The Option Investor Newsletter Tuesday 08-15-2000 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/081500_1.html Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 08-15-2000 High Low Volume Advance/Decline DJIA 11067.00 -109.10 11175.00 11046.10 900 mln 1164/1690 NASDAQ 3851.66 + 1.97 3888.92 3831.96 1.35 bln 1890/2136 S&P 100 811.81 - 4.53 816.47 810.31 totals 3054/3826 S&P 500 1484.43 - 7.13 1493.12 1482.74 44.4%/55.6% RUS 2000 509.93 - 4.55 514.75 509.93 DJ TRANS 2884.41 - 36.80 2920.32 2884.41 VIX 20.97 + 0.62 21.33 20.63 Put/Call Ratio .55 ****************************************************************** Profit taking slows Dow string of ten gains in eleven days! No problem here! We will gladly take ten up days for every two days down. Please keep it up! Nothing goes up in a straight line although the Dow has been testing that rule recently. Most of the loss was on the heels of a downgrade on Home Depot which announced earnings inline with estimates. HD lost -5.38 in regular trading. The Nasdaq struggled in light of the very negative Dow but tried valiantly to break out twice with runs into the mid 3880s. Each time it slipped back but the trend was still up. Dell recovered some lost ground with a +1.38 gain. The Home Depot downgrade was joined by problems with other retail stocks as well. DLJ downgraded HD, WalMart and Costco. Target announced earnings inline with estimates and then warned that next quarter could be less than expected. JCPenny announced earnings inline with estimates but substantially less than last year. The retail sector, which had been enjoying a bounce since the Retail Sales numbers last week came in stronger than expected, now appears down for the count. Chips Ahoy! The rising tide in the chip sector floated all the chip stocks after Morgan Stanley restated their outlook that the death of the chip rally was premature. The analyst there said he felt there was at least 18-24 months of growth remaining. Add to that the blowout ADI earnings after the bell of $.43 vs estimates of $.37 and the three day rally may still have room to run. The drug patent problem reared its ugly head again and IVX dropped another -12.88 after news of another possible patent problem made headlines. Bristol Myers Squibb announced a new patent possibility on Taxol that may delay the generic drug from Ivax. BMY gained +2.25 on the news. The IVX CEO claimed this was hocus pocus legal maneuvering and predicted a quick resolution of the conflict. The Dow losers, led by HD at -5.38, included Boeing -2.25, which may have been influenced by the grounding of all the Concordes. The second largest loser was Hewlett Packard which announces earnings on Wednesday. HWP lost -4.50 as worries of another Dell like report sent traders to the sidelines. Down from $136 last month analysts are mixed as to their success against IBM, SUNW and LXK. SunMicro announced today that their demand was running ahead of estimates and they saw continued strong demand ahead. If this is not at the expense of HWP Unix servers and HWP can take market share from Lexmark then the HWP revival may only just be beginning. If the news after the close tomorrow is negative then expect them to lose supporters quickly. In the long running antitrust case against Microsoft the Justice Dept today urged the Supreme Court to hear the case quickly instead of sending it back down to the lower appeal courts. MSFT has had favorable rulings in the appeals court in the past and the eventual penalty phase will undoubtedly be handled in a lower court. By urging the high court to hear the case the Justice Dept is showing their cards that they are afraid the case will be overturned if heard by the lower court. MSFT only dropped $.56 on the news. Should the Supreme Court send it back down we are likely to see a pretty good pop in the stock price in anticipation of a favorable outcome. The Dow profit taking was expected and the sectors that had been doing the best recently were the ones suffering the most today. One only needs to look at the bank and brokerage sectors for confirmation. LEH -6.63, MER -2.69, JPM -1.25, GS -2.56, MWD -2.56. Other than Lehman Brothers the other stocks only lost a token amount of their strong August gains. We will gladly take five up days for every one down day and that is the recent trend. The Dow broke the late May intraday high of 11140 late Monday and then retreated. I spoke about this level (11150) as a resistance point on Sunday and I was very pleased to see the Monday close. Nothing has changed economically although the Industrial Production numbers this morning caused a little ripple of uneasiness. The next big report is on Wednesday with the CPI expected to post only a +0.1% headline number and a +0.2% core rate. The core rate has been stable for the last 12 months and short of a very bad blowout the Fed will be on hold next Tuesday. The productivity is soaring and costs are not rising. The high tech output is up +50% year over year and this will keep the productivity/price model intact. The drop in the Dow today was on light volume and strictly profit taking in front of the CPI report. The Nasdaq is looking good and the 3888 high today was +200 points from Friday's low. The three day up trend is still intact and more importantly it was positive (barely) when the Dow was down triple digits. The ADI earnings tonight should help as well as the stock split by CIEN. Just give us a benign CPI and we should be ready to rock. The VIX rebounded only slightly, from the low of almost 20 on Monday, to close at 21 today. Still very low volatility which could signify significant complacency in the market. This is a negative indicator but about the only one we can find. With a +650 point 11 day Dow gain we can't complain about a -109 drop especially when the Nasdaq held its ground. Hopefully we will get a good CPI number and move up again from here. Any gains we can manage between now and Labor Day or even between now and the Fed meeting next Tuesday will be icing on the cake since most portfolio managers are on vacation. We still have the dog days of summer ahead of us for two more weeks. The bright side this week is the options expiration on Friday. Expiration week is normally a bullish week and options for the aggressive speculator are cheap. For example, BRCD has earnings this Wednesday and a good earnings report and a good demand forecast could power the related sectors. Brocade is involved in Internet Infrastructure and manufactures switches to support the masses of storage required by the Internet. Exodus (EXDS), is not directly related but as a major Internet hosting service it tends to react with the Infrastructure sector. A strong demand forecast by BRCD could be seen as good continued business for Exodus. EXDS $60 calls were trading at the close for $.94 with the stock at $57.25 after dropping from a high of $60.50 with the Nasdaq just before the close. I picked up some of these as a lottery play on Brocade earnings. If nothing happens I lose $.94 but with any positive news at all or a Nasdaq rally on a good CPI then EXDS could easily be $65 for a windfall profit. I love expiration week! Good luck and sell too soon. Jim Brown Editor ************************Advertisement************************* Investors! Get In On The Ground Floor of the Next Big Idea. Announcing GE Venture Mine, the meeting ground for ideas and money. New on-line technology identifies the kind of opportunities you want to invest in. No more crisscrossing the country looking for the next break through idea. Find entrepreneurs, from start up to early stage business, in a search customized to meet your individual criteria. In privacy. On-line. http://www.sungrp.com/tracking.asp?campaignid=285 ************************************************************** **************** MARKET SENTIMENT **************** Tomorrow's Another Day By Austin Passamonte Did Home Depot really slide the Dow today? Nah, just a token excuse for nervous traders who bought in the recent rally early to cash in some winning chips. A surprising number from the CPI tomorrow will send a bunch more scurrying to secure gains. Think a strong CPI will just get shrugged off? It would if we just ended a several-hundred point move to the downside, not the upside. Happily, no one expects strong numbers this time around and we could very well take back today's 109 point decline and then some tomorrow. Markets at a crossroads are volatile indeed. We'd be thrilled to have these 100-point daily swings for a while and then some. Plenty of tradable plays in both directions if we're careful. And I mean careful each way! Bulls want to rally new market highs but we heard the same song just a few weeks ago during earnings season. Lest we forget that little "dip" in the market shortly after. In the background we see the Dow drop 100+ points today without budging the VIX. All sentiment is bullish to an extreme and it may be right but contrarians do warn otherwise. Next week's Fed meeting with no further rate hike as the consensus could be just the final catalyst for these markets to run. We feel further reports will be weak and the Fed is all done raising rates but would love to see the VIX at or above 24. Whatever it takes to make that happen would have us buying calls with reckless abandon! Trade carefully until then. 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. Tues 8/15 close: 20.97 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 (8/15) (8/17) (8/19) ************************************************************* CBOE Total P/C Ratio .55 Equity P/C Ratio .46 Peak Volume (OEX) CBOE index put/call ratio is a contrarian-sentiment indicator. Numbers above 1.5 are considered bullish, 1.5 to .75 neutral and bearish if below .75 ************************************************************** Tues Thurs Sat Strike/Contracts (8/15) (8/17) (8/19) ************************************************************** All index options .80 OEX Put/Call Ratio 1.50 OEX Maximum Open Interest Strikes/Contracts: Puts 800/6,942 Calls 810/6,564 Put/Call Ratio 1.06 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: (8/15) (8/17) (8/19) Overhead Resistance: (900-835) 1,064.88 (830/810) 5.12 OEX close: 811 Underlying Support: (805-785) 1.56 (780-760) 10.21 What the S/R measure indicates: Net open-interest ratios are firm above 810 and ridiculous above 830. A large index move prior to expiration has clearance to the downside at 780 Market-makers would love to pin the OEX index between 810 & 800 for maximum expiration of worthless contracts. Too soon to predict but highly possible. We would consider a move testing the 780 range good call entry prior to Friday's option expiration. A failed test of 816 could be an excellent short-term put entry. 30-yr Bond: 5.71% Light, Sweet Crude, Barrel: $31.65 200 Day Moving Average (as of 8/08) The 200 DMA is widely considered the major benchmark for critical support in a market. DOW: 10,792 11,067 NASDAQ: 3,936 3,851 NDX: 3,672 3,722 SPX: 1434 1484 OEX: 773 811 CBOT Commitment Of Traders Report: Friday 8/11 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; +116 (long) - 599 (short) Total Open Interest % 2% net-long 3% net-short NASDAQ 100 Net contracts; - 1,854 (short) + 1455 (long) Total Open Interest % 18% net-short 4% net-long S&P 500 Net contracts; + 44,924 (long) -51,720 (short) Total Open Interest % 24% net-long 9.5% net-short BULLISH SIGNALS Interest rates 5.71% on the 30-year Treasury Bond may be signaling 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. CPI is next Strength In GE, Dow Components GE has long been considered a market bell weather and recent all-time highs are encouraging signs. COT Report - NASDAQ 100 Sentiment reversal with small speculators growing net-short while commercials increase accumulation may suggest expected strength in the sector over the next weeks or months. ****** BEARISH SIGNALS VIX Tuesday’s close below 21 sees us in the high danger zone. End Of Earnings Season Lack of positive news will direct market focus on August FOMC fears Tuesday should CPI 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. Energy Prices Prices are still too high. Ultimately this affects profit margins and inflation. Light, Sweet Crude closed $31.65 today. 