The Option Investor Newsletter Wednesday 08-09-2000 Copyright 2000, All rights reserved. 1 of 1 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/080900_1.html Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 08-09-2000 High Low Volume Advance/Decline DJIA 10905.80 - 71.10 10978.30 10892.60 1.06 bln 1440/1402 NASDAQ 3853.50 + 4.95 3936.46 3849.77 1.52 bln 1844/2111 S&P 100 807.06 + 1.10 811.87 805.00 totals 3284/3513 S&P 500 1472.87 - 9.94 1490.37 1471.32 48.3%/51.7% RUS 2000 507.50 - 1.22 512.45 507.24 DJ TRANS 2847.91 - 44.28 2893.69 2838.04 VIX 21.33 + 0.50 21.91 20.99 Put/Call Ratio .57 ****************************************************************** Are You A Believer Yet? Since my last wrap a week ago, the NASDAQ has made many of us ask ourselves, is this rally for real? Last Thursday, the NASDAQ gapped down to 3521 and staged a 240 point turnaround to close at the highs of the day. No rollover, no looking back. So today, with the NASDAQ closing at 3853, the tech index has made an almost 10% recovery in just five sessions. It has been a little surprising for market-watchers considering the seasonal factors, myself included. I have to say it though, I'm not a believer...yet. On the euphoria of CSCO's earnings last night, there was no doubt that the NASDAQ was going to gap up. Being the bellwether that it is, CSCO's report boosted many of the other major networking issues yesterday in after-hours, including JNPR and SCMR. Yet, after the open at 3915, that buying euphoria didn't seem to be overly convincing as investors took the opportunity to sell into the rally. Trader Talk on CNBC was that some fund managers were unloading long positions into the strength. The talk on the Street once again is whether or not investors have the conviction to keep this market moving ahead like it has done so impressively the past week. For the second day in a row, market internals show that NASDAQ Decliners narrowly beat Advancers by a 7-6 margin. So in a true battle between the bulls and the bears, the NASDAQ has slowed and settled into another narrow range between 3800 and 3900. In fact, today's intraday chart shows that the NASDAQ traded between 3875 and 3900 for most of the day, lacking any real excitement. It wasn't until the finally half hour of the day that sellers unloaded on the market to bring the NASDAQ to the recent intraday support of 3850. Notice on the chart below that the NASDAQ trading has been choppy at best, minus the August 3rd launch. With exception of the first hour of trading today above 3900, the NASDAQ has had problems bumping up into this resistance. Also posing as a resistance point are the converging 50-dma and the 100-dma, 3905 and 3904 respectively. Not too far above that is the 200-dma at 3917. Jim pointed out yesterday that all of these technicals are coming together, along with the 15-dma, to either spoil this recent rally or facilitate a breakout beyond belief. Are you a believer? All in all, it was a boring day on the NASDAQ. There was some individual stock news that did, however, spark some buying interest. In addition to CSCO boost, Raymond James analyst Todd Koffman, coincidentally, upgraded JNPR from a Market Perform to a Strong Buy after a Tuesday evening meeting with company management. He stated that the competitive environment is "very favorable" for JNPR. JNPR, you can thank CSCO for that upgrade! JNPR finished up $6.69 to close at $165.63. And yet another CSCO-related story that sent two stocks skyrocketing was the announced merger of Phone.com(PHCM) and Software.com(SWCM), which will be headed up by former CSCO Executive VP Donald Listwin. The agreed merger, worth $6.4 bln, had investors scrambling to buy whatever they could. Terms of the deal have PHCM issuing 1.6015 shares for each SWCM. With this union and the expertise of CSCO's Listwin, who will be the President and Chief Executive, the merged entity will look to grow as one of the chief providers of software to both wireless and landline phone carriers, portals, and ISPs. Both stocks were handsomely rewarded today with PHCM gaining $13.06, or 17%, and SWCM soaring 32%, or $34.69, to close at $142.44. Man, I wish I owned some calls on that one! Well, as the NASDAQ drains the boredom from me, the INDU is finally looking interesting again. Challenging key resistance of 11000 for the first time since April 26th has brought some excitement back to the NYSE. After a seven session rally from the depths of 10500, investors were due to take some profits today as the INDU traded 85 in a point range. On the upside, buyers haven't officially run the INDU into 11000 yet, as an earnings warning from WMT dragged the index down. Today, the world's largest retailer urged