The Option Investor Newsletter Tuesday 08-08-2000 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/080800_1.html Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 08-08-2000 High Low Volume Advance/Decline DJIA 10976.90 +109.90 10988.30 10836.60 994 mln 1587/1256 NASDAQ 3848.55 - 14.44 3893.05 3839.58 1.46 bln 1843/2224 S&P 100 805.96 + 2.24 806.97 799.13 totals 3430/3480 S&P 500 1482.81 + 3.49 1484.40 1472.53 49.6%/50.4% RUS 2000 508.72 - 1.15 511.94 508.72 DJ TRANS 2892.19 - 2.02 2899.07 2870.05 VIX 20.83 - 0.72 21.43 20.67 Put/Call Ratio .50 ****************************************************************** Productivity propels Dow but Cisco caution calms Nasdaq. Corporate productivity increased +5.3% in the second quarter and unit labor costs fell -0.1% in the same period. The greater than expected numbers beat estimates of +4.3% gains and a +0.3% increase in labor costs. The report produced a mixed market with the Dow gaining +109 points but the Nasdaq dropped -14. The Nasdaq drop was prompted by the impending CSCO earnings announcement after the close today. Analysts feel the productivity numbers are the icing on the cake and prove the Fed will not raise rates at the August meeting. As long as productivity goes up faster (+5.3%) than worker compensation costs (+4.7%) then there is no reason to panic. Workers compensation rose +4.8% last year so the current +4.7% is right in line with no sign of inflation. The productivity numbers rose on a year over year rate of +6.9% which is the fastest rate since 1971, or almost 30 years. With bond rates falling to 5.73% today it appears the door is all but shut for an August rate hike. Cisco did announce earnings after the bell and upheld its half of the double trouble CSCO/DELL duo. CSCO beat the street by a penny with $.61 vs estimates of $.15 which was much greater than the $.10 they earned last year. Revenue rose to $5.72 billion up from $3.6 billion last year, a +61% increase. CSCO was optimistic about their prospects going forward but had expressed concern that shortages in their component supply chain could slow sales in the future. This is a continual warning from CSCO but they also have experience in working around the problems. CSCO traded up about $2.50 in after hours to $67.81. They have had trouble at the $70 level lately. On a negative front they did announce the resignation of the top vice-president. I doubt anyone will notice! Next to play in the earnings Olympics is Dell which announces after the bell on Wednesday. Dell has been beaten up recently with earnings rumors and rumors of softer PC sales. Dell did gain +$.50 in after hours trading as a result of positive comments by CSCO. The market will be expecting Dell to meet the street but with the CSCO earnings and revenue numbers so strong the outcome may not hinge entirely on Dell. Nasdaq futures are up +40 at 7:30 tonight. It never hurts to have one of the biggest tech companies post record profits when the tech sector is hurting from tech rumors. Shares of America Online Latin America Inc. rose 10 percent in their stock market debut on Tuesday following an initial public offering that raised $200 million, far below original expectations of $425 million. In its IPO, AOL-LA priced 25 million shares at $8 each, the bottom of a lowered price range. The shares were originally expected to be priced at $15 to $17 each, but the range was cut to $8 to $10 last week. Before the IPO, investor interest was expected to be lukewarm for several reasons, including overall tempered response to new issues and skepticism about how AOL will transfer the power of its U.S. brand to Latin America. Investors also were unwilling to pay the premium that a pricing of $15 to $17 a share would have given the company, which posted about $51.2 million in losses on revenue of $5.2 million for the nine months ended March 31. Critics of AOL-LA have said the company faces stiff competition from entrenched local players in Latin America, most of who staked out their territory much earlier than AOL and are backed by local media and telecommunications heavyweights. Microsoft pulled another rabbit out of the hat today with a +$4.12 gain based on their announced plans to reinstate a share buyback plan and launch an electronic book initiative. The share buyback program is for a yet-to-be-determined number of shares. Even though the productivity numbers were great this morning the Nasdaq rallied early but quickly lost steam and finished the day negative. The Dow however finished near the high of the day. The Nasdaq had posted gains for three days and I am sure was suffering from earnings worry over CSCO but since CSCO has never missed estimates it appears the worry was misplaced. The Dow however, even with the big gain, is more troublesome. Most of the gains came on the back of not techs but cyclicals. The biggest gainers other than the MSFT +4 were Alcoa +2.25, CAT +1.69, IP +1.69, Dupont +1.94, Eastman Kodak +2.38, GM +2, Home Depot +2, and Walmart +2.50. The other tech leader, no not INTC -1.31, was IBM which has a nice five day run in progress with a +2.56. I am always concerned when cyclicals like Alcoa, CAT, EK, IP and Dupont are the market leaders. These two day rallies never seem to last and traders often look at them as shorting opportunities. You choose, CSCO or Dupont? CSCO or IP? I would buy CSCO. Of course the reason behind the cyclical rally is the concept of a soft landing actually coming to pass. If the economy is still growing after six rate hikes then maybe there will not be a crash landing from an over active Fed as previously feared. A reader sent me this sometime back and with all the CSCO interest tonight I thought you would find it interesting. "Just in case investors are feeling that the market has corrected itself and valuations are once again reasonable, consider the following," "For half a trillion dollars, an investor could theoretically buy either 1) Cisco Systems or 2) the entire gas and electric utility industry in the U.S. In the first case, the investor would be buying a company with trailing 12-month revenues of $15 billion. In the second case, he'd be getting an industry that is paying about $15 billion per year of cash dividends. Oh, and with option No. 2, he'd have about $100 billion left over to go buy something else." Yes, value is in the eye of the beholder! The Dow has put together a string of seven positive closes and appears poised to break 11,000 again at the open tomorrow. Today's close was the highest since mid-April and we could be seeing the results of a short squeeze since institutions have been net short the S&P for several weeks. With the almost vertical Dow for almost +500 points, anybody short is bound to be reconsidering the fallacy of their ways. However in the same breath seven days is a long winning streak and we still have Retail Sales and PPI ahead of us this week. Advance declines were net negative today with the NYSE positive and Nasdaq negative. Other causes for concern were the Russell-2000 which lost -1.15 and the Wilshire Total Market Index up only +18 or only 0.13%. If the market is so bubbly why was there no movement in these broader market indexes? I still assume it was fear that CSCO, the biggest tech company of all, might miss estimates or have a bad conference call and cautious traders took profits ahead of the event. Certainly if the futures hold we should see a strong open on Wednesday and that open could propel us over the key 11000 and 3900 benchmarks. How the market will close ahead of the Retail Sales and PPI reports on Friday is another story. The OEX has been bumping a top at 805 this week and finally surged ahead at the close. Next resistance is in the 810-813 area so we have room there. So where is the problem? I don't see a specific one other than the VIX which hit an eight month low today of 20.67. Currently in extreme danger territory but it appears we could break 20 before anybody will care. Just keep your eye on it when planning long plays this week. Shucks, everything just looks too good to be true.......could it be? DELL, we are counting on you. Don't mess this up! Notice the chart above? When have you ever seen this meeting of all the averages in one place. We have either gotten a huge wet blanket to a future rally or the mother of all launch points if we breakout on the CSCO news tomorrow. The Orlando and Dallas seminars are sold out. The only two seminars left this summer are Orange County, Aug-10/12th and Detroit, Aug-28/30th. If you want to learn how to trade better before the fall rally then you are running out of chances. Click here to learn more: http://www.OptionInvestor.com/seminar/seminar.asp 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 Aug 17-19 Orlando 3 day ** Sold out ** Aug 24-26 Dallas 3 day ** Sold out ** Aug 28-30 Detroit 3 day (just changed to 3 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 **************** Is The Autumn Rally Brewing? By Austin Passamonte Lord knows I can't wait for the next major rally; how about you? Seems like we've lived in fear of the Fed and all that goes with it forever now. Perhaps those days are on the wane. The past few sessions leave the bulls longing for days gone by and many more to come. Recent data suggests this rocket ship is now lowering it's flight gear for the gentle landing our Fed's been shooting for. Friday's PPI and then the CPI will stall or fuel this current bullish sentiment in a hurry. Most hope for the latter to occur. Should the Fed pass on further interest rate hikes this time around I don't care how sternly they warn of future moves; we could see new market highs within days. The tension to rally is almost palpable now and promises to build until then. We still don't like the VIX hovering below 21 and it cannot be ignored. Of course we've heard all the arguments about how this measures the OEX and mostly non-tech issues as well. Many tout the NASDAQ being practically immune to this indicator. Oh really? Here's a simple suggestion in that case; take a peek at the daily VIX chart over the past two years vs the Dow & soon after the NASDAQ and let me know what you see. Again, don't trust my lying eyes to the pattern, judge for yourself. We realize the VIX has coiled around the 22 level for several weeks with few short-lived exceptions. A hobby of mine is searching out timber rattlesnakes for wildlife photo opportunities here in the east. It takes a long time to find one and we often become complacent while moving within known den-site areas until a snake is stumbled upon well-camouflaged in plain sight right beneath our feet. It's easy to relax and let one's guard down when danger won't immediately show but that doesn't mean it ceases to exist. Lest you think we hang our hat solely on one indicator let me assure you that's not so. However, if there was only a single market tool traders could use to spot major reversals the VIX would surely be one of the best. Raging bulls have probably tired of hearing VIX mantra but let me assure you the