the Nasdaq and Financial Services sector. Not to be outdone, Bear B takes it even further. He predicts a collapse of the dollar and panic in the streets due to the heavy leveraging in all funds, including money markets. He recommends holding gold bullion and cash in your mattress, and buying futures contracts on gold, silver, yen and Deutsche mark, and selling contracts on the Nasdaq, S&P 500, and Dow indices. Like the first, he thinks good companies will be available for pennies on the dollar once the smoke clears. Wow - fear and greed sells. But if you look closely, my favorite bulls & bears are not that different in what they are predicting for short-term scenarios - just the magnitude is different. They all predicted a significant summer pullback, and some expect further declines (or worse). And they all believe we have a market of individual stocks, some of which will not survive, and others that will thrive, although they vary greatly on the eventual level of the market indices. As Jim says, what we have is "serious volatility and a directionless market. Without a trend in place it would be foolish to try and trade unless you are an accomplished day trader." And my recent experience says he's right, not to mention the fact that I hate having to baby-sit my positions all day in the first place. So, how do we play stock options in this environment? I've been trying to play both directions by holding medium-term puts on the indices as a hedge, while buying calls & puts for short-term plays on the technical bounces. I can't say I've been very successful on the few trades I've entered lately. Either I get whip-sawed out or the premiums erode away as the market flails around, although a few of the OIN plays I've watched without entering have done quite nicely without me, thank you. I hold no front-month calls at the moment, and I think I'll use the rally this week to buy August or September puts on some of the ugly charts when they rally and bounce off resistance. I'm waiting patiently for that "final capitulation" so I can sell naked puts on my favorites in a big way. scott@OptionInvestor.com ************************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 ************************************************************** ************* SECTOR TRADER ************* Resistance Encountered, Look for Decline By Buzz Lynn sectortrader@OptionInvestor.com Poor NASDAQ. . .one good day and one bad, but neither gave it a shove back over its 50 or 200-dma. Can you say "resistance"? Sure, we knew you could! Volume was weak on both days making investors hopes of a meaningful rebound short-lived. It simply means investors are not willing to commit to new positions as evidenced by their lack of buying interest. In front of more economic data, at the end of earnings season, not a mention the next FOMC meeting later in the month where the Fed could decide to raise rates again, who could blame them? There is a ton of uncertainty. Know someone who fits that mindset? Maybe you? Maybe all of us traders looking for a direction? Does this sound like a profitable time to trade? Some days, it just pays to go to the beach. That's what Jim means when he notes, "only trade when it is profitable to do so". You are likely better off sitting on your cash waiting for a profitable entry than trying to force a trade in an unprofitable environment. Success in option trading is all about good money management practices, not necessarily about picking the right company, though that certainly helps if you were in QCOM or JDSU last year. To that end, this may be a good time to study up on some basic strategies. Two excellent and easy reads can greatly enhance your likelihood of success if applied. So put McMillan On Options (by Larry McMillan) and Trading for a Living (by Dr. Alexander Elder) on your summer reading list. Both of these can be easily obtained through the OIN Bookstore. In the meantime, we still favor a flat to down sentiment on the OEX and QQQ over the next couple of weeks and plenty of plays to go with it. For those of you with PPH still on the radar, keep it there. The chart is moving up, but the underlying issues are pretty flat on volume - no commitment yet. Check out the continuing plays below. ************* Results ************* Index Last Mon Tue Wed Thu Fri Week QQQ NASDAQ-100 88.03 2.63 -1.38 0.00 0.00 0.00 1.25 HHH Internet 102.00 2.13 -1.31 0.00 0.00 0.00 0.81 BBH Biotech. 176.88 0.19 8.38 0.00 0.00 0.00 8.56 PPH Pharm. 101.38 -1.25 3.75 0.00 0.00 0.00 2.50 TTH Telecom. 68.50 0.75 0.50 0.00 0.00 0.00 1.25 IAH I-net Arch. 90.69 2.56 -1.69 0.00 0.00 0.00 0.88 IIH I-net Infr. 49.00 1.19 -2.44 0.00 0.00 0.00 -1.25 BHH B2B 41.38 2.13 -1.50 0.00 0.00 0.00 0.63 BDH Broadband 86.38 1.88 -1.25 0.00 0.00 0.00 0.63 SMH Semicon. 81.81 2.69 -2.81 0.00 0.00 0.00 -0.13 RKH Reg. Banks 96.19 -0.06 1.00 0.00 0.00 0.00 0.94 UTH Utilities 94.38 -1.50 2.38 0.00 0.00 0.00 0.88 ************** Updates ************** QQQ - NASDAQ 100 $88.03 -1.38 (+1.25 this week) Poor NASDAQ. As mentioned above, it hasn't been able to snap back over its 50 or 200-dma ($92.40 and $90.30, respectively for the QQQ). Volume too has been weak. There was simply no strength in the recovery attempt yesterday, which has yours truly scrambling to buy puts at the close on the last minute strength. Too bad I didn't get my order in fast enough. For those that did when QQQ smacked against resistance two minutes before the close, congratulations on a good entry. It simply did not make sense for the NASDAQ to be moving up on the strength of a few leaders while the OEX and DOW were falling across the board. QQQ ran predictably into $90 resistance both days making for good entries on the down side if you happen to playing straight puts. We wish we could say that it should move up form here. But the FOMC meeting in three weeks coupled with the end of earnings season, and peppered with economic reports in between should keep a lid on any upward movement and a strong arm on the downward side. If $87 can't hold, the next likely stop would $84. As the bollinger band expands, it's showing an increase in volatility too, which is a good thing for our long straddle play. Long Straddle: This play is all about waiting for volatility to expand the time premium value of our purchased options. The increasing Bollinger band tells us that volatility is on the rise. While the VIX helped confirm that on Friday, a small decrease back to 22.87 isn't doing much for it now. The good news is that the VIX as a measure of OEX volatility is not the same as NASDAQ-100 volatility. While there may be some relationship, they are not joined at the hip. We would look for the VIX to resume its upward course anyway. This play is predicated on three things though. First, we must be expecting a big move in QQQ over the next 30 days. Second, we must be buying cheap (relative to historic volatility) time premium in our options. Third, we must still have some time value left to sell back to the market if we are wrong in our assessment or condition #1. Thus we need to buy at least 90 days or preferably 120 days of time, which by definition means December strikes. Straddle: BUY CALL DEC- 86 QVQ-LH OI=1403 at $12.75 BUY PUT DEC- 86 YQQ-XH OI=1411 at $ 8.50 Net Debit = $21.25 or less BUY CALL DEC- 90 QVQ-LL OI=1870 at $10.75 BUY PUT DEC- 90 QVQ-XL OI=2301 at $10.38 Net Debit = $21.13 or less Strangle: BUY CALL DEC- 90 QVO-LL OI=1870 at $10.75 BUY PUT DEC- 86 YQQ-XH OI=1411 at $ 8.50 Net Debit = $19.25 or less Calendar Spread: Here's another one for a sideways to down market. In a calendar spread, we sell short-term calls against and underlying longer- term call, which is a substitute for owning the security. It ties up less capital, but we in this case, we don't want to get called out of the underlying position should the underlying security (QQQ in this case) rise above our short-term