analysts to cut estimates by two cents from an expectation of $0.33 per share, citing an accounting shift announced last quarter that books their layaway sales differently now. Rather than booking the layaway sale at the time of "laying away," if you will, now WMT is booking those sales when they are paid for. While a creative reason, some analysts are looking to lower-than-expected sales in Germany, which has resulted in the retailer pushing back its estimated time of profitability to 2002. During the past quarter, WMT says they have experienced slowing consumer traffic, but this was countered by the average price remaining high. WMT attempted to lighten the brunt of warning by stating that they expect consumer spending to increase in the 3rd quarter with back-to-school shopping. WMT lost 7% today, finishing off $4 at $53.63. All eyes will be on the Retail Sales numbers and the PPI due out on Friday for more clues to the trend of the economy. Even with this bad news, the INDU has managed to maintain short-term support 10900, closing 10905. This recent rally has broken the trend of lower highs and has many investors breathing a sigh of relief. Looking at the chart below, the trend is beautiful. After launching from 10500, the INDU put in a few days at the 10700 area, where there is a bit of congestion. Tomorrow will be a critical day for the INDU ahead of the economic data on Friday. Financials have pulled back today with the broader profit taking, and further buying of these issues could be the necessary catalyst to move the INDU to 11000. GE, considered as a good barometer for the INDU, traded to a 52-week high today on some heavy buying burst in the final hour of the session. There was no news that drove the activity. GE closed at $55.94. The disaster du jour was a court ruling against LLY regarding their Prozac patents. Trading in LLY was halted today at 1pm EDT due to a news release. When that news hit, the sellers didn't hesitate to punish LLY. Previously trading at $107, once reopened, investors ran for the exits at $75. The root of this evil selloff was the judgement from a U.S. Appeals Court, reversing a lower court decision that gave Lilly's blockbuster anti-depressant drug Prozac patent protection through 2003. The drug does, however, have patent protection through 2001. Well, when there's a loser, there's a winner, and that would be Barr Laboratories(BRL). This is a victory for BRL and other generic drug manufacturers, who will most certainly capitalize on the huge market for this popular drug. Prozac represents a quarter of Lilly's bottomline. They might need a little more than just Prozac to relieve this depressing stock performance. LLY plunged $32.54 while BRL jumped $30.25, both closing at $76. Today's hot IPO stole the show, and attracted much of the limited summer capital. McData(MCDT), the EMC spinoff, opened the day at $73, well above the pre-market price of $28, which was upped from the initial range of $19 to $21. MCDT successfully priced 12.5 mln shares at $28 and shareholders saw an incredible first-day pop, reminiscent of those remarkable 1999 IPOs. In somewhat of a one-up to AOLA's IPO yesterday, MCDT tacked on a healthy $57.56 from the initial offering price, closing at $85.56. McData, headquartered in Broomfield, CO, is a provider of enterprise switches and software for connecting Web servers. EMC plans to spinoff remaining MCDT shares to its shareholders in 6 to 12 months. Looking forward to tomorrow, the question is, will investors sell into strength on AMAT earnings, like they did with CSCO's today. AMAT surprised the Street by two cents, posting profits of $0.70 per share. Revenues jumped by 83% from a year ago. This may help ease the concerns over the semiconductor cycle that has been the center of debate since Jonathan Joseph's comments last month. After tomorrow's close, DELL will report earnings and investors will be eagerly watching to gauge the outlook for the box makers. With overhead resistance very near on both the NASDAQ and the INDU, it is going to take a strong volume effort to push the markets to the next level. If we continue to sell into strength, a rollover could be imminent. Keep tight stops on your existing positions. The VIX.X (is it still broken?) inched up 0.48 to 21.31, so it is still in the red alert area. PPI and Retail Sales on Friday are lurking. August expiration is just a week away, so use caution in initiating new positions in August contracts. With the market in a moment of flux, it really could go either way. I'm not a believer that we have the catalysts and the conviction to go to new highs. So when you get ready tomorrow to trade, ask yourself, am I a believer? Good luck and when in doubt stay