day will come when it hovers near or bove the 30 zone as all the world is touting doom & gloom. We here in Market Sentiment will relish those days likely to offer yet another incredible entry point at that time. Plenty of signs point to glory days ahead for the bulls. Do watch out for snakes hidden within high-rocky peaks, however. Failing to keep a sharp eye out for them can ruin your entire day otherwise. Tread carefully and prosper in either market direction! MARKET SENTIMENT INDICATORS --------------------------- VIX The CBOE Market Volatility Index measures certain S&P 100 option pricing to determine investor sentiment. Historically, readings near 30 signal possible market bottoms while levels near 20 indicate possible market tops. Thurs 8/8 close: 20.83 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 (8/08) (8/10) (8/12) ************************************************************* CBOE Total P/C Ratio .50 Equity P/C Ratio .42 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 (8/08) (8/10) (8/12) ************************************************************** All index options 1.69 OEX Put/Call Ratio 1.84 OEX Maximum Open Interest Strikes/Contracts: Puts 790/7,360 Calls 800/5,824 Put/Call Ratio 1.26 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 "10" considered firm. Divergence of numbers may indicate future market direction. OEX Tues Thurs Sat Benchmark: (8/08) (8/10) (8/12) Overhead Resistance: (850 - 825) 303.75 (820 - 805) 2.52 OEX close: 805 Underlying Support: (805 - 785) 1.66 (780 - 760) 5.32 What the S/R measure indicates: Net open-interest ratios are huge above 825. A large index move prior to expiration has clearance in either direction between 780 and 825. Market-makers would love to pin the OEX index between it’s two largest strikes of 790 & 800 for maximum expiration of worthless contracts. Too soon to predict. 30-yr Bond: 5.73% Light, Sweet Crude, Barrel: $29.15 200 Day Moving Average (as of 8/05) The 200 DMA is widely considered the major benchmark for critical support in a market. DOW: 10,778 10,976 NASDAQ: 3,911 3,848 NDX: 3,648 3,686 SPX: 1430 1482 OEX: 770 805 CBOT Commitment Of Traders Report: Friday 7/28 * Updated 8/12 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 nil. Fed-Fund futures are pricing a slight chance of one or more rate hikes, .25 basis at this time. Benign Government Reports Latest statistics hint the economy is cooling and no further rate hikes may be needed. Renewed Strength In Market Leadership Several session's broad rally after the brief sell-off proves firm buying interest remains near key levels of support. 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 VIX Tuesday’s close below 21 places us back in the danger zone. End Of Earnings Season Lack of positive news will direct market focus on August FOMC fears should future reports prove bearish. Third-Quarter Earnings Warnings A number of companies pre-warning slowed earnings later in the year are being met with extreme selling pressure. IPO Glut Record numbers of IPOs this week could greatly dilute market capital and pressure existing issues. Energy Prices Prices are still too high. Ultimately this affects profit margins and inflation. September Crude closed $29.15 today. Seasonal energy patterns typically bottom by late summer, but all petroleum expected to be very high this fall. Prices in low $20s would be welcome relief but may not arrive. 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. ************** MARKET POSTURE ************** As of Market Close - Tuesday, 08/08/00 Key Benchmarks Broad Market Last Support/Resistance Alert **************************************************************** DOW Industrials 10,976 10,450 11,000 ** SPX S&P 500 1,482 1,425 1,505 ** COMPX NASD Composite 3,848 3,500 4,000 OEX S&P 100 806 770 810 RUT Russell 2000 508 485 540 NDX NASD 100 3,686 3,300 3,900 MSH High Tech 1,017 935 1,025 BTK Biotech 669 570 700 XCI Hardware 1,507 1,380 1,530 GSO.X Software 446 385 465 ** SOX Semiconductor 950 880 1,020 NWX Networking 1,266 1,150 1,295 INX Internet 516 460 580 BIX Banking 592 550 610 XBD Brokerage 606 570 655 IUX Insurance 720 680 725 RLX Retail 901 845 935 ** DRG Drug 406 385 430 HCX Healthcare 841 800 855 XAL Airline 168 160 178 OIX Oil & Gas 289 272 304 Have you ever watched a bear size up prey that he deems suitable for dinner? The first thing he does is stand on his hind legs to see who is bigger, then checks the wind before moving in. A hungry bear prefers to pick on weak animals that have struggled to keep pace with the herd and are near exhaustion. Those animals do not put up much of a fight. The point is; we are starting to see some sectors trade back at resistance levels (catching up to the herd) and volume (strength) has been anemic. If you want to avoid a potential bear, stay away from weak stocks in weak groups that have rallied on light volume, especially if there are hungry bears nearby. If you are a hungry bear, make sure you have an escape plan if you bite off more than you can chew. Raising support (SPX,COMPX, RUT,NDX,BTK,XCI,INX,RLX,XAL) Raising resistance on (DOW,SPX,GSO.X,RLX). *********** OPTIONS 101 *********** Downside Protection By Lee Lowell If you’re like me, you’ve probably got some long stocks in your account that have been taking it on the chin as of late. I’m tired of watching them slowly deteriorate and lose value. It’s time to do something and get pro-active! What’s the best plan of action? From a traditional sense, the most likely course to take is either to sell some covered calls or buy some puts. Nothing wrong with that. Many investors (old and new) are in it for the long haul and wish to hold onto their stocks forever and never sell. They are there through thick and thin. They ride it out through the up cycles and down cycles. That’s fine. But you know what? You can increase your monthly and yearly returns and never have to worry about giving up your shares as long as you employ some defensive tactics. What’s better - selling calls or buying puts? It depends. Do you want to take in premium by selling calls, and subsequently give up more downside protection? Or do you want to pay a little for a put and have the comfort of knowing you’re protected all the way down to zero? Selling calls also caps your upside profits, but you can get around that. Buying puts can be very expensive at times if implied volatility is currently high. So what can we do? Here’s what my situation looks like. I have some telephone stocks that’ve been in my portfolio for some 16 years or so. They’ve been steady small gainers over the years with nice dividends. I’ve been taught to always hold onto stalwarts like these. I’ve gotten what I expected out these phone stocks - but now I want more. We’ve seen the returns that tech stocks have rewarded investors over the last 2 years alone. Should I cash in my Old Timers and go for the gusto, or should I continue to hold these slow and steady Eddies? The same thing goes for the Big Blues - IBM’s, WMT’s, MCD’s, etc. These are stocks that you just never sell. But I want to squeeze more out of them and get some protection on these slow downside moves. I’ve come to two conclusions: I’m either going to sell these Old Timers and get slapped with a big capital gains payment next April and put the money into tech investments, or I’m going to take a more active role and try to increase my monthly returns. I’ll probably do a little of both. So where do we start? Take a look at all the stocks in your portfolio and see how many contracts you can sell against them or how many put contracts you can buy against them. Each option contract constitutes 100 shares of stock. If you have 500 shares of AT&T, then you can work with 5 option contracts. The next step is to check the stock’s volatility and its option premiums. Chances are, some of your stocks will be slow movers so the premiums may not be all that great to sell. But you won’t know until you do a little research. Check the stock’s past volatility levels. If it’s in the higher end of its volatility range, then most likely you’ll be able to sell some covered calls. If it’s at its low end, then buying puts will probably be a better play. You don’t have to concentrate on front-month options only. You might have to go a little further out to get more premium to sell. You can sell the next one or two expiration series if you want to. If you are going to buy puts, then you can either buy an ATM put every expiration cycle or you can buy a further out 3 or 6-month put option. See how the costs compare. You can tailor it any way you want. You can buy slightly OTM or ITM puts. The same thing applies when selling the calls. You can sell ITM, ATM, or OTM call options. The ITM calls will give you more premium into your account and more downside protection, but your upside profit potential will be very limited and your chances for getting called out will be higher. The opposite is true for OTM calls. You get less downside protection, less premium into your account, but a bigger upside potential for your stock and a lower chance of getting called out. Depends on what you want. Many people sell covered calls just for the income producing effects alone. They don’t own any long- standing stocks. They put on the trade simultaneously. They find a quality stock in an uptrend with higher than average volatility, and then pick a call to sell against it. The higher volatility allows the options to have some meat in their premiums. If you buy the puts you’ll never have to worry about being called out of your stock which could potentially lead to a huge capital gain payment. Some investors never feel comfortable buying options because they know the odds are usually against them. They would rather sell the calls, take in premium, and play assignment roulette. If you do want to sell covered calls and continue to keep your stock, then there are a few things you can do to protect yourself against possible assignment. Just know, that if you are getting worried about being assigned, then you are winning on the trade. In order to make money with covered calls, you need the stock to go up. The gain on the stock will always outweigh the loss on the call. So if the call has gone into-the-money, then you are ahead at this point. Here’s what you can do to protect against assignment. Most likely, you will not get an assignment notice unless the option is deep ITM and there are only a few days left before expiration. At this point, you can buy the option back for a loss and sell the next month’s covered call. This is called "rolling out". You continue to buy back the close-to-expiring options and sell the next one. This produces a stream of income throughout the whole year. Even though you are buying back the option for a loss, the gain on the stock will be greater. So you can continue to keep your stock, while adding a few hundred or a few thousand dollars to your account each month or every few months. I’m no tax expert, but buying back options for a loss might entitle you to