sold call strike price. So we cover by repurchasing the short position when a good part of the time value is shaken out of it. Ultimately, we would have the sold call expire worthless every month for three successive months thereby creating a "free" owned option. With the NASDAQ now cast sideways to down, you may want to wait for another dip to enter this position. If your stomach can handle it and you possess some good timing skills, you can leg in by purchasing the underlying option on a dip at or near support in a downward trading day, or sell the near term call at or near resistance on an upward trending day. Consider $84 as the next level of support; $90 as current resistance. Should $87 fail to hold, it would then become the next level of resistance. BUY CALL DEC- 86 YQQ-LH OI= 1403 at $12.75 SELL CALL AUG- 86 YQQ-HH OI= 217 at $ 5.13, ND = 7.63 or less SELL CALL AUG- 90 QVQ-HR OI= 6622 at $ 3.13, ND = 9.63 or less Long Puts Short and simple, we're still looking for continued weakness here given that the QQQ was unable to break back over its 50 and 200- dma ($92.40 and $90.30, respectively). Look for a bounce south of $90, or a move under $87 as place to target shoot your entry. The next support is at $84. Nothing right now that we can see on the horizon that would move QQQ above $90. This could be pretty short-term play, but in the meantime, enjoy the ride. At Resistance: BUY PUT AUG-90 QVQ-TL OI= 8262 at $4.88 SL=3.00 BUY PUT AUG-86 YQQ-TH OI= 9221 at $3.00 SL=1.50 BUY PUT AUG-80 YQQ-TB OI=10319 at $1.19 SL=0.50 Average Daily Volume = 22.01 mln ----- IAH - Internet Architecture $90.69 -1.69 (+0.88 this week) Hopefully, you have not entered this play yet as we in fact got a recovery yesterday and we have not yet broken under our entry level of $88.50, which was the 50-dma at the time. The 50-dma has since moved up to $90.46 and is still providing support (barely). That said, a breakdown under the 50-dma would quickly encounter support at $89. That is why it might be a good idea to still wait for a break under $88.50 to confirm the direction. Though their respective volumes were generally under their ADVs, CSCO, HWP, IBM, SUNW, and especially DELL applied most of the downward pressure. This may largely have been related to Bear Sterns announcement that they expected DELL to fall short of revenue estimates when they report on August 10th. Yet, CSCO may balance that out when they report on August 8th. We'll have to wait and see. But we don't expect tech stocks to "feel the love" from investors with Fed fears rearing up again. Technical indicators are still pointed down too. BUY PUT AUG-95 IAZ-TS OI= 40 at $4.75 SL=3.00 BUY PUT AUG-90 IAZ-TR OI= 68 at $2.38 SL=1.25 BUY PUT AUG-85 IAZ-TQ OI=110 at $0.88 SL=0.00 Average Daily Volume = 45 K ----- IIH - Internet Infrastructure $49.00 -2.44 (-1.25 this week) Well, the cat bounced to $51.50, but didn't make it to $53 and roll over. Yet, the sector is still displaying weakness. IIH was trapped for the last two days between $51.50 and $49. How about the dip to nearly $47 on Monday's open? Wasn't that a great entry? Unfortunately not. Remember, we never want to take a position during amateur hour since it can very often get us filled at the extreme high or low of the day. That's when market orders are still shuffling through the open and can cause wild gyration. Just look at the 10-min chart to see what we mean. IIH bounce off $47 back to $50 within 25 minutes. As Austin Passamonte has mentioned before, we really want to be looking at a 30-min chart. Some of us use a 10 or 15-min chart too and that's OK if you are trying to nail a short-term entry. Technically, $49 is pretty solid support and that's where IIH needs to break down in order for us to be happy with the entry. A bounce back down from $51.50 would also make a good entry. Many of the components, AKAM and VRSN, though crest-fallen from their highs, can still fall further. Only EXDS escaped red ink today on rumors only that it might be acquired. If IIH breaks under $49, the next stop is likely around $45. Wait for confirmation after amateur hour before getting in. BUY PUT AUG-55 IIH-TK OI= 56 at $6.75 SL=4.75 BUY PUT AUG-50 IIH-TJ OI= 31 at $3.38 SL=1.75 BUY PUT SEP-55 IIH-UK OI=185 at $8.25 SL=6.25 Average Daily Volume = 207 K ----- BDH - Broadband $86.38 -1.25 (+0.63 this week) this sector constantly undergoes the battle of the heavyweights. LU and NT make up nearly half the weighting of this sector. LU was the winner today, up $1 to $44.75 on strong volume. NT suffered a $2+ loss. QCOM, JDSU, AMCC, and SDLI also contributed to the downside. Technically, we are glad to see BDH continue to bump its head on resistance at the 50-dma of $88.09. Nonetheless, Support is strong at $85 and we have had good entry opportunities on a couple of bounced down from $88 as suggested on Sunday. That is can't get back over $88 is a good sign for this put play. Should the overall tech market continue down, thanks to the end of earnings season for many optical high flyers, we should see an eventual move down. Confirm the general market direction first. BUY PUT AUG-90 BDH-TR OI=31 at $6.00 SL=4.00 BUY PUT AUG-85 BDH-TQ OI=70 at $3.75 SL=2.25 BUY PUT SEP-90 BDH-UR OI= 3 at $8.25 SL=6.00 Average Daily Volume = 130 K ************** No Play ************** BBH HHH PPH BHH TTH SMH RKH UTH ************* DAILY RESULTS ************* Index Last Mon Tue Week Dow 10606.95 10.81 84.97 95.78 Nasdaq 3685.52 103.99 -81.47 22.52 $OEX 784.01 6.46 1.37 7.83 $SPX 1438.10 10.95 7.27 18.22 $RUT 497.77 10.42 -2.87 7.55 $TRAN 2875.44 88.56 17.35 105.91 $VIX 22.87 -0.86 -0.57 -1.43 Calls BRCD 174.44 14.69 -4.19 10.50 Dropped, quick profit GENZ 69.75 4.31 0.31 4.63 A win's a win, right? LEH 112.75 3.88 0.75 4.63 Lower volume move today IVX 52.00 0.81 2.69 3.50 New, unhindered moves AMGN 69.00 -1.44 4.06 2.63 New, SCMR 117.31 8.31 -6.00 2.31 Dropped, lazy run FRX 112.19 -3.25 5.19 1.94 Bucked the trend today COF 57.56 1.78 -1.03 0.75 Attractive entries HWP 107.88 1.94 -1.38 0.56 Could exceed estimates PVN 103.81 -1.69 1.88 0.19 ATON 127.13 2.94 -4.81 -1.88 Dropped, takeover lull NTAP 82.63 1.19 -3.56 -2.38 Dropped, broke 50-dma Puts AFFX 134.94 -7.97 -1.59 -9.56 Great entry opportunity MRVC 52.13 -0.63 -5.75 -6.38 New, fell below 50-dma AMD 66.88 1.50 -5.38 -3.88 New, a dip for this Chip TERN 51.19 -2.88 0.19 -2.69 Still in a funk CMRC 40.69 -0.81 -1.38 -2.19 Eight straight downdays EMLX 48.00 0.63 -2.00 -1.38 Earnings on Thursday GTW 54.19 0.06 -1.00 -0.94 Meager gains erased CMOS 41.25 0.75 -1.50 -0.75 Chip bears returned ELON 36.00 4.50 -1.13 3.38 Good bounce for entry ARBA 113.00 8.31 -2.94 5.38 How do you spell relief? VRTS 100.00 14.25 -1.94 12.31 Watch for profit takers PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** ATON $127.13 -4.81 (-1.87) The analyst praise we were looking for as a result of the proposed NT - ATON merger never transpired Monday. Several brokerages reiterated their respective Buy ratings on NT, but none of the analysts upgraded the stock nor did they raise earnings estimates. Many analysts said the buyout of ATON was necessary for NT to keep its competitive edge in the cutthroat fiber optic business. NT edged higher Monday along with the Tech sector, which lifted our ATON play. But, the lack of support from Wall Street combined with a weak Tech sector Tuesday has prematurely terminated our play. SCMR $117.31 -6.00 (+2.31) The bounce we had been looking for in SCMR came to light Monday morning with a little help from the Wall Street crowd. Dresdner Benson initiated coverage on SCMR with a Buy rating and set a $170 price target, which boosted the stock as high as $125. But the analyst praise was soon forgotten Tuesday as the Tech sector headed southward. For the most part, the Fiber Optic sector held up relatively well Tuesday, with modest losses in JDSU and GLW. However, the bids dried