out. Matt Russ Asst. Editor ********************************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=164 ***************************************************************** *********** OPTIONS 101 *********** Only Trade The Good Ones By David Popper Once upon a time, while leaving an Orlando Magic basketball game, I noticed people handing out books. I was handed what turned out to be an investment book by a then current "guru." The book touted "secret" investment techniques "that only the rich know." These "secret" techniques were none other than simple option strategies such as writing covered calls, selling puts, buying calls, etc. I read over the book one Thanksgiving and became intrigued with the notion of writing covered calls. In this book, the "guru" made it sound so easy. He claimed that you could make between 14% and 40% per month employing this strategy. All that you had to do was buy stock that had a call premium of 10%, buy all of the stock that you possibly could including using most of your margin, and sell the calls. Why in a few short years you too could be a millionaire. I was given a web site which listed stocks that had the highest call premiums but had no real fundamental or technical analysis. I found Rastergraphics. The stock sold for $5 at the time. The $5 call for the current month was $0.50. Ah, the color of money. That was all I needed to know. Who cares about what product or service Rastergraphics makes? Who cares who its competitors are? Who cares if it makes money? Who cares what the chart looks like, I made 10%. I felt great until 2 weeks later when the company's share price was cut in half. Two months later it was delisted. I made the same mistake that a na´ve teenager would make on the dating scene. She is beautiful-I'm in love, even though I don't know her name, background, family or anything else. It didn't take more than one error in dating to gain some discretion. So too, the Rastergraphics experience taught me to realize that premiums were not everything. Earnings matter. Long term prospects matter. The chart matters. In short, you should only trade quality stocks that you wouldn't mind holding long term. If you only trade stocks that are worth holding for the long term, you are never worse off than a long term holder of a quality stock. You, in fact, are in a much better position because as a call writer, you are always collecting premium. The past few years have demonstrated that quality stocks, particularly in the high tech area, will have violent down times followed by violent upward moves. Purchasing quality stocks and continually writing calls should keep you profitable over the long run. In short, the "guru" was right, writing calls is an effective cash flow technique. The "guru," however, didn't tell me the rest of the story. Rastergraphics episodes are the other half of the story. Margin can make it worse. Short-term covered calls are effective, by itself or in combination with other strategies, if and only if used in light of basic fundamental analysis (earnings) and technical analysis (relative strength and chart analysis). I wish that I could say otherwise, but nothing substitutes for homework and nothing substitutes for quality. So how do you do your homework? An easy way is to use the system that I discussed two weeks ago. I began to use one fundamental measure and one technical measure. The fundamental measure is EPS (earnings per share). As I explained, in Investors Business Daily (IBD), each company's EPS is listed. IBD measures the EPS by comparing a company's earnings in the two most recent quarters and comparing them to the same two quarters from the year earlier. Then, the earnings growth rate for the past 5, 4, and 3 years are evaluated. The results are compared to all other stocks and are rated on a scale of 1 to 99, with 99 being the best. For example, if a stock is rated with a 90 EPS rating, it outperformed 90% of all other companies in earnings growth. I insist that a stock have at least an 80 EPS. The technical measure that I use is relative strength (RS). IBD measures the stock's price change over the past 12 months and once again compares it with the universe of stocks. If a stock has a 90% RS, then it has outperformed 90% of the stocks over the last year. Once again, I insist that a stock have an RS rating of 80%. Once a stock is selected, I then try to make my trade based on the chart. Is the stock trading above its 10 day, 20 day, 50 day, or 200 day moving average? Is the stock basing or is it topping? Is the volume greater on up days than it is on down days? This is not heavy duty technical analysis, this is the basics. The point is, a Rastergraphics situation can be avoided