capital loss deductions. (Please consult your tax professional!) Another way around possible assignment is to sell call spreads against your long stock. You’ll take in a smaller credit, but once the price of the stock starts moving up, the spread will cap itself out and you’re free to participate in the upward move with no possibility of assignment. If you prefer to play the puts, you can also profit on downmoves as well. Not only will the puts protect you all the way down, but if you feel the stock may have hit bottom; sell the puts out for a profit. If the stock turns around and heads higher, congratulations. You can now either buy another put or let the stock keep trending higher. This type of trading may require a little more participation on your part. If you don’t have the time, no problem. Just ride out the put to expiration if you want. That’s what you intended to do in the first place. The whole idea of this article is to get you off the sidelines and use all available resources and tactics. Don’t let your stocks sit idle anymore! If you’re worried about these downmoves, sell a covered call or buy a put. You’ll be glad you did. lee@OptionInvestor.com ************** TRADERS CORNER ************** What Is The Beta Of A Stock? By Mary Redmond The beta of a stock measures a stock's volatility when compared to the volatility of the market. For this definition, the market is the S&P 500 index. If a stock has a beta of 1, this means it moves in tandem with the market. If a stock has a beta of more than 1 this means it is more volatile than the market, and if it has a beta of less than 1 it is less volatile than the market. An example of a stock with a beta near 1 is GE. GE tends to move in a pattern which is highly similar to the S&P 500. The beta of GE is 1.23. You can see the chart of GE compared to the S&P. An example of a stock with a beta much higher than 1 is Broadcom. BRCM has a beta of 2.88. This means it is 2.88 times more volatile than the S&P 500. An example of a stock with a beta of less than the market might be Philadelphia Suburban Corp, a utility with a beta of -.25. During the summer of 1998, when the markets dropped over 20% this stock actually rallied. This is why some investors use utilities to hedge market risk in other sectors. Some portfolio managers use beta to hedge against market risk. For example, if you have a stock portfolio with a value of $1,479,000 and a beta of 1 this means your portfolio is as volatile as the S&P 500. Using a value of the S&P at 1479, the underlying value is $147,900. You would thus need to buy 10 put options to exactly offset the market risk. If the beta of the portfolio is 1.5 you would need to purchase 15 put options to offset the market risk. Beta can be useful when trading because it can give you an idea of how a stock is likely to move when the market rises or falls. For example, it is highly unlikely that GE would move in the opposite direction from the S&P 500 by more than a small percentage. In addition to market sensitivity, traders must consider the sensitivity of stocks to interest rate changes. Financial stocks tend to perform poorly in an environment of rising interest rates because they must pay higher interest rates on their loans and do not necessarily receive proportionately higher interest rates on the loans they give to customers. The financial sector has been rallying lately in part because of anticipation that the Fed is finished or close to finishing the rate increases. It is important to note that the credit spread between high yield corporate loans and risk free yields is wider than it has been in several years. The 30 year and 10 year bond yields are both lower than the Fed Funds rate, but the high yield index is averaging over 13%. US high yield bond issuance has fallen by nearly 50% this year, in part because of the Fed's interest rate increases. Some analysts have suggested that the Fed may even lower rates next year due to slowing corporate growth. The companies which are impacted the most by this are primarily small companies as they are dependent on financing for their expansion. In addition to watching the Fed Funds rate and the 30 and 10 year bond yields, it is useful to track the high risk corporate yields. If these rates decrease, it could be a strong catalyst for certain stocks. The ipo market was robust today, with 7 new issues raising over $668 million. The most successful was ACPW, which traded at a strong premium in the aftermarket. Approximately 40 new deals are scheduled to debut this week, depending on market conditions. With the way the markets are behaving, it seems that the new issues are drawing funds away from Nasaq stocks more than away from Dow stocks. Contact Support ****** Some Lessons I’ve Learned as an Options Trader By Scott Martindale It’s funny that I’ve begun writing for OIN when I’m trading less frequently than at any time since I started options trading two years ago. Not that I don’t want to trade, but I’m hamstrung by a lack of confidence in market direction, as well as a lack of desire to have my nose glued to the screen. Did Thursday give us the final capitulation that many have been predicting? Or are we still due for a retest of this year’s lows? Either way, I’m not quite ready to fire up the mouse in earnest just yet. So along the same vein as Austin’s "Uncle Tom" story yesterday, please indulge me as I wax philosophical and share a little of my history as an options trader. Although I learned about capital markets and trading tools long ago, first through a personal finance home-study course, and later in an MBA program, I didn’t fully understand trading strategies and money management until I took an options trading seminar. I can tell you with neither pride nor embarrassment that I took one of those two-day seminars from a company whose founder writes lots of books and gets lots of flack from market insiders. The seminar gives most people just enough knowledge to be dangerous, but for those who are careful and diligent about continuing to learn, it provides a good toolbox and that little boost of confidence to get started. Anyway, I made nice gains right off the bat buying mostly 2-6 month calls, primarily on split runs. When I hit the January 99 CMGI split run for something like a 1600% return, I thought I had found the goose who laid golden eggs. But of course, I soon learned that it doesn’t always work out that way, and split runs are usually dependent on a cooperative overall market. When EGRP started its split run a couple of months later, I was so confident that I kept buying more calls every time the stock dipped until I had about 1/3 of my six-figure trading portfolio tied up in front- month EGRP calls. I escaped with a 20% overall gain on my positions, although the higher strikes (earliest purchases) went underwater. Despite coming out okay, I was a little unnerved by the experience. I would never dream of going out on such a limb today, especially after experiencing this year’s market. Furthermore, I must confess that if it weren’t for online trading, I don’t think I’d still be at it. I started with a full-service broker - a guy who had been trading options since they started trading in the early 70’s - and he was a great sounding board for my novice ideas, although he was a bit arrogant and condescending with me at first. However, I soon proved myself to him with my knowledge of various strategies. I made small, steady gains with him, until I lost all my gains on one bad Yahoo bull put spread going into a split that I thought was a sure thing. I learned that unwinding a spread can mean losing a lot more than you ever expected the maximum downside to be because of the market maker’s wide bid/ask spread on each leg on expiration day. I also learned that I prefer to have control of how and when I execute my trades rather than having to wait for a callback from my broker (usually due to his smoking breaks) and then deal with his attitude as he fills my orders - and pay big commissions for the privilege. Don’t get me wrong, the experienced full-service broker was helpful for my learning the ropes on the fly (as a novice trader with little interest in paper trading), but it is online charting and trading that keeps me in the game. And I must say the delays due to their web servers, execution time, and customer service response are improving all the time, especially compared with the growing pains of last year during the record-setting volume periods. I have experimented with a wide variety of options trades, although my online broker doesn’t allow writing naked calls. I have bought calls, LEAPs, and puts. I have sold puts and covered calls. I’ve entered into call credit (bear call) spreads, call debit (bull call) spreads, put credit (bull put) spreads, and put debit (bear put) spreads. I’ve sold calls against calls and LEAPs (calendar or diagonal spreads). Having lost money many times by watching short-term time premiums erode away on purchased options, often even as the underlying stock price goes in my direction, I decided that in general it’s better to sell time to someone else. I went through a period in which I looked at the stocks in the $5- $30 range with the highest option premiums and wrote puts on the best looking charts. When stocks were put to me, I happily wrote covered calls. However, I quickly discovered that even the best of technicals can turn sour in a hurry, and I was stuck with some stocks that just continued to fall, in some cases into oblivion. I was burned by the likes of DBCC, HPH, ESPI, KLOC, and even QCOM. I learned that you can’t let a stock continue to drop - you must buy back the naked put or the covered call and get out when your predetermined loss-cut is hit. I also learned that I should only write puts on stocks I really believe in and want to own, not just those that have high options premiums and nice-looking charts. Next time, I’ll talk more about the strategies I focus on today, as well as interesting variations on the basic plays. smartindale@OptionInvestor.com **********************ADVERTISEMENT****************************** FREE! FREE! FREE! FREE! Investor's Business Daily - Free Two Week Trial! No obligation! No invoices! And nothing to cancel! Limited time offer! Click Here! http://ibd.infostreet.com/cgi-bin/freeoffer.cgi?source=ARZ0JES ***************************************************************** ************* SECTOR TRADER ************* Wobbly Gains for the NASDAQ By Buzz Lynn sectortrader@OptionInvestor.com The weak internals from the last two still doesn't lend much credibility to the rally. Even so, you have to take your hat off to its resilience. It (by "it", we're referring to the NASDAQ) has managed to stay above 3750, a level of previous resistance that we thought might hold stocks down. Nope! But don't pump your fists in glory just yet. In contrast to our weekend comments, it is now the overall NASDAQ market that can not get through its 50-dma of 3897, let alone its 200-dma of 3911. Volume remained weak