up for SCMR, which resulted in nearly a 5% drop. SCMR's losses accelerated into the close of trading in conjunction with a pick up in volume. The prospect of an earnings run is fading, which has prompted us to sell too soon. BRCD $174.44 -4.19 (-10.50) Did you take a ride on the pogo stick yesterday? As we had expected, BRCD got a nice oversold bounce from the $163 level yesterday morning. After the opening spike, the stock pulled back to give us another shot at an entry near $164 before embarking on a very pleasing $15 run. By the time the noon hour rolled around in New York, the buyers had bid the price as high as $179.88 and had exhausted themselves. After the stock drifted lower into the close yesterday, investor apathy (low volume) took its toll today and the price drifted lower all day today as well. The $3 recovery at the close isn't enough to keep our attention, so we'll call this one a quick success and take our money and run. NTAP $82.63 -3.56 (-2.38) After the beating that NTAP took last week, it barely stayed on our playlist this past weekend. The selloff looked overdone, and we kept the play for the bounce we expected to see in the stock this week. Rather than bouncing near the 50-dma ($83.19), NTAP continued south at the open yesterday, tagged $76.50 before heading higher. This provided a nice entry point for a quick bounce trade, but the stock couldn't hold up and fell back through the 50-dma today, closing at $82.63. The tone in the technology market is deteriorating and it looks like our play is getting ready to head further south. We don't want to tilt at windmills, and will put on our running shoes to head off in search of better plays. PUTS: ***** No dropped puts today. ********************************Advertisement******************** American Express® Cardmembers are buying online Find out more! http://www.sungrp.com/tracking.asp?campaignid=174 ***************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. 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The Option Investor Newsletter Tuesday 08-01-2000 Copyright 2000, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with imbedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/080100_2.html ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************** PLAY UPDATES - CALLS ******************** FRX $112.19 +5.19 (-1.31) FRX has been somewhat of a roller coaster ride yesterday and today, setting a low of $105.75. With that said, the stock still has its sights set on Thursday's intraday high of $114.50, breaking through resistance at the 10-dma of $108.16 and the 5-dma, currently $110.58. FRX found its feet and rallied to $111 on a strong volume move shortly after the open. The stock encountered intraday resistance at this level until a break through later in the afternoon. With a $2.00 rally in the last 40 minutes today that pushed FRX to its day high, the play is still intact as FRX continues to show bullish signs. For conservative traders, look for a move that convincingly drives the stock through today's high of $112.94. For those who are feeling more aggressive, look for bounces off of the 5-dma of $110. With three key economic indicators coming out at the end of the week which could re-ignite interest rate fears, make sure the buyers are present to continue this uptrend with strong volume. HWP $107.88 -1.38 (+0.63) In a continued push to be a premier Internet host, HWP said Monday that it had signed a multi-year deal to provide Genuity (GENU) with e-services and applications. Traders applauded the announcement, which carried HWP up to its 100-dma at $112. The stock fell victim to Tech sector weakness Tuesday, which sent HWP to support around the $108 level. Despite the on-again off-again Tech sector, HWP is positioned well for an earnings run in the coming weeks. In fact, several analysts recently suggested the possibility of HWP exceeding estimates when it reports on August 16th (inaccurately reported August 18th in Sunday's write-up). Richard Chu of SG Cowen recently had this to say about HWP, "The company is in solid shape to meet or beat investor expectations for the July quarter." The prospects for better-than-expected profits might begin to build and carry HWP higher. A bullish Tech sector might provide entry at current levels if HWP bounces off support at $108. For a more conservative entry wait for HWP to clear resistance at the pesky 100-dma, still at $112. COF $57.56 -1.03 (+0.75) It's having a rough time in these turbulent markets, but COF is continuing to trace higher highs. Not only that, the market indecision continues to deliver attractive entry points each time the stock touches the 10-dma (currently $55.56). After bouncing from the 10-dma last week, COF ran to a new 52-week high of $59.25 yesterday. Today's market weakness served up another entry point as profit taking set in for much of the day. This dropped the price to bounce at $55.75 (just above the 10-dma) before the stock moved up strongly into the close. Trading volume has been on a steady rise for the past week, and today's 2.2 mln shares more than doubles the stock's ADV. We are getting very close to COF's all time high of $60.25, and as long as buying volume remain strong, this level looks attainable. New entries should continue to materialize on bounces at the 10-dma, but make sure bulls keep the buying volume strong. LEH $112.75 +0.75 (+4.62) LEH shares were able to pick up some points even as the Dow was not able to hold its intraday gains on Monday. On Tuesday, the brokers shares were held in check, gaining just $0.75 on the day. The stock made a move through its 10-dma at $113.81, but was not able to hold it. This is a point to watch for adding to or taking new positions. Monday also saw the stock once again test support near $106, which held up nicely. Any future bounces off this support area may also be good entry points. TheStreet.com has an article written today talking about the beefed up research department put in place since the beginning of the year. The article also mentions in a subtle way that LEH is a takeover candidate. Today's neutral move was on lower volume at just 729K compared to an average of over 1 mln shares. PVN $103.81 +1.88 (+0.18) Shares of PVN took part in some profit taking last Friday and yesterday, but the stock has been able to maintain its upward trend line, which is near a 45 degree angle. The stock actually dropped below this trend line and below its 10-dma at $101.25 to open trading, but was able to start a nice intraday rally around 12:30 EDT. The move took the stock from support to resistance and closed near the high of the day near $104. Volume dropped off a bit, the third straight day of falling volume and something to take note of. On Monday, the stock's 12-month price target was raised at PaineWebber to $125 from $110, though they maintained there Attractive rating. A bounce off support near $100 would be a good possible entry point. Look for stronger volume as a sign of continued interest in the stock. GENZ 69.75 +0.31 (+4.69) GENZ shares took a bit of a dive early on Monday, reaching a low near $63 before finding its legs and rising by day's end to a price of $69.44. The overall volume on Monday was lagging a bit, not the greatest confirmation of a new trend, but a win's a win right? Today, the stock was pretty quiet, trading in range from $68.25-$71.25, and closing with a modest gain, but it was on increased volume over Monday. The $70 mark seems to be strong resistance as the stock has tried to close above this mark seven days during July and succeeding just once, which was last Thursday. This brief stay in the $70's resulted in a drastic dive on Friday. Look for volume to continue to rise and a break through $72.50 as a sign this stock is ready to roll upward. ******************* PLAY UPDATES - PUTS ******************* ARBA $113.00 -2.94 (+5.38) How do you