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 & DJX Latest updated figures show small spec traders remain heavily long S&P 500 contracts while commercial traders continue to hold ten-year extreme short position. DJX commercials added to net short while small specs added to net long holdings. Widened divergence strongly implores market turn in favor of commercials. The market's bottom may still lie ahead. ************** MARKET POSTURE ************** As of Market Close - Tuesday, 08/15/2000 Key Benchmarks Broad Market Last Support/Resistance Alert **************************************************************** DOW Industrials 11,068 10,600 11,425 SPX S&P 500 1,484 1,450 1,505 COMPX NASD Composite 3,851 3,500 4,000 OEX S&P 100 811 790 822 ** RUT Russell 2000 509 485 540 NDX NASD 100 3,722 3,400 3,800 MSH High Tech 1,038 975 1,075 ** BTK Biotech 660 570 700 XCI Hardware 1,523 1,450 1,550 GSO.X Software 432 385 455 SOX Semiconductor 1,060 880 1,120 ** NWX Networking 1,274 1,190 1,310 INX Internet 510 460 530 BIX Banking 598 550 610 XBD Brokerage 614 570 635 IUX Insurance 710 680 725 RLX Retail 841 835 910 DRG Drug 390 365 415 HCX Healthcare 807 795 855 XAL Airline 166 162 178 OIX Oil & Gas 300 272 304 Yesterday and today we witnessed the OEX, MSH and SOX break our resistance levels, but only the SOX was able to hold above. Over the past couple of months we have seen resistance levels (even though they were broken) become levels where pullbacks occur. This is a symptom of a range-bound market. Until this "pattern" is broken, momentum investors should be cautious. Raising support (DOW, SPX, OEX, NDX, MSH, XCI, NWX, HCX, XAL) Raising Resistance (OEX, MSH, SOX) Lowering Resistance (NWX, XBD). ************** TRADERS CORNER ************** My Favorite Strategies By Scott Martindale As a follow-up to my article from last Tuesday, I will describe a little of my trading history and some lessons I’ve learned. I’d like to describe some of the strategies I focus on today, as well as interesting variations on the basic plays. By the way, thanks to those of you who wrote after my last article. It’s clear that many of us have similar stories to tell as we navigate our way in this strange, exciting, and dangerous game of options trading. And no matter how much success a self- proclaimed guru has attained, no one can transfer his own success to another by describing a few simple strategies (Step 1). It still takes a shrewd entry point and an emotionless exit strategy (Step 2). Step 1 puts you at risk; Step 2 (the hard part) gives you long-term success. I mentioned last time that I generally prefer to sell time to someone else, and that I try to adhere to a predetermined loss-cut whereby I buy back the sold option. Also, I have learned to 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. My favorite plays, particularly when the market is swinging widely but still within a trading range, are naked puts and put credit spreads. I also like buying stocks or LEAPS on pullbacks within an uptrend and writing covered calls or spreads against them on strength. Whether to buy the LEAP or the underlying stock depends upon whether the underlying price is under about $60. That way I can buy more shares or contracts, which allows me to either write more call contracts or write calls on only part of my position. I still occasionally will buy a call or put when I feel strongly about an impending move, but for the most part I try to shy away from buying short-term options. Keep in mind that when you buy an option the underlying stock must move strongly in your direction to make money, but when you sell an OTM option you make money if it goes in your direction, stays at the same level, or even goes slightly in the wrong direction. So my focus in on selling. Compile a watch list of your favorite stocks and find a good support price for each based on technicals and option open interest. It’s best to catch a stock bouncing firmly off support, and then sell a front-month strike at or below that support price (unless you really want to own the stock at a nice discount, in which case you might sell ITM or slightly above support). But even if the stock moves up as you hoped, be prepared to buy it back, especially if it moves up quickly. I have made the mistake of thinking, "Hey, it moved up so much, and my margin requirement is so small, I can just let it expire worthless and keep all the money!" However, volatile stocks can drop back down just as quickly as they move up (as I have experienced). So unless you’re close to expiration with no scheduled news events, I think it’s better to close out the position when you can lock in a good profit and free up your margin for another play. I usually will place a GTC buy-to-close order at a low price shortly after entering the play, although I will often raise the price and get out if I feel that the technical picture is looking overbought or otherwise rolling over. A variation on the buy-back strategy is to turn the naked put into a put credit spread by legging into the spread as the stock moves up. This provides: a larger credit than if you entered both legs at the same time, a larger target profit than simply buying back the sold put, better downside protection than a naked put position, and it frees up margin. This strategy is particularly attractive if you have little time to closely monitor your positions. What happens if you sell an OTM put below support, but the stock moves against you? OIN has described a strategy whereby if the stock drops to the strike price sold, you cover the position by shorting the stock instead of buying back the put for a loss. This creates a covered put play. The only problem for me with this strategy is that you might end up buying back and reselling the underlying stock in whipsaw action if the stock becomes volatile in the range of the sold strike. A variation on the naked put strategy is to sell a deep ITM naked put as opposed to buying a call on a stock you think is poised to move up. The price erosion is roughly equivalent to the price increase of a deep ITM call, but you are taking in the big premium rather than paying it. Even if the stock doesn’t go up quickly, you will still profit on any increase when you buy it back without worrying about losing value due to time erosion. In addition, depending upon the circumstances, you might consider selling more than one month out in order to give the stock enough time to move up. With covered calls, it’s safer to sell deep ITM front-month calls for small but reliable returns - but only against stocks, not LEAPS (you want to avoid being called out of your LEAPS, so sell ATM or OTM). And don’t be shy about buying it back on a dip. If it’s a normal technical retracement (33-66% of the recent upleg) that finds support, you can buy it back as it bounces from support. Now you are positioned to sell another call on renewed strength. On the other hand, if the stock wants to continue a downward spiral, you might want to close the whole play by buying back the call and selling the stock at the same time. A variation on the covered call strategy is to sell ultra-deep ITM calls, after buying the stock on margin. With certain volatile stocks, the call premium a few months out may even exceed the 50% margin requirement of the purchased stock such that you end up with more buying power after entering the play than you had going in! In this case, the margin purchase is relatively safe, given the very low sold strike, compared with selling ATM calls. Next time, I’ll show some quantitative examples of these plays. smartindale@OptionInvestor.com ****** Double Tops and Bottoms By Mary Redmond A double bottom or double top chart is usually used by technical analysts for analysis of a stock or index over a comparatively long period of time. This can mean that it can be indicative of what a stock or index may do in the coming quarter based on the pattern of the last several months. It is generally not used on a short term daily or weekly trading basis. A double bottom is usually formed when a stock or index forms a solid bottom pattern, rises, and forms the same bottom pattern again. This is often used to indicate that a prolonged rally may ensue. You can see the double bottom the Dow average formed in 1998 in the following chart. The psychology of this type of pattern is easy to understand. During the months of 1998 we had serious deterioration in the averages for many reasons. A bottom in the market can be formed when people stop selling. Many traders and fund managers test the markets to see if bottoms have been formed by selling stocks and seeing if they can go lower. At some point a stock or an average will stop going down and form a bottom. If a stock or an average forms a bottom, rises and forms another bottom then the market often assumes that it simply isn't going any lower. Some analysts have suggested that an ideal scenario might be if the Nasdaq were to form a double bottom around 3500 and then start to rally. This could convince investors that further selling might not knock the Nasdaq any lower at any point in the near future. We saw many double top chart patterns this spring. A double top pattern can be a warning of a serious drop to follow. If a stock starts to rally, fails and tries to rally again and fails then panic can ensue. You can see the chart below of Qualcomm as an example of a double top chart. The chart of the Nasdaq looks like a double top chart as well. There is another important factor to consider with this chart. The filled bars below the Nasdaq represent the approximate moving averages of cash flows to technology funds during each month starting in November of 1999. In November of last year the approximate monthly average of cash to technology funds was $1 billion. In December the moving average went up to over $1.5 billion. In January and February the moving average of cash to technology funds was over $2 billion monthly. In March of 2000 the cash flows to technology funds reached a peak of over $2.85 billion monthly. By April the flows dropped to under $1 billion, and for the last few months they have averaged $500 million. This lower level of cash flows to technology sector funds may have made it harder for the Nasdaq to rally. Although the Dow has moved up over 500 points in the last few weeks, the Nasdaq seems stuck in a trading range. Traders are wondering why the financials and old economy stocks are rallying while JDSU and CSCO are staying about the same. It is interesting to note that the ipo schedule for this week and next week are much lighter than they have been for the last few weeks. Only about 18 ipos have been priced to start trading this week. Today three relatively small issues traded, raising $145 million. It is possible that the investment bankers are anticipating that the next two weeks may be difficult for the markets. The last two weeks in August usually have very light ipo shcedules. Contact Support ***********************ADVERTISEMENT************************ Up To 60% Off At EverythingWireless.com The online super-store for your active lifestyle. Select from the largest range of accessories and products you use every day including Cellular and PCS phones, batteries, chargers, hands-free kits, wireless data products and more. http://www.everythingwireless.com\wireless\homepage?id=1601002 ************************************************************ ************* READERS WRITE ************* Questions concerning the Big-cap Covered-Calls and Naked-Puts 1. Regarding the Naked Puts section: What's the formula for determining monthly returns for naked puts? (ie...how did you arrive at the 13.7% monthly return for the recent play on SAPE?). 