yesterday and today at roughly 1.3 and 1.45 bln shares, respectively. While it isn't the stuff new highs are made of, it isn't going any lower at this moment either. Today's tech weakness could largely have been an exposure reduction in front of CSCO earnings, who true to history, reported a penny above. The real news was that CSCO also exceeded revenue estimates by $500 mln. That should play well for the sector tomorrow. The MSFT stock buyback program to fulfill employees' stock option exercises helped support a sagging NASDAQ today too. Remember that MSFT, CSCO, INTC, DELL, WCOM are the heaviest weighted in the NASDAQ and even heavier in the QQQ (NASDAQ-100 tracking stock). Thus despite general technology issue weakness, MSFT did an awful lot to support the market with its $4+ gain, keeping the overall losses to a minimum. That would also explain how the QQQ did manage to break back over its 50 and 200-dma. Divergence reversed! The generals lead again. Of course, not everything is coming up roses. TTH got whacked today on overall telecom weakness thanks to Verizon (VZ) earnings miss. T and WCOM hit 52-week lows on strong volume in the process. Similarly LU's new 52-wk low kept BDH on a perfectly-charted course to the basement. With charts showing signs of weakness and running into resistance/congestion and a VIX now under 21, earnings season at an end, economic reports, an FOMC meeting in two weeks, and oil prices creeping up again, logic says this can't last. But since when is the market logical? While the market has every probability of rolling over, sentiment is pretty high on theory that Alphonso the Great (Greenspan) will hold firm on more rate hikes. Stay tuned for the next economic reports, which could strike fear again into the hearts of traders everywhere. Index Last Mon Tue Wed Thu Fri Week QQQ NASDAQ-100 92.75 2.38 0.50 0.00 0.00 0.00 2.88 HHH Internet 108.31 3.56 -0.94 0.00 0.00 0.00 2.63 BBH Biotech. 188.25 7.31 -3.88 0.00 0.00 0.00 3.44 PPH Pharm. 100.75 -1.13 0.25 0.00 0.00 0.00 -0.88 TTH Telecom 66.38 0.69 -2.69 0.00 0.00 0.00 -2.00 IAH I-net Arch. 96.69 2.44 0.69 0.00 0.00 0.00 3.13 IIH I-net Infr. 53.44 2.31 -1.00 0.00 0.00 0.00 1.31 BHH B2B 48.25 2.00 1.00 0.00 0.00 0.00 3.00 BDH Broadband 90.69 2.94 -1.06 0.00 0.00 0.00 1.88 SMH Semicon. 81.06 2.31 0.06 0.00 0.00 0.00 2.38 RKH Reg. Banks 105.38 -0.38 0.75 0.00 0.00 0.00 0.38 UTH Utilities 101.63 2.50 1.00 0.00 0.00 0.00 3.50 ************** Updates ************** QQQ - NASDAQ 100 $92.75 +0.50 (+2.88 this week) A tracking stock for the NASDAQ-100, the QQQ reflects the value of the top 100 market cap stocks on the NASDAQ. MSFT, INTC, CSCO, DELL, ORCL and WCOM make up over 35% of the index. When these companies do well (WCOM excepted), the QQQ does well. CSCO's surprise revenues and MSFT's stock repurchases will likely have a positive effect on tomorrow's market - at least at the open. But that today's robust GDP number didn't do more to boost the technology market was a bit of a surprise. Accordingly, the market may care less about CSCO and MSFT tomorrow and send technology issues south again, but don't bet on it. Technically, QQQ broke back above its 200- dma of $91.05 unlike the broader NASDAQ which can't seem to pull off the prairie-dog imitation and pop its head out of the 200-dma hole. Yet, even its attempt to get through its 50-dma has been met with resistance for the last two days. It's looking tired and ready for a rest. With all the resistance above at the 50-dma ($93.65) and the 30 dma ($94.23), it will have a hard time pressing through. However, QQQ's ability to punch through and remain above previous resistance at $90.50 shows there is good support. Watch for CSCO and MSFT-based strength in the morning with the possibility of a pullback beginning in the afternoon and on Wednesday in anticipation of initial jobless claims on Thursday and PPI on Friday. ***August options expire in 2 weeks*** Long Straddle: We can't help but think some straw is about to break the camel's back of low volatility. Once the volatility spikes, the time premiums of our put and call should rise accordingly. In the meantime, it's a hedged but slow process. Good thing we have until roughly mid-October to be right. If the VIX is any indicator (and it hasn't been lately), the markets are due for a volatility spike. That will be our payday. If you are good at timing your entry, consider legging in at support ($90- $91) and resistance ($94) for a lower net debit. In other words, try to buy the call when QQQ is down and buy the put when QQQ is high. ***August options expire in 2 weeks*** Straddle: BUY CALL DEC- 90 QVQ-LL OI=1951 at $12.75 BUY PUT DEC- 90 QVQ-XL OI=2495 at $ 8.75 Net Debit = $21.50 or less Strangle: BUY CALL DEC- 94 QVQ-LP OI=1804 at $10.63 BUY PUT DEC- 86 YQQ-XH OI=1460 at $ 7.00 Net Debit = $17.63 or less Calendar Spread: It's no fun to sell volatility of the volatility rises dramatically, however, with a calendar spread, the long-term call inflates too keeping the total position value roughly the same with time decay still working in your favor. You just don't want to get called out of this one since that would mean having to cash in all the time value at the time you exercise the call. Better to buy back the short call when the time value has been mostly wrung out of it. Remember your underlying call will increase in value as the stock moves up making the cost to cover very small. If you are good at timing and your broker allows you to sell naked options, you can try legging into your long-term position at support ($90-$91) and sell the short-term position at resistance ($94) ***August options expire in 2 weeks*** BUY CALL DEC- 90 YQQ-LL OI= 1951 at $12.75 SELL CALL AUG- 90 QVQ-HR OI=13320 at $ 4.25, ND = 8.50 or less SELL CALL AUG- 92 QVQ-HR OI= 7956 at $ 3.00, ND = 9.75 or less Long Puts No rollover here just yet. But be ready as QQQ approaches $93.65 resistance, its 50-dma, then its 30-dma at $94.25. A move back down from there could make a nice entry for this put. Near-term support is back at $90-$91. So if you buy puts at the $94 level, look to cover at the $91 level. Otherwise conservative traders can consider a move under $90 as a targeted entry under current support. ***August options expire in 2 weeks*** At Resistance: BUY PUT AUG-92 QVQ-TN OI= 4706 at $2.88 SL=1.50 BUY PUT AUG-90 QVQ-TL OI=20028 at $1 94 SL=1.00 BUY PUT SEP-92 QVQ-UN OI= 6130 at $5.75 SL=3.75 BUY PUT SEP-90 QVQ-UL OI=14465 at $4.63 SL=2.75 Average Daily Volume = 22.01 mln ----- IIH - Internet Infrastructure $53.44 -1.00 (+1.31 this week) Relative to other technology plays, IIH is starting to smell like old fish. While it was encouraging to call players (we are looking at the put side for this play) to see the July 28th gap-down retraced and filled yesterday, resistance is formidable at this level - about $54. IIH already shows signs of rolling over as the stochastic has reversed to the downside as has the RSI. MACD is already low and not turning up as it would into a rally. That said, we think any market weakness would constitute a good entry at this level or any rollover from $55. Otherwise wait for a decline back under the 10-dma of $52.40 before taking a position. AKAM, VRSN, INSP, BVSN, and VIGN will be the leaders to watch for a clue. These just don't look too strong. ***August options expire in 2 weeks*** BUY PUT AUG-55 IIH-TK OI= 47 at $3.63 SL=1.75 BUY PUT AUG-50 IIH-TJ OI=121 at $1.13 SL=0.00 BUY PUT SEP-55 IIH-UK OI=122 at $5.75 SL=3.75 Average Daily Volume = 199 K ----- BDH - Broadband $90.69 -1.06 (+1.88 this week) Here's another situation where the stock moved up the fill the gap-down created on July 28th, but couldn't hold the gain. It bounced south of its former resistance at $92, which also happens to be its 30-dma. Unless NASDAQ can break over 3900, we remain in the put camp awaiting a move back down on any NASDAQ weakness. There is mild support at $90 even, and a bit more at $88. Careful though. CSCO strength in the morning may make this look like a new-found call play. You may want to wait until the afternoon to see if the market starts flatten or sell off in the afternoon in front of Thursday's jobless claims and Friday's PPI. Resistance is at $92. ***August options expire in 2 weeks*** BUY PUT AUG-95 BDH-TS OI=64 at $6.00 SL=4.00 BUY PUT AUG-90 BDH-TR OI=41 at $3.13 SL=1.50 BUY PUT AUG-85 BDH-TQ OI=73 at $1.25 SL=0.50 BUY PUT SEP-90 BDH-UR OI= 5 at $5.88 SL=3.75 Average Daily Volume = 126 K ----- SMH - Semiconductor $81.06 +0.06 (+2.38 this week) Despite the gains over the last two days, especially yesterday, our put play remains technically intact. It has failed to get through resistance at $82, and we would consider this level to be an entry. The doji star on the candlestick chart indicates indecision in stark contrast to the rest of the NASDAQ. Nonetheless, CSCO results could prop up the semis too, so keep your eyes open for a move over $82. Find something else to play if that happens. Otherwise, if NASDAQ finds a reason not to go up any further and makes a retreat, feel free to take a position. Mild support is at $80.50, then $78, then $74. ***August options expire in 2 weeks*** BUY PUT AUG-85 SMH-TQ OI= 88 at $5.38 SL=3.25 BUY PUT AUG-80 SMH-TP OI= 68 at $2.56 SL=1.25 BUY PUT AUG-75 SMH-TO OI= 45 at $0.94 SL=0.00 BUY PUT SEP-80 SMH-UP OI= 4 at $5.00 SL=3.00, Low OI BUY PUT SEP-75 SMH-UO OI= 7 at $2.94 SL=1.50, No OI Average Daily Volume = 326 K ************** Dropped Plays ************** IAH - Internet Architecture $96.69 +0.69 (+3.13 this week) Thanks to CSCO earnings and all those sympathy plays that go along with it, we say good bye to IAH tonight. IBM, HWP, SUNW, SCMR, and JNPR were not only mostly up today, all were trading much higher than their closing prices this afternoon. Even without after hours price gains, and even though IAH could move south on us quickly in the right environment, it is pretty tough to play a put that has just broken out over every major dma, and over previous resistance at $96. If we were picking it fresh, we might even consider this to be a long play if the market continues up since the next point of resistance is at $100. For tonight, keep it on your radar. It could still go either way from here. ************** No Play ************** BBH HHH PPH BHH IAH TTH RKH UTH ************* DAILY RESULTS ************* Index Last Mon Tue Week Dow 10976.89 99.26 109.88 209.14 Nasdaq 3848.55 75.63 -14.44 61.19 $OEX 805.96 7.87 2.24 10.11 $SPX 1482.81 16.39 3.49 19.88 $RUT 508.72 6.24 -1.15 5.09 $TRAN 2892.19 7.40 -2.02 5.38 $VIX 20.83 0.01 -0.72 -0.71 Calls MERQ 108.63 4.31 4.31 8.63 Strong bounce from century mark DNA 172.25 1.63 6.50 8.13 Keeps rolling on after dip PEB 101.09 6.81 -2.72 4.09 New, back in the limelight HWP 115.81 3.56 0.50 4.06 Bolted above resistance at $112 MER 138.84 1.41 1.69 3.09 Charging ahead with gains PVN 114.25 -0.09 1.63 1.53 Solid play keeps climbing MVSN 86.81 4.78 -4.19 0.59 One step forward, one step back ABSC 100.00 1.13 -0.75 0.38 Poised to break the pivot pt. AMGN 