spell relief? For investors of B2B stocks, the answer is A-R-B-A. After last week's deep sell-off in all things tech, ARBA has found some strength so far this week. On Monday, ARBA moved lower during amateur hour, testing the psychological $100 level. Finding a bottom at $102.38, buyers spent the rest of the day bidding the stock up to close at $8.31 on higher-than-average volume. Today, with news of an 18-month licensing agreement with Lucent Technologies, one would expect ARBA to rally strong. Instead ARBA chose to move lower with the NASDAQ on only 63% of ADV. Looking at the technicals, ARBA has still not closed above its 5-dma ($114.85). In addition, ARBA is having difficulty with a light resistance level at $117. Combine that with a lack of follow-through despite good news and the picture looks intact for our put play. Look for failure to rally above its 5-dma or $117 to provide for an entry point with additional resistance at its 10-dma at $120. Below that support can be found at $110, $107, and $100. As ARBA continues to move in step with the NASDAQ, make sure the market forces are in your favor before entering. VRTS $100.00 -1.94 (+12.31) After losing almost 20% of its value last week, the bargain hunters just couldn't resist and on Monday they came in force, bidding the stock up $14.25 on higher-than-average volume. In doing so, VRTS closed above its 5-dma for the first time in almost two weeks. Today, VRTS took a moment to pause, trading on low volume to close right on the psychological century mark. News of an alliance with Data General, a division of storage leader EMC, failed to excite investors to rally above its 200-dma, currently at $102.41. It is interesting to note that aside from the first two hours of Monday's trading, VRTS has traded in a narrow range between $97 and $102 on low volume. There seems to be a lack of conviction on the buy side despite good news and it appears that the bargain hunters have had their fill. This is just what us put players want to hear. Rallies that fail to break resistance at $103, its 10-dma at $105, and $110 are targets to shoot for entry into this put play. These past couple of days have seen the 5-dma ($98.50) provide support. A break through that level could send the stock to $95 and from there to $90. This would provide a more conservative entry. VRTS continues to move in sympathy with the NASDAQ so confirm entry points with index movement before making a play. AFFX $134.94 -1.64 (-9.56) Did anyone capitalize on the great entry points on this play yesterday and today? Although AFFX seemed to be regaining ground during the session, it has hit lows throughout yesterday and today, giving us some great opportunities. AFFX has fallen through all technical support levels both yesterday and today. The stock opened Monday at $145, which was already below the 5-dma of $150.425. It then proceeded to lose ground, hitting a low of $133.38 on the day. After hitting a high of about $143 on Monday, the stock settled in between $136 and $138. Hopefully, some were able to capitalize on that spike as a good entry point to the play. Today, AFFX was trading in positive territory on news concerning their first launch of a Genechip that can be used in agricultural research. The stock spiked up to $144.88 right after the open, giving a beautiful entry point. After teetering at $140 all day, the stock accelerated to the downside on heavier volume, closing just an eighth off the low. The stock is still well below all technical support levels. Look for an entry on bounces up to $140, with a strong volume rollover. If the stock moves through $140, the 5-dma at $144.85 may offer resistance and entry. As always, with a stock like AFFX, keep your eye on both the Biotech sector and the NASDAQ for overall sentiment. CMOS $41.06 -1.69 (-0.94) The Philly Semi Index ($SOX) ended its two days of recovery Tuesday, which placed undue pressure on shares of CMOS. The stock bounced off support at the $42 level Monday morning with help from the strength in the broader Chip sector. But, the Chip bears returned early Tuesday to sell CMOS below support at $42. The stock bounced off the $40 level, which has proven to be strong support. The continued rotation out of the Semi sector might weigh heavily enough on CMOS to take the stock below support at $40. Volume continues to remain at healthy levels, which might suggest the Semi-sellers are not quite finished with their work in CMOS. If the Chip sector falls under selling pressure again Wednesday morning, look for an entry into the play if CMOS falls below $40. An aggressive trader might consider entry if CMOS rallies, then subsequently rolls over after hitting resistance at $42, or near its 5-dma at $43. GTW $54.19 -1.00 (-0.94) GTW floated higher off support at $55 Monday along with the return of the Tech bulls. But, the bears returned Tuesday to erase GTW's meager gains from the day prior. The company said Tuesday that it was launching a $100 mln program to help consumers unlock the power of their PCs. The news was overshadowed by a research note released by Bear Sterns later in the day, warning clients that DELL might fall short of second-quarter revenue estimates. The bearish comments on DELL spread throughout the PC sector, which ultimately prompted a rollover in GTW. The warnings of even slower growth was the last thing the beleaguered box makers needed Tuesday. GTW traced a lower low in its descending channel and fell below its crucial support level at $55. In light of the bearish comments on DELL, you might consider entering the GTW play at current levels. The stock has help around the $52.50 level, but no major support until $50. Confirm direction in the sector before entering the play. EMLX $48.00 -2.00 (-1.38) Still refusing to make up its mind whether it wants to go up or down, EMLX has barely moved this week. Volume is continuing to fall off as prices meander in a $4 range. The 5-dma (currently at $50.25) is continuing to exert downward pressure as the stock is finding tenuous support at $46 in advance of the company's earnings announcement set for Thursday after the close. Investors have stayed on the sidelines the past 2 days, not knowing which way to go, and we can see the effect in the trading volume. Only 30% of the ADV on yesterday's slight recovery and 40% of the ADV today. It's hard to stay awake watching this sort of chart, much less make money. Although the lack of price action makes the options relatively cheap, wait for some definitive action to initiate new positions. Your best entry will come from a rollover near the 5-dma, which is backed up by historical resistance at $51. If the bears come out of hibernation and crank up the selling volume, consider opening new positions as the price falls through support at $46. CMRC $40.69 -1.38 (-2.19) Not even another business deal, this time with CACI, could help move this falling Internet stock to the upside. The agreement with CACI will have CMRC providing its Buysite enterprise software to help CACI provide a E-commerce solution for the public sector and federal market. Nonetheless, CMRC shares fell for the eighth straight session. This alone should be a caution sign for new put buyers and current holders. Nothing moves in a straight line forever and on top of this, CMRC is now sitting right above strong support at $40. Along with support, the stock technically looks extremely oversold and we could see the stock experience a bounce of some sort. To enter a play at this point, watch for CMRC to fall through its support line with increasing volume. The stock's volume has been declining for the last week, another sign that sellers are becoming harder to find. TERN $51.19 +0.19 (-2.69) This fast growing tech stock continues to be in a funk, dropping nearly $3 on Monday before closing pretty flat on Tuesday. Volume on Tuesday was extremely light at just 