2. Regarding the naked-calls section: What's the formula for determining monthly returns for naked calls? (ie...how did you arrive at the 19.4% monthly return for the MRVC play?) 3. Regarding the "Bullish Plays" section: ie..EXTR, When providing possible calls and puts to sell, you will occasionally have three asterisks following a particular line item. What do these asterisks signify? For example, you include asterisks following symbols EUTHU and EUTTF. ------ 1) We use standard formulas to calculate the return on investment (ROI) which is based on the equity required to be in your account to start the play. It equals the premium received divided by the put investment required. The equity required would be the greater of the following (based on E*trade): (0.40 * Price Picked + Premium - (Price Picked - Strike Price)) or (0.20 * Price Picked + Premium) which will take precedence as you go deeper out of the money. Example (per share basis): SAPE = $120.81 Strike = $95 Premium received = $1.88 days to expiration = 16 (As of Aug. 2) 20% equity requirement = 120.81*0.20 + 1.88 = 26.04 40% equity requirement = 120.81*0.40 + 1.88 - (120.81 - 95)= 24.39 ROI = 1.88/26.04 = 7.22% (after multiplying by 100) I then extrapolate the ROI to a monthly basis by dividing by the days left to expiration, times 365, and divide by 12. MROI = 7.22 / 16 * 365 / 12 = 13.7% 2) MRVC - $71 Strike - $100 Premium received - $2.44 Days to expiration - 23 (As of July 26) Equity requirement - using the same test as above - 16.64 ROI = 2.44/16.64 = 14.66% MROI - 14.66 / 23 * 365 / 12 = 19.4% Remember, the equity requirement is actually dynamic and changes as the stock value rises of falls. For ease of record keeping and time constraints - we keep the requirement static. 3) The asterisks represent the positions that we have chosen from the group as the best combination of risk and reward, compared to the other options for the same stock. At times, we will use software to determine the best statistical option, but in most cases, these plays are simply our personal selections, based on a conservative outlook. Obviously, you must determine if they fit your risk/reward profile. In addition, the asterisks also represent the positions that we will track and list in the summary each week until expiration. Regards, OIN ************* SECTOR TRADER ************* CPI Caution Keeps Gains In Check By Buzz Lynn sectortrader@OptionInvestor.com Following Friday's steady comeback, Monday afternoon proved to be equally impressive as the NASDAQ steadfastly climbed the stairs to close back over 3850, a historical level of resistance and support. Despite the bulls' attempts to push it higher and bears' attempts to push it lower, Today's NASDAQ closed essentially flat, but still at support at 3850. That in itself is slightly bullish in our book on the day before the release of critical economic news, the CPI, estimated to come in at 0.1% overall, and 0.2% at the core rate. Investors were naturally skittish. But strength in the semiconductor sector kept tech stocks afloat on the NASDAQ. The same cannot be said for the NYSE issues which, measured by the Dow, finished down 109 points today. After 11 positive days out of the last 12, a day of profit taking shouldn't be unexpected, especially in front of CPI number tomorrow. That it happened on volume of just 900 mln shares indicates there is no shift from the bullish sentiment. If there was a shift in sentiment, volume would be much higher indicating most investors' expectation of a market decline. No volume equals no conviction. When all is said and done, today's action seems like a typical bit of fear for those wanting to take money off the table "just in case". Just be careful since if the CPI numbers are not well received, some investors and traders alike will be converted back into thinking that next week will bring rate hikes. We think that's noise, but we don't want to fight the tape. Instead, look at as a buying opportunity when the dust settles. Remember too that in the bigger picture the market is generally well-supported during option expiration week. Plus the FOMC meeting next week is unlikely to produce any more interest rate increases this year. That could spur investors into thinking that the next meeting in 2001 might actually produce a DECREASE in rates. Couple that idea with traders returning from Summer vacation and the Labor day weekend who will want to put that cash back to work as long as interest rates remain on hold, and we have the makings of a stronger market. That's not to say it won't come without dips. Good entries will still be the key to profits as will cutting losses fast. Index Last Mon Tue Wed Thu Fri Week QQQ NASDAQ-100 93.19 1.94 0.19 0.00 0.00 0.00 2.13 HHH Internet 108.75 2.94 1.75 0.00 0.00 0.00 4.69 BBH Biiotech 178.31 -1.00 -3.44 0.00 0.00 0.00 -4.44 PPH Pharm. 96.06 -0.81 0.00 0.00 0.00 0.00 -0.81 TTH Telecom. 65.63 0.81 -0.19 0.00 0.00 0.00 0.63 IAH I-net Arch. 96.25 0.94 -0.25 0.00 0.00 0.00 0.69 IIH I-net Infr. 52.63 1.00 0.13 0.00 0.00 0.00 1.13 BHH B2B 46.50 0.69 0.25 0.00 0.00 0.00 0.94 BDH Broadband 91.81 2.63 0.69 0.00 0.00 0.00 3.31 SMH Semicon 90.63 5.06 2.88 0.00 0.00 0.00 7.94 RKH Reg. Banks 106.44 1.13 -0.69 0.00 0.00 0.00 0.44 UTH Utilities 103.25 1.69 0.81 0.00 0.00 0.00 2.50 ************** Updates ************** QQQ - NASDAQ 100 $93.19 (+2.13 this week) On the heels of Friday's gains came more gains on Monday. While volume hasn't been exceptionally strong, it's dangerous to short a dull market. Besides that, if there was ever a time for low volume, the end of summer into the Labor Day weekend is it. While there was profit taking on the NYSE that kept a lid on last weeks winners like consumer goods, some retailers, and financials, biotechs too kept a lid on QQQ action. The counterbalance was semiconductors, which have benefited from numerous sector upgrades this week. Technically, a nice entry was available yesterday morning around $90.50, which we could have ridden to almost $94 this afternoon. Support is still pretty good at $90 with mild support at $91. Mild resistance is at $94, and a bit more solid at $95. As long as there is no catalyst to change the market, it would remain range-bound as it has for the last three months. Yet despite today's lack of conviction, the 200-dma of $91.78 held up as did resistance at the 30-dma of $93.94. However, with the FOMC meeting unlikely to produce a rate increase, and the return of traders from vacation to their heavy cash positions, we figure the combination will get prices moving upward again with renewed volume. Play the range for now, but look for renewed strength as the week closes out. Calendar Spread: This play has been working out pretty well, especially if you've legged in. Today's top near $94 would have made an excellent entry on the sold position. But we still out hope for $95. Remember that this is just like a covered call, except we don't want to get called out of this one. That would mean giving up all the time value we paid for on the long term underlying position. The objective here is to buy the long at support and sell the short at resistance. If tomorrow's numbers are market friendly, we may have another chance to sell the short position for a higher price. Support is at $90 and $91, while resistance is at $94 and $95.Despite the low volatility, time value still evaporates on current month positions, so enjoy making money while you sleep. Just remember to cover if the time portion of the premium gets really low. That would likely happen only on price spikes up, or when the option is about to expire. BUY CALL DEC- 90 YQQ-LL OI= 2467 at $12.50 SELL CALL SEP- 90 QVQ-IL OI=16534 at $ 7.13, ND = 5.37 or less SELL CALL SEP- 94 QVQ-IP OI= 1775 at $ 4.88, ND = 7.63 or less SELL CALL SEP- 99 QVQ-IU OI= 2355 at $ 2 75, ND = 9.75 or less Long Puts Unless we see a market wide rollover on strong volume tomorrow borne of a lousy CPI number, we suggest not taking any QQQ puts right now. If it does roll over, look for resistance at $95 or $94. A violation of support at $91 or $90 would also make for a confirmed entry point for puts. Long Calls We've been well rewarded so far this week even though today was a dud for the QQQ. After all it's option expiration week and one week before an FOMC meeting. Support has moved up to $91, $90 on a bad day. Target shoot to your level of comfort. Intraday support, if you are quicker on the trigger, can be found at $92.25 and might also make a good entry. Resistance is at $94 and $95. If you can stand the turbulence, you might try to hang on for a breakout up to the next resistance level at $99. But conservative types may want to "sell too soon" and exit with a smaller profit in case regular market buffeting (not the Warren type) turns into an unforeseen downdraft. BUY CALL SEP-85 YQQ-IG OI= 1572 at $10.63 SL=7.75 BUY CALL SEP-90 QVQ-IL OI=16534 at $ 7.13 SL=5.00 BUY CALL SEP-95 QVQ-IQ OI=12018 at $ 4.25 SL=2.75 Average Daily Volume = 21.75 mln ----- SMH - Semiconductor $90.63 (+7.94 this week) Are you glad you switched to playing calls this week? We sure are. Thanks to some rethinking of the sector on part of many analysts. Almost all have changed their tune in the last three days. Today, Morgan Stanley Dean Witter's Mark Edelstone stepped to the microphone to explain that semiconductors had an estimated 18-24 months left in the cycle. The fact is the selling had been overdone and that's all investors needed (in addition to similar comments from DLJ, Merrill Lynch and B of A Montgomery Securities) to blast SMH and SOX.X into orbit and support an otherwise lackluster NASDAQ. We think the sentiment has changed for the better and expect the trend to continue. Technically all indicators are pointing up, including a strong RSI confirmation. Support is around $88.50 and then again at $85. Aggressive traders can consider getting in at $90, but run the risk of a daily pullback given the strong performance so far this week. The congestion from the past three months is thick starting at the 50-dma of $92.27, then again at $93.50, and $94.50. Those could fall with one more strong day on the NASDAQ. After that, there should be smoother sailing. Remain vigilant for a good entry though. BUY CALL SEP-85 SMH-IQ OI=43 at $8.88 SL=6.25 BUY CALL SEP-90 SMH-IR OI=78 at $6.00 SL=4.00 BUY CALL SEP-95 SMH-IS OI= 5 at $3.88 SL=2.25 BUY CALL NOV-95 SMH-KS OI=32 at $8.25 SL=6.00 SELL PUT SEP-85 SMH-UQ OI= 5 at $2.88 SL4.50 Average Daily Volume = 333K K ----- BBH - Biotech $178.31 (-4.44 this week) This sector has been weak so far but not weak enough to drop. Based on volume of the underlying issues like BGEN, ANGN, and DNA, we think the sector is just suffering a bit of profit taking in front of the economic reports due tomorrow. We got close to an entry at $175, but the 50-dma of $177.67 provided support. To the upside, BBH never crossed our breakout entry point of $184. So here we wait patiently for an entry. We will stick our current support level of $175 for an entry, or for those a little itchier to get in the game the 50-dma ($177.76) could also make a good target at which to shoot. We think the mood will improve in this sector on any good day for the NASDAQ. Confirm market direction before entering. BUY CALL SEP-175 BBH-IO OI= 12 at $14.00 SL=10.50 BUY CALL SEP-180 BBH-IP OI=577 at $11.50 SL= 8.75 BUY CALL SEP-185 BBH-IQ OI= 83 at $ 9.13 SL= 6.50 Average Daily Volume = 638 K ----- IAH - Internet Architecture $96.25 (+0.69 this week) IAH has been working hard to eke out a small gain this week. But without participation from CSCO, HWP, and SUNW, IAH will have a tough time. Unfortunately, we haven't been given an entry yet, but the 10-dma and the 30-dma, both just under $95, have acted as support over the last two days. Our plan from Sunday hasn't changed: "The next level of resistance is $97, then $99. If the tech issues take off in front of the FOMC meeting, IAH could deliver us nice profits this week. Target shoot to $93.50 for the best entry. Or if there is no decline during amateur hour, feel free to buy minor intraday dips, or even at the current level." BUY CALL SEP- 90 IAZ-IR OI= 5 at $9.88 SL=7.00 BUY CALL SEP- 95 IAZ-IS OI=15 at $6.50 SL=4.50 BUY CALL SEP-100 IAZ-IZ OI= 0 at $4.00 SL=2.50 Average Daily Volume = 54 K ************** No Play ************** HHH PPH BHH IIH BDH TTH RKH UTH ************* DAILY RESULTS ************* Index Last Mon Tue Week Dow 11067.00 148.34 -109.14 39.20 Nasdaq 3851.66 60.22 1.97 62.19 $OEX 811.81 11.59 -4.53 7.06 $SPX 1484.43 19.72 -7.13 12.59 $RUT 509.93 4.21 -4.55 -0.34 $TRAN 2884.41 -6.29 -36.80-43.09 $VIX 21.01 -0.84 0.62 -0.22 Calls EXTR 173.38 8.50 5.13 13.63 Another day, another high JNPR 169.75 10.06 -0.25 9.81 New, watch it explode! DIGL 108.75 2.13 6.88 9.00 New, tripping the light LSCC 62.44 3.38 2.44 5.81 New, sector coming to life TQNT 44.63 3.08 2.66 5.75 New, "times are a-changin'" SUNW 117.38 1.88 3.31 5.19 Don't forget your sunscreen JPM 146.69 4.06 -1.25 2.81 Trying to make another high IDTI 66.88 0.44 1.00 1.44 New, what Semi correction? AFL 