with a minimum of effort. That is, simply picking good stocks at technically reasonable times. If you are not day trading, precision with entry points is not near as critical. The bottom line is, you should insist on only trading the good ones. Contact Support ************** TRADERS CORNER ************** Rolling Options Continued By Austin Passamonte It's official; traders exist who still believe there is money to be made on stocks other than NASDAQ issues. Perish the thought? I even saw one noted giant fund manager on CNBC Monday profess that SOX.X issues are for the most part mature, save a couple. Not only that, he predicted traders again will turn their attention on some NYSE stocks that offer an unexciting but steady growth potential to us from here. I realize the RMBS & PDLI fans just clicked the "back" button on their browser toolbars, but for those of us who remain, I do love such symbols too. I enjoy the good fortune of having a life designed with available time to watch market action 25/8, which comes in very handy when trading such stocks. I'm willing to bet a majority of readers here mirror the population in general; you have jobs, careers, families and favored hobbies all vying for your precious time. Is that a fair assumption? The volume of email we received since Monday's article seems to back that up. To summarize the feedback, numerous traders here would love to play methodical trades that evolve within parameters that limited time can handle. Let's cover more details to the rolling strategy and we'll move on from there. Rolling stocks (and options) is not a new concept invented by well-known, self-professed gurus. This is the backbone of equity trading almost since market inception. Hard as it is for us to believe, broad markets moved across daily and weekly historical ranges that we now enjoy within minutes or less. Other than the past couple of years and few exceptions beyond, current day volatility was incomprehensible to generations of traders that made or lost fortunes anyway. Lest it seem like a fool-proof way to get rich in the equity world, alas it is not. Fact is I'm still searching for just such a thing and if you discover one first please drop me a note. There are caveats and parameters within this system just as any other. The first challenge is finding stocks entering or trading within a defined roll to begin with. It does take time to screen charts and sift out potential candidates to trade. A number of readers requested OIN offer a feature section on these low volatility plays. Of course, I have no control over that but do know it would take massive manpower to sort, sift & orchestrate such a feature. Having spent the past few days out at OIN headquarters, frankly, I'm in awe of what the staff accomplishes already wearing several hats, each provided for such a paltry monthly subscription. To be honest, competing online services charge much more for a mere fraction of the content. That being said, let's rely on ourselves for now to find our own fish rather than being fed by OIN. We'll leave that thought for another time. Probably the trickiest part in trading such plays is to find one near the beginning of a new roll. By the time they become apparent to all the support/resistance zone is likely to be broken. It takes a while scrolling through daily charts before the ability to pick them out becomes clear. Our first step should be spent learning this simple skill. Over time you will notice rolling stocks predictably behave the same way: they roll up & down for weeks or months and break that range before methodically forming a new one. A few rules of thumb help us spot the next move trying to form. First of all, rolling stocks strongly tend to hug a 10% moving range for some inexplicable reason. After looking at enough charts to require reading glasses, I've noticed this tendency to be true. From stocks under $5 to over $200, the habit of rolling within 10% of its share price is very apparent. The second point to keep in mind is that rolling stocks attempting to form new channels after moving up or down will likely bounce above & below the inevitable 10% zone. This initial erratic "volatility" can be accounted for when deciding on new call or put entries as the trades develop. There is always the strong possibility for us to enter a trade when the stock decides to break containment of the roll. Terrific if it favors our direction but how many times does that happen for you? Trust me, these gift trades occur for me even less. A solid stop-loss management system is imperative even while trading such equity tortoises. Failing to do so will still result in pain albeit over a longer period of time than high-volatility options. Some