893K shares traded. This is peculiar considering TERN announced plans to buy Mainsail Networks for an estimated $164 million. Stochastics and MACD still are showing bearish signs, so watch for either a break of support near $50 or a bounce back from short-term resistance at $55 as possible entry points. Stronger resistance sits near $59, the site of the stocks 5- and 10-dmas. ELON $36.00 -1.13 (+3.32) ELON went on a bit of a run on Monday and early Tuesday, not what we want to see for a put play. The reason for the move was an announcement by ELON that they would be partnering with NTT Data to provide LonWorks training in Japan. The move took ELON to a high of $40.50 today before cooler heads prevailed and it started a decline at 2:30 EDT that took the stock to its low and close for the day at $36. The fact the stock could not hold its gains and also could not stay above its 10-dma at $37.89, tells us it may have more room to fall. Yesterday's bounce was a good entry point for puts. Volume was about equal to Monday's, negating the stocks strength from yesterday. Watch for a possible bounce back from the 10-dma as an entry point though taking positions at current level could be profitable, considering support isn't until $32. ********************************Advertisement******************** American Express® Cardmembers are buying online Find out more! http://www.sungrp.com/tracking.asp?campaignid=175 ***************************************************************** ************** NEW CALL PLAYS ************** IVX - IVAX Corporation $52.00 +2.69 (+3.50 this week) IVAX Corporation, headquartered in Miami, Florida, is a holding company with subsidiaries engaged in the research, development, manufacture, and marketing of branded and generic pharmaceuticals in the U.S. and international markets. IVAX also has subsidiaries specializing in veterinary products, diagnostic products, and nutraceuticals. The company and its subsidiaries employ approximately 3,700 in 13 countries throughout the world. IVAX and its subsidiaries focus primarily on branded and generic pharmaceutical products. Someone forgot to tell IVX that the market has been trendless at best lately. Someone also forgot to tell IVX that even after topping the highest of analyst expectations, that stocks are supposed to sell off. Or perhaps IVX has something to say and investors are listening and liking what they hear. After reporting earnings last Thursday on July 27th, the stock has continued higher, its steady progress unhindered and oblivious to the broader market. Pharmaceuticals have been strong in light of the recent weakness in tech stocks, but even amongst its peers, IVX stands out as a tower of strength. With net revenues of $184.7 mln compared to $154.3 mln from a year ago and an increase in income from continuing operations of 145.7% from last year, IVX posted earnings of 19 cents per share, easily crushing both the Street consensus of 13 cents per share and the whisper number of 14 cents. This marks the seventh quarter in a row that IVX has beaten the Street consensus and in doing so, has come in at least 35% ahead of expectations. Add to that recent announcements of dismissed lawsuits against the company and a revenue-generating licensing agreement, and it's been a nice steady ride up for investors. Technically, the chart looks beautiful. Rarely touching even its 10-dma at $47.80, entry points have been abundant on bounces off the 5-dma, now at $49.50. Today saw the stock break through the psychological $50 mark on higher than average volume and making a new all-time high. This leaves nothing but blue sky to the upside for IVX with support at its 5- and 10-dma. After today's strong move, look for a bounce off the moving averages or $50 as a target for entry. Aside from its Street-beating earnings report last week, shareholders were greeted with more good news yesterday as the FDA gave the company tentative approval for doxazosin mesylate, a drug for benign prostatic hyperplasia and hypertension. Along with this were bullish comments from president and CEO of IVAX subsidiary Zenith Goldline Pharmaceuticals who remarked that, "With the tentative approval of doxazosin mesylate, Zenith Goldline has received five final and three tentative approvals so far this year, with 24 additional ANDAs pending at the FDA. As previously indicated, we expect to file 24 additional ANDAs during the remainder of the year." BUY CALL AUG-45 IVX-HI OI=205 at $8.00 SL=5.75 BUY CALL AUG-50*IVX-HJ OI=380 at $3.75 SL=2.00 BUY CALL AUG-55 IVX-HK OI= 1 at $1.38 SL=0.75 BUY CALL SEP-50 IVX-IJ OI=348 at $5.63 SL=3.50 BUY CALL SEP-55 IVX-IK OI= 36 at $2.94 SL=1.50 Picked on August 1st at $52.00 P/E = 78.27 Change since picked +0.00 52-week high=$52.88 Analysts Ratings 5-4-0-0-0 52-week low =$ 9.63 Last earnings 07/27 est= 0.13 actual= 0.19 Next earnings N/A est= 0.24 versus= 0.19 Average Daily Volume = 942 K AMGN - Amgen $69.00 +4.06 (+2.63 this week) Amgen makes and markets therapeutic products for hematology, oncology, bone and inflammatory disorders, and neuroendocrine diseases. Anti-anemia drug Epogen and immune system stimulator Neupogen account for about 95% of sales. The company has a pipeline of promising drugs in various stages of development. Amgen has research and marketing alliances with several companies, including Hoffman-La Rouche and Johnson and Johnson. Been looking for a bounce back in the Biotech sector? AMGN is poised to lead the way. The Biotech sector has recently been consolidating its massive gains from earlier in the year, but many on Wall Street are expecting the group to move substantially higher into the fall. That's because many companies, including AMGN, are expected to report developments on major drugs in the proverbial pipeline. For its part, AMGN is expected to report progress on an arthritis drug it has been developing known as Interlukin. What's more, AMGN just reported impressive second-quarter earnings that surpassed estimates by a penny. During its conference call, AMGN told analysts that sales of its flagship product Neupogen would improve into the end of the year. The news of improved sales prompted a host of analyst praise. CIBC World Markets reiterated its Buy rating and set a $77 price target, and CS First Boston reiterated its Buy rating and added a $105 target price. It would appear the typical post-earnings sell-off has run its course, which might set AMGN to retest its recent highs in light of the bullish outlook for the Biotech sector. The stock has fallen from its 52-week high in the last two weeks, in part from profit taking, and the earnings sell-off. AMGN stabilized at support near $65 in the last two days, and bounced from that level Tuesday. Volume came in over 2 mln shares more than the ADV, which was convincing given AMGN's 6% gain. Look for an extended bounce Wednesday morning, and consider entry if AMGN clears resistance at $70 on increased volume. A more conservative entry might be found if AMGN can rally back above $72. It was announced Monday that the three-year trial between AMGN and Transkaryotic Therapies (TKTX) would recess until later in September. AMGN brought about the lawsuit to defend its patents on Epogen. The case is considered crucial for future Biotech patent law and for the control of the $4 bln market for Epogen. Although the trial is watched closely, it should move to the back burner for the time being and relieve AMGN of undue pressure. BUY CALL AUG-65*YAA-HM OI=3534 at $5.88 SL=4.00 BUY CALL AUG-70 YAA-HN OI=3399 at $2.75 SL=1.50 BUY CALL AUG-75 YAA-HO OI=6772 at $1.13 SL=0.00 BUY CALL SEP-70 YAA-IN OI= 845 at $5.00 SL=3.00 BUY CALL OCT-75 YAA-JO OI=5185 at $5.25 SL=3.25 Picked on August 1st at $69.00 P/E = 65 Change since picked 0.00 52-week high=$80.44 Analysts Ratings 11-11-5-0-0 52-week low =$37.00 Last earnings 06/00 est= 0.27 actual= 0.28 Next earnings 10-20 