69.50 3.00 -2.63 0.38 Dropped, not convincing enough AFL 55.50 0.94 -1.00 -0.06 Did someone step on the duck? HGSI 142.50 5.88 -5.94 -0.06 A little profit taking today IDPH 136.13 5.75 -6.63 -0.88 Breather after 6 days of rally COF 57.75 -0.50 -0.63 -1.13 Benefiting from no-hike bias IVX 43.81 -5.13 3.19 -1.94 Dropped, investors running FRX 114.47 -2.19 0.00 -2.19 Continuing to hold its own LEH 126.88 -2.63 -0.13 -2.75 Dropped, quick profit play GENZ 70.19 0.25 -3.06 -2.81 Dropped, offered opportunity Puts VRSN 148.00 -7.75 -6.31 -14.06 New, good news hasn't helped AETH 146.00 -2.50 -8.00 -10.50 New, playing the rollover IMCL 67.00 -0.19 -6.00 -6.19 New, closing right at support AAPL 46.75 0.56 -1.19 -0.63 New, definitive downtrend AMD 61.50 3.13 -3.50 -0.38 Battle of the analysts MRVC 61.00 2.75 -1.75 1.00 Dropped, moving on from here TERN 56.47 2.84 -1.50 1.34 Looks a little top-heavy MU 76.88 3.00 0.75 3.75 Bears hiding at the 10-dma EFNT 61.19 3.50 5.81 9.31 Dropped, news event related 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: ***** LEH $126.88 -0.13 (-2.88) Getting out while the getting is still good. LEH has offered us a quick play in the midst of a financial revival during the past two weeks. Entry points were readily available and profitable for the most part as the stock pulled back to as far as $112. An upgrade from Bear Stearns and LEH catapulted from $120 two days later as investors piled into the hot Financial sector. We have decided to take our quick profits for two reasons. First, the DJIA has put together a seven day rally that has elevated the index just shy of 11000. There could be a rollover on profit-taking. Also, LEH has flat-lined the last two days around $127. So we're being preemptive and taking before the rest. GENZ $70.19 -3.06 (-2.81) During a time when trading was a little rough for the NASDAQ, GENZ offered a defensive, yet opportunistic play. The day after we added it, the stock dropped to $65, offering a nice entry point. The 10-dma helped GENZ during the past week, climbing to as high as $75. Yet, since hitting that level, GENZ has pulled back and appears to be under profit-taking pressure. Today's close was just below the 10-dma of $70.44. It also dipped below $70 briefly during today's trading. We are concerned that a short-term reversal may be ahead, or at the least, a consolidation. GENZ provided some good trading opportunity, but we are letting this one go. AMGN $69.50 (+0.38) AMGN edged above the $70 level early Monday with help from the extended rally in the broader Biotech sector. But, the whipsaws returned Tuesday after AMGN rolled over at resistance at $72, and plunged back below support at $70. Volume was more than robust Tuesday en route to the nearly 4% drubbing. The company announced a strategic alliance with HealthCite, to collaborate on Biotech software and technology. But, the announcement couldn't stop the selling Tuesday. AMGN's directionless trading has prompted us to drop the play in search of a more discernible trend. IVX $43.81 +3.19 (-1.94) What was once relative strength now appears to be relative weakness. The selling that appeared to be capitulation last Friday was nothing compared to the even heavier selling on Monday, when the stock lost $5.13 or 11.2% on almost 4 times the ADV. Today the stock bounced, gaining back part of yesterday's losses, on 185% of ADV. The company came out today, issuing a statement that it was not aware of any news to account for the recent decline in the company's common stock price. Despite the bounce on strong volume today, the downdraft of past few trading sessions can not be ignored. Investors vote with their money and the volume speaks volumes. Looking back at IVX's chart, the stock is once again above its 50-dma but the break in its uptrend is more than evident. News or no news, we are using this bounce as a chance to make our escape. PUTS: ***** MRVC $61.00 -1.75 (+1.00) This would be a play to crow about if it were a call. We were a little late to the party, picking MRVC as a new put after its precipitous decline in late July. No sooner had we picked it, than it reversed direction and has been recovering ever since. Recall our cautionary statements on Sunday to not open any new positions unless strong selling could push the stock back below $55. Well, yesterday was another up day, coming on reduced volume, and although MRVC gave up $1.75 today on even lighter volume (only 60% of the ADV), it looks like the stock has put in a bottom and is ready to head higher. Rather than continue to tilt at this windmill, we’ll mount our horse and pursue other plays. EFNT $61.19 +5.81 (+9.31) Good for the long, bad for the short. An announcement on Monday from NorthPoint Communications(NPNT) that they have chosen EFNT as a Customer Premises Equipment provider for NorthPoint, Canada offered strength to EFNT, COVD and CMTN. This news to rapidly deploy DSL service throughout Canada caused an industry-wide breakout. The upward trend led EFNT to bounce off support of the 5-dma of $56.18 in early trading, hitting a low of $56.83. The stock then broke through 10-dma resistance of $61, rallying to a high of $61.75. Failing to fall to or through $50, EFNT is not going our way. Although it looked like a good play on Friday, it will be dropped from the put plays due to this recent news event. ***********************ADVERTISEMENT************************ Get a NextCard Visa, in 30 seconds! 1. Fill in the brief application 2. Receive approval decision within 30 seconds 3. Get rates as low as 2.9% Intro or 9.9% Fixed APR http://www.nextcard.com/index6.html?ref=aff0049911 ************************************************************ FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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The Option Investor Newsletter Tuesday 08-08-2000 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/080800_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 ******************** PVN $114.25 +1.63 (+1.53) Just a solid play that keeps climbing. Today's close brought PVN to level not seen since last November. The last two days of trading shows a nice, steady intraday trend. Yet, we caution that it was been on lower volume. Monday morning had two brief tests of $110 support as the stock continued higher to today's afternoon encounter with $115 resistance. Watch this resistance level carefully considering that strong volume would be a must to conquer that level. If you are looking for entry into this position, wait for a pullback to the $110 area, followed a burst of buying volume to bounce. This would be an aggressive entry. Considering that PVN has run up 14% in the last five sessions, profit takers could take it down toward the $105 - $107 area. Bounces from here would provide nice entries. Conservatively, wait until strong volume pushes the stock through $115 resistance. Today, PVN established its second international operation in Argentina, targeting the Latin American consumer to establish and build credit. Its first was in the United Kingdom. AFL $55.50 -1.00 (-0.06) Did somebody step on that duck? After a strong close on Monday, some of the air was let out of that quack today. The stock closed in NY at $56.06 but after-hour traders took the stock down a little further. There is no news hitting the wires to drive AFL so the trading appears to be technically driven. The $55 level has been providing intraday support. On Monday, $56 provided intraday support and today it was resistance. So how do we play this? The 10-dma has supplied AFL with some good bounce during the past two weeks. If $55 does not hold, look for a bounce off of the 10-dma at $54.38. Volume has been waning in AFL, along with the broader market, so watch for strong volume to come in and push the stock convincingly through $56. This move would provide a more conservative entry point. MERQ $108.63 +4.31 (+8.63) MERQ bounced off the century mark Monday morning with a little help from the resurgent Tech sector. The company introduced a complete set of wireless solutions to the wireless Web application market. MERQ's announcement Monday morning prompted positive analyst comments Tuesday. DB Alex Brown reiterated its Strong Buy rating, citing the new wireless initiatives and the company's strong business trend. The upbeat comments Tuesday morning propelled MERQ past resistance at $105, which provided a solid entry early in the day. Despite the weakness in the broader Tech sector, MERQ held its ground throughout the day, and looked strong going into the close of trading with a surge in volume. If the late-day buyers return Wednesday morning, watch for entry if MERQ extends its recent rally and moves above resistance at $110. An intraday pullback to support at $107.50 or $105 might provide entry for an aggressive trader if MERQ bounces from either level. HGSI $142.50 -5.94 (-0.06) The Amex Biotech Index ($BTK) rallied for the fifth consecutive day Monday, carrying HGSI along for the ride. But, a little profit taking was bound to take place, and it did. HGSI gave back nearly all of its previous day's gains on Tuesday. The stock fell back to support at $142.50 on less than half of its ADV. The pullback in the Biotech sector was widely anticipated after the group's recent run. However, HGSI's dip Tuesday might be the entry we've been looking for. Wall Street is expecting the Biotech sector to stage an impressive rally into the Fall, citing the host of medical conferences and improving earnings reports. We're looking to get in on that run. Wait for the Biotech buyers to return and consider entry if HGSI moves above $145. A more conservative trader might wait for momentum to build and look for entry if HGSI clears resistance at $150. A bounce off support at $140, or the 50-dma near $137, might provide an intra-day entry if the profit taking subsides. ABSC $100 -0.75 (+0.38) As more and more data suggests, the economy is slowing. Many analysts expect investors to move into the Biotech sector as a defensive play to counter the slowing economy. Combine that positive flow of capital with ABSC's strong technical and fundamental position, and we have the makings of an explosive run. Like we mentioned in Sunday's write-up, ABSC has traced a cup-with-handle formation over the last five months, and is now poised to break above its pivot point. The stock has spent the beginning of this week consolidating around the $100 level. An aggressive trader might watch for an intra-day bounce off $100 for a possible entry point, while a more conservative entry might be found if ABSC can rally above $105. Make certain to confirm any breakout with strong volume. Trading activity will be a telling sign if ABSC is going to break above its pivot point. Also, confirm direction in the broader Biotech sector before entering the play. HWP $115.81 +0.50 (+4.06) HWP bolted above resistance at $112 Monday morning after several bullish articles were published over the weekend about the Hardware sector. The buyers showed up with strength and volume