57.69 2.50 -1.13 1.38 Held well with downgrade DNA 165.25 3.06 -1.81 1.25 Where has the volume gone? EXDS 57.13 2.00 -1.13 0.88 New, pattern of higher lows ITWO 147.75 7.69 -6.88 0.81 Finding a bounce at the 5-dma MER 140.00 3.38 -2.69 0.69 Not immune to profit-taking CCU 83.69 -0.88 1.50 0.63 Media giant over $79 support EMC 88.69 0.19 -0.88 -0.69 Fairly quiet start this week COHR 68.06 -0.16 -0.72 -0.88 Two days of consolidation MERQ 98.81 0.69 -1.63 -0.94 Dropped, going nowhere fast PVN 110.13 0.81 -3.88 -3.06 Dropped, getting out good PEB 90.13 -2.13 -1.75 -3.88 Dropped, no signs of survival TIBX 98.25 -4.56 -0.13 -4.69 Dropped, unable to resume IDPH 129.16 -3.19 -3.66 -6.84 Dropped, beginning to break Puts MLNM 109.00 -3.19 -2.31 -5.50 New, what goes up, must SYMC 43.94 -3.13 -1.31 -4.44 New, needs a new enemy INCY 71.28 -0.31 -3.22 -3.53 Some perfect entry points AAPL 46.69 -0.63 -0.38 -1.00 Dropped, hasn't moved enough SGP 40.50 -0.81 0.31 -0.50 Patent worries still looming CRA 85.50 0.75 -0.25 0.50 Dropped, flatlining LVLT 61.81 2.19 -0.13 2.06 Bounced just like a dead cat AMD 63.75 5.50 0.75 6.25 Dropped, analyst boosts Semis MU 86.25 4.63 5.75 10.38 Dropped, Joseph spoke again VRSN 154.19 6.69 7.19 13.88 Dropped, found a bottom 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: ***** IDPH $129.17 -3.64 (-6.83) What looked like consolidation now appears to be the beginning of a downtrend. On Monday, IDPH attempted to rally in the early going. Finding resistance at the $139-140 area, the stock sold off and spent the rest of the day moving lower. The last three hours of the day saw volume to the downside increase but the key support level of $130 held strong. Today was a continuation of that downtrend. At mid-day, with IDPH bouncing off the $130 support level, the stock attempted to stage a late day rally. This was not to be, however, as the sellers came in once again, driving the stock below its key support level of $130. The past three trading sessions have seen IDPH close well below the 5-dma. Although volume so far has been light, the early signs of rolling over are there. The down to flat performance of the biotech and pharmaceutical sectors aren't helping the stock either. As a result, we are exiting this play and putting that money toward a more promising sector. PVN $110.13 -3.88 (-3.06) Having picked this play at $102.38 and seeing a plethora of trading opportunities, we are going to take our profits tonight before everyone else does. Now, PVN very well could be consolidating near support at $109, but today's close was below the 10-dma at $110.67. The past eight days looks like a basing period, but we are a little weary of holding this much longer considering it tried twice to break over $115 to no avail. It was a successful play so we're keeping it that way, along with our profits. Thanks PVN! PEB $90.13 -1.75 (-3.87) On Monday, PE Biosystems announced it was expanding its real estate to include a campus in the Bay Area community of Pleasanton, CA. It's too bad PEB's share price couldn't expand as well. After snowballing earlier last week and peaking at $104.75, it appears the momentum has fizzled. The stock is once again sitting on firm support at $90 and is not showing any signs of a revival. Therefore, we're taking our cash and moving on to greener pastures tonight. TIBX $98.25 -0.13 (-4.69) Even a Buy reiteration and a $150 price target from Stephen Dube at Wasserstein Perella Securities couldn't generate any excitement for TIBX today. The share price actually lost more ground after yielding to another dismal day of trading on Monday. Earlier last week, TIBX saw powerful moves above resistance at $110 as it made a charge for the $120 level. Unfortunately, the market pressure and profit taking got the best of TIBX and it hasn't been able to resume an uptrend. While this is disappointing, there's no reason to keep waiting for TIBX to generate another wave of momentum. It's time to exit and look for other lucrative call plays. MERQ $98.81 -1.63 (-0.94) Yawn, MERQ is going nowhere fast. For the past three trading sessions, MERQ has churned around the century mark on declining volume. The stock has been dipping below, and rising above $100, which has provided several intraday opportunities to trade. But, the momentum we had been gaming has appeared to left MERQ. The company announced a new partnership Monday, which set the stock to attempt to bounce off $100 this morning. But, MERQ slipped back below $100 and weakened as the day wore on. As such, we too must slip away to another trade. PUTS: ***** VRSN $154.19 +7.19 (+13.88) It appears that VeriSign has finally found bottom. Since bouncing above the $135 support level on Friday, VRSN has moved higher all this week. On Monday, VRSN shareholders got their first taste of relief as the stock rallied $6.69 on 89% of ADV. It was not enough to break resistance at the 10-dma but did allow the stock to close above its 5-dma for the first time in a week. Today, buyers continued to drive the stock higher and on greater volume, bidding the stock up 5% in the face of a flat NASDAQ. In doing so, VRSN has finally broken its formidable resistance at its 10-dma, now at $149.75. The break signals to us that perhaps this downtrend is over. This is confirmed by increasing volume to the upside over the past couple of trading sessions. As there has been no news to drive the stock, the move up has been technically driven. With improving technicals for VRSN and a possible break from its downtrend, we are closing this play. AAPL $46.69 -0.38 (-1.00) If it doesn't move, we can't make money. That's the name of the options game and AAPL just isn't cooperating lately. This week AAPL's been range bound between $46.50 and $47.50. This narrow channel doesn't provide much room for short-term momentum trading. Plus, today's lackluster volume at nearly half of the daily average further implies that AAPL be quite comfortable at its current price level. We're exiting this slow mover tonight before it gets the best of us. CRA $84.63 -1.13 (-0.37) You get all pepped up about a potentially good put play and then whamo, nothing exciting happens! This pretty much sums up what transpired with CRA. There was the technical breakdown coupled with a negative sentiment within the sector and great downside volume to boot. But despite the rosy outlook, CRA flatlined. We weren't offered a decent entry never mind the chance to profit. It's likely this week's scuttlebutt about the revival of biotechs may have had some effect on our put play. Whatever the underlying cause may be for the somber trading activity, it's evident that CRA makes the drop list tonight. AMD $63.75 +0.75 (+6.75) Jonathan Joseph, the one-time "chip ax," turned a page for the bulls Monday by boosting his ratings on MU. Morgan Stanley jumped on board the bull bandwagon today by issuing a positive report on the entire Semi sector, calling the concerns of slowing demand overdone. For its part, AMD helped its cause by announcing that it had begun shipping its 1.1 ghz processor. AMD steadily rose into the close of trading Monday, and edged higher today after falling into a trading range between $62 and $64. The return of the Chip sector bulls has ended our play. It's time to sell too soon, and lock in our gains. MU $86.56 +6.06 (+10.94) The amazing power of analyst comments came to bear on MU again as Jonathan Joseph upped his estimates on the stock. The downtrend that began in mid-July was triggered by bearish analyst comments on the Semiconductor sector, and lo and behold, the surge in the sector over the past 2 days has been accompanied by bullish comments about the chip stocks. Numerous analysts are calling for more gains from the Semiconductors, citing continued strong growth. The mixed signals we were getting on Friday (bounce at the 100-dma, but no push to the upside) were resolved yesterday as MU gapped up over $2 at the open and pushed higher all day to close at its high. That was just a warm-up for today’s $6+ gain, which came on very strong volume and solidly kicks MU off the Put list tonight. ***********************ADVERTISEMENT************************ Get a NextCard Visa, in 30 seconds! 1. Fill in the brief application 2. Receive approval decision within 30 seconds 3. 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The Option Investor Newsletter Tuesday 08-15-2000 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/081500_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 ******************** JPM $146.69 -1.25 (+2.81) Starting off on a volume burst this morning, JPM tried in earnest to top yesterday's 52-week high of $147.94, reaching a day high today of $147.19. The stock then traded between $146 and $147 for the remainder of the day, making a late day comeback above the $147 level, but JPM failed to sustain the drive. Still trading well above all technical supports, JPM is still looking great for our call play. Support lies just below today's intraday low of $145.75 at the 5-dma of $144.50. If you are feeling bullish, continue to look for entry points to the play on bounces off the lows. Otherwise, a strong volume move to the upside, breaking though resistance of Monday's established 52-week high would also give a solidly convincing entry point to the play. A few indicators to watch for direction on this stock are interest rate sentiment, the Dow, and the Banking Index, BKX.X. Financials have had quite a run lately, so look to see if they get tired with the Fed meeting a week away. Use stop losses. DNA $165.25 -1.81 (+1.25) Where has all the volume gone? So far this week DNA has been quietly drifting in a narrow range on low volume. On Monday, morning sellers attempted to drive the stock down but buyers rushed in quickly for support, bouncing well above support at $160. It was a battle between buyers and sellers all day, albeit a low volume one. But, in end the good guys won. As a result, the stock advanced $3.06, or 1.87%, on an anemic 35% of ADV. Today, it was the buyers' turn to take the first shot. Attempting to rally in the early morning, DNA hit resistance just below $170 bringing the sellers in. Attempting to drop the stock to $160 to no avail, the buyers came back to keep the stock well above that level. At this point, aggressive traders may consider entering on a bounce from the $164 area. Below that, another entry could be found in the $160 - $161 area, confirming with a bounce off support. Conservative traders may want to see DNA clear resistance and the 5-dma at $168 before entering. With volume so low, make sure volume confirms a bounce or move upward before making a play. EXTR $173.38 +5.13 (+13.63) Another day, another new all-time high for EXTR. Traders who got up early on Monday were treated with a quick dip to its $160 support level during amateur hour. This turned out to be a beautiful entry point as the stock spent the rest of the day moving higher. Making a new all-time high, EXTR closed up $8.50, or 5.32%, on 113% of ADV. Today was more of the same. After a quick dip to its 5-dma, EXTR rose higher and in doing so, took out resistance at $170 to make yet another new all-time high. This time the volume was a little lighter, clocking in at 92% of ADV but we'll take it. The only level of resistance for the stock right now is at $175. A break over that on good volume could provide for a conservative entry. Aggressive traders have found that buying bounces off the 5-dma ($163.60) can be quite profitable. In the news, yesterday EXTR announced that it has added Layer 7 dial tone to its broadband networking solutions with a new product called ServiceWatch. The company claims that this will allow Internet data centers to maintain 100% uptime. AFL $57.69 -1.13 (+1.38) After making an all-time high on Monday at $58.94, AFL pulled back a bit today on higher volume than Monday. This was partly due to the CSFB downgrade from a Buy to a Hold. There were no further details available on the coverage change. In today's trading, AFL dipped below $58 within the first hour and buyers just couldn't break back through this intraday resistance level. Even with this news, we are not giving up on this call play making new highs. We would look to enter this play on any pullbacks to the $56 level, accompanied by a bounce. This is the site of the current 10-dma at $55.96, and where AFL