traders choose to play rolling stocks by simply going long at support and short at resistance. That's about as basic an approach as we could imagine and wouldn't be my first choice. Picking out issues within a roll and buying calls or puts is best done with the usual screening one normally uses for any trade. Just because our target nears a possible entry doesn't mean it's time to pull the trigger. Personally, I do best on any trade when screening it through my chart setup. Failure for me to adhere such discipline normally results in busted plays and stopped-out trades at best. This is no different for rolling stocks as well. The very same chart signals we covered over the past several weeks work very well at confirming solid trade reversals while warning of breakouts from the range. In my opinion, the purpose of singling out stocks in a roll is not merely buying at expected turning points, but to keep an eye on them as they near these marks. The process is almost always slow enough to allow patient entries with limit orders placed before the market open and managed over the course of time. Wouldn't it be nice to place trades that methodically yield 25% - 50% returns or greater over the course of time that don't need constant monitoring? Creeping rallies in a stock that gradually edges up or down 10% are not like watching paint dry, it's more akin to watching grass grow out here in rural New York state this year. Needs mowing every little while regardless what takes place around it. A very good book on the subject is available in the OIN "Bookstore" section for much less than I paid a couple years ago. "Rolling Stocks...Making Money On Ups & Downs" by Gregory Witt is a must-read on the subject. It is the only one on the topic I would personally recommend. You will find it in the title search box at the bottom of current listed selections. A most informative book. Due to my time spent away from home I've been unable to chart further examples of stocks currently rolling right now. We'll wrap this topic up next Monday and proceed with some graphics and final details that will help you on your way. Another idea shall follow of interest to limited-time position traders of any option able equities under the sun. As always, looking forward to our time spent together then! Best Trading Wishes, Contact Support **********************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 ***************************************************************** ********************** PLAY OF THE DAY - PUT ********************** VRSN - VeriSign, Inc. $145.75 -2.25 (-16.31 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. Most Recent Write-Up 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. Comments With the 10-dma, currently $156.50, presenting downward pressure on the stock, VRSN doesn't appear to have the buying force to push it higher. Closing at the lows of the day, along with a weakening NASDAQ, VRSN's downtrend is nicely intact. Look for entries into this put play on any spikes to the 10-dma, followed by a rollover. A strong volume move through $145 would confirm the current trend and offer a more conservative trading opportunity. Look to the NASDAQ for overall market sentiment, especially after the tech index got tired going into the close today. ***August contracts expire next week*** BUY PUT AUG-150 XVR-TJ OI= 667 at $10.88 SL= 8.75 BUY PUT AUG-145*XVR-TI OI= 563 at $ 8.25 SL= 6.25 BUY PUT AUG-140 XVR-TH OI= 632 at $ 6.00 SL= 4.25 BUY PUT SEP-150 XVR-UJ OI= 469 at $18.88 SL=13.25 Average Daily Volume = 4.02 mln ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** Cisco throws a party... The market ended mixed today with technology issues edging higher after news of Cisco Systems' earnings while blue-chips struggled amid a sell-off in retail stocks. After the close Tuesday, Cisco posted better-than-expected quarterly earnings, surpassing the consensus estimates as revenue rose 61%. The announcement was cause for new optimism in the group and a number of technology sectors moved higher during the session. Semiconductor stocks were among the top performers and networking issues also enjoyed substantial gains. In the broad market, Oil service segments rallied in the wake of another decline in inventories, which boosted crude oil futures. The American Petroleum Institute reported that the most recent drop in crude supplies has brought the sum of U.S. inventories to 24-year lows. On the downside, the retail sector slumped after a slew of companies unleashed their quarterly results and sellers invaded the group to take profits. Among other industries experiencing noticeable losses were transportation, banks and utilities. Looking forward, the short-term market