Monday to carry HWP to a new high in its ascending channel. The stock's string of higher highs continued Tuesday after Goldman Sachs reiterated its Buy rating and said the company might beat EPS estimates when it reports next week. The potential for better-than-expected profits helped HWP buck the weakness in the Tech sector Tuesday. Going forward, Wall Street will be watching the DELL report closely Thursday night, which might have an impact on our play. The 5-dma is providing support at the bottom of HWP's channel, which is currently located near $113.50. An aggressive trader might look for a bounce off the 5-day if HWP stumbles in the coming days. A more conservative entry mght be found if HWP traces a new high in its channel, nd rallies above resistance at $116.50. Make sure to confirm a rally with healthy volume. DNA $172.25 +6.50 (+8.13) Monday morning saw a quick dip to the 5-dma before bouncing, providing what turned out to be a beautiful entry point for aggressive traders. By close, DNA inched up just under 1% on about 50% of ADV. This was enough to move it just past resistance at $165. Today, with the rest of the biotech sector taking a break after last week's amazing rally, DNA bucked the trend and continued higher. Gapping up to $170 at the open, DNA made a brief stop at $168.13 before moving higher for the rest of the day to finish up 3.92% on about 63% of ADV. The low volume in the past few trading sessions could be hesitation on the part of traders as the stock price edges closer to the lip of the saucer-shaped formation and the resistance point mentioned by Jim Brown on Sunday at $177. As Jim suggested, traders may want to take some profit if the stock price reaches that level and jump back in if it breaks $177 on high volume. Aggressive traders may want to continue to buy bounces off the 5-dma ($163.71) with additional support at $167 and $165. IDPH $136.13 -6.63 (-0.88) After 6 straight days of rallying, the stock was due for a little breather. On Monday IDPH rallied to close up $5.75, or 4.2%, on news of a new Phase 2 clinical trial for Clenoliximan, a drug they are developing for rheumatoid arthritis. Investors seemed lukewarm however, as the move up was on only about 70% of ADV. Today, the stock gave up all of Monday's gains plus a little more to finish down 4.64% on about half of ADV. The low volume on today's down move is encouraging as it appears to be normal profit taking after a tremendous run last week. However, one item of concern is today's move down closed the stock below its 5-dma (now at $137.13). Those looking for an entry may want to wait for the stock to clear that level with volume before entering. Below that, there is support at $135 and its 10-dma at the $130 area. Looking above there appears to be resistance at $143. A break through that level would find the next level of resistance at $148. MVSN $86.81 -4.19 (+0.58) So far this week it's been one step forward and one step back for Macrovision. On Monday, the stock gained 5.53% and in doing so, broke through $90. This was done on almost twice the ADV, closing the stock just $3.75 shy of its all-time high. Today the stock gave back most of yesterday's gains, closing down 4.6%. Despite this, MVSN was able to close above its 5-dma at $85.50.. Look for this level to continue to act as support. Below that, there is additional support at $85, $83.75, its 10-dma at $82.10 and $81.60. A confirmed bounce off of these levels could be a great entry point for a stock with such a strong chart and so close to its all-time high. Ever since the blowout earnings last Monday, volume in the stock has risen dramatically, especially to the upside which suggests that interest in MVSN's shares has increased. Today's move lower was on about 187% of ADV and while that is high, after five straight days of rallying on equally high volume, a little profit taking is expected. Overhead, there is resistance at $88 and $90. Getting past $90 will leave a clear path to its all-time high. COF $57.75 -0.63 (-1.13) Benefiting from the continued expectations of a no-hike interest rate decision from the August FOMC meeting, COF continues to lurk in new high territory. After setting the most recent high-water mark ($59.25) last Monday, the stock pulled back to consolidate its gains and gave us another attractive entry point as it bounced just above the $54 support level. Then, continuing to use the 10-dma (currently at $57) as support, COF launched higher towards the end of the week and has spent this week struggling to reach its all-time high again. Although the bulls managed to succeed in touching that level again early in today’s session, their victory was short lived as the marauding bears came out of hiding and pushed the stock lower for much of the day. The buyers weren’t willing to give up too much ground though and drew their line in the sand (support) at $57.50. So what do we do from here? The Financials are still leading the DJIA higher, and as long as they maintain their strength, we can consider new positions as COF bounces at support and heads higher on increasing volume. If you are worried about getting caught in a congestion zone, wait for increasing volume to push the stock through resistance at $60 before playing. MER $138.84 +1.69 (+3.09) Charging ahead, MER picked up yesterday right where it left off on Friday. Tagging a new 52-week high yesterday was just a warm-up, as the stock surged again today, resetting the yearly high again, this time at $139.38. Benign economic data continues to fuel the belief that the Fed will leave interest rates unchanged later this month, and the Financials will be one of the primary beneficiaries of such a move. After leading its sector higher and consequently propelling the DJIA within spitting distance of 11000, the stock is now up nearly $20 in only 7 days. With the chatter on CNBC about the Financials possibly running out of steam, make sure you tighten up your stops to preserve your profits. MER hasn’t even descended to touch its 5-dma (now at $133.91) since last Thursday and is bumping its head on the upper Bollinger band, so a pullback would not be out of the question. Volume has also been declining the past 2 days, which is another indication that the current move may need to pause before continuing higher. Look for support to appear at $135 (the high from early July), followed by the 5-dma. Wait for a pullback to support and then pull the trigger as the buying volume ratchets up again. FRX $114.48 +0.00 (-2.21) Continuing to hold its own, FRX is a keeper for the moment. Trading in a range from $112 to $118 this week, FRX is continuing to offer nice entry points at the lows. The stock opened today at $114.25, where it stalled for most of the morning. The stock only traded as low as $113.25, after which it broke out on a strong volume move to the day high of $115.75, overcoming resistance at the 5-dma of $114.50. The stock pulled back briefly, but regained momentum in the last hour of trading, jumping above $115. FRX received positive press on Monday, securing the right to develop and market Dexloxiglumide, a drug used in the treatment of Irritable Bowel Syndrome, from which over 30 mln people suffer. Aggressive traders may continue to look for entry points around $112.50 on upward momentum bounce and strong volume spikes. Traders who are feeling more conservative would do well to look for a convincing move above $114.50 before opening a position. ******************* PLAY UPDATES - PUTS ******************* AMD $61.00 -4.00 (-1.50) The battle of the analysts intensified early this week when AMD suffered a downgrade from US Bancorp Piper Jaffray. The influential Chip analyst, Ashok Kumar, slashed his rating on AMD to a Neutral from a Buy rating, citing the slowing growth in the PC market and the oversupply of flash memory on the market. Then, Prudential Securities came to AMD's rescue by reiterating its Strong Buy rating and calling the recent sell-off unwarranted. The feuding analysts fell into the background Monday after the SOX bounced higher from its recent sell-off, which boosted AMD above the $65 level. But, the Chip bears returned Tuesday to take AMD back down near support at $60. The wide intra-day swings are providing entry points as AMD trades between $60 and $65. The stock is again precariously hovering above critical support at $60. Look for entry if AMD falls below support at $60, and confirm a breakdown with continued heavy volume and weakness in the Semi sector. An aggressive trader might continue to target shoot intra-day for entry between AMD's range of $60 and $65. MU $76.88 +0.75 (+3.44) Typical of the weakness being seen in many of the Semiconductor stocks, MU looks like it is ready to roll over. After finding support at $73 (just above the 100-dma) on Friday, the stock managed to stage a tenuous recovery. After moving up just over $5, today MU ran headfirst into the 10-dma (currently at $78.25) and by the close it was clear who won that exchange. Three times today the bulls made a run at this level and all three times the bears chased them away. After reversing on Friday, the volume has been steadily declining and today’s weak gain saw only half the average daily number of shares change hands. This seems to indicate that the recovery is running out of steam. On the other side of the coin, the lows have been getting progressively higher the past 3 days, and as the stock approaches resistance at $78, this bullish wedge pattern (although more significant over a longer period of time), could portend a breakout to the upside. The fly in the ointment is the sentiment in the Semiconductor sector; if it improves, look for the rising tide to lift the weaklings along with the leaders. Consider entering new positions if MU rolls over at resistance again, but confirm that volume increases as the price rolls over. Intraday support has been forming near $76, and more conservative players may want to wait for the selling volume to push MU below this threshold before playing. TERN $56.50 -1.50 (-1.38) TERN eclipsed the $56 level early Monday morning, en route to ultimately rallying above its 10- dma. The stock benefited from the broad rally in the Tech sector early this week, with particular strength in broadband related issues, but now looks a little top-heavy. TERN spiked above $60 early Tuesday morning, after its opening gap down to the $56 level. Once the amateurs retired, TERN slowly slipped back down near support at the $56 level. The first signs of weakness in the Tech sector Wednesday morning might warrant consideration for entry into the play at current levels. However, watch how Wall Street reacts to the upbeat CSCO report. If the Networking sector carries TERN higher, watch for the stock to rollover near congestion around $57.50, or again at the $60 level, and consider entry if the downward momentum picks up. A more conservative entry might be found if TERN falls back below its 10-day, which is now providing support around $55.33. **********************ADVERTISEMENT****************************** FREE! FREE! FREE! FREE! Investor's Business Daily - Free Two Week Trial! No obligation! No invoices! And nothing to cancel! Limited time offer! Click Here! http://ibd.infostreet.com/cgi-bin/freeoffer.cgi?source=ARZ0JES ***************************************************************** ************** NEW CALL PLAYS ************** PEB - PE Biosystems $101.09 -2.72 (+4.09 this week) PE Biosystems develops, markets and maintains systems that are used in basic life science research, pharmaceutical research and development, diagnostics, forensics, and food testing. PEB and the Celera Genomics Group are parented by the PE Corporation. One of PEB's largest customers is sister company, Celera Genomics, which used the company's technology in its effort to map the human genome. The separately traded stocks were launched in 1999. The genomics-related issues hurled the biotech sector back into the limelight last week. While the broader markets erupted, PEB tested the waters and managed to hold a higher price level above $90. There was a lot of intraday volatility with spreads of 6 to 7 points; however, it demonstrated strength above the old resistance. On Monday, it became evident that the momentum was building as PEB cleared the century mark. The technical break above this psychological hurdle and the corresponding 5-dma ($97.86) should generate more enthusiasm in the short-term. There is also another factor, which may act as a stimulus for PEB's advancement. At $110, the stock is considered a split- candidate. This element in itself can sometimes create a wave of excitement bringing in more momentum traders. As it stands, the company currently has 500 mln shares authorized and about 208 mln issued, which offers plenty of room for a stock dividend. For now, the stock's strong disposition at its new near-term support of $100 is a potential entry point assuming the bulls keep charging ahead. If profit takers come in for a piece of the pie, then look at $97-$98 for light support and again around $92 at the 10-dma. Some others in the genomics like sister company Celera (CRA) and Millenium Pharmaceuticals (MLNM) are good references to how the sector is moving. Confirm sentiment and stock direction before entering new plays during these turbulent times. On July 27th, before the market, PE Biosystems released its fiscal 4Q earnings meeting analyst expectations. The unit's profits rose 26% on increased sales of tools used in genetic research, like the Human Genome Project. The numbers came in at $56.6 mln, or $0.26 p/s in comparison to $45 mln, or $0.21 same quarter last year. The following day PEB was reiterated an Outperform at Lehman Brothers and given a $97 target price. ***August contracts expire next week*** BUY CALL AUG- 95 BVE-HS OI=826 at $ 8.50 SL= 6.00 BUY CALL AUG-100 BVE-HT OI= 0 at $ 7.75 SL= 5.50 BUY CALL AUG-105 BVE-HA OI= 1 at $ 3.50 SL= 1.75 BUY CALL SEP-100*BVE-IT OI=550 at $10.50 SL= 7.50 BUY CALL SEP-105 BVE-IA OI=308 at $ 8.25 SL= 5.75 BUY CALL SEP-110 BVE-IB OI=150 at $ 6.50 SL= 4.50 Picked on Aug 8th at $101.09 P/E = 116 Change since picked +0.00 52-week high=$160.00 Analysts Ratings 6-4-1-0-0 52-week low =$ 29.16 Last earnings 06/00 est= 0.26 actual= 0.26 Next earnings 11-02 est= 0.18 versus= 0.14 Average Daily Volume = 1.78 mln ************* NEW PUT PLAYS ************* VRSN - VeriSign, Inc. $148.00 -6.31 (-14.06 this week) VeriSign is the leading provider of Internet trust services and digital certificate solutions needed by Web sites, enterprises and individuals in order to conduct secure electronic commerce and communications over IP networks. VRSN has used its secure online infrastructure to issue over 100,000 of its Website digital certificates and over 3.5 mln of its digital certificates for individuals. To date, over 300 enterprises have subscribed to the OnSite service and VRSN has strategic relationships with industry leaders including Cisco, Microsoft, RSA, Security Dynamics, and VISA. Even good news can't move this stock up. Considering the post-earnings depression since VeriSign reported on July 26th, one would think that the company must have disappointed or had a nice healthy pre-earnings run-up. Closer examination would reveal that this is not the case. For the quarter, VRSN posted revenues of $70.3 mln, a 275% increase over last year's revenues of $18.7 mln. This was good enough to earn 7 cents per share for the company, easily blowing away Street expectations of a one penny loss. Along with that were bullish words from President and CEO Stratton Sclavos. According to Sclavos, "Our second quarter results underscore the momentum we are seeing across all of our lines of business and the leverage that is inherent in our business model as we continue to drive more and more services through our infrastructure." It appears that this was not enough as the stock has moved sharply lower since then, despite the waves of good news. An upgrade by Sands Brothers, new business from CIBC, an alliance with INKT, even a dismissal of a $1.7 bln class action lawsuit against the company cannot seem to break VRSN out of its downward spiral. Since the news can't explain the recent activity, let's examine the technicals. The stock has had difficulty with the 10-dma (now at $160) since earnings and has been riding it down. Bouncing sharply last Thursday, the stock found resistance in the $165 area and since then has moved lower, violating not only its 100-dma but it's 200-dma as well, both in the $155 area. Today, VRSN closed below the key support level of $150, putting it also below its 5-dma. Failure to rally above resistance at $150, its 5-dma at $153.80, $155 and $160 may be an opportunity to enter this play. The next levels of support appear to be at $145, $142 and from there it's a short trip to $135. ***August contracts expire next week*** BUY PUT AUG-155 XVR-TK OI=1204 at $13.38 SL=10.00 BUY PUT AUG-150*XVR-TJ OI= 661 at $10.25 SL= 7.00 BUY PUT AUG-145 XVR-TI OI= 549 at $ 7.75 SL= 5.50 BUY PUT SEP-150 XVR-UJ OI= 467 at $18.13 SL=13.00 Average Daily Volume = 4.02 mln IMCL - Imclone Systems $67.00 -6.00 (-6.19 this week) Engaged in the research and development of novel cancer treatments, IMCL focuses on growth factor inhibitors, therapeutic cancer vaccines and angiogenesis inhibitors. The company’s lead product candidate, IMC-C225, is a therapeutic monoclonal antibody that inhibits stimulation of a receptor for growth factors upon which certain tumors depend. Phase I/II clinical trials have been promising. The lead candidate for angiogenesis inhibition, IMC-1C11 is an antibody that binds selectively and with high affinity to KDR, a principal Vascular Endothelial Growth Factor (VEGF) receptor, thus inhibiting angiogenesis. If you follow the Biotech sector, you've undoubtedly noticed that it is having problems lately. After leading the NASDAQ rally in early June, the Biotechs have handed the leadership roll off to other sectors, that are also struggling to move higher. As a matter of fact, a quick look at a daily chart of the Biotech Index (BTK.X) looks like it is forming the right shoulder of a bearish head and shoulders formation. If the Biotechs continue to roll over as we head into the heart of the summer doldrums, the weakest stocks in the group will likely feel the most pain. So what about IMCL makes it look weaker than its peers? Well, a good place to start is the company’s most recent earnings report. Missing estimates by more than 33% and showed declining revenue, and the estimates for this quarter (announcement set for August 15th) are calling for a wider-than-expected loss compared to this quarter last year. The series of lower highs the stock has been posting since May is a reflection of investors' intolerance of anything but glowing reports of increasing revenue and increasing profits (or decreasing losses). As the Biotech sector continues to shake out the winners from the losers, the winners will have a fat pipeline of products coming to market and will be showing improving financials - two criteria that IMCL does not meet. So how do we play this one? Today was a painful day, as the stock gave up $6 to close right on the $67 support level, and below the 200-dma ($70.69) for the first time in over a year. Volume today was a solid 50% over the ADV, and if this selling continues, a break below $66 looks like a good entry trigger. A recovery followed by a rollover at the 10-dma ($72.91) may provide the opportunity to get into the play at a better entry point. ***August contracts expire next week*** BUY PUT AUG-70*QCI-TN OI=241 at $ 6.63 SL=4.50 BUY PUT AUG-65 QCI-TM OI=320 at $ 4.00 SL=2.50 BUY PUT SEP-70 QCI-UN OI=174 at $10.13 SL=3.75 Average Daily Volume = 577 K AETH - Aether Systems Inc $146.00 -8.00 (-10.50 this week) Aether Systems is the company that offers information in the palm of your hand. They provide wireless data services and systems enabling people to use wireless handheld devices for real-time data communications and transactions. The company also designs and develops wireless data systems and software engineered strictly for business customers. AETH is based in Owings Mills, MD and has branch offices in New York and Florida. Traders kept AETH in the palm of their hands until the telecom battle began in earnest. The gyrations between $165 and $145 recently afforded day traders a multitude of opportunities from which to profit, but now it appears AETH may sink below the support of the 200-dma ($144.76) in the near-term. Previously, AETH bounced off the lows intraday, but for three consecutive days now the stock has steadily inched lower. And today's strong 5.2%, or $8.00 cut was also a significant factor. With the telecoms struggling to reclaim some dignity in the markets and the PPI coming up this Friday, AETH may very well prove to be lucrative. There's no doubt, however, that this is an aggressive play. We're hoping that the NASDAQ will rollover and provide a more bearish environment. It's imperative to wait for AETH to make definitive moves south. Even the more risk-aversive will want to confirm that a downtrend line is intact before taking positions. ***August contracts expire next week*** BUY PUT AUG-150*HEX-TJ OI=176 at $11.00 SL=8.25 BUY PUT AUG-145 HEX-TI OI=237 at $ 8.25 SL=5.75 BUY PUT AUG-140 HEX-TH OI=495 at $ 5.75 SL=3.75 Average Daily Volume = 1.31 mln AAPL - Apple Computer Systems $46.75 -1.19 (-0.63 this week) Apple ignited the personal computer revolution in the 1970s with the Apple II and reinvented the personal computer in the 1980s with the colorful Macintosh. Other products include the Mac OS operating system, the portable iBook, and a variety of multimedia tools. Apple is committed to bringing the best personal computing experience to students, educators, creative professionals and consumers around the world through its innovative hardware, software and Internet offerings. The company is still run by the original founder, Steve Jobs. Here again we have a story of slowing PC sales. The box makers recently warned