found intraday support on Friday. A conservative trader may wait for the stock to break above $59 on strong volume. If sellers take AFL down to break the 10-dma, we would be cautious. CCU $83.69 +1.50 (+0.63) This media giant continued to established its presence above former resistance of $79. The development of a pattern of higher-lows is currently driving near-term support just above the $81 level. The bounce off $81.38 to an intraday high of $85.06 this afternoon cleared away any short-term opposition. The next price barrier to contend is at $88 and $90, which CCU hasn't seen the upside of since January and February. If the strong volume perseveres, then it's likely that CCU's momentum can bring it over the top. Today's volume levels, for instance, were very robust at 3.95 mln, almost double the ADV. Also keep an eye on the Dow's movements for some hint of this stock's ultimate direction. Play it safe and keep stops in place over the next couple of sessions. CCU may experience some profit taking considering today's convincing performance. The $80 level at the 10-dma should hold as firm support on a pullback. If it doesn't, put up the radar and keep your cash on the sidelines until a trend resumes. On the other hand, if CCU breakouts again, enter on positive moves off $82 but watch for resistance at the $85 mark. SUNW $117.38 +3.31 (+5.19) Don't forget your sunscreen, our play is shining brightly. SUNW held its mid-quarter analyst meeting Tuesday, which was filled with bullish tones. The company guided analysts to higher revenue growth and appeased Wall Street's concerns over component shortages. The upbeat tone beaming from the mid-day conference call boosted SUNW into rally mode and to a new all-time high. The stock is plowing higher in spite of the waning in the broader Tech sector, with few signs of slowing. Furthermore, the buyers were more than convincing Tuesday as trading activity spiked above the ADV. The fact that SUNW is trading near its 52-week high leaves little resistance above. Watch for the return of buyers early Wednesday morning and consider entering the play if SUNW bursts above its intraday high of $119. An aggressive trader might target shoot for an entry upon an intraday pullback to support near the $115 - 116 range, or down to the 5-dma at $113.25. COHR $68.06 -0.75 (-0.88) COHR spent the past two days consolidating its gains from last week. The tepid volume has confirmed our suspicions of profit taking. Despite the second day of light selling pressure, COHR did, however, stop at its 5-dma this morning, and bounced off that level in the latter half of trading. Over the past two weeks, COHR has exhibited a similar pattern to its current trading. The stock has the tendency to consolidate its gains for several days, followed by a burst of buying. The stock's intraday rallies can be quick and furious, which requires a close watch. With that said, an aggressive trader might watch for the beginnings of a big intraday rally, and consider entering the play on a bounce off current levels. For the more conservative traders, wait for COHR's momentum to build and consider entering the play near resistance at $69, or on a rally above the technically significant $70 level. Another bounce off support at the 5-dma, currently at $67, might provide an additional entry upon further profit taking. ITWO $147.75 -6.88 (+0.81) ITWO said Monday that its TradeMatrix eBusiness solutions software had helped the company gain over 30 new customers. The news, combined with a healthy Tech sector, helped ITWO's stock to a near-term high in its ascending channel, which we noted in Monday's Play of The Day. But, the enthusiasm was short-lived as ITWO fell under control of the profit takers today and slipped lower on light volume. Although ITWO gave back much of Monday's gains, the stock's technical picture remains strong, which bodes well for the health of our play. The buyers stepped in this afternoon near the 5-dma, currently at $146.56, to stabilize ITWO's sell-off. An aggressive trader might consider entering the play at current levels given the fact that ITWO bounced off its 5-dma late today. But, before entering the play, make sure to confirm strength in the broader Tech sector and the return of ITWO buyers with robust volume. A more conservative entry might be found if ITWO builds steam and rallies back above the $150 level. EMC $88.69 -0.88 (-0.88) It’s been a fairly quiet start to the week for our EMC play. Entry points are dancing just out of reach as the stock has spent its time trading between $88 and $90. Sure there have been brief forays fractionally outside of this range, but they have been small and short-lived. The fact that EMC has managed to hold its ground is a good sign for future gains, once all the major indices decide to march in the same direction. Yesterday, the stock gained $0.88 to close fractionally above the $90 resistance level as the NASDAQ rallied. Today’s action saw the stock give up twice that amount as investors showed their nervousness ahead of tomorrow’s CPI numbers. Volume was on the light side, clocking in at only about 80% of the ADV, but picked up near the close as the stock dropped to the bottom of its recent range. Our entry strategy remains unchanged; target shoot entries on dips to support at $88, and then $86.50. More conservative traders will wait for the buying volume to pick up and launch EMC through the $90 resistance level. MER $140.00 -2.69 (+0.69) Financial stocks were due for some profit taking and although MER’s gains have been steady and consistent, it wasn’t immune to the decline. After tagging yet another all-time high of $143 yesterday, nervousness about the economy dragged our favorite bull back to earth today. In retrospect, yesterday’s action gave us warning signs that weakness could be ahead as the run to new highs came on only two-thirds of the ADV. It was encouraging to see the profit taking today come on similarly light volume, and on top of that, the stock held support at $140. Below current levels, we still have intraday support at $139, and $137.50. Then stronger support exists at $136, just below the 10-dma (currently at $136.75). Consider target shooting intraday dips to support for better entries, or for a more conservative entry wait for a resurgence of buying volume to push MER to new highs above $143. Need another catalyst for our play? How about a split run? That’s right, MER will split 2-for-1 on September first, so now is the time to get positioned to run with the bull. ******************* PLAY UPDATES - PUTS ******************* INCY $71.28 -3.22 (-3.53) INCY has proven to give us some perfect entry points to this put play, rising up in the early morning both Monday and today. Threatening to break through 10-dma resistance of $78.09, the stock only managed to hit a high of $77.88 yesterday, and $75.88 today. Profit takers then took their gains, driving the stock to violate support of the 5-dma at $74.15, hitting a low today of $71.25. INCY is still trading well below all other technical levels, still making the play attractive, especially on the volatility. Look for peaks in the morning, with strong volume rollovers to the downside, which appears to be standard behavior for the sell-offs of late. With the stock closing only $0.03 above the day low, we could be in some downside acceleration and profit taking tomorrow, so keep your eyes open for the morning spike. LVLT $61.81 -0.13 (+2.06) LVLT bounced like a dead cat off the $60 level Monday with help from a stabilizing Telecom sector and some positive press. The company announced it had launched a new networking service, which could lower the cost of bandwidth across the Internet. The momentum from the announcement caused LVLT to gap nearly $2 higher this morning. But, the Telecom bears returned to sell into strength and carry LVLT lower. The stock fell into a trading range between $60 and $62 for the better part of Tuesday. If LVLT continues to bounce within its newfound range, an aggressive trader might target shoot for entry points upon a bump against $62. A failure of support at $60 might provide a solid entry for the more conservative traders. If LVLT does fall back below $60, make sure to confirm the return of institutional sellers with heavy volume before entering the play. Also of note, the stock did close right on its 5-dma today, which might provide support on an attempted rally. SGP $40.50 +0.31 (-0.50) After the fateful court decision relating to LLY’s flagship drug Prozac, interest in Pharmaceutical stocks has been more sedate. These stocks had been moving strongly with the DJIA, but the LLY news really took the shine off the sector. Any stock with patent expiration concerns has had a hard time over the past week and SGP is one of those. The issue for the company is expiration of its patent protection on its Claritin product. A vigilant reader corrected an error we made in the weekend write-up. We had pointed out that this patent expired at the end of this year, which would make the risk for the company near at hand. The patent actually expires at the end of 2002. The near-term issue is the development of a replacement for Claritin, and the company’s candidate for this role is currently awaiting FDA approval, which should be forthcoming by the end of this year. The downward slide in shares of SGP is continuing this week and an interesting pattern is starting to develop; the last two days, SGP has gapped up, only to decay throughout the day. The 10-dma, at $42, is still well above the current price, and will likely continue to create downward pressure on SGP. Look to enter new positions as the price rolls over, either at the 10-dma or after the strength of the morning gap up loses momentum. Support sits at $39-40, and more conservative players will want to wait for selling pressure to penetrate this level before playing. ***********************ADVERTISEMENT************************ Up To 60% Off At EverythingWireless.com The online super-store for your active lifestyle. Select from the largest range of accessories and products you use every day including Cellular and PCS phones, batteries, chargers, hands-free kits, wireless data products and more. http://www.everythingwireless.com\wireless\homepage?id=1601002 ************************************************************ ************** NEW CALL PLAYS ************** EXDS - Exodus Communications $57.13 -1.13 (+0.88 this week) Exodus provides Internet system and network management solutions for companies with mission-critical Internet operations. The company offers sophisticated systems along with technology professional services to provide optimal performance for customers’ Web sites. Exodus has a long list of customers, including: EBAY, YHOO, SUNW, and AMAT. The company continues to expand its business through acquisitions and expansion overseas. It has been a volatile year for EXDS. But, the simple fact is the company operates in a high-growth business. And, with that high-growth comes high volatility. The company has been aggressively expanding its operations overseas in areas including Europe and Asia. EXDS's push into international markets, combined with the still-explosive growth in domestic markets, helped the company win over 500 new customers last quarter alone. Furthermore, EXDS announced last week that it had opened its fifth Internet Data Center in the high-demand locale of Silicon Valley. The company continues to attract new business, with the signing of one contract after another. Just last week, the company announced Elite Systems had chosen EXDS to host its financial information services Web site. Although the company has yet to turn a profit, investors are once again warming up to the Web hosting giant. The Internet shakeout left many dot coms to the bears, but not EXDS. The stock is once again reasserting itself as a Tech champion. EXDS has been rolling higher over the past two months, and attempted to breakout to a near-term high Tuesday. Volume has begun to pick up over the past three sessions as EXDS encroached upon the $60 level. Consider entering the play Wednesday morning if EXDS breaks above $60 on relatively strong volume. An aggressive trader might look to enter the play on a bounce off support at $56, or lower near the 5-dma around $55. Confirm strength in the broader Tech sector before