est= 0.28 versus= 0.25 Average Daily Volume = 7.03 mln ************* NEW PUT PLAYS ************* MRVC - MRV Communications $52.13 -5.75 (-6.38 this week) MRV Communications is in the business of creating and managing growth companies in optical technology and Internet infrastructure. The company has created several start-up companies and independent business units in these areas. MRVC's core operations include the design, manufacture, and sale of products in these areas, primarily Network Element Management, and physical layer, switching and routing management systems in fiber optic metropolitan networks. The company also produces fiber optic components for the transmission of voice, video and data across enterprise, telecommunications and cable TV networks. We hope you didn't hold this one over earnings! After running up over 200% between the end of May and mid-July, MRVC ran out of steam in the week before earnings and began to roll over ahead of the company's results, announced on July 27th. Confirming the pattern of selling off after earnings, MRVC's decline has been exacerbated by missing estimates by a penny. Although the number is small (2 cents reported vs. 3 cents estimated), that is a 33% disappointment and the stock has been declining ever since. Last Friday, it looked like the 50-dma might provide some support, but the higher opening yesterday had no staying power, and the remainder of amateur hour was truly ugly. MRVC touched $53.38 before finding support. The recovering NASDAQ provided some help yesterday and the stock managed to recover all the way to the close. That was as good as it was going to get though, and the bears went on the offensive this morning, pushing the price below the 50-dma (currently $55.31), and producing a close just barely above the low of the day. Although the day ended on average volume, the selling volume was very heavy in the final 2 hours as the stock gave up nearly $4. Mild support may materialize near $45, but after that we have to go all the way down to $40 to find significant support. Look for MRVC to roll over at the 50-dma, and then open new positions as the selling volume picks up again. Continued selling from current levels will be confirmation of the stock's weakness and more conservative investors can use this as an entry trigger as well. BUY PUT AUG-55*VQX-TK OI=390 at $8.13 SL=5.75 BUY PUT AUG-50 VQX-TJ OI=312 at $5.25 SL=3.25 Average Daily Volume = 2.36 mln AMD - Advanced Micro Devices $66.88 -5.13 (-4.13 this week) AMD ranks #2 in the microprocessor market, after Intel. The company has grabbed a substantial share of the sub-$1000 PC market. AMD's microprocessors include the K6 and the super-fast Athlon (K7). The company also makes embedded chips and nonvolatile memories. AMD's major markets are computers, networking, and communications. About 60% of sales are outside the United States. It comes with no surprise that this Chip has taken a dip recently. Intel, AMD's arch nemesis, announced Monday that it had successfully developed a 1.13 gigahertz microprocessor. The new chip, which is the fastest to date, will be sold to computer manufacturers such as Dell and Gateway. Not to be completely outdone, AMD will reveal its 1.1 gigahertz chip later this month. The increased competition from Intel comes at a crucial time for AMD, and the rest of the Semiconductor sector for that matter. The mumblings of a market peak in the infamously cyclical Chip sector have filled the ears of investors recently. Although demand for chips and chip equipment appears to be healthy as ever, it is widely known that the Semi stocks peak well before the market becomes saturated. The possibility of slowing demand, in conjunction with several high-profile earnings warnings from the likes of LSI, have combined to carry AMD below several key support levels recently. The stock crashed through its critical support at $70 Tuesday on increased volume. Tuesday's drubbing in the Semi sector marks the end of the group's two day attempt at a recovery rally. It was obvious that the analysts were pulling for a rally in the sector. Needham & Co upgraded AMD to a Strong Buy rating Monday, which helped stabilize the stock. But, it was apparent Tuesday that the bears have more pull than the analysts. The failure of support Tuesday warrants consideration for entry at current levels if the Semi sector continues to fall Wednesday. AMD has minor support remaining at $65, where a trader might find a more conservative entry point if stock's recent losses mount. BUY PUT AUG-70*AMD-TN OI=8582 at $6.63 SL=4.50 BUY PUT AUG-65 AMD-TM OI=2600 at $4.00 SL=2.50 BUY PUT AUG-65 AMD-TL OI= 969 at $2.25 SL=1.00 Average Daily Volume = 4.62 mln ********************** PLAY OF THE DAY - CALL ********************** VRTS - Veritas Software Corp. $100.00 -1.94 (+12.31 this 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. Most Recent Write-Up After losing almost 20% of its value last week, the bargain hunters just couldn't resist and on Monday they came in force, bidding the stock up $14.25 on higher-than-average volume. In doing so, VRTS closed above its 5-dma for the first time in almost two weeks. Today, VRTS took a moment to pause, trading on low volume to close right on the psychological century mark. News of an alliance with Data General, a division of storage leader EMC, failed to excite investors to rally above its 200-dma, currently at $102.41. It is interesting to note that aside from the first two hours of Monday's trading, VRTS has traded in a narrow range between $97 and $102 on low volume. There seems to be a lack of conviction on the buy side despite good news and it appears that the bargain hunters have had their fill. This is just what us put players want to hear. Rallies that fail to break resistance at $103, its 10-dma at $105, and $110 are targets to shoot for entry into this put play. These past couple of days have seen the 5-dma ($98.50) provide support. A break through that level could send the stock to $95 and from there to $90. This would provide a more conservative entry. VRTS continues to move in sympathy with the NASDAQ so confirm entry points with index movement before making a play. Comments Having benefited from Monday's tech relief rally, VRTS ran right up into its 200-dma at $102.41 yesterday. Today, the stock made a similar attempt and backed off just slightly to close the day with a 2% loss. Look for bounces to the 200-dma accompanied by a rollover for entry into this put. Given the 15% move of the past two days on lower volume, we are looking for the sellers to take short term advantage of this run-up. A more conservative entry can be attained on a sustained move through the 5-dma at $98.40. BUY PUT AUG-105 VUQ-TA OI=2060 at $10.25 SL=8.00 BUY PUT AUG-100*VUQ-TX OI=3412 at $ 7.88 SL=6.00 BUY PUT AUG- 95 VUQ-TW OI=2318 at $ 5.50 SL=4.25 Average Daily Volume = 5.70 mln ************************Advertisement************************* FREE local phone number and a FREE 800 number for life. Sign up now and receive 30 FREE minutes phone-to-phone domestic calling your first month! And receive an airline voucher worth up to $100 off any major airline! http://www.sungrp.com/tracking.asp?campaignid=182 ************************************************************** ************************ COMBOS/SPREADS/STRADDLES ************************ Investors flock to safety issues... Industrial stocks rallied today as traders rotated into defensive issues amid fears of a slowdown in the economy. Friday, July 28 Technology stocks plunged today sending the Nasdaq Composite into a confirmed downward trend. The Index fell 179 points to 3,663. The slide in the hi-tech issues also dragged the broader market lower. The Dow closed down 74 points at 10,511 and the S&P 500 Index was down 29 points to 1,419. Trading volume on the Nasdaq reached 1.76 billion shares with declines pounding