of slowing sales and painted a poor picture for the 3Q. This outlook coupled with the lazy days of summer trading shed any hopes for price stability. It looks like AAPL could head lower before finding a bottom. The recent trading action has kept AAPL below the near-term 5 and 10-dmas. And each attempted recovery has hit with a wall of resistance at $50. A rollover near this mark are reasonable entry points assuming the market is cooperating. It could be risky, but we've got the PPI numbers coming out on Friday, and the NASDAQ looks to be topping out at 3900. Still, it's always best to keep an escape plan in mind in the event of a short-term rally. Keep those stops tight. Technically, there's light support first at $45, and then lower at $40. Watch for opposition at these levels. ***August contracts expire next week*** BUY PUT AUG-55 AAQ-TK OI= 2740 at $8.88 SL=6.25 BUY PUT AUG-50*AAQ-TJ OI= 2302 at $4.50 SL=2.75 BUY PUT AUG-45 AAQ-TI OI=14525 at $1.69 SL=0.75 Average Daily Volume = 4.62 mln ********************** PLAY OF THE DAY - CALL ********************** HWP - Hewlett-Packard $115.81 (+4.06 this week) HP is a top provider of computers, imaging and printing peripherals, software, and computer-related services. More than half of HP's sales come from outside the US. To further fuel its growth, HP is restructuring itself as an Internet specialist providing Web hardware, software, and support to corporate customers. To that end the company has spun off its test and measurement equipment and medical electronics businesses as Agilent Technologies (A). Most Recent Write-Up HWP bolted above resistance at $112 Monday morning after several bullish articles were published over the weekend about the Hardware sector. The buyers showed up with strength and volume Monday to carry HWP to a new high in its ascending channel. The stock's string of higher highs continued Tuesday after Goldman Sachs reiterated its Buy rating and said the company might beat EPS estimates when it reports next week. The potential for better-than-expected profits helped HWP buck the weakness in the Tech sector Tuesday. Going forward, Wall Street will be watching the DELL report closely Thursday night, which might have an impact on our play. The 5-dma is providing support at the bottom of HWP's channel, which is currently located near $113.50. An aggressive trader might look for a bounce off the 5-day if HWP stumbles in the coming days. A more conservative entry mght be found if HWP traces a new high in its channel, and rallies above resistance at $116.50. Make sure to confirm a rally with healthy volume. Comments Despite the dichotomy in the Tech sector and the broader markets recently, HWP has established a solid uptrend over the past two weeks. Wall Street will be looking for good numbers when the company reports its quarterly results next week, which is the catalyst we're looking to carry the play higher. The rolling trend of higher highs and lows should continue as the Tech bulls and bears duke it out over the coming week. After bouncing off the 5-dma this afternoon, HWP reversed course to retest resistance at $116. A breakout above that level might set HWP to test congestion at the $120 level. A breakout to a new channel high will provide new entry into the play. ***August contracts expire in two weeks*** BUY CALL AUG-110 HWP-HB OI=3754 at $ 8.50 SL=6.50 BUY CALL AUG-115*HWP-HC OI=2317 at $ 5.50 SL=3.75 BUY CALL AUG-120 HWP-HD OI=3481 at $ 3.25 SL=1.75 BUY CALL SEP-115 HWP-IC OI=1530 at $ 8.88 SL=6.75 BUY CALL NOV-120 HWP-KD OI= 606 at $12.25 SL=9.50 Picked on July 30th at $107.25 P/E = 36 Change since picked +8.56 52-week high=$156.00 Analysts Ratings 9-10-4-0-0 52-week low =$ 67.00 Last earnings 04/00 est= 0.82 actual= 0.87 Next earnings 08-16 est= 0.85 versus= 0.85 Average Daily Volume = 3.75 mln ***********************ADVERTISEMENT************************ Get a NextCard Visa, in 30 seconds! 1. Fill in the brief application 2. Receive approval decision within 30 seconds 3. Get rates as low as 2.9% Intro or 9.9% Fixed APR http://www.nextcard.com/index6.html?ref=aff0049911 ************************************************************ ************************ COMBOS/SPREADS/STRADDLES ************************ Buying the Right Option... Last Sunday’s discussion of Option Trading Basics brought some interesting comments from the readership. Many of the replies were in regard to my statement that most novice investors lose money not only because they "buy" options but also because they pay little attention to the fair value of the position they are purchasing. Buying a call is the most basic option trading strategy an investor can utilize when he anticipates a bullish movement in a particular stock. There are different methods for choosing the underlying issue but in simple terms, when you buy a call, you expect to the stock's value to increase before the option expires. Buying options provides investors with leverage, as well as limiting the loss on the position to the cost of the option. This common method of directional option trading maximizes the trader’s potential for profit and provides tremendous flexibility in managing the position for optimum performance. Obviously, it's a great technique when used properly but many inexperienced traders don't realize how difficult it is to profit from the strategy on a regular basis. Statistics reveal and most experts agree, option buyers lose money the majority of the time. One of the primary reasons that traders fail to achieve a high rate of success in this strategy is they rely too much on market timing and too little on proper position selection. The concept most investors overlook is that the change in value of a given option is not always directly correlated to the price movement of the underlying security. As a result, even when a call option is purchased at the exact low point in the underlying stock’s current trend, it is still quite possible that the eventual upside movement will not generate a favorable profit from the resulting change in the price of the option. The fact that the price of the underlying instrument and the value of option fluctuate independently, based on several unique components, is one reality that is often ignored by the novice trader. Understanding theoretical pricing and the elements that determine the fair value of a specific option can be very difficult for new investors. The primary factors that influence an option’s value include the price and volatility of the underlying instrument, and the time remaining in the life of the option. These components can affect the price of the listed option substantially and it is important to determine whether they will adversely limit the potential for profit in a given position. Implied volatility is a fundamental element in the pricing of an option and traders should be aware of how a change in this value can affect the outcome of a position. In some instances, an issue that has been historically volatile may reach periods in which it is somewhat inactive, and conversely, stocks which are normally subdued in terms of volatility will suddenly rally or decline precipitously. These changes in price behavior will alter the influence of this factor on the option premium. Often, when you buy an option, a subsequent decline in volatility can create a loss in the position, regardless of whether the underlying issue moves in the forecast direction. Ideally, an option buyer should focus on situations where implied volatility is relatively low. Using that approach, one can profit not only from a bullish movement in the underlying security but also from a favorable change in the option’s volatility. There are other influences that can have an effect on the price behavior of a specific option. One important bias is the trend of the market. For example, optimism rises during a market rally and prices often become inflated as new interest in call options enlarges demand. Option premiums increase substantially during periods of bullish sentiment and in many cases, theoretically expensive options emerge, regardless of the price movement of the underlying issue. Even during times when the market lacks a definite trend, public opinion and the current economic outlook can have an important effect on option price behavior. When the majority of investors lack interest in the market or there is indecision on the part of analysts about future direction, option prices generally decline. The reason is simple; options need activity, either in the price movement of the underlying issue or in its potential (speculative) value, to maintain robust premiums. An experienced trader will use these market slumps to increase his potential for profit, opening new positions when the option premiums are at a discount. Another significant factor to consider when buying options is supply and demand. This element, along with liquidity, can have a material affect on the pricing of options. A lack of buying interest causes premiums to deflate, creating opportunities for traders who use strategies that profit from discounted prices. Liquidity relates to trading volume, and the ability to buy or sell an option for a fair price, at the true market value. As noted earlier, market rallies normally produce higher trading volumes and the bullish trend often carries over to derivatives, creating greater demand for listed options. The increased liquidity attracts institutions, which in turn add to the trading volume. Surprisingly, institutions are primarily option writers, selling both put and call options to enhance the income from their stock portfolios. This lesser-known aspect of option trading can be a great benefit to investors who attempt to earn their profits through speculative (buying) strategies. The appropriate price for a particular option is a primary factor to consider when participating in a directional strategy. At the same time, the outlook for the underlying issue, its potential volatility and the overall character of the market are also material considerations. As with any investment, the position entry is particularly important. It deserves one’s best analysis and judgment. Correctly timing the purchase requires a thorough knowledge of charting techniques and market trends. In addition, it's important to make a few key decisions: What is your risk tolerance? What will you do if the trade goes against you? At what price and in which way are you going to exit the position? Are there alternative strategies that can help limit losses and increase profits? At times, it seems the most costly (and often self-taught) lesson is the value of an exit strategy however, the entire process is something you must completely understand because a successful exit is by and large the product of a proper entry. Good Luck! ************************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 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
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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