entering the play. EXDS has won over the attention of Wall Street recently. The stock has been the target of several upbeat analyst reports in the past week. Last week, Robertson Stephens reiterated its Strong Buy rating and Legg Mason also reiterated its Strong Buy rating and established a $95 price target. And yesterday, DLJ reiterated its Buy rating based on EXDS's strong business trends, and raised its price target to $88. BUY CALL SEP-55 DUB-IK OI=5050 at $ 6.63 SL=4.75 BUY CALL SEP-60*QED-IL OI=5413 at $ 4.25 SL=2.75 BUY CALL SEP-65 QED-IM OI=4076 at $ 2.75 SL=1.50 BUY CALL DEC-60 QED-LL OI=2521 at $10.13 SL=7.00 BUY CALL DEC-65 QED-LM OI=1527 at $ 8.50 SL=6.00 Picked on August 15th at $57.13 P/E = N/A Change since picked 0.00 52-week high=$89.81 Analysts Ratings 26-5-1-0-0 52-week low =$15.06 Last earnings 06/00 est= -0.12 actual= -0.10 Next earnings 10-23 est= -0.17 versus= -0.07 Average Daily Volume = 8.30 mln DIGL - Digital Lightwave Inc. $108.75 +6.88 (+9.00 this week) Digital Lightwave was founded in 1991 on the premise that high-speed optics would play an increasingly important role in network development, due to light's superior capacity and speed as a communication transport medium. Digital Lightwave provides the fiber-optic networking industry with products and technology that monitor, maintain and facilitate the management of fiber-based high-speed communications networks. The company's products are used to cost-effectively verify and qualify service during network installation and to proactively monitor deployed networks to ensure their optimal performance. Tripping the light fantastic! It's been a great month so far for DIGL. But, it's also been a long road traveled. The chart on this stock clearly tells classic tale of earnings-driven momentum. A pre-earnings run-up in early July gave way to a post-earnings sell-off, with help from strong resistance at $120. Revenues for the second quarter were $22.1 mln. This was more than double the $10.7 mln reported the year before. Net income came in at $6.2 mln, or 20 cents per share, compared $0.1 mln, or close to break-even from a year ago. This easily blew through Street estimates of 14 cents per share. Despite this, DIGL was treated to a severe earnings sell-off. Since finding a solid bottom at the $80 level in early August, however, the stock has propelled itself upwards. News of a $1.3 mln order from Fujitsu for DIGL's high-speed optical analyzers certainly helped in the cause. In the past five trading sessions, DIGL took some time to consolidate, trading in a narrow range between support at $95 and resistance at $105. Today, the stock broke out of that range, gaining 6.75% on almost 150% of ADV. Looking ahead, the next level of resistance appears to be at $115. Breaking through that level will bring DIGL face to face with formidable resistance at $120. A break through that area will likely see DIGL reach for a new all-time high. Aggressive traders will notice that bounces off the 5-dma ($102.37) have been ideal entry points with support at $105, the psychological $100, and $95. So far the few pieces of news for DIGL in the month of August have been positive. Aside from the Fujitsu order, DIGL established a distribution partnership with Conformance Standards Ltd., which would see CSL distribute its products. BUY CALL SEP-105 DGU-IA OI= 45 at $14.38 SL=10.75 BUY CALL SEP-110*DGU-IB OI=138 at $12.13 SL= 9.00 BUY CALL SEP-115 DGU-IC OI= 1 at $ 9.88 SL= 7.00 BUY CALL OCT-110 DGU-JB OI= 62 at $18.25 SL=13.00 BUY CALL OCT-115 DGU-JC OI= 27 at $16.38 SL=11.75 SELL PUT SEP-100 DGU-UT OI= 20 at $ 7.00 SL=10.00 (See risks of selling puts in play legend) Picked on August 15th at $108.75 P/E = 167 Change since picked +0.00 52-week high=$150.00 Analysts Ratings 4-3-0-0-0 52-week low =$ 5.81 Last earnings 07/18 est= 0.14 actual= 0.20 Next earnings 10-17 est= 0.21 versus= 0.09 Average Daily Volume = 818 K JNPR - Juniper Networks Inc $169.75 -0.25 (+9.81 this week) Juniper Networks develops and provides next-generation Internet infrastructure systems that are designed to meet the scalability, performance, density, and compatibility requirements of IP networking systems. The company's M40 and M20 Internet backbone router use JUNOS network traffic management software, ASICs. Its clients include some of the world's leading service providers such as Ericsson and MCIWorldcom. Give JNPR a good market environment and watch it explode! Juniper Networks is once again on the move and we want a piece of the action. As the NASDAQ made its way above the 3800 level this week, JNPR shot upwards with a fervor. There's a momentum run in our midst or so it seems. Let's retrace for a moment. Last week JNPR traded above the former resistance of $160, but didn't demonstrate any strength at the higher price level. This week JNPR is not only holding the lofty gains, but also shot through technical resistance at the 5-dma ($165.51) without a backslide. Entries off the current level may be somewhat aggressive in this topsy-turvy market. If you are looking for more confirmation, then wait for high-volume moves through the first line of opposition at $175. Upper resistance is at $180 and $181.25, the 52-week high. We're anticipating the respectable volume to sustain the upward momentum in the short-term. However, you will want to monitor the market's direction. Remember, the NASDAQ is currently at a precarious level and could pullback with profit taking. Stop losses may be useful, but remember, this is an Internet play and is subject to wide intraday swings. Earlier this month, JNPR was reiterated a Buy at Lehman Brothers and was raised to a Strong Buy from a Market Perform at Raymond James Financial. More positive comments like that would certainly spice up this momentum play. BUY CALL SEP-160 JUD-IL OI=3828 at $20.88 SL=14.50 BUY CALL SEP-170*JUD-IN OI=3324 at $16.00 SL=11.50 BUY CALL SEP-180 JUD-IP OI= 327 at $11.75 SL= 8.75 BUY CALL OCT-170 JUD-JN OI= 349 at $24.63 SL=19.25 BUY CALL OCT-180 JUD-JP OI= 956 at $20.38 SL=14.50 Picked on August 15th at $169.75 P/E = 1882 Change since picked +0.00 52-week high=$181.25 Analysts Ratings 15-3-0-0-0 52-week low =$ 28.25 Last earnings 06/00 est= 0.04 actual= 0.08 Next earnings 10-12 est= 0.08 versus=-0.01 Average Daily Volume = 6.21 mln IDTI - Integrated Device Technology $66.88 +1.00 (1.44 this week) The company's high-performance semiconductor products and modules are found in computers, peripherals, and communications and networking devices. About 70% of sales are from communications and high-performance logic components, specialty memory, clock management circuits, and networking devices. IDTI also makes static random-access memories (SRAMs). What Semi sector correction? IDTI has held its ground remarkably well during the recent drubbing in the Chip sector. IDTI's impressive relative strength lends itself to the company's blowout earnings report and stable sales. Speaking on the former, IDTI blew past analysts' estimates by a whopping 23%, reporting a more than 200% year-over-year increase in earnings. But, more importantly, IDTI's recent rally stems from the fact that the company manufactures a type of semiconductor that is far less of a commodity than other chips. IDTI's communications chips are not as sensitive to the seasonality or cyclical nature of the Semi sector. The prospects of stable sales going forward, despite the turmoil in the broader Chip sector, combined with IDTI's relatively low valuation, have combined to position the stock on the brink of a breakout to new highs. The stock has been on an unimpeded march higher since reporting second-quarter earnings in late July, using its 5-dma, currently at $64, as support along the way. IDTI attempted to hurdle the $70 level Tuesday, but was hindered as a round of profit taking swept through the broader Semi sector. However, once the light selling subsides, watch for IDTI to make another attempt at $70, which might position the stock to take on its all-time high at $77. An aggressive trader might look for a quicker entry into the play upon a rally back above resistance at $68. However, if the profit taking persists, look for IDTI to find support near its 5-dma, and consider entering the play if the stock reverses course and heads north. And, of course, watch for a strong rally above the technically significant $70 level, and confirm a breakout attempt with healthy volume. One possible event which might boost our play into breakout mode is the potential for a split announcement. IDTI last split its stock in 1995, when it was trading around $51. The company is holding its Annual Shareholder Meeting in a little over a month, with a proposal to increase its number of authorized shares. BUY CALL SEP-60 ITQ-IL OI= 320 at $10.50 SL=7.25 BUY CALL SEP-65*ITQ-IM OI= 309 at $ 7.75 SL=5.50 BUY CALL SEP-70 ITQ-IN OI= 544 at $ 5.38 SL=3.25 BUY CALL NOV-65 ITQ-KM OI=1003 at $12.38 SL=9.25 BUY CALL NOV-70 ITQ-KN OI= 443 at $10.13 SL=7.00 Picked on August 15th at $66.88 P/E = 37 Change since picked +0.00 52-week high=$77.44 Analysts Ratings 6-1-1-0-0 52-week low =$15.06 Last earnings 06/00 est= 0.47 actual= 0.58 Next earnings 10-16 est= 0.70 versus= 0.18 Average Daily Volume = 3.14 mln TQNT - TriQuint Semiconductor, Inc. $44.63 +2.66 (+5.75 this week) Triquint is the prevalent global supplier and creator of high performance analog and mixed signal circuits. Its technology is used in wireless communications, telecommunications, data communications, and aerospace systems. TriQuint offers its customers both standard and specialty products as well as foundry services. TriQuint’s operations satisfy the international quality standard. Customers include Nokia, Nortel Networks, Alcatel, Ericsson,and Lucent. An oversold sector? That's just what analysts and investors feel is the case for the semiconductors. Last month, the sector was besieged with bearish comments, but "times are a-changin'." On Monday, respected analyst Jonathan Joseph of Salomon Smith Barney joined the bulls in the semiconductor arena. As a result, the SOX.X jumped 7.7% and many stocks were propelled off their recent lows. Today, the gains extended as many investors took advantage of what is now considered a prime buying opportunity. In particular, TQNT was launched from its comfortable zone at $36-$38. It's rise above upper resistance at $40 and strong close today confirms there's momentum building. TQNT does have a couple of technical hurdles to overcome, however, the sector momentum should prevail and carry TQNT to back towards its former price level. Currently, TQNT is perched just below the 100-dma at $46.09 and will face the formidable 50-dma around the $49 level. Entries would be on dips off the $40 level, assuming the trend is intact. If there's a pullback to this area, the 200-dma at $41.17 is there for support. More conservatively, a push through the 100-dma with good volume would be a nice entry. Since this is a sector-based momentum run, watch others like MU, KLAC, NVLS, and AMAT for broad direction. All wasn't bad for this semiconductor during the month of July. Van Kasper, Pacific Crest, Bear Stearns and CIBC World Markets all put out Buy or Strong Buy recommendations for TQNT. BUY CALL SEP-40 TNN-IH OI= 351 at $8.25 SL=5.75 BUY CALL SEP-45*TNN-II OI= 410 at $5.75 SL=3.75 BUY CALL SEP-50 TNN-IJ OI= 233 at $3.88 SL=2.50 BUY CALL NOV-45 TNN-KI OI= 194 at $9.88 SL=7.00 BUY CALL NOV-50 TNN-KJ OI=1160 at $8.00 SL=5.75 Picked on August 15th at $44.63 P/E = 76 Change since picked +0.00 52-week high=$67.75 Analysts Ratings 8-1-2-0-0 52-week low =$11.44 Last earnings 06/00 est= 0.13 actual= 0.19 Next earnings 10-19 est= 0.19 versus= 0.09 Average Daily Volume = 2.53 mln LSCC - Lattice Semiconductor $62.44 +2.44 (+5.81 last week) Customization is the name of the game for LSCC. The company makes programmable logic devices (PLDs), logic integrated circuits that manufacturers can program to perform specific functions. The company is one of the world’s top suppliers of in-system PLDs, which can be configured and reconfigured even after being attached to a circuit board. LSCC also sells the software needed to customize its chips, which are used in computing, communications, industrial, and military applications. The company focuses its efforts on design and testing, outsourcing its manufacturing to factories in Asia. You