outlook is mixed with the week's remaining big news; the retail sales report and the producer price index, due out on Friday. With any luck, the data will be bullish and the recent recovery in the technology group will continue. Summary of Previous Picks: Covered Calls: (Margin would double the listed Monthly Return) Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return GMST AUG 60 56.06 64.75 $3.94 7.1% Rally off support CALP AUG 50 47.84 58.25 $2.16 6.0% CALP AUG 50 48.50 58.25 $1.50 5.9% ITWO AUG 115 109.00 139.25 $6.00 5.6% ENE AUG 75 72.88 82.28 $2.12 5.5% NTAP AUG 90 85.44 90.56 $4.56 5.4% Bounce off 150 dma IDPH AUG 120 116.94 135.00 $3.06 5.0% VRTA AUG 55 52.18 73.50 $2.82 4.4% Nice Bounce VSTR AUG 135 127.25 124.63 -$2.62 0.0% Buyout candidate ARTG Closed AWRE Closed AETH Closed Naked Puts: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return SAPE AUG 95 93.12 137.50 $1.88 13.7% ENE AUG 75 73.12 82.28 $1.88 11.8% TUTS AUG 70 68.81 101.25 $1.19 11.8% CALP AUG 45 43.88 58.25 $1.13 10.9% CALP AUG 45 44.31 58.25 $0.69 10.4% VRTA AUG 55 53.81 73.50 $1.19 9.6% IDPH AUG 110 108.50 135.00 $1.50 9.2% NTAP AUG 80 78.12 90.56 $1.88 8.7% Bounced off 150 dma VRTA AUG 50 48.38 73.50 $1.62 8.4% GMST AUG 50 48.87 64.75 $1.13 7.7% TIBX AUG 90 87.63 116.38 $2.37 7.5% AMCC AUG 120 118.31 151.44 $1.69 6.5% SEBL AUG 115 113.94 165.31 $1.06 6.5% 2 -1 split 9/11 AETH AUG 135 133.19 136.00 $1.81 6.3% Time to go? MACR AUG 75 73.32 84.38 $1.68 6.2% Still Weak! ITWO AUG 95 93.31 139.25 $1.69 6.1% MERQ AUG 85 83.32 106.44 $1.68 5.8% SAPE AUG 85 83.56 137.50 $1.44 5.7% VSTR AUG 110 108.31 124.63 $1.69 5.6% Buyout Candidate MERQ AUG 80 78.87 106.44 $1.13 5.2% ARTG Closed AWRE Closed CLRN Closed Naked Calls: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return MRVC AUG 100 102.44 62.63 $2.44 19.4% RBAK AUG 155 156.13 151.06 $1.13 8.7% Ready to Cover? MUSE AUG 195 196.31 142.13 $1.31 5.9% HWP AUG 150 151.00 113.75 $1.00 5.7% New Candidates: This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. *************** BULLISH PLAYS - Covered Calls & Naked Puts *************** EXTR - Extreme Networks $156.56 *** Split Rally? *** Extreme Networks is engaged in the design, manufacture and sale of high performance networking products based on Gigabit Ethernet technology. They provide end-to-end switching solutions that meet the requirements of enterprise LANs, ISPs and content providers. Their Summit and BlackDiamond switches share a common ASIC, software and management architecture that facilitates a relatively short product design and development cycle, thereby reducing the time-to-market for new products and features. Earnings continue to dominate the market and in the current year, Extreme's net revenues totaled $262 million, up from last year's $98 million. The increase reflects increased sales of the Summit and BlackDiamond products and the outstanding performance did not escape analysts' notice. Since the posting of these results, Extreme has received a number of bullish ratings from several analysts, including Morgan Stanley Dean Witter and Lehman Brothers. With this proliferation of positive analyst's opinions, the stock has climbed impressively through resistance, culminating in a new 52-week high (near $160) on Tuesday. In addition, EXTR's stock will split 2-for-1 on August 25, 2000. The current technical outlook is favorable and our conservative position offers a way to participate in the volatile issue with relatively low risk. EXTR - Extreme Networks $156.56 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call AUG 140 EUT HU 443 19.25 137.31 6.6% *** Sell Put AUG 130 EUT TF 194 0.88 129.12 8.1% *** Sell Put AUG 135 EUT TG 139 1.50 133.50 11.9% Sell Put AUG 140 EUT TU 298 2.38 137.62 16.6% Chart = ****** PHCM - Phone.com $91.13 *** Big Merger! *** Phone.com is a leading provider of software that enables the delivery of Internet-based services to mass-market wireless telephones. The company's products enable the delivery of Internet-based services to the wireless market. Products include: UP.Link Server Suite, which allows network operators to connect their subscribers' wireless telephones to Internet services; UP.Browser, which is embedded in wireless telephones and enables subscribers to access Internet services; UP.Smart, a suite of software applications that delivers personal digital assistant features to smartphones; and UP.SDK, a kit that many Internet content providers and third-party developers use to create WML-compliant applications. Phone.com and Software.com (SWCM) announced today they would merge in an $8 billion stock deal to create the top provider of the technology that delivers Internet access over cellular phones, handheld computers