advances 2,853 to 1,139. Activity on the NYSE was average at 979 million shares with declines doubling advances 1,852 to 933. In the bond market, the 30-year Treasury fell 5/32, pushing its yield up to 5.78%. Thursday's new plays (positions/opening prices/strategy): Paxson PAX SEP7C/SEP10C $2.00 debit bull-call CSX Corp. CSX SEP22C/AUG25C $2.00 debit diagonal Ryder Group R NOV20C/AUG22C $2.12 debit diagonal The prices listed are based on Time & Sales data for the session. We did not monitor the market's activity on Friday and therefore cannot verify the actual entries in each position. Portfolio Plays: The stock market retreated on Friday, following the release of unfavorable economic data. U.S. economic growth rose 5.2% in the second quarter, well above expectations of 3.5% and revised first-quarter growth of 4.8%. The weakness in technology stocks weighed heavily on other groups as investors unloaded companies with high valuations amid concerns about future earnings growth. Internet and biotech issues endured a massive sell-off and many of the leading computer hardware and software stocks were drawn into the bearish activity. A poor performance in financial and retail stocks pulled the Dow lower with American Express (AXP) and Home Depot (HD) leading the way down. In the broad market, defense, beverage and healthcare companies moved higher while networking, broadcast media and retail issues consolidated. The number of earnings and revenue shortfalls in the technology industry continues to worry investors and our portfolio has been substantially affected by the recent downtrend. Fortunately, the losses have been minimal and with the usually conservative manner in which we approach option trading, many of the plays have been able to absorb the recent sell-off, maintaining profitability. One of the surprise winners was A.G. Edwards (AGE), which rallied another $4 today on speculation of a new merger in the sector. Our recent debit straddle returned an 80% profit in just under one month. Allstate (ALL), Interstate Bakeries (IBC) and Secure Computing (SCUR) have also produced favorable "early exit" returns. However, there were also a few positions that required timely exit and adjustment decisions, both for limiting losses and protecting profits. With Friday's bearish activity, a number of moves were initiated. To lock-in position gains, we have closed the General Magic (GMGC) calendar spread at a $1.00 credit. To protect against future downside movement, the Virata (VRTA) put-credit spread has been rolled down and forward to an OCT-$40 Put, retaining the initial credit of $0.75 with only a relatively small increase in collateral. The current (profitable) positions on our watch-list include: Thermo Electron (TMO) at $1.88 credit and Peoplesoft (PSFT) at $2.88 credit. Both plays are bullish diagonal spreads and may need to be closed to protect current gains. Issues that we are monitoring in the technology group include American Online (AOL), Cisco (CSCO), International Rectifier (IRF), Qlogic (QLGC), Network Appliances (NTAP), and Voicestream (VSTR). Monday, July 31 The Nasdaq rallied today as technology stocks rebounded from the recent sell-off. The composite index was up 103 points at 3,767. The Dow industrials also enjoyed small gains, closing 10 points higher at 10,521. The S&P 500 Index was up 10 points at 1,430. Trading volume on the NYSE hit 934 million shares, with advances beating declines 1,711 to 1,161. Activity on the Nasdaq reached 1.5 billion shares with advances beating declines 2,318 to 1,751. In the bond market, the 30-year Treasury was unchanged, yielding 5.78%. Portfolio Plays: The stock market rebounded today as bargain-hunting investors shrugged off fears of higher interest rates and poor earnings growth in the second half of the year. Questions about future profits of many high-tech companies, as well as the possibility of another rate hike, have conspired to create a bearish market environment. Technology equities were Monday's market leaders, bouncing back from a brutal sell-off last week after a string of profit warnings. Chip and telecom issues led the recovery after being pummeled in recent sessions. On the Dow blue-chip average, financial issues helped bolster the rebound in major technology components. Remarkably, drug and biotechnology shares suffered despite the buying spree. In the broad market, broadcast media, defense and airline issues rallied while household non-durables, retail and generic healthcare stocks languished. Networking giant Cisco Systems (CSCO) was one of the technology group's most heavily traded stocks, bought up along with other leading companies, which appear to be less vulnerable to recent volatility. Our bullish position in the issue has a cost basis near $60 and with some new speculation in the sector, it could finish at maximum profit. Traders who are concerned with the current bearish sentiment might consider transitioning to the SEP-$45 (naked) Put for a small credit. That's the method we will use to increase the downside profit margin. Altera (ALTR) rallied $5 on strength in the semiconductor group after a string of negative performances. Our recent downward adjustment in the ALTR position may have been premature but as always, the goal in this portfolio is to limit losses before they become significant. With that idea in mind, we are going to use today's rally to roll down and forward in the remaining big-cap technology plays. Our recent position in Qlogic (QLGC) will be rolled to an OCT-$45 Put at $0.25 credit. The new position has a cost basis of $44.00. The Network Appliance (NTAP) spread should have been closed weeks ago when the issue was trading in the $100 range. Now we are faced with rescuing a losing play. Since the cost of the stock (and the collateral for a naked position) is substantially higher, we will transition to a put-credit spread; SEP60P/SEP65P, for a small debit. The cost basis for the new position is $64.56 with a return of approximately 5% per month if the play is profitable. International Rectifier (IRF) is the only credit spread we have yet to adjust and our target for that position will be a move to the SEP-$45 put with little or no additional debit. Tuesday, August 1 Industrial stocks rallied today as traders rotated into defensive issues amid fears of a slowdown in the economy. The Dow average closed up 84 points at 10,606 but the Nasdaq ended down 81 points at 3,685. The S&P 500 Index was up 7 points at 1,438. Activity on the NYSE was below average at 921 million shares traded, with advances beating declines 1,679 to 1,182. Trading volume on the Nasdaq hit 1.33 billion shares, with advances beating declines 2,320 to 1,684. In the bond market, the 30-year Treasury was up 27/32 pushing its yield down to 5.72%. Portfolio Plays: The technology sell-off continued Tuesday as downward pressure emerged in the semiconductor and Internet sectors. Both groups faltered, increasing the fallout from two weeks of heavy losses. Luckily, a small recovery in the biotechnology group checked the descent. The Dow Industrials saved the day with solid advances on buying interest in the consumer-durable and major drug stocks. New strength was also seen in the oil service, paper and utility industries. Leading the blue-chip rally were shares of Eastman Kodak, Walt Disney, AT&T, Procter & Gamble, Coca-Cola and Merck. Within the broad market, traders moved out of companies with big multiples and into more defensive positions in conservative groups that are known for dependable earnings. In the near-term, most analysts see additional downside potential but they expect the stock market to gain positive momentum as we approach the Presidential election season later in the year. Our portfolio was once again the victim of rampant selling in the technology group. Share values in all the major electronic and computer groups fell substantially during the session and there are few signs of any upcoming recovery in the current technical pattern. Remarkably, we did enjoy a few positive moves in the section today. CSX Corporation (CSX) edged above recent trading range resistance near $25 on strength in the transportation group. Our new diagonal spread is at maximum profit above the current price. Kellogg Company (K) rallied $1.06 to finish at $27 as new interest seeped into the Food and Beverage industry. We noticed a few traders using the bullish activity to write call options and that may be the strategy to follow in our bullish calendar spread at $30. Thermo Electron (TMO) and Secure Computing (SCUR) also moved against the trend, rallying in small increments while the majority of technology stocks slipped amid profit-taking. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** LMT - Lockheed Martin $29.12 *** On The Move! *** Lockheed Martin is a highly diversified global enterprise that principally researches, designs, develops, manufactures and integrates advanced technology systems, products and services. The company operates through four principal business segments: Systems Integration, which includes missiles and fire control, naval electronics and surveillance systems, platform integration, aerospace electronics, control systems, and command, control, communications, computers and intelligence lines of business; Space Systems, which includes space launch, satellites, and strategic missiles lines of business; Aeronautical Systems, which includes tactical aircraft, airlift, and aeronautical research and development lines of business; and Technology Services, which includes federal technology services line of business. The Aerospace industry has been in the news over the past few months with the majority of interest focused on Boeing's (BA) fundamental recovery. Lockheed Martin has also been quietly on the move and based on the current price of the issue and the recent rally above a resistance area near $27, this company appears to be poised for higher share values. From a technical viewpoint, the stock now has favorable support just below our cost basis and a small disparity in option premiums will allow us to initiate this bullish position at a reasonable entry point. PLAY (conservative - bullish/diagonal spread): BUY CALL SEP-25 LMT-IE OI=3705 A=$4.75 SELL CALL AUG-30 LMT-HF OI=409 B=$0.75 INITIAL NET DEBIT TARGET=$3.75-$3.88 INITIAL TARGET ROI=28% ****************************************************************** MSGI - Marketing Services Group *** Cheap Speculation! *** Marketing Services Group is a vertically integrated provider of direct and Internet marketing services to large and medium sized companies. The company provides marketing services including database management, data processing, list processing, database product development, research, direct mail support services, media planning and buying, Internet services and automated Internet marketing, as well as telemarketing and fundraising services. Marketing Services Group currently has over 2,000 clients who utilize its various marketing services. After a major slump earlier in the year, Marketing Services Group appears to be back on track with a bullish outlook for future revenues and earnings. Company officials recently announced an extensive list of new clients for one of its subsidiaries and excellent growth in revenues from another core company. The Grizzard Agency is one of the nation's largest full-service direct marketing providers and now bolsters the MSGI portfolio. Grizzard's sales were a record-breaking $55 million for the year and more notably, revenues for its Internet-related applications jumped by an impressive 400%, as a result of their emphasis on the development of leading-edge services. With favorable premiums in the OTM options, this position offers a reasonably conservative, low cost speculation play for traders who are bullish on the long-term outlook for the issue. PLAY (conservative - bullish/calendar spread): BUY CALL NOV-7.50 UMS-BU OI=104 A=$1.31 SELL CALL SEP-7.50 UMS-IU OI=0 B=$0.25 INITIAL NET DEBIT TARGET=$0.88-$0.93 TARGET ROI=50% A less neutral and more bullish type of calendar spread is when the underlying issue is some distance below the strike price of the options. This position is speculative with low initial cost and large potential profits. Two favorable outcomes can occur: the stock rallies in the short-term and the position is closed for a profit as time value erosion in the short option produces a net gain or; the underlying stock consolidates, allowing the sold option to expire and then eventually rallies above the long option strike price. It is generally best to establish this type of spread at least 2 - 3 months before the long option expires, capitalizing on the ability to sell another option against the longer-term position. That is the basic idea in this spread play; selling time value in the options when they are overpriced (high implied volatility) and buying it back (if necessary) when they return to intrinsic value. Ideally, the spreader would like to have the stock finish just below the sold strike when the near-term option expires. If the short options are in-the-money at expiration, he will have to buy them back to preserve the long-term position. ****************************************************************** - READER'S REQUEST *** ****************************************************************** PRD - Polaroid $18.00 *** Bottom Fishing! *** Polaroid is the leading instant imaging company in the world and is the only manufacturer of traditional, chemical-based, instant cameras and film in the United States. The company's principal products are instant film, instant and digital cameras, digital peripherals, secure identification systems, software and system solutions. Polaroid has also participated in non-core businesses such as graphics, sunglasses, and polarizers and holography. The company primarily designs, develops, manufactures and markets hardware accessories for the instant imaging market, conventional 35mm cameras and film and videotapes. With annual sales of over $2 billion, the company remains the worldwide leader in instant imaging. Polaroid has fallen to historic lows in the past few months but based on the recent interest in digital imaging products, the company may be on the verge of a recovery. The company posted net earnings of $8.7 million in 1999, ending a string of annual losses that began in 1994. Polaroid also has four of the top 10 selling digital cameras on the market and has already surpassed last year's digital sales of 500,000 cameras. In addition, the company said it sold 65% more instant cameras during the second quarter than in the year-ago period. Today, the company announced the appointment of Ian J. Shiers as senior vice president for worldwide sales and marketing. Shiers has responsibility for the company's sales and marketing in North America and based on comments from others in the industry, he has a solid track record for delivering strong top-line growth and solid financial performance. That's exactly what Polaroid needs to change investor's future outlook for the company. One of our subscribers was kind enough to point out the increased option activity in this issue and he requested that we identify a favorable spread position. Here is one potential position, based on a neutral-to-bullish outlook and a favorable disparity in the front-month option premiums. PLAY (conservative - bullish/calendar spread): BUY CALL OCT-20 PRD-JD OI=272 A=$1.43 SELL CALL AUG-20 PRD-HD OI=1015 B=$0.43 INITIAL NET DEBIT TARGET=$0.88 TARGET ROI=50% ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? 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Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.
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