can’t keep a good stock (or sector) down! The selloff in Semiconductor stocks that followed the bearish comments from Jonathan Joseph at Solomon Smith Barney a month ago, dragged everything in the sector lower. LSCC was not immune and by the time it found support at $46 nearly 2 weeks ago, the stock had dropped more than 40% from its July high of $80. The bounce on August 3rd came on strong volume of more than double the ADV, and naturally the stock needed to consolidate that bounce before heading higher. After confirming support near $55 late last week, the stock has launched higher this week, increasing by more than 10% in the past 2 days. Aiding LSCC and other stocks in the Semiconductor sector with their strong moves this week have been positive comments from analysts. Today, Mark Edelstone with Morgan Stanley Dean Witter said, "We remain positive on the sector. We believe the cycle has another 18-24 months to run. Investor sentiment has been too negative, and stock price valuations have reached levels that have been too low." Now that’s what I call a glowing endorsement! Today’s move ran into resistance at $64, and as LSCC continues to head higher, it will find more resistance at $67. Support (old resistance) is found at $58, and it is backed up by the 10-dma (currently at $56.69). An intraday dip to support will likely provide the best entry into the play, although more cautious investors will want to wait for a breakthrough of resistance at $64. There has been little in the way of company specific news since early August. On August 3rd, First Security Van Kasper released their Select List, where they list LSCC as a Strong Buy. For now, we are focused on the positive commentary coming from analysts about the Semiconductor sector. BUY CALL SEP-60*LQT-IL OI= 176 at $ 7.88 SL=5.50 BUY CALL SEP-70 LQT-IM OI=1267 at $ 5.38 SL=3.25 BUY CALL SEP-75 LQT-IN OI= 123 at $ 3.50 SL=1.75 BUY CALL DEC-65 LQT-LM OI= 32 at $11.25 SL=8.50 BUY CALL DEC-70 LQT-LN OI= 53 at $ 9.00 SL=6.25 SELL PUT SEP-55 LQT-UK OI= 719 at $ 2.63 SL=4.25 (See risks of selling puts in play legend) Picked on August 15th at $62.44 P/E = 27 Change since picked +0.00 52-week high=$83.38 Analysts Ratings 10-3-3-1-0 52-week low =$14.19 Last earnings 07/00 est= 0.55 actual= 0.61 Next earnings 10-16 est= 0.64 versus= 0.23 Average Daily Volume = 1.02 mln ************* NEW PUT PLAYS ************* MLNM - Millennium Pharmaceuticals $109.00 -2.31 (-5.50 this week) Millennium Pharmaceuticals, Inc. is a leading biopharmaceutical company, focusing on the discovery and development of small molecule, biotherapeutic and predictive medicine products. With the vision of providing personalized and precise medicine by integrating breakthrough therapeutic products and predictive medicine, the Company strives to deliver precisely the right medicine to precisely the right patient at the right time. The Company does this by incorporating large-scale genetics, genomics, high-throughput screening and informatics in an integrated science and technology platform. The law of gravity states that what goes up must eventually come down. After a great run in the early part of this month for MLNM, it appears that gravity may finally be taking effect. The first week of August saw the stock blasting off from the $95 level, moving up almost 30% in a span five days. MLNM was obviously helped by a strong biotech sector, which clearly illustrates the importance of confirming sector sympathy with a play before entering. Encountering resistance at $125, the stock has since moved lower. The first signs of a rollover appear to already be in place. In the past four trading sessions, MLNM has had difficulty closing above its 5-dma, now at the $115 area. This also happens to be where the 10-dma currently resides as well as the 50-dma. The convergence of moving averages should provide for strong resistance and a failed rally at that level could provide for an entry point. The next level of support for the stock appears at to be at $105 and from there the psychological century mark. Could this stock make a double-bottom at $95? Quite possibly as that is where the strong support really is, thanks to its 100-dma. A break through that level could be ugly for the stock (and profitable for us). With the lack of news and low trading volume lately in MLNM's shares the technicals take on an even more important role. Sector sympathy will also play a key role. As mentioned earlier, make sure sector sentiment confirms direction before entering. BUY PUT SEP-115 QMR-UC OI= 12 at $14.25 SL=10.75 BUY PUT SEP-110*QMR-UB OI= 16 at $11.25 SL= 8.50 BUY PUT SEP-105 QMR-UA OI= 17 at $ 8.63 SL= 6.25 Average Daily Volume = 2.03 mln SYMC - Symantec Corp. $43.94 -1.31 (-4.44 this week) A world leader in Internet security technology, SYMC provides a broad range of content and network security solutions to individuals and enterprises. The company is a leading provider of virus protection, risk management, Internet content and e-mail filtering, remote management and mobile code detection technologies. The desktop battleground is where SYMC derives nearly 60% of its sales. Duking it out with Network Associates in this arena, the company is best known for its security software (Norton AntiVirus), desktop efficiency (Norton CleanSweep), and PC utility (Norton Ghost) products. What SYMC needs is a new enemy to battle. Whenever there is a computer virus scare, shares of computer security firms tend to surge, but the excitement quickly fades from investors’ minds. It has been a while since the latest scare, and investors have lost interest in shares of SYMC. The stock has been posting lower highs since hitting a high of $81.63 in the middle of March. After failing to hold above the 200-dma (then at $56.69) in late June, the price drifted lower into the company’s July earnings report. The strong report (the company posted $0.67 vs. the expected $0.62) got investors’ attention and enthusiasm returned, pushing the stock back over the 200-dma. Unfortunately, it couldn’t hold and a week later the stock was back below the 200-dma and hasn’t been back since. Over the past week, SYMC has been headed lower again, and the volume is accelerating as the stock is falling through long-term support levels. Although $47 had held up well since the beginning of the year, the increasing volume dropped the share price through this level on nearly double the ADV yesterday. The pain continued today as SYMC dropped still further, with volume hitting more than 2.5 times the ADV today. The stock should have had support at $44, but it fell to selling pressure today as well. All of the moving averages are overhead, with the 5-dma (currently at $47.75) providing downside pressure. Mild support may exist near $40, followed by stronger support at $36. Look for the stock to move up to resistance at the prior support levels of $44 or $47 and roll over. As the selling volume picks up again, go ahead and jump on for the slide into the basement. BUY PUT SEP-50 SYQ-UJ OI=26 at $7.00 SL=5.25 BUY PUT SEP-45*SYQ-UI OI=58 at $4.63 SL=2.75 BUY PUT SEP-40 SYQ-UH OI= 0 at $1.13 SL=0.00 Wait for OI Average Daily Volume = 1.04 mln ********************** PLAY OF THE DAY - CALL ********************** CCU - Clear Channel Communications $83.69 +1.50 (+0.63 this week) Clear Channel Communications is a diversified media company with extensive holdings in over 510 radio stations, 22 television stations, and more than 550,000 outdoor billboards. After the acquisition of the #1 radio station owner, AMFM, is completed this year, CCU will have a presence in 47 of the top 50 radio markets in the US. Additionally they are the largest Spanish language broadcaster in the US. The company is also a leader in the live entertainment industry through its subsidiary SFX Entertainment. Most Recent Write-Up This media giant continued to established its presence above former resistance of $79. The development of a pattern of higher-lows is currently driving near-term support just above the $81 level. The bounce off $81.38 to an intraday high of $85.06 this afternoon cleared away any short-term opposition. The next price barrier to contend is at $88 and $90, which CCU hasn't seen the upside of since January and February. If the strong volume perseveres, then it's likely that CCU's momentum can bring it over the top. Today's volume levels, for instance, were very robust at 3.95 mln, almost double the ADV. Also keep an eye on the Dow's movements for some hint of this stock's ultimate direction. Play it safe and keep stops in place over the next couple of sessions. CCU may experience some profit taking considering today's convincing performance. The $80 level at the 10-dma should hold as firm support on a pullback. If it doesn't, put up the radar and keep your cash on the sidelines until a trend resumes. On the other hand, if CCU breakouts again, enter on positive moves off $82 but watch for resistance at the $85 mark. Comments While holding the line today at $82, CCU appeared to be drifting. Then at 2:10pm EDT, boom, huge buying volume came in and drove CCU to a high of $85.06. Entry into this call play can be attained on a pullback and bounce from the $82 base. If $82 doesn't hold, $81.50 has been support also. Any strong volume move over the $85 level, feel free to jump on board as CCU trades into levels not seen since February. Wait until after amateur hour and confirm market direction. BUY CALL SEP-80 CCU-IP OI=3866 at $7.38 SL=5.50 BUY CALL SEP-85*CCU-IQ OI= 914 at $4.75 SL=2.75 BUY CALL SEP-90 CCU-IR OI= 99 at $2.88 SL=1.50 BUY CALL OCT-85 CCU-JQ OI= 441 at $7.00 SL=5.25 BUY CALL OCT-90 CCU-JR OI=3949 at $4.63 SL=2.75 Picked on August 13th at $83.06 P/E = N/A Change since picked +0.63 52-week high=$95.50 Analysts Ratings 12-3-1-0-0 52-week low =$57.88 Last earnings 06/00 est= 0.06 actual= 0.09 Next earnings 10-25 est= 0.05 versus= 0.00 Average Daily Volume = 2.28 mln /charts/charts.asp?symbol=CCU ***********************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 ************************ Into any rally, a little profit-taking must come... Blue-chip stocks slumped today as selling pressure overcame the bullish outlook amid a slew disappointing earnings in the retail group. Monday, August 14 Industrial stocks extended their recent rally amid optimism over a slew of mergers in the media, semiconductor and biotech arenas. The Dow finished up 148 points at 11,176. The bullish activity pulled technology stocks higher and the Nasdaq ended up 60 points at 3,849. The S&P 500 index edged up 19 points to 1,491. Volume on the NYSE hit 785 million shares with advances beating declines 1,846 to 1,038. Trading activity on the Nasdaq exchange reached 1.22 billion shares with advances edging declines 2,109 to 1,930. In the bond market, the 30-year Treasury rose 6/32, pushing its yield down to 5.693%. Sunday’s new plays (positions/opening prices/strategy): Anheuser BUD SEP75P/SEP80P $0.56 credit bull-put Infocus INFS SEP35P/SEP40P $0.68 credit bull-put WellPoint WLP SEP75P/SEP80P $0.68 credit bull-put PMC Sierra PMCS SEP270C/150P $5.00 credit strangle The market moved higher today, limiting the premiums available in the new bullish positions. Traders who entered the spreads with individual transactions may have reached the position targets but the observed (simultaneous) credits were all less than expected. We will attempt to achieve the target prices in coming sessions. PMC Sierra rallied late in the day, providing the suggested entry price (and more) for those who were willing to wait for the move. If the rally is sustained, our first technical review will occur at $225, near the most recent resistance level. Portfolio Plays: After a brief period of caution, stocks rallied Monday amid optimism over the outlook for interest rates. Early buying activity in financial issues fueled investor speculation that the Federal Reserve is not going to raise interest rates next week. On the Dow, J.P. Morgan (JPM), Hewlett-Packard (HWP), Intel (INTC) and Home Depot (HD) helped the blue-chip index close at a recent high, well above technical resistance levels. Traders said that much of the bullish interest was focused on issues with upcoming earnings. A slew of S&P 500 companies will release quarterly results this week, including a number of retailers. Along with banking stocks, semiconductor