and other wireless devices. The idea of a merger between the two had been discussed recently and analysts lauded the formation of this giant player in a market seen booming for years to come. One expert noted that the deal creates a powerhouse in the wireless community with enormous market potential. The companies also hired a Cisco veteran, Don Listwin, to lead the new venture. The terms of the deal, in which ownership of the combined company will be divided evenly between both PHCM and SWCM stockholders, calls for each Software.com share to be traded for 1.61 Phone.com shares. Based on the favorable reaction to the announcement and the positive fundamental outlook for the new company, this play provides an excellent opportunity to speculate on the success of the venture. PHCM - Phone.com $91.13 NOTE: September Expiration Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call SEP 85 UMN IQ 15 12.88 78.25 7.1% *** Sell Put SEP 65 UGE UM 219 1.50 63.50 6.3% *** Sell Put SEP 70 UGE UN 54 2.38 67.62 9.5% Sell Put SEP 75 UGE UO 18 3.75 71.25 12.8% Sell Put SEP 80 UGE UP 105 5.50 74.50 14.7% Chart = ****** PROX - Proxim $85.81 *** A Big Day! *** Proxim designs, manufactures and markets high performance wireless local area networking (LAN) and building-to-building network products based on radio frequency technology. Their highly integrated wireless client adapters and network infrastructure systems seamlessly extend existing enterprise LANs to enable mobile applications in a variety of in-building, campus area and building-to-building network environments. Proxim's RangeLAN2 2.4 GHz wireless LAN technology has been adopted by a number of major mobile computer system and handheld data terminal manufacturers and many leading wireless solution providers for real-time data collection applications in manufacturing, transportation and retailing. Proxim has been expanding and this year the company acquired two enterprises, Micrilor and Farallon Communications. The Farallon purchase gives Proxim a new market angle: Macintosh connectivity. Proxim's CEO David C. King recently explained that the company achieved faster growth in the second quarter of 2000, based on increasing momentum in their emerging home networking products combined with continuing strength in the company's commercial wireless networking business. In home networking, they began volume shipments of their new HomeRF products to Intel and other key strategic partners who are working with Proxim to lead the way in this rapidly emerging market. Proxim has also announced a 2-for-1 split, effective on August 18, 2000 and investors have reacted positively to the news. With favorable disparities in the front-month premiums, this position offers an excellent speculation play for traders who are bullish on the issue. PROX - Proxim $85.81 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call AUG 75 WQG HO 3 12.38 73.43 7.2% *** Sell Call AUG 80 WQG HP 53 8.75 77.06 12.9% Sell Put AUG 75 WQG TO 6 1.25 73.75 17.1% *** Sell Put AUG 80 WQG TP 45 2.88 77.12 31.0% Chart = ****** TUTS - Tuts Systems $101.25 *** New, All-Time High! *** Tut Systems develops and markets advanced communications products that enable high-speed data access over the copper infrastructure of telephone companies, as well as the copper telephone wires in homes and businesses. Their products incorporate high-bandwidth access multiplexers, associated modems and routers, Ethernet extension products and integrated network management software. This company is one of our favorites for long-term portfolios and the recent demand for Communications Equipment Providers has boosted this bullish issue out of a previous trading range. In addition, Tuesday's bullish comments by John Hughes of Shields & Co. on CNNfn.com helped boost the issue to a new, all-time high. The analyst said that TUTS has performed extremely well for a technology stock in the short term, and because the outlook is very positive (revenues are expected to grow 100% year over year), the issue should see higher prices in the future. The current trend is favorable and we offer this position as a "second chance" entry, based on the bullish technical indicators. The stock is slightly over-extended but a reasonable, short-term cost basis exists near the previous resistance area at $85. TUTS - Tuts Systems $101.25 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call AUG 90 QSS HR 108 12.75 88.50 5.7% *** Sell Call AUG 95 QSS HS 66 9.38 91.87 11.5% Sell Put AUG 85 QSS TQ 229 0.88 84.12 11.8% *** Sell Put AUG 90 QSS TR 157 1.81 88.19 19.7% Sell Put AUG 95 QSS TS 20 3.25 91.75 29.3% Chart = *************** BEARISH PLAYS - Naked Calls *************** ADBE - Adobe Systems $116.31 *** Trading Range *** Adobe Systems is a provider of graphic design, publishing, and imaging software for Web and print production. They offer a line of application software products for creating, distributing, and managing information of all types. Adobe licenses its industry-standard technologies to major hardware manufacturers, software developers, and service providers, and offer integrated software solutions to businesses of all sizes. The performance of the Computer Software group has slumped substantially since earlier in the year and now it appears the leading issues in the industry are again mired in a bearish trend. Obviously, Adobe is a great company but the short-term technical picture is less than outstanding. With today's big drop, the issue has failed to successfully recover after the recent technical rally and for now it appears the stock has little chance of reaching our sold positions. ADBE - Adobe Systems $116.31 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call AUG 125 AXX HE 880 2.63 127.63 22.0% Sell Call AUG 130 AXX HF 1007 1.50 131.50 14.8% Sell Call AUG 135 AXX HG 1144 0.69 135.69 8.2% *** Chart = ****** IMCL - Imclone Systems $70.50 *** Big Premiums! *** Imclone Systems is engaged in the research and development of novel cancer treatments. They focus on growth factor inhibitors, therapeutic cancer vaccines and angio-genesis inhibitors. Their lead product candidate, IMC-C225, is a therapeutic monoclonal antibody that inhibits stimulation of a receptor for growth factors upon which certain solid tumors depend in order to grow. IMC-C225 has been shown in several Phase I/II trials to have an acceptable safety profile, to be well tolerated and, when administered with either radiation therapy or chemotherapy, to enhance tumor reduction. Imclone is also developing inhibitors of angio-genesis, which could be used to treat various kinds of cancer and other diseases. This play is simply based on the current price or trading range of the underlying issue and its recent technical history. We will use the current consolidation period to benefit from overpriced option premiums with these relatively conservative, bearish positions. The probability of the share value reaching our sold strikes appears rather low but there is always the possibility of a recovery rally so monitor the issue daily for changes in technical character. IMCL - Imclone Systems $70.50 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call AUG 80 QCI HP 826 2.38 82.38 38.2% Sell Call AUG 85 QCI HQ 362 1.31 86.31 28.7% Sell Call AUG 90 QCI HR 889 0.69 90.69 15.8% *** Chart = ****** VRSN - Verisign $145.75 *** Rolling Over! *** Verisign is a global provider of Internet-based trust services, including authentication, validation and payment, needed by web sites, enterprises, electronic commerce service providers and individuals to conduct trusted and secure electronic commerce and communications over wired and wireless Internet protocol (IP) networks. The company has established strategic relationships with industry leaders, including BT, Cisco, Microsoft, Netscape, RSA Security and VISA, to enable widespread utilization of its digital certificate services and to assure their interoperability with a wide variety of applications and network equipment. The company has used its secure online infrastructure to issue over 200,000 of its web site digital certificates and millions of its digital certificates for individuals. Sellers took charge of the Internet sector today and companies in the Software and Services group continued to suffer from widespread profit-taking. Verisign has experienced a major sell-off in recent sessions (on higher-than-average volume) and with the issue now trading below an intermediate-term moving average, it appears the new trend has further downside potential. The volatile activity in the stock has produced some excellent premiums in the (OTM) call options and we will use the current speculative interest to open a conservative, short-term position with a bearish outlook. VRSN - Verisign $145.75 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call AUG 165 XVR HM 471 2.06 167.06 16.9% Sell Call AUG 170 QVZ HN 593 1.50 171.50 14.3% Sell Call AUG 175 QVZ HO 609 1.00 176.00 11.2% *** Chart = ***********************ADVERTISEMENT************************ Get a NextCard Visa, in 30 seconds! 1. Fill in the brief application 2. Receive approval decision within 30 seconds 3. Get rates as low as 2.9% Intro or 9.9% Fixed APR http://www.nextcard.com/index6.html?ref=aff0049911 ************************************************************ ******************* 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. 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