issues also rallied, leading the Nasdaq to favorable gains. Sipex (SIPX) was our big winner in the chip sector, climbing almost $3 to $32.12 on speculation that the industry has reached an interim bottom. We will target a 25% overall return to exit the bullish combination early. i2 Technologies was another big mover, up $7 to $156 amid strength in the Application Software group. Our synthetic position is now trading at a $7.75 profit and conservative traders should consider closing the spread to lock-in gains. Other leaders in the technology industry included Altera (ALTR), International Rectifier (IRF), Network Appliances (NTAP), Sun Microsystems (SUNW) and the beleaguered merger issue, Voicestream (VSTR). In the finance group, Charles Schwab (SCH) moved up $1.00 to a recent high near $40 and our new synthetic position offered a $1.00 profit to close the position. That’s a very favorable (10%) return for a 10-day play and one we simply can’t pass up! Allstate (ALL) recovered from a short-term slump to the $29 range, and Countrywide Credit (CCR) also edged higher during the session. We will use the current upside movement in the stock to transition the diagonal spread forward to September options. A number of other, lower-priced stocks performed well. American Eagle Outfitters (AEOS) moved to a recent high near $21 and the bullish, debit-spread remains at maximum profit. CSX Corporation (CSX) ended near $27, over $2 "in-the-money," and the position can be closed for a favorable return. Mail.com (MAIL) and PSS World Medical (PSSI) also participated in the optimistic activity. A few other issues deserve mention. American Online (AOL) may have finally turned the corner, up $1.38 to $53, and it will be interesting to see if we can rescue any premium from the bullish position. Our first target will be a "break-even" exit. In the Straddles section, Knight Trading group (NITE) appears to have made a technical reversal and rather than watch the PUT premium erode, we decided to close the bearish portion of the position. Aggressive traders might consider using the existing PUT credit to buy additional calls in the hopes of a near-term rally. One of our recent offerings, Hewlett Packard (HWP) rallied $4 to a short-term resistance area near $115. The move provided a good opportunity to enter the new bearish, synthetic position at the target price. Tuesday, August 15 Blue-chip stocks slumped today as selling pressure overcame the bullish outlook amid a slew disappointing earnings in the retail group. The Dow Jones industrial average ended down 109 points at 11,067. The Nasdaq Composite remained relatively unchanged at 3,851 as chip stocks continued to recover from a recent slump. The S&P 500 index was down 7 points at 1,484. Trading volume on the NYSE reached 895 million shares with broad market declines beating advances 1,696 to 1,168. Activity on the Nasdaq exchange was average at 1.34 billion shares traded. Technology declines beat advances 2,144 to 1,895. In the bond market, the 30-year Treasury fell 12/32, pushing its yield up to 5.71%. Portfolio Plays: In the technology group, chip stocks powered forward for a second consecutive session after Morgan Stanley analyst David Edelstone said that he believes the cycle is intact and has at least another year to run. Virata (VRTA) led the rally in our portfolio, up $8 to a recent high near $77. The original bullish, credit-spread appears to be safely "out-of-the-money" but unfortunately, we chose the conservative alternative, rolling down and forward to October Puts. Our break-even basis in the issue is near $39.25 but we will have to wait two months to earn any profit from the play. Altera (ALTR), International Rectifier (IRF), and Sun Microsystems (SUNW) continued their winning ways while Advanced Fibre (AFCI) and Qlogic (QLGC) recovered from recent slumps. CNBC reported that Merrill Lynch expects SUNW to beat its revenue growth estimates by 2% to 5% and that bodes well for our bullish position in the issue. We had a number of favorable surprises today. American Online (AOL) moved up another $1.68 to $54.68 after ING Barings analyst Youssef Squali reiterated his buy on America Online with a price target of $90. At the same time, SG Cowen analyst Scott Reamer said he recommended Internet investors build positions in AOL. Our bullish, debit spread traded as high as $4.00, just short of the target exit. Sipex (SIPX) continued its recent rally, up to a mid-day high near $35.75, and offering a $1.00 profit in our conservative, debit-spread/naked-put combination. Ciena (CIEN) continued its recent rally, up $6 to $170 in anticipation of the upcoming earnings report. As we noted in last week’s narrative, the issue has moved up in the sessions preceding the report and if the share value rises through the current resistance level at $175, we will plan to roll into a bullish stance. At that price, a new technical trading-range will have been defined and we can use the expected upside activity to close the original bearish position for a profit. With today’s slump in blue-chip issues, a period of profit-taking may begin. One of our top priorities will be to lock-in positive gains rather than risk a losing outcome at the August expiration. In addition, positions that need to be rolled to September should be adjusted if they are showing signs of technical weakness or if they are in danger of a near-term correction. Countrywide Credit (CCR), Lockheed Martin (LMT), Polaroid (PRD), and Ryder (R) are some of the issues that appear to fit that description. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** REGN - Regeneron Pharmaceutical $33.50 *** Big Move Today! *** Regeneron Pharmaceuticals is a biopharmaceutical company that discovers, develops, and intends to commercialize therapeutic drugs for the treatment of serious medical conditions. They are currently expanding from an initial focus on complex degenerative neurologic diseases, and the company has recently broadened its product pipeline to include drug candidates for the treatment of obesity, rheumatoid arthritis, cancer, allergies, ischemia, and other diseases and disorders. Regeneron jumped over $3 today after John Burnham of the Burnham funds promoted the company as his "double your money" pick on a CNBC report this morning. Investors apparently agree with the optimistic outlook and a number of traders made positive comments about the company. One bullish individual noted that, "Regeneron Pharmaceutical is definitely a must buy’ - they have a tremendous pipeline of drugs that will be coming out each year for trials." He also commented that their most promising drug is Axokine, which has exhibited excellent phase I trials. This drug is expected to target the multibillion-dollar weight loss industry. Another promising drug is VEGF-Trap molecule, for the anti-angiogenesis of tumor inhibition, which will be in trials next Spring. Regardless of the outlook for the company’s drugs, the technical indications reflect a trading-range breakout with high volume and based on the favorable disparities in option premiums, this is a great speculation play for those who are bullish on the issue. PLAY (aggressive - bullish/debit spread): BUY CALL SEP-25 RQP-IE OI=0 A=$9.50 SELL CALL SEP-30 RQP-IF OI=14 B=$5.62 INITIAL NET DEBIT TARGET=$3.75 ROI(max)=33% B/E=$28.75 Chart = ****************************************************************** RHAT - Red Hat $24.00 *** On The Rebound! *** Red Hat is a worldwide developer and provider of open source software products and services. Their product offerings include Red Hat Linux and other related tools, open source software applications, documentation, manuals and general merchandise. Professional services offerings include technical support and maintenance, custom development, consulting, training and basic education, developer support and hardware certification. The company has also built a comprehensive web site dedicated to the open source software community. Red Hat is a leader in the Linux software industry. Among Web sites running Linux, it commands almost 75% of the market. In a bid to increase its dominance, Red Hat recently disclosed plans to buy C2Net Software, its fifth major acquisition this year. C2Net has developed software that enables the running of Internet sites with tight security. By purchasing C2Net, Red Hat will be able to offer clients a bundled package of products and services from one source. In addition, with this acquisition, they are buying the #1 company in the secure Web server market with a 30% share of the industry. In other news, International Business Machines (IBM) recently said it would sell computers packaged with Red Hat's Linux system. Almost at the same time, Motorola (MOT) said it will package and market Red Hat's Linux products with Motorola products. These agreements demonstrate a new acceptance of the Linux operating system and based on the recent technical trend and forecasts for growth in the company, this position offers a unique speculative opportunity for traders who agree with the outlook. PLAY (aggressive - bullish/debit spread combination): BUY CALL SEP-22.50 RCV-IX OI=1041 A=$3.88 SELL CALL SEP-25.00 RCV-IE OI=1595 B=$2.50 SELL PUT SEP-20.00 UAB-UD OI=821 B=$1.18 DEBIT SPREAD COST BASIS TARGET=$1.25 NAKED PUT TARGET=$1.25 OVERALL NET DEBIT TARGET=$0.00 ROI=18% (based on collateral) We have received many positive comments about this debit-spread combination strategy. In simple terms, the position is nothing more than a sold (short) PUT and a bullish, debit spread. The play is actually somewhat aggressive, based on a bullish outlook for both components, but we use out-of-the-money options to lower the potential risk. The premium from the sold PUT is used to finance the purchase of the debit spread. In this position, the collateral requirement for the naked put is approximately $675 per contract. Chart = ************** BROKERS CORNER ************** Covered Strangles A particularly effective strategy that has worked very well in this sideways market has been the Covered Strangle. We have written about this strategy in the past using various examples and have had tremendous enthusiasm about it. It is definitely worth mentioning again. A Covered Strangle is a strategy whereby you utilize Naked Calls and Naked Puts together. For example, Phone.com (PHCM) announced last week that it would merge with Software.com and that Don Listwin, former V.P at Cisco will head the newly formed company. This was announced on the 9th of August. The stock went on a two-day run up and then fell back after hitting resistance. Currently PHCM is trading at about 89 per share. If you were to look at the daily chart on PHCM, you’ll notice that after a large decline in the spring of this year, the stock has begun a new trading pattern. Trending up, but basically hitting support at $65-70 per share and hitting resistance at $100-105 per share. Now take a look at the Calls and the Puts of PHCM. The September $70 Puts can be sold for $2. The September $110 Calls can be sold for $3 (12:00 pm cdt 8-15-00). With 10 Contracts each, this is a net credit before commissions of $5,000.00. The Margin Requirement is figured only on the higher priced option (the call). In this case it would be roughly a 13% return on your money in 1 month. What if the stock rises or falls and I’m naked? You cover that particular side of the strategy at your strike price. For example, we have alerts set at $72 on the downside and $105 on the upside. If PHCM falls and goes below $72 we prepare ourselves to short PHCM at $70, thus "covering" our Naked Put position and we let the Naked call ride. On the other hand if the stock rises and gets above $105, we prepare ourselves to go long the stock at $110, thus "covering" our Naked Call position and we let the Naked Put ride. Either way you win. It takes a little bit of management when the stock gets near your strike prices. Of course you could get more aggressive and use other strike prices like the September $75 Puts and the September $100 Calls, but that is a decision that only you can make. You do bring in even more premium but certainly take more risk. Robert L. Norman Vice President-Investments J. Michael-Patrick L.L.C. St. Louis, Mo. ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? 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